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TAX MATTERS

Alimony deduction were still married, as Pennsylvania
allowed for health care law recognizes only divorce, not legal

premiums purchased separation. The final decree of divorce
was not issued until 2016. Therefore,
with pretax wages the Leyhs could have filed a joint re-
turn in 2015 and avoided the alimony
The Tax Court denies IRS regime. Cynthia Leyh would then
arguments of a ‘double not have been required to include
deduction.’ any portion of the alimony payments
in her income. But because she was
In a case of first impression, the Tax alimony payments his spouse’s health required to include them, the court
Court rejected the IRS’s objection to a insurance premiums that were paid reasoned, the matching principle of
taxpayer’s alimony deduction of pretax to him as compensation but excluded the alimony regime allowed Charles
medical insurance premiums for from gross income, which the Tax Leyh a corresponding deduction.
coverage of a separated spouse. Court had not previously considered. In response to the IRS’s windfall
Facts: In 2012, Charles and When an employee receives argument, the court stated that there
Cynthia Leyh separated in Penn- health coverage covering the was no risk of a windfall and that
sylvania and signed an agreement employee and/or the employee’s disallowing the deduction would
in 2014 incident to their divorce. spouse as a benefit through an leave Leyh with a greater tax burden,
Charles Leyh promised to pay employer-sponsored health care plan, which ran counter to the alimony
Cynthia Leyh alimony until the final the premiums paid for the coverage regime’s purpose of shifting the bur-
divorce was granted. As part of the may generally be excluded from the den to the alimony’s recipient. With
agreement, he paid for her health and employee’s gross income (Secs. 106(a) respect to the Sec. 265 argument, the
vision insurance. and 125(a); Regs. Sec. 1.125-1(h)(2)). court stated that it was not aware
In 2015 Charles Leyh paid In general, before repeal by the of any case in which an alimony
$10,683 for Cynthia Leyh’s health law known as the Tax Cuts and Jobs deduction had been disallowed on
insurance premiums as pretax payroll Act (TCJA), P.L. 115-97, amounts that basis, and as Cynthia Leyh
reductions through his employer’s received as alimony were includible in was required to include the alimony
cafeteria plan. On his 2015 Form income in the year received and de- in her income, it was not wholly
1040, U.S. Individual Income Tax ductible by the payer in the same year allocable to tax-exempt income for
Return, Leyh, using the married filing (former Secs. 71 and 215). The TCJA Sec. 265 purposes.
separately status, excluded the total repealed Secs. 71 and 215 with respect “Neither the double deduction
amount of the premiums for health to divorce or separation instruments common law principle nor section
care coverage he and Cynthia Leyh executed after Dec. 31, 2018 (or 265 applies to prevent the deduction
received through the cafeteria plan modified after that date to apply the of alimony where a separated couple
and claimed an alimony deduction of change). Therefore, the TCJA did not pending a final decree of divorce cre-
$10,683 for the premium payments apply to the agreement at issue. ate an alimony pendente lite agreement
made on Cynthia Leyh’s behalf. The IRS argued that permitting that includes continued health cover-
Following an audit of Charles the alimony deduction would create age as provided by the payor spouse’s
Leyh’s 2015 return, the IRS disal- a “windfall” to Leyh by granting him employer, premiums for which are
lowed his deduction for the alimony the practical equivalent of multiple properly excluded from the payor’s
payments and determined a $3,770 deductions. It further argued a second gross income and included in the
income tax deficiency and a $754 issue, that Sec. 265 prohibits deduc- recipient spouse’s gross income,” the
Sec. 6662(a) accuracy-related penalty. tions for amounts attributable to court concluded (slip op. at 14–15).
Leyh timely petitioned the Tax Court tax-exempt income. ■ Leyh, 157 T.C. No. 7
for a redetermination of the deficiency Holding: The Tax Court held
and penalty. that Leyh was entitled to deduct the — By Maria M. Pirrone, CPA, LL.M., IMAGES BY YURIY ALTUKHOV/ISTOCK
Issues: One issue was whether premiums as alimony. The court noted and Joseph Trainor, CPA, Ph.D., CFE,
Leyh claimed an impermissible that Leyh received the health insur- both associate professors of accounting at
“double deduction” by deducting as ance compensation while the parties St. John’s University, Queens, N.Y.

40 | Journal of Accountancy January 2022