The CPA Journal

FEDERAL TAXATION

March 2002

Alimony Recapture Provision

By Ken Laks, CPA, Eisner & Lubin LLP

Some divorce or separation instruments require the payor spouse to make a single, large cash payment to the payee spouse. Congress was wary that these payments could constitute some hidden cash property settlements. In response, Congress enacted IRC section 71(f) to reduce the potential for abusive transactions that try to disguise cash property settlements as alimony in order to obtain a deduction for the payor.

Large one-time payments are not the only instruments used. Sometimes, large payments are made during the early years of an alimony schedule, called front loading. To counteract this technique, IRC section 71(f) calls for certain calculations that will produce an add-back of income. For example, consider the following schedule:

Year one	$80,000
Year two	$80,000
Year three	$30,000
Year four	$30,000

The first step in determining the total recapture amount is to add $15,000 (IRC section 71 recaptures payments in excess of $15,000) to year three’s $30,000, and then subtract year two’s $80,000, yielding $35,000. The next step is to compare year one to the average of year two reduced by this recapture amount ($80,000 – $35,000 = $45,000) and year three ($30,000). The section 71 recapture amount is added to this average ($15,000 + $37,500 = $52,500), and then year one’s $80,000 is subtracted from it to yield the $27,500 recapture. The total recapture amount is $35,000 (year two) + $27,500 (year one) = $62,500.

Back-loading is not addressed, so if the stream of payments go up there is no recapture issue. As described above, the third year is used as base and is compared to year two, then year one is compared to the average of years two and three; no other years are considered.
There are scenarios that will not trigger the recapture rule. If the amount of payment in the second or third year is reduced because either spouse dies or the payee spouse remarries, this reduction is not taken into account. Another exception is made for contingent payments. Payments made for at least three years under a continuing liability to pay a fixed portion of the income from a business, from property, or from employment or self-employment compensation are not subject to the recapture rule.

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