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DIVORCE IN HASTE, REPENT AT LEISURE

December 28, 2004

Mumtaz and Shagufta Ali were separated. Mumtaz owned a corporation called Spearmint Rhino Clubs. Because California is a "community property" state, Shagufta had a "community interest" in the property.

Spearment Rhino Clubs is a chain of "upscale gentlemen's clubs." They must be prosperous, because from June through December 2000, Spearmint Rhino paid Shagufta $24,000 per month. During this time, no divorce decree or other court order required the payments.

Mumtaz wanted this payment to be treated as alimony. If a payment is alimony, it is deductible to the payor and taxed to the recipient. Unfortunately for Mumtaz, the tax law requires the payments to be pursuant to "a divorce or separation instrument." Perhaps to repair the lack of any court document requiring the payments, a divorce judge filed a stipulation that "deemed" the distributions to be under court decree retroactively.

The Tax Court yesterday said that this instance of time travel was invalid for tax purposes: "...retroactive imposition of support by a Sate court does not have retroactive effect for Federal tax purposes."

THE MORAL: If money is changing hands in separation or divorce, be sure to ponder the tax implications before you write the check, as current time-travel technology cannot undo any unhappy tax result that becomes apparent in hindsight.

Cite: Mumtaz A. Ali, T.C. Memo. 2004-284.

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