Miller v. Commissioner

T.C. Memo. 1999-273

UNITED STATES TAX COURT

CHERYL J. MILLER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

JOHN H. LOVEJOY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 8094-97, 8158-97. Filed August 12, 1999.

William C. Waller, Jr., for petitioner in docket

No. 8094-97.

Thomas G. Hodel, for petitioner in docket No. 8158-97.

Sara J. Barkley, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent determined deficiencies in the

Federal income tax of petitioner Cheryl J. Miller, formerly
 - 2 -

Cheryl J. Lovejoy (Ms. Miller), for the taxable years 1993 and

1994 of $8,863 and $2,766, respectively. Respondent also

determined deficiencies in the Federal income tax of petitioner

John H. Lovejoy (Mr. Lovejoy) for the taxable years 1993 and 1994

of $12,018 and $5,905, respectively.

These cases have been consolidated for purposes of trial,

briefing, and opinion because they involve common questions of

fact and law arising from the separation and divorce of

petitioners. After concessions,1 the issues addressed in this

opinion are:

(1) Whether any part of "unallocated child support and

maintenance" payments made pursuant to a State court decree is

alimony deductible by the payor spouse under section 2152 and

includable in the income of the payee spouse under section 71;

and

1
Mr. Lovejoy has conceded that a State tax refund of $175 is
includable in his gross income for the taxable year 1993.
Respondent has conceded that Ms. Miller is entitled to claim
additional medical expenses for the taxable year 1993 in the
amount of $1,033 before application of the limits of sec. 213(a).
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. All monetary amounts are rounded to the
nearest dollar.
 - 3 -

(2) whether any part of "unallocated child support and

maintenance" payments made pursuant to a State court decree

constitutes child support under section 71(c).3

FINDINGS OF FACT

Some of the facts and certain exhibits have been stipulated

pursuant to Rule 91. The parties' stipulations of fact are

incorporated herein by reference and are found as facts in these

cases.

Petitioners Cheryl J. Miller and John H. Lovejoy resided in

Colorado during the years in issue and when the petitions in

these consolidated cases were filed.

Petitioners were married on August 30, 1970. They had two

children during their marriage--Krista Holly Lovejoy (Krista),

born on January 8, 1977, and Dean Ross Lovejoy (Dean), born on

May 10, 1980 (the children).

In May 1992, petitioners separated. Ms. Miller remained in

the family home, and Mr. Lovejoy moved into a separate residence.

Mr. Lovejoy and Ms. Miller maintained separate residences

throughout 1993 and 1994 and were not members of the same

household at any time during those years.

3
The only other issues raised by the notices of deficiency
or the pleadings require a determination of which petitioner is
entitled to claim the dependency exemptions for the minor
children for the years at issue or are computational. The
dependency exemption issue will be addressed separately if it is
not resolved by agreement of the parties.
 - 4 -

Unallocated Child Support and Maintenance Payments

Shortly after petitioners separated, Ms. Miller filed a

"Petition for Dissolution of Marriage" seeking, inter alia, a

divorce, temporary and permanent maintenance, and child support

(the divorce case). On August 13, 1992, nunc pro tunc July 27,

1992, the Denver (Colorado) District Court (the State court)

signed Temporary Orders4 in the divorce case that incorporated

stipulations of the parties. The relevant portions of the

Temporary Orders provided:

1. The parties shall share the joint custody of their
children, Krista Holly Lovejoy and Dean Ross Lovejoy,
with * * * [Ms. Miller] designated as the primary
residential custodian for the children. * * *

* * * * * * *

3. As temporary support, * * * [Mr. Lovejoy] shall pay
* * * [Ms. Miller] unallocated child support and
maintenance in an amount equal to fifty-five percent
(55%) of his net income * * *. * * * Payments shall be
due on each bi-weekly pay day of * * * [Mr. Lovejoy]
commencing immediately after the hearing herein and
continuing until further Order of Court.

4. * * * [Mr. Lovejoy's] temporary support payments
herein shall include his contributions toward the son's
attendance at Denver Academy and toward the skating
activities of the daughter. * * *

The Temporary Orders did not state how petitioners were to treat

the payments for Federal income tax purposes. The Temporary

4
"Temporary Orders" may provide for temporary payment of
debts, use of property, custody, maintenance, child support, or
attorney's fees during the pendency of divorce or separation
proceedings. Colo. Rev. Stat. sec. 14-10-108 (1998).
 - 5 -

Orders did not specify what portion, if any, of the "unallocated

child support and maintenance" payments (unallocated family

support payments) constituted child support. The Temporary

Orders did not include any contingencies related to the children

that would reduce or terminate the payments or any portion

thereof.

