Mark Hexum v. Comm., CA-7, 2018-1 USTC ¶50,168

Mark Hexum paid his ex-wife, Sherri, half of the net gain from the sale of their marital home because the Illinois family court ruled payment was required under their divorce agreement. Mark had been responsible for the house’s mortgage and expenses after the divorce, and in his view, the equity accrued before the sale was not “marital property” that he should have been made to split with his ex-wife when the house was sold. He characterized the payment as alimony and deducted it on his tax return.

Mark and Sherri settled on the terms of their divorce in a dissolution agreement. As alimony, Mark agreed to pay Sherri a percentage of his salary and of the incentive-based pay that he received. The agreement provided that “maintenance is taxable income to Sherri and deductible by Mark [under] Section[s] 71(a) and 215 of the Internal Revenue Code.” It incorporated Section 510 of the Illinois Marriage and Dissolution of Marriage Act, which provided that unless the agreement says otherwise, “the obligation to pay future maintenance is terminated upon the death of either party” (750 ILCS 5/510(c) (2012)).

In a separate paragraph regarding the marital home, Mark and Sherri agreed to sell the house and divide equally “the net equity of said property,” and they agreed that Mark would “pay all expenses associated with the … property until [then].” Accordingly, from when the agreement took effect to when the house was sold, Mark paid the mortgage on the property; he also paid to replace some carpeting. In total, he paid $25,906. Mark believed that before the gain from the sale was divided, he should first be reimbursed that sum as non-marital property. Sherri moved the family court to hold Mark in civil contempt when he withheld the money. The circuit judge rejected Mark’s view of the agreement and directed him to pay Sherri half of the net gain.

On his 2013 tax returns, without consulting a lawyer or accountant, Mark told his tax preparer that he paid alimony in a total amount that included the $12,953 payment to Sherri, and he claimed a deduction. The IRS determined the payment was not alimony under §71 and disallowed the deduction.

The Tax Court ruled for the Commissioner. The Tax Court said that “it is undisputed by [Mark] that he would have continued to have an obligation to make the payments on the gain from the real estate even if his former spouse had passed away before the sale.” Thus, the Tax Court concluded, the payment did not qualify as alimony (§71(b)(1)(D)).

Mark appealed the Tax Court decision. Mark appealed and argued that the equity accrued in the house after the divorce was not marital property under Illinois state law, and thus, he reasoned, his payment of half of its value was necessarily alimony. He also said the payment qualified as alimony under §71(b), as described on the IRS’s website, and so was properly deducted.

Appeals Court agrees payment wouldn’t end at death. The Appeals Court found that Illinois law unambiguously provided that the payment at issue would not terminate at Sherri’s death. Mark was to transfer half of the net gain from the sale. This is a fixed amount and so is categorized either as maintenance in gross or a property settlement. (And because periodic maintenance was ordered, it must be the former.) Regardless, Mark’s obligation would not terminate at Sherri’s death. Because the payment did not meet the requirement of §71(b)(1)(D), it is not alimony.