Unallocated Alimony and Child Support Can Be All Taxable/Deductible Alimony
Alimony, if in compliance with the provisions of I.R.C. §71, is taxable to the payee and deductible to the payor pursuant to I.R.C. §215 [hereafter “taxable/deductible”]. Child support is not taxable/deductible.1 To qualify as taxable/deductible alimony, a stream of payments must be cash2 received by or on behalf of a spouse3 under a divorce or separation instrument4 which does not designate such payments as not taxable/deductible.5 If divorced or legally separated and not living in the same household,6 the spouse’s liability for payments ceases upon the payee’s death,7 no part of which is “fixed” as child support.8 The payments cannot qualify if the parties file joint returns.9
An award of, or an agreement for, unallocated alimony and child support, sometimes referred to as “family support,”10 can be all taxable/deductible; but only if all the requirements of I.R.C. §71 are met.
The Third Circuit, in
Kean v. Commissioner,
407 F.3d 186 (3d Cir. 2005), put it another way, stating:
ordering the payor spouse to make an unallocated support payment taxable in full to the payee spouse, the couple may be able to shift a greater portion of their collective income into a lower tax bracket. Consequently, an unallocated payment order not only frees the parents from restrictive court instructions that dictate who pays for which, but may allow the parties to enjoy a tax benefit at a time when they face increased expenses as they establish independent homes. This advantage would be lost by taxing all unallocated payments to the payor spouse.
The benefit of an unallocated amount of alimony and child support was articulated by the court in Miller v. Commissioner, T.C. Memo 1999-273:
Unallocated family support is a technique sometimes used in domestic relations cases to encourage sensible cash-flow planning between separated spouses. If used correctly, the technique enables the parties to achieve a higher net transfer of funds to the payee spouse because the payor spouse, who is generally in a higher tax bracket, reaps an economic benefit from the larger tax deduction obtained when allocated family support payments are structured to be deductible as alimony. The unallocated payments, while typically temporary, can facilitate the economic transition that must occur as a result of a divorce or separation, provided that parties understand and agree to the tax consequences. (See Appendix prepared by Norman H. Kronstadt, CPA/ABV/ASA/CVA of Plantation, Florida, demonstrating a tax savings using family support.)
As to the code prohibition of an amount being fixed as child support being treated as alimony, the unallocated sum for both spousal support and child support is all allowable as taxable/deductible alimony because it does not “fix” an amount for child support.
Florida courts have recognized this form of support. In dicta, the court in Friedman v. Friedman, 844 So. 2d 789 (Fla. 4th DCA 2003), articulated that
unallocated support awards of alimony and child support have been approved in special circumstances, see, e.g., Pastore v. Pastore, 497 So. 2d 635, 637 (Fla. 1986) (awarding unallocated child support and alimony award consisting of house payment, taxes, and insurance); McKelvey v. McKelvey, 534 So. 2d 801, 801 (Fla. 3d DCA 1988) (awarding undifferentiated temporary alimony and support of $10,000 per month).
In Wallace v. Wallace, 605 So. 2d 504 (Fla. 4th DCA 1992), the court affirmed an award of undifferentiated temporary alimony and child support. Of course, in making such award, the court should consider11 child support guidelines.12
Lawton v. Commissioner, T.C. Memo 1999-243, held child support guidelines do not fix a portion of an unallocated temporary award of support as “child support.” In Lawton, the court dealt with a Pennsylvania court’s temporary order “for support of spouse and one child” (unallocated temporary support for the wife and child). The court rejected the wife’s argument that a portion of the payments were not alimony taxable to her because all awards for support must conform to the federally mandated child support guidelines. The ruling was that I.R.C. §71(c)(1) requires that the amount of child support must be fixed by the terms of the divorce or separation instrument (here, the order for temporary support), not outside of the instrument. The Tax Court concluded that the wife could have sought allocation in the Pennsylvania court.
Simpson v. Commissioner, T.C. Memo 1999-251, also dealt with an unallocated alimony and child support temporary award from a Pennsylvania divorce court. The Tax Court observed that it is inappropriate “to look beyond the instrument to examine what effects, if any, are made by operation of state law,” i.e., the state’s child support guidelines. The Tax Court went on: “If Congress had intended for us to look beyond the written instrument it would have amended section 71(c)(1) to so reflect.”
Cessation on Death of Payee
There is no problem meeting the cessation of liability requirement of the code13 if the court requires or the parties agree in the divorce or separation instrument that the liability to pay family support provided during the pendency of the proceedings, or thereafter, shall cease upon the death of payee spouse. The problem arises when there must be reliance upon state law.
In Florida, case law holds that the obligation to pay permanent periodic alimony (spousal support) ceases on the death of the payee.14 There is no authority in Florida as to cessation of liability for unallocated alimony and child support on the death of the payee. There is a major conflict of authorities concerning this issue.
Unallocated Alimony and Child Support Not Taxable/Deductible.
Several cases in which the payment of family support did not qualify as taxable/deductible alimony are explored below.
