A divorced spouse could deduct her indirect repayment of an amount previously included in her and her former husband's jointly reported income.
The Eleventh Circuit held that a taxpayer could deduct the reimbursement to her ex-spouse for her share of his repayment of an amount previously included as income on their joint tax return during their marriage, reversing the decision of a district court. According to the court, the taxpayer satisfied the requirements of Sec. 1341 even though she had not directly repaid the amount.
Facts: From 1999 to 2004, Nora Mihelick and her then-husband, Michael Bluso, worked for Gotham Staple Co., based in Ohio and owned by the Bluso family, with Bluso as CEO and the majority shareholder. They reported compensation from Gotham on their joint tax returns for those years. In 2004, Mihelick filed for divorce, but while the divorce was pending, Pamela Barnes, Bluso's sister and a minority shareholder of Gotham, sued Bluso, Gotham, and others, claiming that Bluso had paid himself excessive compensation.
The couple's divorce became final in 2005. It stipulated that the former spouses would be jointly and severally liable for damages, costs, and other expenses arising from Barnes's claim and incurred by Bluso, although Mihelick was not a party to the lawsuit. In 2007 the Barnes lawsuit was settled. Under the terms of the settlement, Bluso paid Barnes $600,000 but disclaimed any wrongdoing. He took a tax deduction of 1300,000 because he was seeking reimbursement from Mihelick for the remaining $300,000, her share of the settlement payment. In 2009, after Mihelick's lawyer advised her that she had an obligation to reimburse Bluso, she paid him $300,000 and similarly sought a refund reflecting a deduction of that amount under Sees. 1341 and 165 on her 2009 return.
The IRS disallowed Mihelick the refund and deduction. She filed suit for a refund in district court, but it granted summary judgment in favor of the IRS, holding that no other Code section would allow a deduction to Mihelick for all or part of the repaid amount, a requirement of Sec. 1341. The district court also held there was no substantial nexus between Mihelick's right to the income when she received it and her obligation to return it (Mihelick, No. 2:16-cv-741-FtM-38MRM (M.D. Fla. 10/11/17)). Mihelick appealed the decision to the Eleventh Circuit.
Issues: Sec. 1341 allows a taxpayer to take a deduction or a credit if he or she repays an amount exceeding...