John DiTullio v. Commissioner of Internal Revenue

The $50,000 Question: Alimony or Property Settlement?

John DiTullio's tax return hinged on a single, silent clause. A $50,000 payment to his ex-wife loomed large, carrying with it a potential $12,000 tax deficiency if the IRS successfully denied its deductibility as alimony. The legal battle boils down to this: Can a lump-sum payment meant to resolve a pension obligation qualify as alimony under tax law if the divorce agreement fails to explicitly state that the debt vanishes upon the ex-wife's death? In a recent ruling, Judge Marshall sided with the IRS, concluding that because the obligation would survive the ex-wife’s death, the payment constituted a non-deductible property settlement, not alimony. The IRS conceded the fraud penalty.

A Workplace Injury, A Divorce, and a Cash Handshake

The saga began in 2013 when DiTullio, then an electrician for the State of New Jersey, suffered a workplace injury that left him permanently disabled. In 2014, he applied for a disability pension with the New Jersey Public Employees’ Retirement System (PERS). The Board of Trustees approved his application in March 2020, with benefits retroactive to July 1, 2014.

In the interim, DiTullio and Lisa Lopez divorced. Their Final Judgment of Divorce (FJOD), signed on March 22, 2017, stipulated in Paragraph 6 that because DiTullio had a pending disability pension application, a Qualified Domestic Relations Order (QDRO) would be prepared to divide his pension benefits. DiTullio paid his share of the QDRO preparation fee to Ms. Lopez's attorney, but Ms. Lopez never paid her share, and consequently, no QDRO was ever filed. DiTullio understood that, had a QDRO been executed, the New Jersey Department of Pensions would have directly paid Ms. Lopez her share of his pension payments.

Upon receiving a lump-sum retroactive pension distribution of $156,564 in 2020, DiTullio informed Ms. Lopez. Instead of pursuing the QDRO route outlined in the FJOD, they agreed to a lump-sum payment of $50,000 to fully satisfy any pension-related obligations. DiTullio hired an attorney to draft a Consent Order formalizing this agreement. The Consent Order amended Paragraph 6 of the FJOD, stating that the $50,000 payment constituted "full satisfaction of any entitlement" Ms. Lopez might have regarding the pension. The order explicitly stated that "No Qualified Domestic Relations Order shall be necessary."

On June 9, 2020, DiTullio and Ms. Lopez signed the Consent Order. Concurrently, DiTullio gave Ms. Lopez a check for $50,000, noting "Equitable Pension Distribution – Lump Sum" in the memo line. Beyond this $50,000 payment, no other periodic or monthly payments were made. Neither the FJOD nor the Consent Order mentioned alimony or specified that DiTullio’s obligation to pay a share of the retroactive pension payment would terminate upon Ms. Lopez’s death.

Petitioner vs. IRS: The 'Ghost' of the Unwritten QDRO

On June 9, 2020, DiTullio and Ms. Lopez signed the Consent Order. Concurrently, DiTullio gave Ms. Lopez a check for $50,000, noting "Equitable Pension Distribution – Lump Sum" in the memo line. Beyond this $50,000 payment, no other periodic or monthly payments were made. Neither the FJOD nor the Consent Order mentioned alimony or specified that DiTullio’s obligation to pay a share of the retroactive pension payment would terminate upon Ms. Lopez’s death.

At the heart of the dispute is Section 71(b)(1)(D) of the Internal Revenue Code. This section defines "alimony or separate maintenance payment," and it stipulates, among other things, that to qualify as alimony, "there is no liability to make any such payment for any period after the death of the payee spouse." In simpler terms, if the payments continue even after the ex-spouse dies, the payment cannot be considered alimony for tax purposes.

The IRS argued that the $50,000 payment was a property settlement, not alimony, and thus did not meet the requirements of Section 71(b)(1)(D). The IRS pointed to the fact that the Final Judgment of Divorce (FJOD) and the Consent Order were silent on whether the payment obligation would cease upon Ms. Lopez's death. Because these documents were silent, the IRS contended that under state law, or even the plain language of the agreements, the debt would remain, even if Ms. Lopez died.

DiTullio countered that the 2017 FJOD referenced a Qualified Domestic Relations Order, or QDRO. DiTullio argued that since QDROs are creatures of pension regulations—specifically, the New Jersey Public Employees’ Retirement System (PERS)—which do terminate upon death, this "termination on death" condition should be implied in his $50,000 payment. He maintained that the spirit of the agreement was to align with PERS regulations, where withholdings mandated under a matrimonial order cease upon the death of either the retired member or the alternate payee.

Court: 'Full Satisfaction' Means the Debt Lives On

DiTullio argued that since QDROs are creatures of pension regulations—specifically, the New Jersey Public Employees’ Retirement System (PERS)—which do terminate upon death, this "termination on death" condition should be implied in his $50,000 payment. He maintained that the spirit of the agreement was to align with PERS regulations, where withholdings mandated under a matrimonial order cease upon the death of either the retired member or the alternate payee.

Judge Marshall, however, disagreed. The court first addressed whether New Jersey state law was ambiguous on the issue of maintenance payments terminating upon the death of the payee when the divorce instrument is silent. Finding no explicit state caselaw on the matter, the court determined that New Jersey law is ambiguous on whether this specific type of maintenance automatically terminates upon death. Because of this ambiguity, the court turned to the text of the Final Judgment of Divorce (FJOD) and the subsequent Consent Order.

The court noted that the Consent Order stated DiTullio "shall give" his ex-wife $50,000 as "full satisfaction" of the debt outlined in the FJOD. Judge Marshall then relied heavily on the precedent set in Webb v. Commissioner, T.C. Memo. 1990-540. In Webb, the Tax Court considered whether the phrase "[t]he Husband shall pay" created an obligation that survived the death of the recipient spouse. The Webb court, highlighting that the statute speaks in terms of "liability," held that the phrase "[u]nquestionably . . . created a liability which would have been enforceable by [the recipient spouse's] estate had she died after the execution of the agreement but before the payments were actually made.”

Judge Marshall found the language in DiTullio's Consent Order analogous to the language in Webb. Because the obligation to pay the $50,000 would have been enforceable by the ex-wife’s estate if she had died before cashing the check, it failed the requirement under Section 71(b)(1)(D), which stipulates that, to qualify as alimony, the payor must have no liability to make the payments after the death of the payee spouse. Therefore, the payment was not alimony.

Practice Point: Why 'Silence' is Expensive in Tax Law

As demonstrated in DiTullio v. Commissioner, and echoing the precedent in Webb, practitioners must pay meticulous attention to detail when drafting divorce instruments. The Tax Court found the language in DiTullio's Consent Order analogous to the language in Webb. Because the obligation to pay the $50,000 would have been enforceable by the ex-wife’s estate if she had died before cashing the check, it failed the requirement under Section 71(b)(1)(D). Section 71(b)(1)(D) stipulates that, to qualify as alimony, the payor must have no liability to make the payments after the death of the payee spouse. Therefore, the payment was not alimony.

The lesson for practitioners is clear: when drafting divorce instruments—especially 'Consent Orders' or modifications that convert pension shares into lump sums—silence regarding the 'death of the payee' is fatal for alimony treatment. Furthermore, relying on the implied rules of a Qualified Domestic Relations Order (QDRO) that was never actually executed does not work. The specific contract signed (the Consent Order) controls the tax treatment.