Eighth Circuit: Deductions denied for deferred cash payments of $51 million made to former spouse

The U.S. Court of Appeals for the Eighth Circuit today affirmed the opinion of the U.S. Tax Court denying the taxpayer’s deduction claims for $51 million in deferred cash payments that he made to his ex-wife. The appeals court agreed that these were not “spousal maintenance” payments pursuant to the applicable provisions of Minnesota law and that the deductions were properly denied under the now-repealed alimony provisions of the Internal Revenue Code for the taxpayer’s 2012 and 2013 federal income tax years.

The case is: Redleaf v. Commissioner, No. 21-2209 (8^th Cir. August 5, 2022). Read the Eighth Circuit’s decision [PDF 66 KB] 

This dispute concerns deferred payments that the taxpayer agreed to make to his ex-wife in 2012 and 2013. The taxpayer filed federal income tax returns claiming these were deductible “alimony and separate maintenance payments” whereas the ex-wife filed income tax returns claiming the payments were nontaxable transfers of property incident to divorce.

The IRS issued separate deficiency notices to the taxpayer, explaining he had not shown the payments “qualified as alimony,” and to the ex-wife, explaining payments to her “are includable in taxable income as alimony income.” Both petitioned the U.S. Tax Court for redetermination of their federal tax liabilities. The Tax Court consolidated the cases and granted summary judgment in favor of the ex-wife. Focusing on two of the four criteria that defined deductible alimony payments in section 71(b)(1), the Tax Court concluded (1) that the taxpayer’s obligation to make payments would have continued if the ex-wife had died before the final payment was due; and (2) that Minnesota law designated the payments as not includable in her gross income and not deductible by the taxpayer.

The taxpayer appealed, and today the Eighth Circuit affirmed.