only the tip of the iceberg, of course, since many more disputed cases are settled at the administrative level or resolved in the unreported small case docket of the Tax Court than ever reach a reported court decision. In many of these cases, the Federal government often issues notices of deficiency to both parties, claiming that the payment excluded by the payee should, in fact, have been included and that the payment deducted by the payor should, in fact, not have been deducted (or vice versa). It concedes that only one or the other claim should prevail, that it is merely a stakeholder in the litigation, depending on how the court characterizes the payment. As recited by the Tax Court in one case, the government "has taken the position of a stakeholder and has no preference concerning whether we find that the payments in controversy are alimony includable by [the payee] or property settlement and/or child support not deductible by [the payor].>>175 174 T.C.M. (CCH) 453 (1998); Nelson v. Comm'r, 76 T.C.M. (CCH) 145 (1998); Walker v. Comm'r, 75 T.C.M. (CCH) 2373 (1998); Smith v. Comm'r, 75 T.C.M. (CCH) 2250 (1998); Human v. Comm'r, 75 T.C.M. (CCH) 1990 (1998); Burkes v. Comm'r, 75 T.C.M. (CCH) 1772 (1998); Hammond v. Comm'r, 75 T.C.M. (CCH) 1745 (1998); Peterson v. Comm'r, 75 T.C.M. (CCH) 1620 (1998); Croteau v. Comm'r, 75 T.C.M. (CCH) 1550 (1998); Wells v. Comm'r, 75 T.C.M. (CCH) 1507 (1998); Raymond v. Comm'r, 73 T.C.M. (CCH) 2572 (1997); Ribera v. Comm'r, 73 T.C.M. (CCH) 1807 (1997); Sugarman v. Comm'r, 72 T.C.M. (CCH) 602 (1996); Murphy v. Comm'r, 71 T.C.M. 3144 (1996); Hill v. Comm'r, 71 T.C.M. 2759 (1996); Ambrose v. Comm'r, 71 T.C.M. 2429 (1996); Stewart v. Comm'r, 71 T.C.M. (CCH) 1966 (1996); Rosenthal v. Comm'r, 70 T.C.M. (CCH) 1614 (1995); Richardson v. Comm'r, 70 T.C.M. (CCH) 1390 (1995); Israel v. Comm'r, 70 T.C.M. 1037 (1995); Mercurio v. Comm'r, 70 T.C.M. (CCH) 59 (1995); Heffron v. Comm'r, 69 T.C.M. (CCH) 2849 (1995); Stroufe v. Comm'r, 69 T.C.M. (CCH) 2870 (1995); Hoover v. Comm'r, 69 T.C.M. (CCH) 2466 (1995); Walters v. Comm'r, 68 T.C.M. (CCH) 1533 (1994); Cunningham v. Comm'r, 68 T.C.M. (CCH) 801 (1994); Heller v. Comm'r, 68 T.C.M. (CCH) 730 (1994); Stokes v. Comm'r, 68 T.C.M. (CCH) 705 (1994); Heller v. Comm'r, 68 T.C.M. (CCH) 538 (1994); Fosberg v. Comm'r, 64 T.C.M. (CCH) 1527 (1992). 174 See, e.g., Richardson v. Comm'r, 125 F.3d 551, 553 (7th Cir. 1997) (“The Commissioner has sent inconsistent notices to protect the government's right to tax revenue. This practice has been recognized as valid."); Murphy v. Comm'r, 71 T.C.M. (CCH) 3144 (1996) (“In the notices of deficiencies and in her pleadings, respondent has taken inconsistent positions, disallowing alimony deductions to Ronald Murphy but requiring Diane Murphy to report alimony income. Respondent, however, does not ask us to sustain inconsistent positions. Respondent is content that we determine the tax consequences of the subject payments ... consistently between petitioners.") Accord Leventhal v. Comm'r, 79 T.C.M. (CCH) 1670 (2000); Jaffe v. Comm'r, 77 T.C.M. (CCH) 2167 (1999); Baxter v. Comm'r, 77 T.C.M. (CCH) 2137 (1999); Raymond v. Comm'r, 73 T.C.M. (CCH) 2752 (1997); Richardson v. Comm'r, 70 T.C.M. (CCH) 1390 (1995); Heffron v. Comm'r, 69 T.C.M. (CCH) 2849 (1995). But see Christoph, infra notes 220-24 and accompanying text (where government took inconsistent positions and court held that fact to be significant to its decision). 176 What it means to "fix" an amount for child support continues to generate significant litigation. Under the Lester Rule, an amount not specifically denominated as "child support" in the relevant documents was not considered "child support" for tax purposes, even if the surrounding circumstances tied the payments to the children. The 1984 amendments provided that payments that are reduced upon the happening of contingencies relating to the children would be considered "fixed" as child support, but they went no further. That is to say, the statute was not amended to provide that, if surrounding circumstances of any kind indicate that the payment might have been intended as "child support," they should be so treated for tax purposes. What if surrounding circumstances other than a reduction upon the happening of contingencies related to the children indicate that an amount might have been intended as child support, though not denominated as such? 178 179 In 1988, Congress mandated that each state create and publish child support guidelines.177 The Federal law contains a rebuttable presumption