## Facts

- An Illinois dissolution judgment required John R. Okerson to make 113 monthly cash payments totaling $117,000 to his former wife, labeled “alimony.”
- The decree provided that if the former wife died before receiving all 113 payments, John would owe a $33,500 lump-sum payment to her estate.
- The decree also included provisions that, upon the former wife’s death, amounts associated with the remaining payment stream would be applied toward the children’s college education expenses.
- During the tax years at issue, the former wife remained alive, and John made the required monthly payments to her; no post-death obligations were triggered.
- John and his current spouse, filing jointly, deducted the monthly payments as alimony; the IRS disallowed the deductions for failure to satisfy I.R.C. § 71(b)(1)(D).
- During the Tax Court case, a state court order stated the $117,000 and $33,500 were alimony deductible by the payor and includable by the payee for federal purposes.

## Issues

1. Whether the monthly payments made to the former spouse qualified as “alimony” under I.R.C. § 71(b)(1) and were deductible under I.R.C. § 215.
2. Whether contingent, post-death obligations (payments to the former spouse’s estate and education-related payments for the children) created prohibited “substitute” payments under I.R.C. § 71(b)(1)(D), disqualifying the payments made while the payee was alive.
3. Whether a state court’s characterization of the payments as deductible alimony controls the federal tax treatment.

## Decision

- The Tax Court held the monthly payments made to the former spouse during the years at issue qualified as alimony under I.R.C. § 71(b)(1) and were deductible under I.R.C. § 215.
- The court concluded the decree’s contingent post-death provisions did not make the live-payee monthly payments fail § 71(b)(1)(D).
- The court treated alimony characterization as a federal tax question and did not treat the later state court order as controlling.

## Legal Principles

- Federal law governs whether divorce-related payments are “alimony” for federal income tax purposes; state-court labels or later state-court tax characterizations are not controlling.
- Under I.R.C. § 71(b)(1), a cash payment qualifies as alimony only if, among other requirements, (D) the payor has no liability to make the payment after the payee spouse’s death and no liability to make a payment as a substitute for such payments after the payee’s death.
- For § 71(b)(1)(D), a contingent post-death obligation does not automatically disqualify payments made while the payee is alive; the inquiry is whether the post-death obligation is a true substitute for the same payment obligation, rather than a separate obligation different in purpose and operation.
- Monthly payments that terminate on the payee’s death can satisfy § 71(b)(1)(D) even if the instrument contains independent, death-triggered obligations benefiting the children or the payee’s estate.

## Conclusion

The Tax Court held that the husband’s monthly payments to his former wife were deductible alimony because his liability for those payments ceased upon her death, and the decree’s death-triggered obligations to the children or the former wife’s estate were separate obligations rather than prohibited substitutes under I.R.C. § 71(b)(1)(D).


Okerson v. Commissioner, 123 T.C. 14 (2004)