While the Tax Cuts and Jobs Act ended the deduction for alimony payments for divorces finalized after 2018, we still have to deal with the status of payments for divorces prior to that date.  In the case of Ibrahim v. Commissioner, TC Summary Opinion 2022-7,[1] the Tax Court ruled payments from a physician to his former spouse did not meet the criteria to be alimony under the law.

Alimony Under Pre-TCJA Law

For a payment to qualify as alimony for federal tax purposes under the law in effect before the Tax Cuts and Jobs Act, payments in cash must meet the following conditions:

• Such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,

• The divorce or separation instrument does not designate such payment as a payment which is not includible in gross income and not allowable as a deduction as tax alimony,

• In the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and

• There is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.[2]

Of course, in a divorce a lot of transfers take place between the spouses. In addition to payments that might be alimony, payments will be made to divide property and may also be child support.

Since the other payments are nondeductible to the party paying the funds and nontaxable to the party receiving the funds, there’s often disagreements over the nature of such payments.  And since often the payor is in a higher tax bracket than the recipient, even if the parties agree the payment is alimony, the IRS might beg to disagree.

Facts of the Case

The basic structure of the divorce agreement is outlined as follows:

On January 5, 2017, Ms. Edington filed a petition for dissolution of marriage in Texas County Circuit Court in Texas County, Missouri. Dr. Ibrahim filed his answer to the petition for dissolution of marriage on January 27, 2017.

On May 11, 2017, Dr. Ibrahim and Ms. Edington signed the first amendment to the marital separation agreement (amended agreement). The amended agreement was executed “to allow the Court in its Judgment for Dissolution to refer to the fact that the parties hereby agree that neither party shall pay maintenance to the other party, as expressly stated in Paragraph 42 in the Maintenance section.” The amended agreement also states:

Paragraph 43 in the Maintenance section is hereby amended to state that the Husband agrees to pay Wife the total sum of fifty thousand dollars ($50,000), to assist in Wife's relocation and legal fees, payable three hundred dollars ($300) monthly beginning upon the execution of the original agreement and payable five hundred dollars ($500) monthly beginning in June 2017, and payable monthly until a final judgment and decree of dissolution, at which time Husband will pay the then yet unpaid balance of the fifty thousand dollars.

Dr. Ibrahim and Ms. Edington's divorce was finalized on June 7, 2017, when the judgment for dissolution of marriage (judgment) was filed in the Texas County Circuit Court. Paragraph 11 of the judgment states that “[t]he parties have entered into a written Marital Separation Agreement that makes full and final disposition of all marital property and provides that neither party shall receive maintenance from the other.” The judgment provided that “neither party shall receive maintenance from the other, and this judgment with respect to maintenance is not modifiable.”

The agreement, the amended agreement, and the judgment have not been modified since the judgment was filed on June 7, 2017.[3]

The payments for the years in question are described by the court:

Dr. Ibrahim paid Ms. Edington a total of $1,200 during 2016 and a total of $48,800 during 2017.[4]

Dr. Ibrahim claimed the payments as alimony and deducted them on his returns.  The IRS examined the return and disallowed the deductions.  Dr. Ibrahim filed in Tax Court to challenge the IRS’s position.

Why Did the Court Find the Payments Were Not Alimony?

The IRS and the taxpayer agreed that the payments were made under a divorce agreement and that Dr. Ibrahim and his former spouse were not members of the same household.  But the IRS argued that the payments were specifically designated as not deductible alimony by the agreement and that, in any event, the payments would not cease if his ex-spouse had died before the payments were due under this agreement.

The opinion first looked to see if the language of the agreement explicitly treated the payment as not tax alimony.  The opinion described the standards used to make this evaluation:

Section 71(b)(1)(B) requires that the divorce instrument “not designate such payment as a payment which is not includible in gross income under this section and not allowed as a deduction under section 215.” While it is not necessary for the divorce instrument to use the exact statutory text of sections 71 and 215, the requirements of subparagraph (B) will generally be met if there is no “clear, explicit and express direction” in the divorce decree stating that the payment is not to be treated as an alimony or separate maintenance payment. Proctor v. Commissioner, 129 T.C. 92, 96 (2007) (quoting Estate of Goldman v. Commissioner, 112 T.C. 317, 323 (1999), aff'd without published opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000)). We have previously held that payments made pursuant to a divorce or separation instrument do not meet the requirements of subparagraph (B) where the instrument “provides clear, explicit, and express direction that neither party shall receive alimony or a separate maintenance payment.” Shelton v. Commissioner, T.C. Memo. 2011-266, 2011 Tax Ct. Memo LEXIS 260, at *3.[5]

In this case the Court finds that the language of the agreement contains terms that causes the agreement to fail the second of the four tests:

Here, the agreement, the amended agreement, and the judgment each contain statements indicating that neither Dr. Ibrahim nor Ms. Edington would pay maintenance to the other. We find these statements provide “clear, explicit and express direction” that neither party shall receive maintenance payments from the other. Accordingly, Dr. Ibrahim's 2017 payments do not satisfy the section 71(b)(1)(B) requirements, and thus, he is not entitled to an alimony or separate maintenance payment deduction pursuant to section 215. See id. at *3–4.[6]

Although failing this test meant the payments were not deductible, the Court also found that the payments would not have terminated had his ex-spouse died before the payment was made.  Again, the Court outlines the basic analysis to be used to determine if the payments would have ceased at the recipients’ death:

Pursuant to section 71(b)(1)(D), for an alimony or separate maintenance payment to be deductible there must be no liability for the payor to make such payments, or for the payor to make substitute payments, after the death of the payee spouse. To determine whether a payor has liability to continue payments after the payee’s death, we apply the following sequential approach: (1) the Court first looks for an unambiguous termination provision in the applicable divorce instrument; (2) if there is no unambiguous termination provision, then the Court looks to whether payments would terminate at the payee’s death by operation of state law; and (3) if state law is ambiguous as to the termination of payments upon the death of the payee, the Court will look solely to the divorce instrument to determine whether the payments would terminate at the payee’s death. Logue v. Commissioner, T.C. Memo. 2017-234, at *8–9; see Hoover v. Commissioner, 102 F.3d 842, 846 (6th Cir. 1996), aff’g T.C. Memo. 1995-183; Okerson, 123 T.C. at 264–65; Stedman v. Commissioner, T.C. Memo. 2008-239, 2008 Tax Ct. Memo LEXIS 234, at *4.[7]

As is often the case, the agreement itself did not provide for whether or not payments would continue to be due following the death of the payee, so the Court looks to determined what would happen under the applicable state law, which was Missouri in this case:

The parties agree that there is no express termination upon death provision in the agreement, the amended agreement, or the judgment. The parties further agree that relevant Missouri state law, see Mo. Rev. Stat. § 452.370(3) (2017), provides that “[u]nless otherwise agreed in writing or expressly provided in the judgment, the obligation to pay future statutory maintenance is terminated upon the death of either party or the remarriage of the party receiving maintenance.” Courts have previously ruled that a taxpayer may rely upon state law to comply with section 71(b)(1)(D). See Johanson v. Commissioner, 541 F.3d 973, 976–77 (9th Cir. 2008), aff’g T.C. Memo. 2006-105; Kean v. Commissioner, 407 F.3d 186, 191 (3d Cir. 2005), aff’g T.C. Memo. 2003-163. However, before Dr. Ibrahim can rely upon state law to meet the requirements of section 71(b)(1)(D), we must determine whether there is an “obligation to pay future statutory maintenance.”[8]

The taxpayer argued that the situation in this case was such that the payments should qualify as statutory maintenance under state law given the situation of his former spouse:

Dr. Ibrahim asserts that the payments qualify as statutory maintenance under Missouri state law because it was questionable whether Ms. Edington had sufficient property to provide for her reasonable needs and was unable to support herself through appropriate employment. Under Missouri state law, the Missouri state court can award maintenance only where the court finds that the receiving spouse “(1) [l]acks sufficient property, including marital property apportioned to him, to provide for his reasonable needs; and (2) [i]s unable to support himself through appropriate employment or is the custodian of a child whose condition or circumstances make it appropriate that the custodian not be required to seek employment outside the home.” See Mo. Rev. Stat. § 452.335(1) (2017).[9]

But the Tax Court notes that no such finding was made by the Missouri court in this case, his former spouse had the ability to and actually did support herself and, in fact, the text of the agreement explicitly states there was no obligation for either party to pay maintenance:

We decline to accept Dr. Ibrahim's argument, since there was no finding by the Missouri state court that Ms. Edington was eligible for maintenance under Missouri state law. Rather, the evidence demonstrates that Ms. Edington was continuously employed as a nurse during and after their marriage. She was able to rent and later purchase a home during her separation from Dr. Ibrahim. Moreover, Dr. Ibrahim's trial testimony confirms that Ms. Edington was able to support herself financially during and after the divorce. Furthermore, under the express terms of the agreement, the amended agreement, and the judgment, neither party was responsible for maintenance of the other.[10]

Thus, for this reason as well the payments would not qualify under federal law as deductible alimony payments.

[1] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/doctor-can%e2%80%99t-claim-alimony-deduction%2c-liable-for-accuracy-penalty/7dhg1 (retrieved May 17, 2022)

[2] IRC §71(a)(1) prior to  amendment by the Tax Cuts and Jobs Act

[3] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022

[4] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022

[5] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022

[6] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022

[7] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022

[8] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022

[9] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022

[10] Ibrahim v. Commissioner, TC Summary Opinion 2022-7, May 16, 2022