On January 24, 1994, nunc pro tunc November 12, 1993, the

State court entered orders (the Permanent Orders) granting Ms.

Miller sole custody of the children. The Permanent Orders also

provided:

CHILD SUPPORT

For purposes of calculating child support
according to the guidelines, the Court finds that
* * * [Mr. Lovejoy's] gross income is $8,500.00 per
month.

* * * * * * *

The Court further finds that * * * [Ms. Miller's]
gross income is $571.00 per month, with her net monthly
income being $404.00. * * * [Ms. Miller's] income for
1987 was over $60,000, for 1988, $51,000, for 1989,
$74,000, for 1990 $28,000, 1991, $6,000, and 1992,
$12,000. The Court also finds that * * * [Ms. Miller]
received for each of those years, except 1992, a
director's fee of $3,000.00.

The Court further finds that * * * [Ms. Miller's]
health problems and those of the minor child, Dean,
have affected her ability to work more hours and
increase her income, and the Court believes that the
conclusion of this divorce action will aid in improving
her health problems and those of the minor child,
thereby freeing up * * * [Ms. Miller's] time to work
more hours and increase her income * * *. The Court,
accordingly, imputes income to * * * [Ms. Miller] of
 - 6 -

$2,000.00 per month, such income to begin, for purposes
of computation of child support, March 1, 1994.

* * * * * * *

The Court orders * * * [Mr. Lovejoy] to continue
to pay the sum of $3,127.00 per month as ordered under
Temporary Orders until March 1, 1994. This amount
shall be paid in equal installments on the 15th and
30th days of the month. There shall be no gap in
payments between Temporary Order [sic] and these
Permanent Orders. Thereafter, child support shall be
calculated according to the guidelines.

The Court orders * * * [Mr. Lovejoy] to pay to
* * * [Ms. Miller] the sum of $1,900.00 as and for
child support, plus 69.5% of work related day care, net
of federal tax credit, commencing March 1, 1994. * * *

* * * * * * *

MAINTENANCE

The Court finds that * * * [Ms. Miller], at this
time, is not self-supporting * * *. * * * The Court
orders * * * [Mr. Lovejoy] to pay * * * [Ms. Miller] an
additional $200.00 as maintenance, in addition to the
$3,127.00 paid under Temporary Orders, and that such
$200.00 be effective commencing December 1, 1993 until
March 1, 1994.

The Court orders that there will be no permanent
maintenance. Commencing March 1, 1994, * * * [Mr.
Lovejoy] shall pay to * * * [Ms. Miller] as maintenance
the sum of $1,200.00 for a period of two years. Then
maintenance will be reduced by 50%. If child support
for some reason should decrease during that two years,
the maintenance amount will not change. * * * at the
end of six years, maintenance terminates.

The Court orders that maintenance shall be taxable
to * * * [Ms. Miller] and deductible by * * * [Mr.
Lovejoy].
 - 7 -

Neither the Temporary Orders nor the Permanent Orders

provided for any payment as a substitute for the unallocated

family support payments in the event of Ms. Miller's death.

From January 1 to November 11, 1993, Mr. Lovejoy paid

unallocated family support to Ms. Miller of $32,789 pursuant to

the Temporary Orders. From November 12 to December 31, 1993, Mr.

Lovejoy paid $5,203 in unallocated family support and $200 in

maintenance to Ms. Miller pursuant to the Permanent Orders. On

his 1993 Federal income tax return, Mr. Lovejoy claimed alimony

deductions for his payments of $37,992. On her Federal income

tax return for 1993, Ms. Miller included only the $200 of

maintenance required by the Permanent Orders in her gross income.

From January 1 to February 28, 1994, Mr. Lovejoy made

payments to Ms. Miller of $6,654. Under the terms of the

Permanent Orders, $400 of this amount was maintenance, and $6,254

was unallocated family support. From March 1 to

December 31, 1994, Mr. Lovejoy made payments to Ms. Miller of

$28,070. Of this amount, $19,000 was child support, and $9,070

was maintenance. On his 1994 tax return, Mr. Lovejoy claimed

$18,656 as an alimony deduction. On her 1994 tax return, Ms.

