T.C. Memo. 2003-163
UNITED STATES TAX COURT
PATRICIA P. KEAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ROBERT W. KEAN, III, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 8966-00, 9144-00. Filed June 4, 2003.
R determined deficiencies for W’s 1992, 1993,
1994, 1995, and 1996 taxable years. R determined
deficiencies for H’s 1995 and 1996 years. R’s
determinations were based upon R’s inconsistent
position that payments made by H to W, pursuant to
pendente lite unallocated support orders, were
includable in the gross income of W as alimony
received, and not deductible by H as alimony paid.
Held: The payments H made to W meet the criteria
of sec. 71(b)(1), I.R.C. Specifically, the payments
were received by W and, pursuant to State law, would
have terminated at W’s death. Consequently, the
payments are alimony for Federal income tax purposes,
and are deductible by H, under sec. 215, I.R.C., and
includable in the gross income of W, under secs.
61(a)(8) and 71(a), I.R.C.
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Alan R. Adler, for petitioner in docket No. 8966-00.
Jeffrey M. Garrod and Eugenia Yudanin, for petitioner in
docket No. 9144-00.
Joseph J. Boylan, for respondent.
MEMORANDUM OPINION
NIMS, Judge: Respondent determined deficiencies in the
Federal income tax of petitioner Patricia P. Kean (Ms. Kean) for
taxable years 1992, 1993, 1994, 1995, and 1996 of $14,299,
$17,419, $20,116, $18,390, and $4,393, respectively. Respondent
also determined additions to tax pursuant to section 6651(a)(1)
for 1992 and 1994 of $3,557 and $5,029, respectively. Respondent
determined deficiencies in the Federal income tax of petitioner
Robert W. Kean III (Mr. Kean) for the taxable years 1995 and 1996
of $27,584 and $16,781, respectively.
After concessions, the issue remaining to be decided is
whether any part of the unallocated support payments constitutes
alimony under section 71 that is deductible by the payor spouse,
Mr. Kean, under section 215, and includable in the gross income
of the payee spouse, Ms. Kean, under sections 61(a)(8) and 71(a).
In the notices of deficiency respondent took inconsistent
positions, in that respondent disallowed deductions to Mr. Kean
and required Ms. Kean to report alimony income. On brief,
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however, respondent argues that Mr. Kean should be allowed the
deductions and Ms. Kean should report alimony income.
These cases have been consolidated for purposes of briefing
and opinion because they involve common questions of law and fact
arising from the separation and divorce of Mr. Kean and Ms. Kean
(hereinafter collectively referred to as petitioners).
Unless otherwise indicated, all section references are to
sections of the Internal Revenue Code in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
These cases were submitted fully stipulated pursuant to Rule
122, and the facts are so found. The stipulations of the
parties, with accompanying exhibits, are incorporated herein by
this reference.
Background
Ms. Kean resided in Lawrenceville, New Jersey, when she
filed her petition. Mr. Kean resided in Far Hills, New Jersey,
when he filed his petition.
Petitioners were married on September 12, 1970, in Glen
Cove, New York. Petitioners have three children born in the
marriage: (1) Robert W. Kean IV (born January 26, 1979), (2)
Philip E. Kean (born August 23, 1982), and (3) Cristina D. Kean
(born September 4, 1984) (collectively referred to as the
children).
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Ms. Kean brought an action for divorce from Mr. Kean on
October 1991, in the Superior Court of New Jersey, Chancery
Division-Family Part, Somerset County. On April 7, 1992, Graham
T. Ross, J.S.C., P.J.F.P. (Judge Ross), issued an order (April 7,
1992, Order), which required that Mr. Kean deposit no less than
$6,000 each month into a joint checking account, which was
maintained in the names of Mr. Kean and Ms. Kean. The April 7,
1992, Order granted Ms. Kean unlimited access to the joint
checking account and checkbook, and she was ordered to use funds
from the joint checking account to maintain herself, the
children, and the household. The April 7, 1992, Order also
required that Mr. Kean: (1) Pay all household expenses,
including, but not limited to, the mortgage, taxes, and
utilities; (2) pay all expenses for the children, including, but
not limited to, private school tuition; and (3) maintain
insurance coverage and pay all unreimbursed expenses for health
and medical needs of Ms. Kean and the children.
