Eleventh Circuit Finds Taxpayer's Payments to Ex-Spouse Were Not Deductible Alimony

(Parker Tax Publishing March 2025)

The Eleventh Circuit affirmed the Tax Court and held that payments a taxpayer made to his ex-spouse in 2017 and 2018 were not deductible as alimony under Code Sec. 71 and Code Sec. 215. The court found that the governing divorce instruments contained multiple non-alimony designations for the payments and that a divorce court's income-deduction order, entered after the taxpayer fell behind on the payments, did not change the nature of the taxpayer's obligations. Martino v. Comm'r, 2025 PTC 75 (11th Cir. 2025).

Background

Dr. Joseph Martino and Cindy Roberts divorced in 2016. Before their divorce was finalized, Martino and Roberts reached a settlement agreement concerning their marital property. That agreement stated that it was "mean to be an equitable division of the marital property [that is] non-taxable to either party." Among other things, the agreement provided that Martino would gain sole possession of the former couple's marital residence in exchange for a $2.2 million payment to Roberts. In a separate provision, the agreement spelled out Martino's obligation to pay Roberts $3,000 per month "as taxable periodic alimony." A few months later, a Georgia court issued a final divorce decree that dissolved Martino and Roberts's marriage. That decree incorporated the former couple's settlement agreement "as if quoted verbatim."

A few months later, Martino and Roberts signed a consent order that modified Martino's obligations under the divorce decree. In exchange for some concessions by Roberts, Martino now agreed to pay his ex-wife $3.5 million for the marital residence - a payment that Martino would make in three installments. The consent order reiterated that these payments would be "tax-free" to Roberts.

Martino failed to pay the second installment, prompting Roberts to move for contempt and the court to enter another consent order. That order required Martino to pay the second installment with interest, and it directed Martino to execute a deed giving Roberts the right to foreclose on the marital residence if Martino failed to make the third installment. When the third installment came due, Martino failed to pay it, and Roberts moved for contempt again. This led the court to issue a contempt order requiring Martino to make the $3 million payment by a specific date. But shortly after the contempt order's issuance, Martino filed for bankruptcy. The marital residence was sold in Martino's bankruptcy, but the proceeds of that sale went to other creditors - not Roberts. Martino received a bankruptcy discharge of various debts, but the bankruptcy court ruled that Martino's $3 million obligation to Roberts was nondischargeable.

In a renewed effort to have Martino satisfy his debt to Roberts, the Georgia court imposed a revised payment schedule that included one immediate payment and a series of monthly payments. Consistent with this new plan, the court issued two income-deduction orders that directed Martino's insurers to withhold specific sums (totaling $25,000) from Martino's monthly disability insurance distributions and instead pay those sums directly to Roberts. The income-deduction orders specified that the withheld sums were "for the previously owed arrearage due to [Roberts] in the amount of THREE MILLION DOLLARS ($3,000,000) plus interest." The court also directed Martino to maintain an irrevocable life insurance policy, with Roberts as sole beneficiary, "in an amount equivalent to his outstanding obligation."

Over the next six years, Martino made the monthly withholding payments to chip away at his $3 million obligation to Roberts. But eventually, Martino became delinquent with regard to other payments on which the former couple had settled, including alimony. In response, the Georgia court issued another consent order detailing how Martino's payments were to be applied to his various outstanding debts. Starting in October 2016, Martino's monthly $25,000 payments were first to go to the balances of five obligations, including his past-due alimony of $27,000. When those outstanding balances were satisfied, all succeeding payments would go to the "outstanding balance due on the property division payment that was in the original principal amount of $3 million, plus interest."

By the end of 2016, Martino's monthly payments had discharged the past-due amounts he owed Roberts for alimony, child support, and uninsured medical expenses. In both 2017 and 2018, Martino continued to make the monthly payments, amounting to $300,000 for each year. In 2017, Martino's payments first applied to his outstanding obligations to defray Roberts's attorney's fees and to his court-ordered life insurance premiums - for a total of $125,023. All other debts having now been satisfied, the rest ($174,977) went to the $3 million marital-residence debt - and so did the entire $300,000 for 2018.

