In a divorce settlement between unrepresented spouses, my experience has been that just about nobody thinks clearly abut the tax consequences in mediation. Usually, the conversation comes around to the dependency exemptions, if there are children, but that is about as far as it goes.
In the scenario offered here, neither party had thought that there might be nasty unexpected income tax consequences arising out of their divorce settlement. Both would have done well to hire attorneys with some understanding of the tax code. However, even without that, there is some advice available for free from the IRS.
If you search irs.gov for “divorce settlement,” one of the hits you will see is IRS Publication 504. This covers a wealth of information, including information about dependency exemptions etc. There are in fact a myriad of IRS publications that are relevant to divorce, and it is worth reading through these.
For our purposes, IRS Publication 504 explains that generally “Alimony is deductible by the payer and must be included in the spouse's or former spouse's income” So, yes she should be thinking that her alimony will be taxable as income to her. If he were hoping to cheapen a lump sum cash payout immediately after the divorce by characterizing it as alimony, he might have done well to read that “If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Your spouse can deduct in the third year part of the alimony payments he or she previously included in income.”
The bottom line from my perspective is that if you are working on a divorce settlement without professional help, do check out the information the IRS provides for free. It might give you a heads up about some unforeseen tax issues.