July 20, 2020 The Tax Lawyer

Naked Stripping for Alimony and Child-Support Tax Benefits

Vol. 73, No. 4 - Summer 2020

by Steven J. Willis

Abstract

Despite the alimony tax deduction repeal as part of the 2017 Tax Cuts and Jobs Act (TCJA), opportunities for alimony and child-support tax benefits currently exist. Indeed, the attempted repeal actually expanded the tax benefits—even extending them to child support—contrary to the stated congressional intent. An often-praised (but ill-advised) 2002 revenue ruling, along with a long-dormant provision for preferred-stock income stripping and the poorly drafted provision of the TCJA, combine to produce these unintended consequences.

Wealthy and merely well-to-do taxpayers can easily benefit, as can many small-business owners. Indeed, the wealthy can likely receive double benefits. Unfortunately, moderate-income employed persons—those arguably most deserving of tax benefits—are at risk of having the proposed tax plans disallowed. These proposed plans involve income stripping and the assignment of income. The plans are naked because they lack any real economic substance, although they all satisfy the narrow requirements of the statutory economic substance doctrine (though not quite so clearly if used by moderate-income taxpayers).

This Article serves several purposes. First, it illustrates the unintended consequences of legislation and administrative actions. Second, it explains how many taxpayers may be able to take advantage of the resulting loopholes. Third, it argues that the benefits should help everyone, or no one. Finally, it suggests that congressional acquiescence to the plans (per the legislative acquiescence doctrine) could expand them to help all taxpayers despite administrative or judicial action.

Read the full article or download the complete issue.

Entity:
Topic: