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the right to distribute the new IRA or 2021-45 indexes the amount for 2022 to Andrew Redleaf to his former wife,
any part of it to the taxpayer. $540,000 for joint returns and $270,000 Elizabeth, pursuant to a marriage ter-
The taxpayer, as the surviving spouse, for all others. The threshold is increased mination agreement, were made under
trustee, and sole beneficiary of the in 2023 to $578,000 for joint returns and Sec. 1041 rather than being deductible
survivor’s trust, wished to roll over the $289,000 for all others.73 alimony payments under now-repealed
inherited IRA into one or more IRAs Sec. 215. The court affirmed the Tax
in the taxpayer’s name. Because no third Sec. 469: Passive activity Court’s decision.
party could prevent the taxpayer from losses and credits limited Andrew and Elizabeth married in
receiving the proceeds of the IRA and In Rogerson,74 the Tax Court addressed 1984, and Andrew initiated divorce
from rolling over the proceeds into the the issue of material participation after proceedings in 2007. They owned
taxpayer’s own IRA, the IRS allowed a a corporate reorganization. Before the substantial marital properties. On Feb.
tax-free rollover of the inherited IRA. reorganization, the businesses were all 4, 2008, after months of litigation,
operated through one S corporation. they sought to resolve the remain-
Sec. 461(l): Limitation on The taxpayer materially participated in ing financial issues by entering into a
excess business losses of the S corporation (S1) for at least five marital termination agreement (MTA).
noncorporate taxpayers of the 10 immediately preceding years. The final divorce judgment and decree
The excess business loss limitation that The reorganization divided the existing S dissolved the marriage under Min-
originated as part of the law known as corporation activities into three S corpo- nesota law, approving the MTA and
the Tax Cuts and Jobs Act70 limits the rations. The taxpayer filed his tax returns incorporating many of its provisions
amount of trade or business losses that reporting material participation in S1 into the decree. The MTA provided
can offset nonbusiness income for non- and S3 but reported S2 as a passive activ- that if it was approved and the marriage
corporate taxpayers such as individuals, ity. The taxpayer argued that S2 should dissolved, all terms “shall be made by
trusts, and estates. An excess business be considered a new activity; thus, the reference a part of any decree issued.”
loss equals aggregate trade or business five-of-10-years test would not apply. This dispute involved the tax con-
deductions that exceed the sum of ag- The Tax Court determined that Regs. sequences of deferred payments that
gregate trade or business gross income Sec. 1.469-5(j)(1) does not require the Andrew made to Elizabeth in 2012 and
or gain plus a threshold amount. This precise activity to have existed in prior 2013. Andrew took the position in his
disallowed loss is carried forward to the years to apply the five-of-10-years test. federal income tax returns that these
next tax year as an NOL. The regulation treats a taxpayer as ma- were deductible “alimony and separate
The limitation initially applied to terially participating in an activity under maintenance payments.” Elizabeth’s
tax years beginning after Dec. 31, 2017, this test if the new activity includes returns claimed, on the other hand, that
and before Jan. 1, 2026. However, the significant Sec. 469 activities that were the payments were nontaxable transfers
CARES Act retroactively postponed its included in an activity in which the of property incident to divorce.
implementation to tax years beginning taxpayer materially participated in five of The IRS issued separate deficiency
after Dec. 31, 2020. The American Res- the 10 preceding years. Since the activity notices to each of them. The notice to
cue Plan Act of 202171 then extended in S2 was part of the activities of S1 prior Andrew explained he had not shown
the provision one year through 2026, to the reorganization, the court ruled that the payments “qualified as ali-
and later, in 2022, the Inflation Reduc- that the five-of-10-years test applied and mony,” and the one to Elizabeth said
tion Act72 added two years through that the taxpayer materially participated that payments to her “are includable
2028. As a result, the excess business loss in S2 for the years in question. in taxable income as alimony income.”
limitation’s current period of applicabil- Both individuals filed petitions with
ity is 2021–2028. Sec. 1041: Transfers of the Tax Court, where the IRS took the
The calculation’s initial threshold in property between spouses or position that the payments were neither
2018 was set at $250,000 (or $500,000 incident to divorce alimony payments deductible by An-
for joint filers), with these amounts In Redleaf,75 the Eighth Circuit con- drew nor taxable income to Elizabeth.
indexed for inflation annually. Rev. Proc. cluded that $51 million in payments by The Service therefore acknowledged

70. The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. 73. Rev. Proc. 2022-38.
71. American Rescue Plan Act of 2021, P.L. 117-2. 74. Rogerson, T.C. Memo. 2022-49.
72. Inflation Reduction Act, P.L. 117-169. 75. Redleaf, 43 F.4th 825 (8th Cir. 2022).

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