In Uncategorized on 10/04/2021 at 15:38

Judge Travis A (“Tag”) Greaves has a bonus for the family lawyers (if we ever get back Section 215) in Charles H. Leyh, 157 T. C. 7, filed 10/4/21. Charles got health insurance for his loved-once through his employer’s Section 125 Cafeteria plan, and deducted those premiums as alimony (in a year when you could still do that). IRS said, no, double-dip, but Judge Tag says yes.

“…petitioner paid $10,683 for Ms. Leyh’s health insurance premiums as pretax payroll reductions from his wages through his employer’s ‘cafeteria plan’ (alimony payments). On his [year at issue] Form 1040, U.S. Individual Income Tax Return, petitioner excluded from his gross income the total amount of health care coverage premiums he and Ms. Leyh received through his employer’s ‘cafeteria plan’ (health insurance compensation) and also claimed an alimony deduction for the alimony payments.” 157 T. C. 7, at p. 3 (Footnotes omitted, but Charles and ex-Mrs. Charles filed MFS, per their separation agreement, pre-divorce, which was granted the next year).

“Petitioner received the health insurance compensation while Ms. Leyh was still considered his spouse as Pennsylvania law recognizes only divorce, not legal separation, and a final decree of divorce was not granted until [next year]. Consequently, there is no dispute that petitioner was entitled under sections 106 and 125 and the regulations thereunder to exclude from his gross income the health insurance compensation, including the portion covering Ms. Leyh’s health insurance coverage. Respondent, however, challenges petitioner’s attempt to also deduct the alimony payments.” 157 T. C. 7, at p. 5. (Citation omitted).

I’m sure my ultra-sophisticated readers already yelled, “Why not file MFJ? Premiums not income to either, and no income to ex-Mrs. Charles.” But here Charles gets the double-dip.

It’s the “alimony régime,” says Judge Tag.

“If a taxpayer pays alimony as defined in section 71(b), then the taxpayer may deduct such payments from gross income if the amounts are includible in the gross income of the recipient under section 71. Secs. 62(a)(10), 215(a) and (b).8 We are satisfied, and respondent does not dispute, that the alimony payments statutorily qualify as alimony and that Ms. Leyh was required to include these amounts in her gross income in accordance with section 71. In most cases there is little question as to whether the taxpayer may deduct a payment if it qualifies as alimony under the Code and is included in the recipient’s income. However, the facts here require us to consider another matter outside the statute: Did petitioner claim an impermissible ‘double deduction’ when deducting the alimony payments and excluding the health insurance compensation from his gross income?” Order, at p. 6.

Alimony reallocates income and deductions. If the parties have Mrs. Charles picking up the income, then Charles should get the deduction.

“As a married couple awaiting a final decree of divorce under Pennsylvania law, petitioner and Ms. Leyh could have chosen to file a joint return for [year at issue] and avoid the alimony regime altogether. If they had, they would have had an exclusion from gross income equal to the amount of the health insurance compensation, no alimony deduction for that amount, and no alimony income inclusion for that amount. Instead, petitioner and Ms. Leyh chose to file separately and treat the alimony payments as alimony. But for the alimony regime, Ms. Leyh would not have been required to include any portion of the alimony payments in her gross income. It follows that, per the general matching design of the alimony regime, if Ms. Leyh is required to include the alimony payments in her income, then petitioner should be permitted a corresponding deduction for those payments to preserve this equilibrium. In other words, petitioner’s alimony deduction should be properly viewed as being matched against Ms. Leyh’s alimony income, not against his excluded wage income.” 157 T. C. 7, at pp. 8-9.

IRS fights on: “Respondent points to a statement from the Senate Finance Committee describing the creation of the alimony deduction as an attempt by Congress to relieve a payor-spouse from the tax burden of whatever part of an alimony payment was ‘includible in * * * [the payor’s] gross income.’ S. Rept. No. 77- 1631, at 83 (1942), 1942-2 C.B. 504, 568. We believe, however, that this legislative history cannot be read to override the plain text of sections 62, 215, and 71 by interpreting these comments as imposing a precondition not present in the statutes themselves. These sections are clear that a payor of alimony may deduct such expenses to the extent they constitute alimony and are includible in the recipient’s gross income. Respondent recognizes that these elements are present in petitioner’s case by conceding that the alimony payments meet the section 71(b) definition of alimony and would otherwise be deductible under sections 62 and 215 but for petitioner’s exclusion of the health insurance compensation from his gross income. If respondent is concerned that petitioner’s situation might create an unanticipated statutory ‘loophole (which we do not believe is the case here), it would be up to Congress, not the Commissioner or this Court, to retroactively address.” (Footnote omitted).

Anyway, IRS can’t rewrite the statutes.

Section 265 does prohibit taking deductions with tax-exempt money, but here there is taxable income to ex-Mrs. Charles.

Judge Tag nails it.

“Neither the double deduction common law principle nor section 265 applies to prevent the deduction of alimony where a separated couple pending a final decree of divorce create an alimony pendente lite agreement that includes continued health care coverage as provided by the payor spouse’s employer, premiums for which are properly excluded from the payor’s gross income and included in the recipient spouse’s gross income. Accordingly, petitioner is entitled to deduct an amount equal to the alimony payments from his gross income.” 157 T. C. 7, at pp. 14-15.

Edited to add, 10/5/21: Of course my ultra-savvy readers have long since twigged to the fact that by filing MFS, ex-Mrs. Leyh’s net tax bite is way lower than Charles’, so the deduction helps Charles a lot more than the alimony income hurts ex-Mrs. Leyh. So I must infer that, in negotiating the break-up, ex-Mrs. Leyh got suitable off-tax-return compensation. And if my source got it right, Chuck Leyh is President and CEO of Enterprise Bank, and has forty (count ’em, forty) years’ combat time as a CPA, specializing in tax.  So although pro se, Chuck didn’t need any help litigating this case. Chuck gets a Taishoff “Good Job, First Class.”


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