Miller reported alimony income of $9,448.5

5
Most of the inconsistency in reporting is explained by
petitioners' inconsistent treatment of the unallocated family
support payments.
 - 8 -

The Notices of Deficiency

Respondent issued separate notices of deficiency to Ms.

Miller and Mr. Lovejoy. In Ms. Miller's notice, respondent

proposed an adjustment increasing Ms. Miller's income by the

amount of unallocated family support paid to her in 1993 and

1994. In Mr. Lovejoy's notice, respondent disallowed that part

of Mr. Lovejoy's alimony deduction attributable to the

unallocated family support paid by him in 1993 and 1994.

OPINION

Classification of Unallocated Family Support Payments

We must decide whether all or any part of the unallocated

family support payments made by Mr. Lovejoy to Ms. Miller

qualified as (1) alimony includable in the income of the payee

spouse under section 71 and deductible by the payor spouse under

section 215, or (2) child support excludable from the income of

the payee spouse under section 71(c) and nondeductible by the

payor spouse.

In this case, the Temporary Orders, incorporating the

stipulation of the parties, imposed an obligation on Mr. Lovejoy

to pay a percentage of his income as family support. This family

support obligation was characterized as "unallocated child

support and maintenance" by the State court. We are satisfied,

on the basis of our review of the record, that the required

payments were intended to cover both Mr. Lovejoy's obligation to
 - 9 -

support his minor children and his obligation to pay maintenance

to Ms. Miller. However, whether an unallocated payment combining

spousal support and child support can be allocated for Federal

income tax purposes depends upon whether the requirements of

section 71(b) and (c) are met. We turn first to the requirements

of section 71(b) to test the unallocated family support payments

for alimony.

Testing Unallocated Family Support Payments for Alimony

In order for any part of an unallocated family support

payment to qualify as alimony, the payment must satisfy the

requirements of section 71(b). Section 71(b)(1) provides:

SEC. 71(b). Alimony or Separate Maintenance
Payments Defined.--For purposes of this section--

(1) In general.--The term "alimony or
separate maintenance payment" means any payment in
cash if--

(A) such payment is received by (or on
behalf of) a spouse under a divorce or
separation instrument,

(B) the divorce or separation instrument
does not designate such payment as a payment
which is not includible in gross income under
this section and not allowable as a deduction
under section 215,

(C) in the case of an individual legally
separated from his spouse under a decree of
divorce or of separate maintenance, the payee
spouse and the payor spouse are not members
of the same household at the time such
payment is made, and
 - 10 -

0 (D) there is no liability to make any
such payment for any period after the death
of the payee spouse and there is no liability
to make any payment (in cash or property) as
a substitute for such payments after the
death of the payee spouse.

The "divorce or separation instrument" to which section

71(b)(1)(A) refers includes "a decree of divorce or separate

maintenance", sec. 71(b)(2)(A), or "a decree * * * requiring a

spouse to make payments for the support or maintenance of the

other spouse", sec. 71(b)(2)(C).

The parties agree that the unallocated family support

payments at issue in this case satisfy all of the requirements

set forth in section 71(b)(1)(A) and (C). The parties disagree,

however, as to whether the requirements of section 71(b)(1)(D)

and (B) have been met.

We turn first to the termination requirement of section

71(b)(1)(D).

Although section 71(b)(1)(D) requires that there must be no

liability to make alimony or separate maintenance payments for

any period after the death of the payee spouse, the divorce or

separation agreement need not expressly state that the payment

obligation terminates upon the death of the payee spouse if

termination would occur by operation of State law. See Notice

87-9, 1987-1 C.B. 421, 422. In this case, because the State
 - 11 -

court decrees are silent on the issue, we look to Colorado law6

in order to determine whether Mr. Lovejoy's legal duty to pay

unallocated family support would terminate upon Ms. Miller's

death. Cf. Brown v. Commissioner, 50 T.C. 865 (1968), affd. per

curiam 415 F.2d 310 (4th Cir. 1969).

