A client received $120,000 spousal support in 2018 before the TCJA and her spouse deducted this amount from his MFS return. In 2019 a judge ordered her to repay $60,000 of the spousal support. Rather than repay it, the paying spouse simply deducted the $60,000 from spousal support payments he was supposed to make in 2019.
The divorce agreement was amended to take the TCJA into account and spousal support after 2018 is not deducible or reportable. My client wants to amend 2018 MFS returns to reflect the $60,000 reduction in spousal support the judge ordered in 2018. I don't think this is permissible because she did not actually pay her ex back for the overage, instead her ex deducted it from 2019 payments. This is a bad outcome for her since she would not have had to report spousal support under the modified agreement in 2019 anyway.
Does anyone know if my analysis is correct?
I think in general I agree with your analysis. The glimmer of hope may lie in Section 1341 but I think it's really going to come down to a legal question on the "repayment". The dollar amounts are substantial enough that I'd recommend the client get a legal opinion on this based on the language written into the court order. If she had actually repaid the $60K that might be a stronger argument for a 1341 claim but it sounds like the 2019 benefits were reduced rather than the 2018 benefits repaid.
Agree with Rick for the most part.
Requirements for §1341 rest largely on (1) the taxpayer's believe in the year of inclusion as to his/her unrestricted right to the income and (2) the repayment of such income in a later year due to the taxpayer not having an unrestricted right.
Unless the income is an illicit gain or acquired by illegal means, which could render §1341 inapplicable, #1 is generally not a point of contention.
#2 is largely a legal question. Repayment out of a legally enforceable obligation such as the one described should, prima facie, meet the requirement of this being an involuntary repayment resulting from the taxpayer not having an unrestricted right.
If the taxpayer and spouse mutually agreed to the offset, there is sufficient nexus between the offset and the repayment. There is nothing in the Code or Reg. that dictates the form of repayment or methods by which it must be made. From an accounting perspective, these would essentially be two separate transactions that produce the same result. The taxpayer would be well-advised, nevertheless, to document such an agreement as part of her tax and legal records.
If I were you, I would review the court order to ascertain why she was required to repay the $60k received in 2018 and assess whether there are other considerations.
Still an AllStar
Thank you for responding. I could not find anything about the form of repayment and was unsure about whether deductions from 2019 spousal support would qualify as reimbursements of 2018 spousal support payments. It is worth a shot. I appreciate your research.