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Taxpayer Can Deduct Unallocated Support Payments in Full as Alimony
(Parker's Federal Tax Bulletin: March 27, 2013)
In Tax Court cases involving alimony, a recurrent theme is whether or not unallocated family support payments that are a combination of spousal support and child support constitute deductible alimony instead of nondeductible child support. This was exactly the situation in Delong v. Comm'r, T.C. Memo. 2013-70 (3/11/13), where the IRS rejected the taxpayer's contention that his family support payments were deductible in full as alimony. According to the IRS, because some of the unallocated payments were for child support, none of the payments were deductible. The Tax Court, however, disagreed, and allowed the taxpayer to deduct all the unallocated payment as alimony.
OBSERVATION: While this is a win for the taxpayer who made the payments, the opposite is true for the taxpayer receiving the payments because the payments, some of which represent child support, are taxable in full. Thus, if a practitioner has a client receiving such unallocated payments, the practitioner may want to review the separation papers to make sure such payments are excludible from income. In this case, the child support was not fixed and thus none of the payments were considered nontaxable child support to the payee. Alternatively, if the practitioner has a chance to advise the client ahead of time, the practitioner may want to review with the client the consequences of unallocated support payments and child support payments that are not fixed.
Background
Brendan DeLong was married to Tamsin DeLong before separating in 2006. Brendon and Ms. DeLong had two children, who lived with Ms. DeLong after the separation. Ms. DeLong filed for divorce in California Superior Court. While the divorce case was pending, Brendan and Ms. DeLong entered into a stipulated agreement that was incorporated into a temporary order of the Superior Court on December 6, 2007. The first support order required Brendan to pay Ms. DeLong $3,000 as family support for January 2008. The Superior Court issued a second support order two months after the first support order was issued. Brendan was obligated under the second support order to continue to pay Ms. DeLong family support payments of $3,000 per month until a trial in the divorce case was held. The Superior Court indicated in the second support order that the family support payments were for both spousal support and child support. It did not allocate, however, any specific portion of the family support payments as spousal support or child support in the second support order or the first support order. Neither the first support order nor the second support order included an explicit condition that would terminate Brendan's obligation to make the family support payments on Ms. DeLong's death.
Brendan made $24,491 in family support payments during 2008 under the support orders. On his individual income tax return for 2008, Brendan claimed an alimony deduction for the family support payments. The IRS issued a deficiency notice that disallowed the alimony deduction and also assessed a penalty. Brendan appealed to the Tax Court.
Alimony Deduction
Whether a payment constitutes deductible alimony is determined by reference to Code Sec. 71(b)(1), which defines an alimony or separate maintenance payment as any payment in cash if:
(1) the payment is received by (or on behalf of) a spouse under a divorce or separation instrument;
(2) the divorce or separation instrument does not designate the payment as a payment that is not includible in gross income under Code Sec. 71 and not allowable as a deduction under Code Sec. 215;
(3) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made; and
(4) there is no liability to make any 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 substitute for such payments after the death of the payee spouse.
A payment satisfying the preceding criteria is nevertheless not includible in the recipient spouse's gross income under Code Sec. 71(a), and thus not deductible as alimony, if it qualifies as child support under Code Sec. 71(c).
IRS's Argument
The IRS did not dispute that the family support payments were made under a divorce or separation agreement or that Brendan and Ms. DeLong were members of different households when the family support payments were made. The IRS argued, however, that the family support payments failed to satisfy the general alimony requirements because they were designated as nonalimony and Brendan's liability to make them would have continued past Ms. DeLong's death. The IRS argument that the payments were designated as nonalimony was based, at least partly, on the fact that the support orders indicated the payments were partly for child support.
Tax Court's Analysis
The Tax Court began its analysis by considering whether Brendan's liability to continue making the family support payments ended after Ms. DeLong's death as required under Code Sec. 71(b)(1)(D). The court noted that the support orders did not expressly state that Brendan's liability for making the family support payments would end on Ms. DeLong's death. Accordingly, the court had to consider whether a termination would occur by operation of California law. The California Family Code, the court observed, defines family support as an unallocated combination of spousal support and child support. California law provides that a spousal support obligation terminates upon the death of the payee spouse. In contrast, a child support obligation survives the death of the payee spouse and continues as an obligation of the payor spouse under California law.
Whether a family support obligation terminates upon the death of the payee spouse, the Tax Court noted, is not specifically addressed in the California Family Code. Additionally, the IRS failed to cite, and the Tax Court was unaware of, any California case that had conclusively decided the question. The court did note that it had recently addressed the effect of a payee spouse's death on a family support obligation under California law in Berry v. Comm'r, T.C. Memo. 2005-91. The facts of Berry, the court said, were similar to the facts in DeLong. In Berry, the taxpayer was obligated to make California family support payments and claimed an alimony deduction for those payments. The IRS in Berry, as in DeLong, argued that the family support obligation did not terminate upon the death of the payee spouse as required by Code Sec. 71(b)(1)(D). In Berry, the Tax Court held that there was no continuing payment liability past the death of a payee spouse with respect to a family support obligation. The Tax Court stood by its reasoning and analysis in Berry. Moreover, it did not find any distinguishable facts in the DeLong situation that merited a different result. Thus, the court concluded that Brendan had no continuing liability for the family support payments past the death of Ms. DeLong and that the Code Sec. 71(b)(1)(D) requirement was met.
The court then considered whether the family support payments were designated as nonalimony. Under Code Sec. 71(b)(1)(B), the court noted, a payment is not treated as alimony if it is designated as nonalimony. Accordingly, the IRS's designation argument rested on whether any part of the family support payments constituted child support. Child support is defined under Code Sec. 71(c)(1) as any part of a payment that the terms of a divorce or separation instrument specifically fix (in terms of the amount of money or any part of the payment) as a sum that is payable for the support of the payor spouse's children. The statutory directive that child support payments be fixed is generally taken literally, and child support cannot be inferred from intent, surrounding circumstances, or other subjective criteria. An amount fixed as payable for the support of the payor spouse's children, nevertheless, includes any amount specified in the instrument if that amount will be reduced on the happening of a contingency specified in the instrument relating to a child (e.g., attaining a specified age, marrying, dying, leaving school, or a similar contingency) or at a time that can clearly be associated with such a contingency.
In the instant case, the court noted, the support orders made an unallocated award of spousal and child support. Consequently, they did not fix any portion of the family support payments as a sum that was payable for the support of Brendan's children for purposes of Code Sec. 71(c)(1). In sum, the Tax Court held that the family support payments made by Brendan constituted alimony, not child support, and were thus deductible in full.
Staff Editor Parker Tax Publishing
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