Earlier this month, actors Johnny Depp and Amber Heard reached a divorce settlement in what was a nasty divorce battle that included allegations of domestic abuse. Heard pledged to donate her entire $7 million settlement to charity (divided equally between the American Civil Liberties Union and the Children’s Hospital of Los Angeles), a pledge which has now sparked a new row between her and Depp.
According to reps for Heard, Depp has decided to donate the money directly to charity in Heard’s name, rather than give her the money first and then allow her to make the payments to the charities. This has led to accusations that Depp received a sizable tax benefit from making the direct payment and that such action was in violation of the terms of the settlement agreement. Heard’s camp insists that if Depp wishes to change the terms of the settlement and make direct payments, he must donate $14 million to honor the full amount of his payment obligation to Heard and account for his alleged $7 million tax deduction. Her team also added that Depp should make one lump sum payment rather than paying it in installments, as he already started to do.
Did He or Didn’t He?
According to Boies, Schiller & Flexner LLP tax lawyer Michael Kosnitzky, who represents both domestic and foreign high net worth individuals and corporations from the law firm’s New York and Miami offices, Depp probably didn’t receive such a benefit or even intend to receive one, but the right answer to whether he got a significant tax break depends on three things: (1) the specific provisions of their marital settlement agreement; (2) whether they complied with the specific Internal Revenue Service rules related to this matter; and (3) Depp’s taxable income received and his other itemized deductions incurred during 2016.
Kosnitzky went on to say that for a payment to a charity to be tax-deductible, it must be given with what tax professionals call “detached and disinterested generosity.” Here, Depp's payment probably wouldn’t have been made but for whatever the requirements are under the marital settlement agreement, so it’s unlikely that he’d be entitled to a tax deduction or that his intention was to seek such a tax deduction.
Requirements to Qualify as Charitable Contribution
There are specific Temporary Treasury Regulations1 that address this issue. These regulations treat a payment made by a former husband to a qualifying charity as a charitable contribution made by the former wife, if: (1) the former husband made the charitable contribution on behalf of the former wife pursuant to the marital settlement agreement; (2) the former husband made the charitable contribution on behalf of the former wife pursuant to the written request of the former wife; or, (3) the former wife provides to the former husband her written consent to, or ratification of, the charitable contribution made by the former husband on behalf of the former wife.
If any one of these three tests are met, the payment by Depp directly to the charities will be treated as a non-taxable transfer of this amount from Depp to Heard and then immediately thereafter, a contribution of this amount by Heard to the various charities.
Tax Benefit Unlikely
Even if these rules weren’t satisfied, and Depp was found to have the requisite donative intent, his deduction would be limited by various tax rules that limit contributions to a percentage of Depp’s adjusted gross income and those that limit the tax benefits of itemized deductions generally.
Based on such rationale, Kosnitzky believes that it’s either unlikely that Depp intended to receive a tax benefit for directly making the payments to Heard's charities or that he’d receive a tax benefit if they were so intended.
Endnote:
1. Treasury Regulation 1.1041-1T(c), Q&A 9.
