Alimony Paid From Section 125 "Cafeteria Benefits" Plan

[BobKamman]

You be the judge:

Incident to a separation agreement pending divorce, taxpayer agreed to pay his wife’s health insurance premiums through a “cafeteria plan” provided by his employer. He then excluded from his gross income an amount equal to the health insurance premiums pursuant to Section 125 and also claimed an alimony deduction under Sections 62 and 215 for the portion of the premiums covering his wife.

IRS issued a notice of deficiency to him, disallowing the alimony deduction in an amount equal to the premiums paid to provide health insurance coverage for his wife.

[IRonMaN]

If I get to be the judge -------- guilty!   Since this is a federal charge, do I have to take the death penalty under consideration in the sentencing phase of the case?

[Taxes-by-Rocky]

No tax basis in the funds used to make the alimony payment.

About the same as contributing to a 401(k), sending it to her via QDRO, and letting her make the premium payments (and pay the income tax).

[joshuabarksatlcs]

@IRonMaN 

Dear Judge FeMan (FE, iron. Got it??):

Now that you've executed the dude, let me ask you this:

What if the man kept a pot of muni bonds and fully use the interest to fund the alimony?  Would the alimony be deductible?

How about the case of an old client of mine, who was hit by a truck and got a judgement (by you, I think) of $100K per year for life, with COLA, 100% for pain and suffering.  He had NO other income and used the funds to buy into a partnership interest.  Was his investment in the partnership at risk? 

How about the stock he bought with the tax-free pain money?  Did he get any basis for the stock?  (Well, it turned out to be moot because he went all in with Enron anyway, but that was another story.)

NO research here. But did you ask counsel whether:

1.  Sec 125 allowed such arrangement?

2.  Did that particular 125 plan allow such an arrangement?

IF Yes and Yes, wouldn't it worth to entertain an argument that, by the grace of his employment, as he was entitled to such a tax perk, shouldn't the Alimony deduction be allowed??

Of course, going by what you said in one of your prior postings, because my avatar  is a cartoon provided by Lacerte, my comments are NOT binding.  Especially right before the drop dead day and AFTER my daily regimen of you know what.

That said, if I were to rule on this, I will:

1.  Call Lacerte Support; and

2.  Take out my luckiest quarter, and - quoting Anton Chigurh - tell the dude: "Just call it, Friendo".

But then, OMG, you have executed him!!!!

Sincerely,

Just A barking dog. (JABD)

[dkh]

wow 

[BobKamman]

Well, I suppose it's time to reveal the surprise answer, for those whose first instinct is "protect the revenue."  Yesterday the Tax Court decided: Sure, the husband gets an alimony deduction.  Of course he does, because his wife still has to pay tax on it. (This was decided, of course, under the alimony rules before TCJA changed them.)

There is an interesting discussion of this, with further details, at one of the tax blogs I check daily:

https://taishofflaw.com/2021/10/04/a-true-premium-deduction/

I did a Google search for the winning taxpayer, who represented himself in Tax Court, and I'm fairly certain he's this bank president and CEO:

" He is a CPA with more than 40 years of experience in public accounting with an emphasis in tax and business consulting."

https://www.enterprisebankpgh.com/about-us/board-of-directors 

[joshuabarksatlcs]

I didn't see the TC case.  

Yesterday, I wrote what I wrote after my daily regimen of you know what.  As yesterday's bourbon wears out, I need to add another thought to my "Yes and Yes" questioning:

Did the payment qualify for alimony?

When I wrote " No research here", I was going to say "No research here; so , don't know if the payments qualified for alimony".  That was understood, I guess.

Downloading an application for a TC judgeship...

@dkh thanks for the drink,,,

@BobKamman  thanks for a good question.  Please cite the case when you get to it.

[joshuabarksatlcs]

Oops.  You did cite the case.  I guess yesterday's bourbon is still at work...

[dkh]

@joshuabarksatlcs   that drink was for me lol

here's one for you  

[joshuabarksatlcs]

Surprise? 

If you're surprised, here is another one for you:

You put $20K into a 529 Plan, it grew to $100K.  Gain = 80K

You cashed out all $100K, paid tuition for $60K.  Paid dorm fee for $40K.  Sob sob, your spouse makes a lot of money and you two don't get the education credit.  (And sob, sob, Junior got a 1.4 GPA, but that was another story.)

How much was taxable for the $100K of 529 draw?  $80K?  $0?  Somewhere in between?

You had $100K of qualified education expenses, didn't you? 

$0 taxable.  Right?

Now, "surprise!!"  You use the TAX FREE 529 growth to QUALIFY FOR the tax free treatment of the draw?  Circular tax logic?  Did you know the $0 answer?  Are you now "surprised"?

[BobKamman]

What's a 529 plan?

Oh, right, I've heard about them.  Mostly a loophole for the very wealthy to make big gifts to future generations without much accountability.  They threw in some crumbs for the little people who pay taxes, just to avoid suspicion.  

My clients who think their kids are so smart they will get to college, ask me about these 529 creatures sometimes.  I tell them to contribute to their favorite Members of Congress instead, to improve the chances of a service-academy appointment.  Kids should get paid to go to college, and these days it doesn't hurt to know how to shoot a gun either. 

But then they ask which will look better on a FAFSA:  Loads of money in a 529, or more equity in the primary residence.  

I tell them no one knows, either under today's rules or the rules that might apply in ten years.  But people who have paid off their mortgage seem to get the same scholarships for their kids as the people who have little or no equity.  

[joshuabarksatlcs]

In my drinking group, there's this one guy who always cries about city planning rules, the complexities, how exceptions, technicalities...   favor big time developers.  How and what big contractors get away with...

what does he do?  He's a consultant in urban planning and compliances.  His clients are developers and contractors...

[Taxes-by-Rocky]

Assuming that the funds used to make the "alimony payment" were the same as those directed to the Section 125 plan, I still think I would argue that the taxpayer had no basis in the "funds" since he never received (had control over) the funds in the first place (but for, perhaps, a plan election).  Looked at another way (using the court's apparent logic), it's about the equivalent of something that might fall under the anticipatory assignment of income doctrine......and step transaction doctrine....just saying..