On November 25, 1992, Judge Ross issued an order (November
25, 1992, Order), which denied Mr. Kean and Ms. Kean’s separate
applications for physical custody of the children, required that
Mr. Kean and Ms. Kean continue existing custodial arrangements,
and required that Mr. Kean and Ms. Kean share equally in the
legal authority and responsibility for major decisions concerning
the children.
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On March 5, 1993, Judge Ross issued an order (March 5, 1993,
Order), which granted Ms. Kean exclusive use of the $6,000 Mr.
Kean deposited into the joint checking account and required that
the money from that account be used to support Ms. Kean, the
children, and the household. The March 5, 1993, Order enjoined
Mr. Kean from using the money deposited into the joint account to
pay a note at National State Bank or to pay any other expense.
On April 23, 1993, Judge Ross issued an order (April 23,
1993, Order), which defined the obligations to be paid from the
$6,000 Mr. Kean deposited into the joint checking account as all
shelter, transportation, and personal expenses of Ms. Kean and
the children.
On January 30, 1995, Judge Ross issued an order (January 30,
1995, Order), which required that Mr. Kean make future payments
to Ms. Kean through the applicable probation department.
On January 9, 1996, Judge Ross issued an order (January 9,
1996, Order), which continued Mr. Kean and Ms. Kean’s joint legal
custody of the children and specified how physical custody of the
children should be shared between Mr. Kean and Ms. Kean.
On April 11, 1996, Judge Ross issued an order (April 11,
1996, Order), which reduced the pendente lite support Mr. Kean
was to pay to Ms. Kean from $6,000 to $1,600, effective April 1,
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1996. The April 11, 1996, Order also required that Mr. Kean pay
all household bills and expenses of the children, effective April
1, 1996.
Judge Ross issued a Final Judgment of Divorce on February
19, 1997.
For the taxable year 1992, Mr. Kean made payments to Ms.
Kean, pursuant to the April 7, 1992, Order, in the amount of
$54,000, by either depositing checks into the joint checking
account or issuing checks to Ms. Kean, which were thereafter
deposited into the joint checking account. Ms. Kean reported no
alimony income on her 1992 U.S. Individual Income Tax Return.
For taxable year 1993, Mr. Kean made payments to Ms. Kean,
pursuant to the April 7, 1992, Order and the March 5, 1993,
Order, in the amount of $57,388, by either depositing checks into
the joint checking account or issuing checks to Ms. Kean, which
were thereafter deposited into the joint checking account. Ms.
Kean reported no alimony income on her 1993 U.S. Individual
Income Tax Return.
For the taxable year 1994, Mr. Kean made payments to Ms.
Kean, pursuant to the April 7, 1992, Order and the March 5, 1993,
Order, in the amount of $71,500, by either depositing checks into
the joint checking account or issuing checks to Ms. Kean, which
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were thereafter deposited into the joint checking account. Ms.
Kean reported no alimony income on her 1994 U.S. Individual
Income Tax Return.
From January 1 through February 10, 1995, Mr. Kean made
payments to Ms. Kean, pursuant to the April 7, 1992, Order and
the March 5, 1993, Order, in the amount of $9,000, by either
depositing checks into the joint checking account or issuing
checks to Ms. Kean, which were thereafter deposited into the
joint checking account. From March 6 through December 7, 1995,
Mr. Kean made payments, pursuant to the April 7, 1992, Order, the
March 5, 1993, Order, and the January 30, 1995, Order, through
the Somerset County Probation Department, to Ms. Kean, in the
amount of $61,200. Ms. Kean reported no alimony income on her
1995 U.S. Individual Income Tax Return. Mr. Kean claimed a
deduction for alimony paid of $72,000 on his 1995 U.S. Individual
Income Tax Return.
For the taxable year 1996, Mr. Kean made payments, pursuant
to the April 7, 1992, Order, the March 5, 1993, Order, the
January 30, 1995, Order, and the April 11, 1996, Order, through
the Somerset County Probation Department, to Ms. Kean, in the
amount of $32,400. Ms. Kean reported $14,400 in alimony income
on her 1996 U.S. Individual Income Tax Return. Mr. Kean claimed
a deduction for alimony paid of $37,715 on his 1996 U.S.
