Unallocated Spousal and Child Support Payments Pendente Lite
by Burgess J.W. Raby and William L Raby Burgess J.W. Raby, Esq., and William L. Raby, CPA, both associated with the Raby Law Office, Tempe, Ariz., discuss recent cases dealing with the tax treatment of pendente lite support obligations. Date: May 19, 2005
Patricia P. Kean married Robert W. Kean III on September 12, 1970, had three children, and in October 1991 brought an action for divorce in Somerset County, N.J. On April 7, 1992, while the divorce action was pending, the county court judge ordered Mr. Kean to deposit $6,000 monthly into a joint checking account maintained by Mr. and Ms. Kean. He instructed Ms. Kean to use the funds from that account to maintain herself, the children, and the household. In 1996 the court reduced Mr. Kean's pendente lite1 support obligation from $6,000 per month to $1,600. Mr. Kean did not write checks on the joint account during the years in question. For most of that period (1992 through 1996), the Keans and their children lived together in the family home in Far Hills, N.J. Under court order, Mr. Kean paid the mortgage, taxes, and utilities on that home; private school tuition for the children; and health insurance coverage and unreimbursed medical expenses for the entire family. A final judgment of divorce was issued on February 19, 1997. Alimony and Not Alimony? During the time the pendente lite order was in place, Mr. Kean paid Ms. Kean at least $250,000. Ms. Kean did not report any of that as alimony income, although Mr. Kean claimed it as an alimony deduction against his gross income. The IRS asserted deficiencies against Ms. Kean for the years 1992 through 1996, and against Mr. Kean for 1995 and 1996, arguing both that Ms. Kean was the recipient of unreported alimony income and that Mr. Kean had no right to the alimony deduction he had claimed. The IRS wanted $75,000 plus interest from Ms. Kean. Because only 1995 and 1996 deficiencies were asserted against Mr. Kean, the IRS sought only $44,000 plus interest from him. In Patricia P. Kean et al. v. Commissioner, T.C. Memo. 2003-163, Doc 2003-13669 [PDF], 2003 TNT 108-10 , Senior Tax Court Judge Arthur L. Nims III had considered the combined cases of both Keans. He focused a great deal of his attention on whether the payments would terminate on Ms. Kean's death, which is one of the four requirements for a payment to be classified as alimony for tax purposes. He concluded that:
Based upon the general rule that divorce proceedings terminate with the death of either spouse, and absent unusual circumstances, the New Jersey court would not have had continuing jurisdiction or reason to enforce or modify any support order upon Ms. Kean's death. Even though the series of orders was both temporary and modifiable during the divorce proceeding, upon Ms. Kean's death, the divorce proceeding would have abated, and Mr. Kean's obligations under the orders would have terminated. Since the disputed payments would have terminated at Ms. Kean's death, they meet the requirements of section 71(b)(1)(D).
After Judge Nims handed down his opinion, Mr. Kean filed a motion with the Tax Court asking that he be reimbursed the litigation costs of $54,012.63 that he had incurred resisting the IRS's attempt to collect $44,000 from him. We will return to the outcome of that motion later. Of more concern to us now is that Ms. Kean filed an appeal from the decision that she had alimony income. In Patricia P. Kean et al. v. Commissioner, No. 04-2931, 04-3018 (3rd Cir. 2005), Doc 2005-10265 [PDF], 2005 TNT 91-11 , Ms. Kean argued that Judge Nims was wrong on at least two points. First, she contended, the payments from Mr. Kean under the pendente lite order would not have ended upon her death; second, the payments themselves were not alimony, because the New Jersey court had ordered that they be used to support the children and the household. The Ex-Wife Appeals Circuit Judge Franklin S. Van Antwerpen explained why the need to use the payments in some undesignated part for the children did not change the payments from alimony to "not alimony":
Ms. Kean's alternate argument is without merit in light of the Supreme Court's opinion in Commissioner v. Lester, 366 U.S. 299, 303-04 (1961) (overruled by I.R.C. ยง 71(c)(2)) which remains persuasive even though the ultimate holding was overruled by statute, Preston v. Commissioner, 209 F.3d 1281, 1284 (11th Cir. 2000). In Lester, the Court examined a statute that preceded section 71 and explained that slight restrictions on the use of payments should not color a court's overall analysis of the nature of the payments. Lester, 366 U.S. at 304. "Under the type of agreement here, the wife is free to spend the monies paid under the agreement as she sees fit. 'The power to dispose of income is the equivalent of
ownership of it.'" Id. (Quoting Helvering v. Horst, 311 U.S. 112, 118 (1940)). Although the divorce court offered broad guidance as to how the money was to be spent, Ms. Kean's use of the money was sufficiently unrestricted. Because Ms. Kean's access and control of the money was unfettered, we have no trouble concluding that she "received" the funds as required by section 71(b)(1)(A).
The pendente lite orders did not specify whether Mr. Kean's obligation to make payments would terminate on Ms. Kean's death. Ms. Kean suggested that the appeals court in her case follow Lovejoy v. Commissioner, 293 F.3d 1208, 1211-12 (10th Cir. 2002), Doc 2002-14684 [PDF], 2002 TNT 119-9 , a case with similar facts but in which the applicable state law was that of Colorado. In Lovejoy, Circuit Judge David M. Ebel had explained that the case turned on whether the husband's "obligation to make these payments [for temporary support of both the wife and the children] would have terminated automatically had his spouse died; they qualify as deductible alimony only if they would have so terminated." As with New Jersey in the Kean case, there is no Colorado law squarely addressing the treatment of unallocated payments on the death of the payee spouse. Lovejoy argued that his wife's death would have divested the Colorado court of jurisdiction over the divorce action. Therefore, the temporary order would cease to have effect and that would end his obligation to make payments under that order. The government pointed out that another part of Colorado law provided that provisions for the support of a child are not terminated by the death of a parent. "It is not clear under Colorado law," said Judge Ebel in his opinion, "which rule trumps the other -- i.e., whether the abatement of dissolution proceedings upon a spouse's death would negate temporary orders providing for child support payments. However," he continued, "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." Reinforcing that conclusion, said Judge Ebel, was that the unallocated support payments required by the temporary order were to continue "until further Order of Court." Judge Ebel noted that "there is no reason to believe that the death of a spouse negates this language," and upheld the denial of Lovejoy's claimed alimony deduction. A New Jersey Case Right on Point? That sounded pretty good for Ms. Kean's position. Even better was a decision of the Tax Court itself in a case involving New Jersey law, Marie A. Gonzales v. Commissioner, T.C. Memo. 1999-332, Doc 1999-31997, 1999 TNT 191-57 . In Gonzales, Tax Court Senior Judge William M. Fay had held that pendente lite family support payments Marie received for herself and her four children under a temporary support order were not taxable as alimony to her because they would not necessarily cease on her death. As in Kean, the court order itself was of no help in making that determination, because it said nothing about the eventuality of death. A New Jersey statute provided that the obligation to pay alimony ended at the recipient's death. New Jersey case law also made clear that the obligation to pay child support survived the death of either spouse. The Gonzales court order, like that in Kean, provided for both, without making any allocations between amounts for the spouse and amounts for the children. Judge Fay pointed out that the order was effective only during the pendency of the divorce proceeding. Also, the order was modifiable before and at the time of the final judgment. "The failure of the temporary order to say expressly whether payments thereunder cease at petitioner's death," he observed, "means that they terminate when the divorce becomes final, and not at the happening of any other event." He then concluded, "The fact that the unallocated support order is modifiable and temporary tells us, at the least, that a court might have reduced Dr. Gonzales' payments [in the event of Marie's death] rather than