Colorado has enacted the Uniform Dissolution of Marriage Act

(UDMA), Colo. Rev. Stat. secs. 14-10-101 through 14-10-133

(1998). As enacted in Colorado, the UDMA specifically authorizes

two types of support orders: Maintenance and child support. See

Colo. Rev. Stat. secs. 14-10-114, 14-10-115. The term

"maintenance" is defined to include the term "alimony". Colo.

Rev. Stat. sec. 14-10-103(1).

Under the UDMA as enacted in Colorado, the obligation to pay

future maintenance terminates upon the death of either party or

the remarriage of either spouse, unless otherwise agreed in

writing or expressly provided in the decree. See Colo. Rev.

Stat. sec. 14-10-122(2); Menor v. Menor, 391 P.2d 473, 477 (Colo.

1964). On the other hand, the obligation to pay child support is

6
Because Mr. Lovejoy and Ms. Miller reside in Colorado, they
are bound by Colorado law on the issue of when the unallocated
child support and maintenance payments terminate. See Napolitano
v. Napolitano, 732 P.2d 245 (Colo. Ct. App. 1986); McDonald v.
McDonald, 634 P.2d 1031 (Colo. Ct. App. 1981);. Under Colorado
law, support orders are governed by the law of the State that
issued the orders. See Colo. Rev. Stat. secs. 14-5-303, 14-5-604
(1998).
 - 12 -

"terminated by emancipation of the child but not by the death of

a parent obligated to support the child" unless otherwise agreed

in writing or expressly provided in the decree. Colo. Rev. Stat.

sec. 14-10-122(3); see also Abrams v. Connolly, 781 P.2d 651,

656-657 (Colo. 1989) (the obligation to pay child support

continues beyond the death of the custodial parent, at least when

the noncustodial parent does not assume custody of the children

following the death of the custodial parent).

We have found no specific statutory authority authorizing

unallocated family support payments other than scattered

references in the UDMA to "maintenance when combined with child

support". See, e.g., Colo. Rev. Stat. secs. 14-14-105

(Continuing Garnishment), 14-10-122(1)(c) (Modification and

Termination of Provisions for Maintenance, Support, and Property

Disposition--Automatic Lien). Similarly, we have found no

statute which addresses whether an obligation to pay unallocated

family support terminates upon the death of the payee spouse.

Mr. Lovejoy argues that, because the Temporary Orders (and

that part of the Permanent Orders dealing with the unallocated

payments) did not "fix" any amounts as child support, his duty to

make the unallocated family support payments would end upon Ms.

Miller's death. Ms. Miller argues that, because at least some

portion of each unallocated family support payment is child

support, under Abrams v. Connolly, supra, some portion of each
 - 13 -

payment would survive her death. We reject both of these

arguments and the circular reasoning on which they rely.

Unallocated family support is a technique sometimes used in

domestic relations cases to encourage sensible cash-flow planning

between separated spouses.7 If used correctly, the technique

enables the parties to achieve a higher net transfer of funds to

the payee spouse because the payor spouse, who is generally in a

higher tax bracket, reaps an economic benefit from the larger tax

deduction obtained when unallocated family support payments are

structured to be deductible as alimony. See generally H. Rept.

98-432 (Part 2), at 1495 (1984). These unallocated payments,

while typically temporary, can facilitate the economic transition

that must occur as a result of a divorce or separation, provided

the parties understand and agree to the tax consequences.

In this case, the Temporary Orders are silent regarding the

tax consequences of the unallocated family support payments.

Although petitioners could have agreed to the tax consequences of

the payments, they failed to do so. See sec. 71(b)(1)(B) and

(c). Colorado's UDMA does not state expressly whether combined

spousal and child support payments must terminate on the death of

the payee spouse. We must examine, therefore, whether the

provisions of the UDMA applicable to temporary orders permit us

7
This practice is sometimes referred to as "Lesterizing".
See Commissioner v. Lester, 366 U.S. 299 (1961).
 - 14 -

to conclude that the unallocated payments must terminate on the

death of the payee spouse as required by section 71(b)(1)(D).

Under the UDMA, child support and spousal maintenance must

be separately stated in a final divorce decree. See In re Huff,

834 P.2d 244, 248 (Colo. 1992) (error to incorporate an award of

attorney's fees into a maintenance award, because under the UDMA,

the district court is required to make separate orders regarding

each element of a dissolution order). Consequently, it appears

that unallocated family support payments may be used only in a

written separation agreement or in temporary orders.

