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For federal tax purposes, any payment made in the initial phase of a divorce under a pendente lite support order that does not allocate between alimony and child support is considered the income of the spouse who receives the payment, the 3rd U.S. Circuit Court of Appeals has ruled. Ordinarily, alimony is deductible from the paying spouse’s income and must be claimed as income by the receiving spouse, but child support is neither deductible nor transferred. In Kean v. Commissioner of Internal Revenue, a unanimous three-judge panel found that where an interim court order combines the alimony and child support into a single, unallocated support payment, the funds are treated as “alimony” under the federal tax code. “Child support payments may be separated out of alimony payments for tax purposes, but only if the amount intended for child support is sufficiently identifiable,” 3rd Circuit Judge Franklin S. Van Antwerpen wrote. “Where support payments are unallocated, as in this case, the entire amount is attributable to the payee spouse’s income,” Van Antwerpen wrote in an opinion joined by 3rd Circuit Chief Judge Anthony J. Scirica and 3rd Circuit Judge Jane R. Roth. The ruling upholds a decision by the U.S. Tax Court against Patricia Kean that affirmed an IRS notice of deficiency for nearly $75,000 in unpaid taxes over five years. Van Antwerpen found that Section 71(b) of the Internal Revenue Code — which defines “alimony” — was enacted to “provide a uniform definition of alimony so that alimony payments could be distinguished from property settlements which receive different tax treatment.” An objective test was necessary, Van Antwerpen said, because state courts sometimes used the term “alimony” indiscriminately. “Congress specifically intended to eliminate the subjective inquiries into intent and the nature of payments that had plagued the courts in favor of a simpler, more objective test,” Van Antwerpen wrote. Van Antwerpen also found that the law can help families to reduce their tax burden by shifting income to the spouse who is in a lower tax bracket. “By ordering the payor spouse to make an unallocated support payment taxable in full to the payee spouse, the couple may be able to shift a greater portion of their collective income into a lower tax bracket,” Van Antwerpen wrote. “Consequently, an unallocated payment order not only frees the parents from restrictive court instructions that dictate who pays for what, but may allow the parties to enjoy a tax benefit at a time when they face increased expenses as they establish independent homes. This advantage would be lost by taxing all unallocated payments to the payor spouse,” Van Antwerpen wrote. The ruling creates a split in the federal circuits because the 3rd Circuit refused to follow the 10th Circuit’s 2002 decision in Lovejoy v. Commissioner of Internal Revenue, which held that, under Colorado law, support payments made during divorce proceedings do not fit Section 71′s definition of “alimony.” Van Antwerpen found that the logic of Lovejoy was flawed because the court “rel[ied] too heavily on the intricacies of family law and fail[ed] to take into account the overall purpose of Section 71.” According to court papers, Patricia and Robert Kean were married in 1970 and have three children. In 1991, Ms. Kean filed for divorce in New Jersey Superior Court. While the case was pending, the court ordered Mr. Kean to deposit $6,000 per month into the couple’s joint checking account, and Ms. Kean was instructed to use the funds to support herself, the children and the household. In 1996, the court reduced Mr. Kean’s pendente lite support obligation from $6,000 to $1,600. During the years that the pendente lite order was in place, Mr. Kean paid Ms. Kean more than $250,000. On their tax returns, Mr. Kean was deducting all of the payments, but Ms. Kean was not claiming the payments as income. In 2000, the IRS issued a notice of deficiency to both of the Keans. In 2003, the tax court issued an opinion addressing both of the Keans’ cases in which it concluded that the payments made by Mr. Kean to Ms. Kean met the tax code’s definition of “alimony.” Now the 3rd Circuit has upheld that decision, finding that “pendente lite support payments should be considered ‘alimony or separate maintenance payments’ for federal taxation purposes.” Van Antwerpen found that, under the tax code, such payments are considered alimony unless the divorce or separation instrument “fixes a sum of money as child support, or provides that the payments are reduced on the happening of an event related to the child, or at a time associated with such an event.” Patricia Kean’s lawyer, Alan R. Adler of Morristown, N.J., argued that the payments were not “received” by his client because they were deposited into a joint checking account and the court had placed certain conditions on the use of the funds in the account. Van Antwerpen disagreed, finding that “Ms. Kean had unfettered access to the funds,” and that any doubt about that issue was resolved by a court order that explicitly said Ms. Kean was to have exclusive use of the funds. Adler also argued that the payments could not be considered alimony because the tax code’s definition states that one characteristic of alimony is that “there is no liability to make any such payment for any period after the death of the payee spouse.” If Patricia Kean had died, Adler argued, Robert Kean would have been required to continue making the pendente lite payments. Van Antwerpen disagreed, finding that the court order “did not specify whether Mr. Kean’s responsibility to make payments would terminate upon Ms. Kean’s death.” Since the court order was silent, Van Antwerpen looked to New Jersey law and concluded that “a support order issued pendente lite in a New Jersey divorce proceeding does not survive the death of the payee.”

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