The Question of Palimony: Taxable or Not?
Palimony provides relief for those couples who live together for extended periods of time and live as though married, yet never get that piece of paper to make it legal. In those instances where palimony is granted by the Courts, the question of its tax treatment still lingers. Is an award of palimony considered income, thereby making it taxable to the payee and tax deductible to the payor? Or is palimony more so considered a gift that would be deemed tax-free money?
The answer to that question remains indefinite and very fact-specific. Typically, when determining tax consequences regarding money, we look to the IRS and how it views long-term relationships where the parties never married. The problem with that is the IRS only sees couples as married or not married, with no in between. The IRS has never made clear how it would treat palimony, nor have the New Jersey tax codes. As such, we must look to case law and how the IRS has treated previous cases involving palimony in order to draw some conclusions regarding this issue.
Palimony: Taxeable Income or Tax-Free Gift?
In Pascarelli, the case was made by the IRS that money given to the woman by the man in that case was for “wifely services,” just as it can be argued alimony is given for the same purpose when one spouse didn’t work during the marriage. The Court shot down the IRS’ argument for two reasons: the intent of the man in that case was to give a gift and the value of the services given by the woman were less than the amount of money the woman received over the course of the relationship. The man’s intent came from generosity and affection, although not quite sure how that differs from alimony. These two factors led the way in determining whether or not compensation between unmarried couples would be considered income or a gift for tax purposes.
A case that dealt more directly with the tax consequences of a palimony award was Green v. Commissioner. The unmarried couple lived together for nine (9) years until Ms. Green’s partner died. Ms. Green sued the partner’s estate as a creditor claiming compensation for services she performed during the relationship, and won under the doctrine of “quantum meruit,” an equitable doctrine which allows for restitution for unjust enrichment. The IRS of course wanted to claim their money and stated the monies she received were gross income and should be taxed.
Green took the position similar to Pascarelli, claiming the services she performed were “wifely duties” and should therefore be considered a gift, rather than income. Unlike Pascarelli, the monies she received were considered taxable income. It should be noted that as a general rule, payments made during unmarried couple’s time together for “wifely services” performed in exchange for a promise of support are generally considered gifts; the reason being that wifely services are not full and adequate consideration for support. The Green case was different because Ms. Green claimed as a creditor against her deceased partner rather than as a palimony claim. Had she filed a palimony claim instead, the outcome would likely have been different and her award likely been considered a tax-free gift.
The conclusion we can draw from the trend in the case law is that the Courts tend to view palimony payments as non-taxable gifts rather than income due to the intent of the parties giving monies out of affection and generosity and the consideration given for support is less than the actual services performed. Most likely, palimony payments, unless specifically designated as payment for services, are considered gifts.
For additional information about your New Jersey family law matter, contact the Morris County law offices of Townsend, Tomaio & Newmark today at 973-840-8970. Our knowledgeable New Jersey divorce and family law attorneys will be happy to answer your questions with a cost-free consultation.