Individual Income Tax Return.
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For taxable years 1992 through 1996, Mr. Kean and Ms. Kean
were not legally separated under a decree of divorce or separate
maintenance.
Pursuant to court orders, the payments made by Mr. Kean to
Ms. Kean during the period of April 7, 1992, through February
1995, were deposited into the joint checking account. Pursuant
to court order, during the period of March 6, 1995, through
December 1996, Mr. Kean made payments to the account of Ms. Kean
with the Somerset County Probation Department. The checks
received by Ms. Kean from the Somerset County Probation
Department were deposited by her into the joint checking account.
From at least March 5, 1993, through December 1996, Mr. Kean
did not make any withdrawals or write any checks on the joint
checking account.
Ms. Kean filed her U.S. Individual Income Tax Return for
1992 late on June 8, 1998. Ms. Kean filed her U.S. Individual
Income Tax Return for 1993 on January 22, 1996. Respondent did
not determine a penalty for failure timely to file an income tax
return for 1993. Ms. Kean filed her U.S. Individual Income Tax
Return for 1994 late on January 29, 1996. Ms. Kean filed her
U.S. Individual Income Tax Return for 1995 on October 11, 1996.
Her 1995 return was filed within a permitted extension of time to
file. Ms. Kean timely filed her U.S. Individual Income Tax
Return for 1996 on April 15, 1997.
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Mr. Kean filed his U.S. Individual Income Tax Return for
1995 on July 8, 1996. Mr. Kean submitted Form 4868, Application
for Automatic Extension of Time to File U.S. Individual Income
Tax Return, which provided an automatic extension of time to file
his 1995 return to August 15, 1996. Mr. Kean filed his U.S.
Individual Income Tax Return for 1996 on October 17, 1997.
Respondent did not determine a penalty for failure timely to file
an income tax return for 1996.
From January 1 through September 1992, the children resided
with both Mr. Kean and Ms. Kean at 144 Lake Road, Far Hills, New
Jersey (the marital residence). During October and November
1992, the children resided with Ms. Kean outside the marital
residence. In December 1992, Ms. Kean and the children returned
to the marital residence, where the children resided with Mr.
Kean and Ms. Kean until at least January 1996.
Discussion
I. General Rules
We consider whether certain payments (disputed payments),
made pursuant to court orders issued during the pendency of a
divorce proceeding, are to be treated as alimony for Federal
income tax purposes. Generally, alimony and separate maintenance
payments (hereinafter collectively referred to as alimony) are
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taxable to the recipient and deductible by the payor. Secs.
61(a)(8), 71, 215. Whether a payment constitutes alimony is
determined by reference to section 71(b).
Section 71(b) 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
(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.
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II. Parties’ Contentions
The disputed payments were made pursuant to orders that did
not specifically allocate a portion of the amount as alimony or
as child support, but, rather, required that the money be used to
maintain Ms. Kean, the children, and the household. Respondent
and Mr. Kean argue that these payments should be treated as
alimony. Ms. Kean argues that the payments should not be treated
as alimony.
The parties agree that the disputed payments meet the
requirements of section 71(b)(1)(B). The parties agree that the
requirements of section 71(b)(1)(C) do not apply because Mr. Kean
and Ms. Kean were not legally separated under a decree of divorce
or separate maintenance when the disputed payments were made.
Ms. Kean argues that the disputed payments do not satisfy the
requirements of section 71(b)(1)(A) or (D). Respondent and Mr.
Kean argue that the disputed payments satisfy these requirements.
III. Section 71(b)(1)(A)
As to the requirements of section 71(b)(1)(A), Ms. Kean
argues that she did not receive the payments. Despite this
contention, Ms. Kean stipulated that Mr. Kean made each of the
disputed payments to her by either depositing money directly into
the joint checking account; issuing checks to her, which were
then deposited into the joint checking account; or making a
payment on her behalf with the Somerset County Probation
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Department. In light of these stipulations, we find disingenuous
Ms. Kean’s current claim not to have received payments from Mr.
Kean. Consequently, we find that the disputed payments satisfy
the requirements of section 71(b)(1)(A).