Murphy v. Commissioner, T.C. Memo 1996-258, involved an award of family support in a California divorce. The Tax Court observed that the petitioner/ex-husband had the burden to prove that California law would allow for cessation of family support upon the death of the ex-wife. He did not so prove, and the court somewhat angrily noted that he did not file a brief; the filing of which is “not permissive but mandatory.” The court stated:
For purposes of this case, we shall assume that the obligation to make the marital payments could have survived the remarriage or death of Diane Murphy. Moreover, there is insufficient evidence for us to find that the marital payments would not have survived the death of Diane Murphy before the majority of the children in her custody. Thus, Ronald Murphy has failed to prove a necessary element of section 71(b)(1), viz, the subparagraph (D) requirement of cessation on the death of the payee spouse, and, consequently, he has failed to prove that the marital payments are alimony within the meaning of section 71(b).15
Wells v. Commissioner, T.C. Memo 1998-2, also dealt with a California divorce. Citing Murphy, the court’s rationale that family support would not cease upon the death of the ex-wife because “assuming a worst case scenario (i.e., custodial parent dies and custody is awarded to someone other than the surviving spouse) we cannot believe that California law would permit the surviving spouse to avoid any further support obligations.”
Miller v. Commissioner, T.C. Memo 1999-373, was affirmed by the Tenth Circuit in Lovejoy16 v. Commissioner, 293 F.3d 1208 (10th Cir. 2002). There, the court ruled on “unallocated child support and maintenance” pursuant to a Colorado temporary support order, observing that Colorado had adopted the Uniform Dissolution of Marriage Act which made no provisions for cessation on death of unallocated support. In holding that the payments did not qualify as alimony, the circuit court first looked to California cases17 and observed that there was split of authority. The circuit court articulated:
We are inclined to believe that the Colorado Supreme Court would hold that temporary orders providing for child support payments, even when included within a general unallocated payment obligation, do survive the death of the recipient spouse.
* * *
Lovejoy bore the burden of proving that his obligation to make unallocated payments would cease upon his ex-spouse’s death. Because the divorce court orders are silent and Colorado law is at best unclear on the issue, and likely contrary to Lovejoy’s position, he has failed to meet his burden.
Gonzales v. Commissioner, T.C. Memo 1999-332, involved pendente lite family support ordered by a New Jersey divorce court. The Tax Court refused to allow a deduction to the husband for alimony payments because it ruled “New Jersey law would not necessarily have relieved Dr. Gonzales of his obligation to pay family support had [the wife] died before the divorce judgment” because he would not necessarily have been awarded custody of his minor children. In a footnote, the Tax Court bolstered its opinion by referring to cases heretofore cited stating, “[t]his holding comports with our conclusions reached in prior opinions addressing the characterization of ‘family support.’ See, e.g., Miller v. Commissioner, T.C. Memo 1999-273 (holding that, in Colorado, family support paid under a temporary order is not alimony); Wells v. Commissioner, T.C. Memo 1996-258 (holding that, in California, family support payments are not alimony).”
The progression of the anti-alimony cases appears to end with Gilbert v. Commissioner, T.C. Memo 2003-92,18 dealing with an award of unallocated temporary child and spousal support in an agreement ordered by a Pennsylvania court. Applying Pennsylvania law to applicable years 1993, 1994, and 1995, the Tax Court determined that the unallocated support was not alimony as the doctrine of abatement would not apply to the child support portion of the award.19 The Tax Court relied on Miller (Lovejoy). It stated:
In Miller v. Commissioner, T.C. Memo 1999-273, we examined a provision of an unallocated support order arising from a divorce in Colorado, which ordered that unallocated support payments continue “until further Order of Court.” We conclude that the provision in issue in Miller, is similar to the provision in issue in the instant case because the unallocated support payments may continue beyond the death of the payee spouse at the discretion of the Pennsylvania court. Consequently, we have no reason to conclude that Mr. Hawley’s obligation to make unallocated support payments under the February 4, 1992, separation instrument terminates upon the death of Ms. Gilbert.
Commenting on Lovejoy, Gilbert, and Gonzales, Professor Thomas R. White III, wrote:
In these cases, it is not that the law of the state involved is clear that the family support obligation would survive the abatement of the divorce action, but rather that the payor could not prove that the support obligation would terminate under state law.20
Unallocated Alimony and
Child Support Is Taxable/Deductible Alimony
The following cases, some emanating from divorces in the same states with contrary results, hold that pursuant to state law the liability to pay unallocated alimony and child support would cease upon the death of the payee.
Ambrose v. Commissioner, T.C. Memo 1996-128, concerned a temporary award by a California divorce court of family support. The Tax Court held that under California law, the payments meet the termination on death requirement of I.R.C. §71(b)(i)(D).
Heller v. Commissioner, 103 F.3d 138, (9th Cir. 1996), in an unpublished opinion relying on Ambrose, ruled that the California ordered unallocated support would terminate on the death of the payee.
Kean v. Commissioner, T.C. Memo 2003-163, like Gonzales, involved New Jersey law. It distinguished Gonzales, in allowing the deduction to the husband of the unallocated award because both parties had custody during the pendency of the proceedings, and if the wife died, the husband would get custody. Thus, the doctrine of abatement applied. All of the unallocated alimony and child support would have ceased.
