UNCONSCIONABLE SEPARATION AGREEMENTS HELD TO BE ALIMONY

The Richardsons were married in 1983 and separated in 1983. Pursuant to the separation agreement, Mr. Richardson was to pay his wife $10,000 per month. In 1987, Mr. Richardson filed for divorce. During the divorce proceedings, Mrs. Richardson claimed the 1983 separation agreement was unconscionable because it was obtained pursuant to fraud and duress, an assertion later upheld by the Illinois courts. The divorce was granted in December 1990. Ultimately, Mr. Richardson's monthly alimony obligation was set at $26,700 effective February 1989.

Until 1988, the Richardson's filed jointly; but beginning in 1988, they filed separately. Mrs. Richardson, however, was notified by her husband on April 14, 1989, that a joint return was not being filed. She did not get an extension and ultimately filed in October 1990. Mrs. Richardson did not include the monthly payments she received pursuant to her divorce decree as income on her return.

Mrs. Richardson argued that the separation payments she received pursuant to an unconscionable agreement should not be includable as income. She argued that an agreement obtained under fraud and duress is no agreement at all and payments in such a situation should not be taxable. Both the Tax Court and the Circuit Court of Appeals disagreed, noting that the applicable Treasury Regulation, section 1.71-1, applies to legally unenforceable agreements. The regulation states that all payments made pursuant to a written separation agreement are includable in the recipient's gross income. To ignore the regulation in Mrs. Richardson's case would, in effect, write the regulation out of existence.

Mrs. Richardson also argued that the subsequent payments were not includable in income. The court noted that such payments are excludable if the court decree "designates" the payments as excludable from income. Mrs. Richardson argued that the facts were such that the court implicitly designated the payments as nontaxable. The court checked the definition of designate and held that the divorce court had to specifically address the tax status of Mrs. Richardson's payments if it intended them to be nontaxable to her. The divorce court was silent on the issue and, therefore, the payments were taxable. *

Source: Richardson v. Commissioner, __ F3d. __, No. 96-3657 and 96-3693 (7th Cir. 1997).