Unallocated Support Payments as Alimony

The requirements that determine whether payments between ex-spouses qualify as alimony were discussed in a tax case in the November issue of the JofA (What Makes It Alimony? page 95) If payments are to qualify as alimony, the payor spouse cannot be liable for payments after the payee spouse's death (a continuing payment liability) or any amounts in lieu of those payments (substitute payment liability). When unallocated support payments are present, the courts have looked first at the language in the written agreement when deciding whether either a continuing payment liability or a substitute payment liability exists. If the agreement does not address the issue, the courts in previous cases have examined the payor spouse's legal responsibilities under state law to determine whether those payments terminate upon the death of the payee spouse (Lovejoy v. Commissioner, 293 F3d 1208 (10th Cir. 2002) and Gonzales v. Commissioner, TC Memo, 1999-332). Patricia Kean filed for divorce in 1991. Until the divorce became final in 1997, a temporary court order granted her and her husband joint custody of their three children and also required Mr. Kean to deposit specified amounts into a joint bank account for the support of his wife and the children. In 1993 Mrs. Kean was granted the exclusive use of the money deposited into the account, though she did not withdraw any of it from March 1993 to December 1996. She reported none of the money received from her former spouse as gross income for tax years 1992-1996; however, Mr. Kean deducted the payments as alimony during that period. The IRS determined the amounts Mrs. Kean received were taxable alimony payments and assessed her a deficiency of approximately $75,000 in unpaid income taxes. Mrs. Kean petitioned the Tax Court for relief, arguing that the amounts deposited into the account were not alimony. The court rejected her first argument that she did not receive the payments because the money was deposited into a bank account. She then argued that the Tax Court should follow its decision in Gonzales in which unallocated support payments a taxpayer received while a divorce was pending were not considered alimony. In Gonzales, the court determined that under a temporary court order a non-custodial payor-spouse was liable for a continuing payment because New Jersey state law could require that spouse to make family support payments if the payee-spouse died before the final decree was granted. The Tax Court distinguished the Kean case from Gonzales, stating that if Mrs. Kean had died before the divorce was finalized, her spouse would not have been liable to make payments to a third party. Under New Jersey state law, he had joint custody rights and thus automatically would have been given custody of the children. Mrs. Kean appealed the decision to the Third Circuit Court of Appeals, making the same arguments she had presented to the Tax Court. …