Taxing Lessons Case Summaries

Case — Alimony Deduction

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TL Case Summ


Does a payment made as an offset instead of in cash qualify as deductible alimony?


Taxpayer Says: The alimony deduction should be allowed because offsetting the alimony due against an equalization payment is the same as paying the alimony.

Internal Revenue Service Says: The payment was not made in cash, and is not deductible as alimony.


From Internal Revenue Code Section 71(b): Requires that alimony be a payment in cash but does not limit the term to bills and notes.

From Internal Revenue Code Section 215(a): Allows a taxpayer to deduct alimony paid during the taxable year.

From Internal Revenue Code Section 7701(c): States that the terms “includes” and “including”, when used in the Internal Revenue Code, “shall not be deemed to exclude other things otherwise within the meaning of the term defined”.

From From Federal Tax Regulation 1.71-1T(b), Q&A-5: Provides a nonexclusive list of accepted cash equivalents, stating that cash payments “including checks and money orders payable on demand” qualify as alimony.


Alimony, or spousal support, is generally deductible on the tax return of the individual who pays it, and is income to the person who receives it. Among other rules, alimony must be paid in cash, which includes checks or money orders. Noncash property settlements do not qualify as alimony, and are not deductible.

In this case, the taxpayer owed his ex-wife $69,000 in alimony, while his ex-wife owed him $69,000 to equalize the value of their divided property. Instead of writing separate checks, the two amounts were offset. The taxpayer says the $69,000 is alimony, and is deductible.

The IRS says the offset is not an accepted cash substitute, as defined in the Internal Revenue code. Because the payment was not made in cash, it does not qualify as deductible alimony.


Make your selection, then see “The Court’s Decision” below for a full explanation

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

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For the taxpayer. Although the taxpayer did not satisfy all the steps of section 71(b) by paying in a manner specifically mentioned in the regulation, he used a conceptually similar form of payment that did not alter the transaction’s substance. The Court does not require taxpayers to follow literally all transactional steps when to do so would result in the “utilization of fruitless steps.”