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Unallocated Family Support
In an article in the January, 2004, issue of The Matrimonial Strategist, I discussed the use of temporary support orders in a divorce action to allow the payor to deduct undifferentiated family support payments or for the purpose of paying debts, such as counsel fees, in light of a series of recent cases. The leading case disallowing the deduction of family support payments is Lovejoy v. Commissioner, 293 F.3d 1208 (10th Cir. 2002) (Colorado law; family support payments) but there are decisions involving the law of other states, mainly found in a series of Tax Court memorandum decisions. Some more recent cases now cast doubt on these precedents, leaving resolution of the issue uncertain, both for temporary orders, which by definition abate with the death of one of the parties to the pending divorce action, and for permanent marital settlements. They also raise the question whether an explicit termination provision would be effective if federal tax authorities conclude that the relevant state court would decide that the termination clause could not apply to the payor's child support obligation included within the support payments required by the order. A survey of state law reveals that this question is unresolved in almost every state, leaving the field wide open for federal tax determination of an important state law issue.
Taxable Alimony
Taxable alimony is defined in 71(b)(1) of the Internal Revenue Code to include all cash payments that: 1) are made under a divorce or separate instrument; 2) are not designated as not includible in income and not allowed as a deduction, 3) are made between divorced spouses who are not members of the same household; and 4) terminate on the death of the payee. The last of these requirements also requires that “there is no liability to make any payment as a substitute … ” for the alimony payments. Section 71(b)(1)(D) (emphasis supplied). Moreover, child support is not deductible, and child support is defined in section 71(c)(1) to be payments that are “ fixed … as a sum which is payable as child support.” This term is modified by section 71(c)(2) to include the amount of any payment that is a reduction in the obligation of the payor occurring “on the happening of a contingency relating to a child” or at a time “which can clearly be associated” with such a contingency. Amounts paid to an ex-spouse as “family support” can qualify as taxable alimony even when they include child support, so long as the child support portion is not “fixed” as defined in section 71(c). The question that seems to recur often in the cases is whether such an undifferentiated family support payment terminates on the death of the payee as required by section 71(b)(1)(D) when it includes child support, and the payor's obligation to support his or her children survives the payee's death, as it almost invariably will.
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