IV. Section 71(b)(1)(D)
The remaining dispute involves the requirements of section
71(b)(1)(D). These requirements are satisfied if Mr. Kean had
“no liability to make any such payment for any period after the
death of the payee spouse [Ms. Kean] and there * * * [was] no
liability to make any payment (in cash or property) as a
substitute for such payments after the death of the payee
spouse.” Sec. 71(b)(1)(D). If the payor is liable for even one
otherwise qualifying payment after the recipient’s death, none of
the related payments required before death will be alimony. Sec.
1.71-1T(b), Q&A-13, Temporary Income Tax Regs., 49 Fed. Reg.
34456 (Aug. 31, 1984). Whether such obligation exists may be
determined by the terms of the applicable instrument, or if the
instrument is silent on the matter, by looking to State law.
Morgan v. Commissioner, 309 U.S. 78, 80 (1940); Gilbert v.
Commissioner, T.C. Memo. 2003-92.
The orders issued by Judge Ross did not indicate whether the
disputed payments would terminate at Ms. Kean’s death. We agree
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with the stipulation made by the parties that the orders should
be interpreted under New Jersey law since they were issued by a
New Jersey court.
New Jersey has a support statute authorizing courts to award
alimony or child support, either pending the divorce suit or
after final judgment. N.J. Stat. Ann. sec. 2A:34-23 (West 2003).
Generally, divorce proceedings abate with the death of either
party. Carr v. Carr, 576 A.2d 872, 875 (N.J. 1990). Despite the
general rule that divorce proceedings abate with the death of
either party, “Some New Jersey courts have recognized that in
highly unusual circumstances some aspects of statutory equitable
distribution and related forms of relief may precede a divorce
judgment or survive a spouse’s death before divorce.” Id.
The obligation to pay alimony ends at the recipient’s death.
See Jacobson v. Jacobson, 370 A.2d 65, 66 (N.J. Super. Ct. Ch.
Div. 1976). The obligation to pay child support survives the
death of either spouse. See Kiken v. Kiken, 694 A.2d 557, 561-
562 (N.J. 1997); Jacobson v. Jacobson, supra at 66. Regarding
the death of the custodial parent, New Jersey statutory law
provides:
In case of the death of the parent to whom the
care and custody of the minor children shall have been
awarded by the Superior Court, or in the case of the
death of the parent in whose custody the children
actually are, when the parents have been living
separate and no award as to the custody of such
children has been made, the care and custody of such
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minor children shall not revert to the surviving parent
without an order or judgment of the Superior Court to
that effect. * * * [N.J. Stat. Ann. sec. 9:2-5 (West
2003).]
New Jersey law does not specify whether unallocated support
payments terminate on the death of the payee spouse. Ms. Kean
relies on Gonzales v. Commissioner, T.C. Memo. 1999-332, in which
this Court held that New Jersey law would not necessarily have
relieved the payor spouse of his obligation to pay family support
had the payee spouse died before entry of the divorce judgment,
under the particular circumstances of that case.
Respondent and Mr. Kean argue that the decision in Gonzales
is not applicable to the instant case. They argue that Gonzales
was wrongly decided and, alternatively, that the facts of the
instant case distinguish it from the facts of Gonzales. The
factual distinction highlighted by respondent and Mr. Kean
involves custody of the children. In Gonzales, the payee spouse
had primary residential custody of the children. In the instant
case, Mr. Kean and Ms. Kean shared a residence with the children
for most of the period during which the disputed payments were
made, and the orders make it clear that they shared custody of
the children during the period when the disputed payments were
made.
The Court in Gonzales v. Commissioner, supra, concluded that
“The fact that the unallocated support order is modifiable and
temporary tells us, at the least, that a court might have reduced
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Dr. Gonzales’ payments rather than terminate them altogether.
Indeed, there are no counterindications.” The Court also stated,
however, that had the payee spouse “died before the superior
court entered the divorce decree, Dr. Gonzales, as the
noncustodial parent of three children, could have remained liable
to pay family support, whether in full or in diminished amounts.”
(Emphasis added.)
