Alimony Tax Case

After several years of a difficult marriage, Donald and Marla agreed to a divorce. As part of the property settlement. Marla transferred to Donald corporate stock, a commercial building, and a personal residence. Donald transferred other property to Marla, but the fair market value of the property was $600,000 less than the fair market value of the property Marla had transferred to him. To make the settlement equal, Donald agreed to pay Marla $600,000, payable over 10 years at 8% interest. For several years, Donald deducted the interest on his Federal income tax return as investment interest.

Upon audit, the IRS disallowed the interest deduction, classifying it as nondeductible personal interest. Donald believes the interest is deductible and has asked you to find support for the deduction.

Write a memo indicating your findings for us to present to Donald.

Note: Primary authority is the only acceptable support for our position.