The Kean decision was affirmed by written published opinion of the Third Circuit in Kean v. Commissioner, 407 F.3d 186 (3d Cir. 2005), in which it criticized Lovejoy of the Tenth Circuit (thus, Miller, of the Tax Court) and Gonzales stating:
Having considered both cases, we believe that the decisions rely too heavily on the intricacies of family law and fail to take into account the overall purpose of section 71. Furthermore, these cases ignore the interplay between section 71(b) and section 71(c) and their importance in distinguishing between alimony, child support and property settlement payments for the purpose of tax treatment.
The Tax Court in Berry v. Commissioner, T.C. Memo 2005-91, analyzed most of the foregoing cases: Both cases holding that the liability for payments of unallocated alimony and child support would not cease by state law upon the death of the payee, and those holding otherwise.21
The Berry court concluded that the liability for family support by a California court would terminate on the payee’s death while admitting that the cases dealing with California law are conflicting. Commenting upon the Wells decision, the court said:
We reject the notion that one must assume a worst case scenario (under which someone other than the payor spouse would take custody of the children upon the death of the payee spouse) in determining the applicability of the substitute payment clause of section 71(b)(1)(D) to an unallocated support obligation. Accordingly, we hold that a payor spouse’s general [s]tate law obligation to support his or her children, without more, does not cause any or all of that spouse’s unallocated support obligation to fail to qualify as alimony by reason of the substitute payment clause of section 71(b)(1)(D).22
Provide in Writing That Liability Ceases
The case authorities are admittedly in conflict. Unpublished circuit court opinions are not binding. Tax Court Memorandum opinions ordinarily are limited to that case, and although readily cited, are supposed to have no value as precedent. Only rulings from the Tenth Circuit (Lovejoy) and the Third Circuit (Kean) have real precedential value, and they conflict.
Accordingly, to be “tax safe”:
1) If the payments for unallocated alimony and child support (family support) are to be taxable/deductible, make sure the liability for the payments cease upon the death of the payee. Add such a provision in the order or agreement.
2) Make no provision for substitute payments.
3) Spell out what the intended tax consequences are to be and provide for an adjustment if the results are otherwise
1 I.R.C. §71(c).
2 I.R.C. §71(b)(1).
3 The term “spouse” includes “a former spouse.” I.R.C. §71(d).
4 I.R.C. §71(b)(1)(A).
5 I.R.C. §71(b)(1)(B).
6 I.R.C. §71(b)(1)(C).
7 I.R.C. §71(b)(1)(D).
8 I.R.C. §71(c).
9 I.R.C. §71(e).
10 Florida cases have also referred to such an arrangement as an “undifferentiated (combined) award of alimony and support.” Fleischfresser v. Accursio, 833 So. 2d 803 (Fla. 3d D.C.A. 2002). The Tax Court referred to “family support” as “the newfangled amalgam.” Berry v. Commissioner, T.C. Memo 2005-91.
11 But not to “fix” same in the amount.
12 Abraham v. Abraham, 700 So. 2d 421 (Fla. 3d D.C.A. 1997).
13 I.R.C. §71(b)(1)(D).
14 In Re Freeland’s Estate, 182 So. 2d 425 (Fla. 1966).
15 The Tax Court cited its earlier and contrary opinion in Ambrose v. Commissioner, T.C. Memo 1996-128, where it was the ex-wife who had the burden to prove it was not alimony.
16 John H. Lovejoy was Judith Miller’s ex-husband.
17 It cited holding for taxable/deductible alimony, Heller v. Commissioner, 103 F.3d 138 (9th Cir. 1996); and Ambrose v. Commissioner, T.C. Memo 1996-128, comparing them with Wells v. Commissioner, T.C. Memo 1996-258, holding that the obligation does not terminate upon death.
18 The Tax Court in Gilbert was affirmed in an unpublished opinion by the Third Circuit in Hawley v. Commissioner, 94 Fed. Appx. 126, 2004 WL 817354 (3d Cir. 2004). Richard Hawley was Jane Gilbert’s husband.
19 However, if the Gilbert case had involved support for the years 2001 and subsequent years, the result would be different because a cessation rule was adopted by the Pennsylvania Supreme Court.
20 Thomas R. White III, Undifferentiated Support Orders: Can They Be Taxable Alimony?, The Matrimonial Strategist1 (Jan. 2004).
21 The Tax Court did not cite the Third Circuit’s opinion in Kean as it was not available when Berry was published one month later.
22 I.R.C. § 71(b)(1)(D) provides “there is no liability to make such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitution for such payments after the death of the payee spouse.
Melvyn B. Frumkes is the principal of Melvyn B. Frumkes & Associates, P.A., with offices in Miami and Boca Raton. He focuses his practice on handling and consulting in complicated divorce and custody matters. He is the author of Frumkes on Divorce Taxation, fifth ed., published by James Publishing Company.
This column is submitted on behalf of the Family Law Section, Jorge M. Cestero, chair, and Charles F. Miller, editor.