Conceivably, the facts in Gonzales could fall within the
“highly unusual circumstances” referred to by the New Jersey
Supreme Court in Carr v. Carr, supra at 875, that provide an
exception to the general rule that divorce proceedings abate with
the death of either party. In any event, the holding of Gonzales
was essentially based upon the fact that the payor spouse was a
noncustodial parent. Since, under N.J. Stat. Ann. sec. 9:2-5
(West 2003), quoted above, custody does not automatically revert
to the noncustodial parent when the custodial parent dies, the
Carr v. Carr, supra, exception could perhaps be held to apply
under facts like those in Gonzales, and, assuming such
applicability, a New Jersey court would continue to have
jurisdiction to modify the pendente lite order to provide
continuing family support.
In the instant case, Mr. Kean and Ms. Kean shared custody of
the children. The November 25, 1992, Order denied both Mr. Kean
and Ms. Kean’s separate applications for pendente lite physical
custody of the children, and ordered Mr. Kean and Ms. Kean to
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continue existing custodial arrangements, reduce the custodial
arrangements to writing, and share equally in the legal authority
and responsibility for major decisions concerning the children.
There is no evidence in the record that Mr. Kean and Ms. Kean
ever reduced the custodial arrangements to writing pursuant to
the November 25, 1992, Order. For 2 months in 1992, Ms. Kean and
the children lived in a residence apart from Mr. Kean. That Ms.
Kean and the children lived apart from Mr. Kean for 2 months does
not necessarily mean that Mr. Kean was not a custodial parent.
During the time when they lived apart, Judge Ross issued the
November 25, 1992, Order, denying both Mr. Kean and Ms. Kean’s
separate applications for physical custody, thereby confirming
that Mr. Kean and Ms. Kean were both custodial parents.
As of December 1992, Ms. Kean and the children resumed
living in the marital residence with Mr. Kean. The January 9,
1996, Order, was the first of the orders issued by Judge Ross to
determine physical custody as an issue separate from legal
custody. In the January 9, 1996, Order, Judge Ross ordered that
Mr. Kean and Ms. Kean share physical custody and set out the
particular schedule that they should use to share physical
custody. There is no indication in the record that Mr. Kean was
a noncustodial parent at any time during the divorce proceeding.
Because Mr. Kean was a joint custodial parent, N.J. Stat. Ann.
sec. 9:2-5 (West 2003), quoted above, would have had no
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applicability upon the death of Ms. Kean, and the general rule
that divorce proceedings abate with the death of either party
would continue to apply. At this point, the New Jersey court
would no longer have jurisdiction to modify the support order.
Mr. Kean would have received sole custody of the children if
Ms. Kean had died during the pendency of the divorce proceeding.
Consequently, and in contrast to the situation in Gonzales v.
Commissioner, supra, even with jurisdiction there would be no
logical reason for the New Jersey court to order that Mr. Kean
continue to pay support or for the New Jersey court to order any
payment as a substitute for the unallocated support that Mr. Kean
paid during the pendency of the divorce proceeding.
In summary, based upon the general rule that divorce
proceedings terminate with the death of either spouse, and absent
unusual circumstances, the New Jersey court would not have had
continuing jurisdiction or reason to enforce or modify any
support order upon Ms. Kean’s death. Even though the series of
orders was both temporary and modifiable during the divorce
proceeding, upon Ms. Kean’s death, the divorce proceeding would
have abated, and Mr. Kean’s obligations under the orders would
have terminated.
Since the disputed payments would have terminated at Ms.
Kean’s death, they meet the requirements of section 71(b)(1)(D).
Consequently, the disputed payments are alimony for Federal
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income tax purposes. The disputed payments are deductible by Mr.
Kean, under section 215, and includable in the gross income of
Ms. Kean, under sections 61(a)(8) and 71(a).
Given the unique factual circumstances of the instant case,
Miller v. Commissioner, T.C. Memo. 1999-273, affd. sub nom.
Lovejoy v. Commissioner, 293 F.3d 1208, 1212 (10th Cir. 2002),
decided under Colorado law, and Gilbert v. Commissioner, T.C.
Memo. 2003-92, decided under Pennsylvania law which is no longer
in effect, do not support a different result.
To reflect the foregoing and the parties’ concessions,
Decisions will be entered
under Rule 155.