that the amount of child support awarded under the guidelines is correct. My own home state of Ohio has complied by issuing detailed listings of how much child support should be ordered for each child, depending on the income levels of the payor and payee. While a judge can deviate from the guidelines, the judge must defend the deviation by reference to the surrounding circumstances that justify it. What happens when a judge makes an unallocated "family support payment" for the support of the ex-spouse and children? Can the recipient spouse argue that the portion of the payment equal to the guideline amount should be considered "fixed" as child support within the meaning of I.R.C. § 71(c)(1)? 180 The Tax Court has said "no." In Simpson v. Commissioner, for example, a family court in Pennsylvania issued an order requiring Mr. Simpson to pay a monthly unallocated family support payment of $718 to Ms. Simpson for the support of herself and their minor children. Ms. Simpson argued that the entire payment constituted child support, since the Pennsylvania child support guidelines would require a monthly payment of $789, which exceeded the unallocated family support payment. The Tax Court, however, concluded that such inferences from state child support guidelines are not permissible in determining whether any amount is "fixed" as child support. The language of section 71(c)(1) is clear that for payments to be child support, the 176 177 See supra notes 162-63 and accompanying text. See Child Support Enforcement Amendments of 1984, P.L. 98-378, § 181, 98 Stat. 1305, 1321, amended by the Family Support Act of 1988, P.L. 100-485, tit. I, § 103(a) and (b), 102 Stat. 2346. 179 See Ohio Revised Code § 3113.2115 (as amended July 1, 2000). beyond the written instrument to examine what effects, if any, are made by If Congress had intended for us to look beyond the written instrument, it would We conclude, therefore, that because the court order does not specifically fix a 181 In a similar case where the payee made the identical argument, relying on the published state child support guidelines, the Tax Court said: Even assuming, for the sake of argument, that a simple reference to the grid 182 Surely this result is right as a matter of positive law, but it probably does not accord with what the parties expect if they are told simply by their attorneys that "child support" is excludable/nondeductible. At the least, there remain tremendous traps for the unwary, and the potential for confusion is clear. And it does not appear that family law courts are going to abandon their practice of ordering unallocated family support payments simply because the Federal tax law prefers to have different tax consequences apply to "child support" and "alimony." A similar problem in distinguishing alimony from child support often arises in the case of temporary support orders, which quite often take the form of unallocated "family support." In Heller v. Commissioner, 183 for example, Lawrence and Madeline Heller divorced in 1986. They divided their community property, and Madeline took custody of the couple's children. The divorce court entered three consecutive orders that defined Mr. Heller's payment responsibilities with respect to Madeline and their children. 181 182 Id. Lawton v. Comm'r, 78 T.C.M. (CCH) 153 (1999). Neither will the "Dissomaster" computer program, which apparently helps family law lawyers compute support payments based on income and other factors, serve to identify how much of an unallocated family support payment constitutes child support. See Wells v. Comm'r, 75 T.C.M. (CCH) 1507 (1998). On February 19, 1986, the court issued a temporary order directing Mr. Heller to Is any portion of the payments made under the first order nondeductible "child support" in view of the designation in later orders that a specified portion of each payment constituted "child support"? No amount of the payments made in the first order would be considered "child support" under the Lester Rule; the entire payment would be considered an unallocated "family support payment" that would fully qualify as “alimony" (so long as the other alimony requirements were satisfied). There were no reductions in the amounts payable under this first order connected with any contingencies relating to the children, which is the only situation involving "disguised child support" addressed in the 1984 amendments. Does that mean that the entire payment should qualify as alimony? Or because the later payments indicated that $1,000 of each monthly