Martino filed late tax returns for both 2017 and 2018. His 2017 return claimed a $43,343 deduction for a net operating loss but no deduction for alimony. Martino later filed an amended 2017 return in which he claimed a $300,000 deduction for alimony, but the IRS did not accept the amended return for filing. On his 2018 return, Martino again claimed a $300,000 alimony deduction. The IRS disallowed Martino's 2017 net operating loss deduction and his 2018 alimony deduction. Martino petitioned the Tax Court to redetermine his tax deficiencies. Martino eventually filed a motion for summary judgment, arguing that he was entitled to $300,000 alimony deductions for each of 2017 and 2018. The IRS objected to Martino's motion and filed a cross-motion for summary judgment, contending that the relevant payments constituted nondeductible payments toward a marital property settlement.

For divorce or separation instruments executed before 2019, the Code distinguished between alimony payments and transfers pursuant to a division of property. Under Code Sec. 215(a), alimony payments were deductible by the payor but taxable to the payee under Code Sec. 61(a)(8) and Code Sec. 71(a). By contrast, property transfers incident to the divorce, including transfers by an equitable division of marital property, were generally neither taxable nor deductible. Under Code Sec. 71(b)(1), a cash payment constituted a deductible alimony or separate maintenance payment only if it met four requirements, one of which was that the divorce or separation instrument does not designate the payment as a payment which is not includable in gross income under Code Sec. 71 and not allowable as a deduction under Code Sec. 215.

Observation: Under the Tax Cuts and Jobs Act, alimony payments made under divorce or separation instruments executed after 2018 are not taxable to the payee or deductible by the payor.

The Tax Court ruled in the IRS's favor after finding that Martino's payments did not meet the requirements for deductible alimony under Code Sec. 215 and Code Sec. 71. Accordingly, the Tax Court granted summary judgment for the IRS and upheld Martino's tax deficiencies for 2017 and 2018. Martino appealed to the Eleventh Circuit. He argued that the payments in 2017 and 2018 were made pursuant to the Georgia court's income-deduction orders, which (according to Martino) contained no statement that the payments were not alimony or that the payments would not be treated as income to Roberts.

Analysis

The Eleventh Circuit rejected Martino's appeal and held that his payments were not deductible alimony under the explicit terms of the governing divorce instruments. The court noted that Martino and Roberts agreed that Martino would hold no to the marital residence and pay Roberts $2.2 million in return. The former couple's settlement agreement, incorporated verbatim by the court's divorce decree, specified that it was "meant to be an equitable division of the marital property [that is] non-taxable to either party. The court further observed that a separate clause in the agreement obligated Martino to pay Roberts $3,000 per month "as taxable periodic alimony."

The court found that the governing instruments contained multiple nonalimony designations for the monthly payments that Martino made to Roberts in 2017 and 2018 - from the settlement agreement as incorporated by the divorce decree to the court's income-deduction orders and final consent order. In the court's view, Martino's insistence to the contrary lacked merit. The income-deduction orders made clear, the court found, that they had nothing to do with alimony but instead were targeted at Martino's obligation regarding the marital residence. More importantly, in the court's view, was that Martino was wrong in his narrow focus on the income-deduction orders, which were only part of the picture.

The court noted that under Code Sec. 71(b)(2)(A), the term "divorce or separation instrument" includes both "a decree of divorce" and the "written instruments incident to such decree." The court said that the settlement agreement as incorporated by the divorce decree clearly stated that Martino's debt for the marital residence was not alimony. The Georgia court's later orders - including the income-deduction orders - did not change but rather reaffirmed the obligation's nature by compelling Martino to honor it. The court concluded that the nonalimony designation remained unchanged, meaning that Martino's payments did not count as deductible alimony under Code Sec. 71(b)(1)(B).

For a discussion of alimony paid under a divorce or separation instrument executed before 2019, see Parker Tax 14,220.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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