Since the Temporary Orders did not require Mr. Lovejoy to

make separate maintenance and child support payments under the

provisions of the UDMA dealing expressly with those types of

payments, we conclude that the State court intended for the

unallocated payments to be governed by the express terms of the

Temporary Orders and the provisions of the UDMA dealing with

temporary orders.

In this case, petitioners agreed to the unallocated family

support payments in a stipulation which was incorporated into

Temporary Orders. The Temporary Orders state that the

unallocated payments must continue "until further Order of

Court." Moreover, Colo. Rev. Stat. sec. 14-10-108(5)(c), dealing

with temporary orders and injunctions, provides, in pertinent

part, that a temporary order "Terminates when the final decree is
 - 15 -

entered, unless continued by the court for good cause to a date

certain, or when the petition for dissolution or legal separation

is voluntarily dismissed."8

Neither the Temporary Orders nor the UDMA provides that the

unallocated family support payments must terminate on the death

of the payee spouse. We hold, therefore, that the unallocated

payments could be terminated only by "further Order of Court" as

stated in the Temporary Orders or upon the entry of the final

divorce decree or voluntary dismissal of the petition for

dissolution as provided in Colo. Rev. Stat. sec. 14-10-108(5)(c).

The termination requirement of section 71(b)(1)(D) is not

met with respect to the unallocated family support payments at

issue in this case. Since the failure to satisfy the termination

requirement is fatal to Mr. Lovejoy's argument that the

unallocated family support payments are alimony, we need not

address whether the section 71(b)(1)(B) requirement is met. The

unallocated family support payments are not includable in Ms.

Miller's income under section 71 and are not deductible by Mr.

Lovejoy under section 215.

8
Temporary support orders further the purpose of the UDMA,
to mitigate the potential harm to spouses and their children
caused by the process of dissolving a marriage, by maintaining
the status quo pending final disposition of dissolution
proceedings. See In re Price, 727 P.2d 1073, 1076 (Colo. 1986).
 - 16 -

Testing Unallocated Family Support Payments for Child Support

In order for any part of an unallocated family support

payment to qualify as child support for Federal income tax

purposes, it must satisfy the provisions of section 71(c). As a

general rule, section 71(c)(1) provides that that part of any

payment which the terms of the divorce or separation instrument

fix as a sum payable for the support of the payor's children is

not alimony under section 71.

Neither respondent nor Ms. Miller argues that any portion of

the unallocated family support payments is fixed as child support

and thus excludable from Ms. Miller's gross income. Instead,

both respondent and Ms. Miller take the position that the

payments are not alimony and, therefore, by process of

elimination, the payments must be child support.

We decline to address whether the unallocated family support

payments, or any part of them, qualify as child support under

section 71(c). Ms. Miller has asserted that the unallocated

family support payments are child support only because she wants

to avoid any argument that those payments are includable in her

income. Since the unallocated family support payments do not

satisfy the termination requirement of section 71(b)(1)(D) and,

therefore, do not qualify as alimony for Federal income tax

purposes in any event, it is not necessary to decide the child

support issue. No other ground for asserting that the payments
 - 17 -

are includable in Ms. Miller's income has been raised by

respondent in this case.9

We have carefully considered all remaining arguments made by

the parties for a result contrary to that expressed herein, and,

to the extent not discussed above, find them to be irrelevant or

without merit.

Conclusion

The unallocated family support payments made by Mr. Lovejoy

to Ms. Miller in 1993 and 1994 are not includable in Ms. Miller's

income under section 71 and are not deductible by Mr. Lovejoy

under section 215.

Our holding in this opinion will be incorporated into the

decisions to be entered in these cases when all other issues are

resolved.

An appropriate order will

be issued.

9
Respondent did not raise sec. 61 as an alternative ground
for including the unallocated payments in Ms. Miller's income.
See, e.g., Mass v. Commissioner, 81 T.C. 112 (1983). But cf.
Gould v. Gould, 245 U.S. 151 (1917) (alimony not includable in
recipient's gross income under predecessor to sec. 61). Since
the issue was not raised expressly in the notices of deficiency
and since all of the parties have tried this case on the
assumption that only sec. 71 applies, we do not address whether
family support payments not meeting the requirements of sec. 71
must be included in income under sec. 61.