Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
Alimony Requirement #6: Millions in Payments by Hedge Fund Partner to Ex-wife Did Not Meet Alimony’s Survival Criterion (Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224, Aug. 5, 2022)
Andrew Redleaf is the majority partner at Whitebox Advisors, LLC, a hedge fund asset management firm. The Redleaf’s marriage termination agreement (MTA) required Mr. Redleaf to pay his ex-spouse $140 million including $1,500,000 per month for sixty months. Mr. Redleaf deducted $51 million in payments he made to his ex-spouse in 2012 and 2013 as spousal maintenance (alimony). The issue in the case was whether the alimony payments would stop after payee spouse’s death.
The Court’s tests. To determine whether a payor has liability to continue payments after the payee’s death, the courts 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.
“Rather surprisingly, given the overall sophistication of the document and the substantial state court litigation between the parties that followed, the MTA contained no provision clarifying (designating) that the payments in question were not includable in Elizabeth’s gross income and allowable as a deduction to Andrew, §71(b)(1)(B)4; and no provision unambiguously stating that Andrew had no liability to make payments for a period after Elizabeth’s death, §71(b)(1)(D).”
Therefore, the Court concluded that Minnesota law unambiguously established that the MTA was not a spousal maintenance agreement. Rather, it was a contractual division of marital property. The payments by Mr. Redleaf were not deductible as alimony.