payment would be considered child support, should the first $1,000 of each payment made under the first order be considered child support as well? The Tax Court concluded the latter, but the 9th Circuit reversed on this point, concluding that, under Lester, the entire payment could potentially qualify as “alimony." "The designation contained in the second order was insufficient to fix $1,000 per month as child support during any time before July 1, 1986. Accordingly, no payment was fixed as child support for February through June, 1986, of the first order. The government next argued that Lawrence's obligation to make the payments would not have stopped if Madeline had died prior to July of 1986, and thus the payments nevertheless failed to qualify as alimony. Under this view, they would be considered an excludable/nondeductible property settlement by default--clearly on odd conclusion on the facts, but that is the inevitable result of the analysis required by the current rules. Again the 9th Circuit disagreed, finding that the payments would have stopped on Madeline's death, but it had to undertake an examination of state law in order to come to this conclusion. By its terms, the first court order creates a legal obligation for Mr. Heller to pay $3,500 a month "spousal support" to his former wife. The order did not specify that the payments would continue upon the death of Madeline. California law provides that "[e]xcept as otherwise agreed by the parties in writing, the obligation of a party under an order for the support of the other party terminates upon the death of either party or the remarriage of the other party."... California law also provides that in the event a single stated amount covers both alimony and child support in an order, the courts cannot determine, after a terminating event, what proportion of the total award is allocable to alimony and to child support. [state case law citations omitted.] Mr. Heller's legal obligation to pay money under the first court order would therefore terminate upon Madeline's death, and a court would have no ability to allocate retroactively between spousal and child support. Accordingly, the obligation embodied in the first court order would terminate on the death of the payee spouse and meets the test for alimony. 186 Thus, Ms. Heller had to include the full amount of the unallocated support in her gross income as tax “alimony." ,,187 188 In contrast, Ms. Gonzales, in Gonzales v. Commissioner, was held to be entitled to exclude temporary unallocated family support on virtually identical facts, since the court--again after examining state law--concluded that the temporary support payments would not have stopped had Ms. Gonzales died. In other words, amounts received under a temporary support order were considered, by default, to be a cash property settlement--an obvious error if the facts themselves could control the inquiry, but the necessary result of the stop-at-death inquiry. Mr. and Ms. Gonzales, who had four minor children, were separated in 1992 and divorced in September of 1995. On February 18, 1993, a state court entered a temporary order awarding custody of the children to Ms. Gonzales and directing Mr. Gonzales to make an unallocated family support payment of $7,500 per month, as follows: [P]ending the resolution of this matter... [Dr. Gonzales] shall pay $7,500 per 189 186 187 Id. The same result occurred in Ambrose v. Commissioner, 71 T.C.M. (CCH) 2429 (1996), even though the Judge who ordered the unallocated family support payment of $17,500 said: "Because 'family support' is allowed only by stipulation, the court does not to inquire if Ms. Ambrose wishes the $17,500 amount broken down into child support and spousal support. If she does, I propose that it be broken down to $8,000 child support, $9,500 spousal support. If both parties are willing, it will stay as family support." Id. Ms. Ambrose included in her gross income only $9,500 of each monthly payment, but the Tax Court concluded that she had to include the entire $17,500. It rejected, under Lester, any inference that could be drawn from the judge's precatory language. It also concluded, after examining California state law, that no part of the $17,500 payment obligation would have survived her death, since at least a portion of that payment constituted "alimony" for state law purposes, and if any portion of a mixed payment stream constituted state-law alimony, the Tax Court believed that state law would terminate Mr. Ambrose's payment obligation for the entire amount. |