The recent case of Timothy Clinton Biddle v. Commissioner, T.C. Memo. 2020-39 (April 6, 2020) (Judge Vasquez) teaches that payments labeled as alimony may be treated as child support even when the divorce decree has other provisions explicitly labeled as child support. Some may think that a lesson about the difference between alimony and child support is not worth learning because Congress eliminated the §215 deduction for alimony payments in December 2017. See §11051(a) of P.L. 115-97, 131 Stat. 2054 at 2089. Once Congress did that, both alimony and child support payments are treated the same for income and deduction purposes: not deductible by the payor spouse and not includable by the payee spouse.
I think the lesson is still important, however, for three reasons. First, the repeal generally does not apply to divorce or separation instruments entered into before December 31, 2018. Thus, there are lots of potential situations where this exact issue may yet arise. Second, the lesson may be important for ongoing §152(d)(1)(C) issues, where taxpayers need to figure out who meets the support test to claim someone as a qualifying relative. Third, this is a lesson about the limits of state court decrees to shape the federal tax consequences of divorce. That is always a lesson worth remembering. Details, as usual, below the fold.
The Old Law: Deductions for Alimony, Not for Child Support
When I teach the tax consequences of divorce, I tell my students to think of payments between ex-spouses as falling into one of three mutually exclusive buckets: (1) alimony; (2) child support; (3) property settlement. I approach the subject that way because in respect of divorce and separation instruments created before December 31, 2018, now-repealed §215 permitted taxpayers to deduct those payments that now-repealed §71 required the ex-spouse to include in income as alimony. The definition of alimony, in turn, excluded payments that were either child support or property transfers. I blogged the latter distinction in my Lesson From The Tax Court: Distinguishing Property Settlement from (Indirect) Alimony, (September 17, 2018). Today’s lesson involves the former distinction.
Child support payments were specifically excluded from the definition alimony by §71(c)(1). Section 71(c)(2) dealt with the idea of implied child support. Child support was implied by divorce decree if reduction in payments to an ex-spouse were related to some even involving a child. As examples, §71(c)(2)(A) listed “attaining a specified age, marrying, dying, leaving school....”
Mr. Biddle divorced his wife in 2010. They had four children. The decree contained separate provisions requiring him to pay monthly child support of roughly $1,800 and monthly alimony of roughly $1,600. The next year, the court reduced the child support amount to roughly $400, apparently to account for Mr. Biddle assuming custody of one or more of the children. Thus, in 2015, the year in dispute, Mr. Biddle paid $2,000 to his ex-wife each month, $400 of which was specifically designated as child support and $1,600 specifically designated as alimony.
Both the original and modified court decree contained the same provisions regarding how long each type of payments were to continue. The child support was to continue until such time as each of their four children had either turned 18, died, married, gone to military school, or became self-sufficient. The alimony was apparently to continue “for at least five years” (Op. at 3) and, after that, it would continue until one of the following events: (1) the youngest child’s 18th birthday; (2) the death of either spouse; (3) the ex-wife’s remarriage; or (4) the ex-wife becoming self-supporting.
Yes, I know. That “at least five years” language is troublesome. And notice that the year in dispute (2015) was one of those first five years. If the divorce decree really set a mandatory minimum of five years on the alimony, that would apparently disqualify all of the payments during those five years as alimony because they were not contingent on the payee spouse’s life as required by former §71(b)(1)(D). However, if state law would have relieved Mr. Biddle of the alimony obligation on the death of his wife, then that drafting defect would cause no harm. Id. As it turns out, however, the payments were entirely disqualified for a different reason: they were contingent on an event relating to a child.
Lesson 1: What is a Contingency
Judge Vasquez applied the plain language of §71(c)(2)(A) to find that none of Mr. Biddle’s designated alimony payments were deductible. That is because of the contingency in the decree that allowed Mr. Biddle to stop making all alimony payments once the youngest child reached 18 years of age. Judge Vasquez says the statute is pellucid that “any payment that will be reduced on the happening of a contingency relating to a child is child support.” (Op. at 7, emphasis supplied). There could simply not a be a clearer contingency than a child turning a certain age.
Lesson 2: The Limits of Language
Mr. Biddle argued that his alimony payments should not count as child support because child support was separately stated in the decree. Notice, too, that it was only the amount designated as child support that was later modified by the state court to reflect the change in the custody of at least one of the children. The alimony payments remained the same; they were not affected by who had custody of which child. So the state court was definitely not treating the amounts labeled alimony as child support.
Judge Vasquez rejected the argument. The entire point of §71(c) is to overrule labels, whether imposed by the party or by state courts. Just because state courts follow labels does not bind the Tax Court or alter the federal tax consequences of a transaction. The labels must yield to operational language of the decree. Former Tax Court Judge David Laro explained why way back in Heller v. Commissioner, T.C. Memo 1994-423:
“Section 71(c)(2) was enacted by the Congress in 1984 in response to the Supreme Court's opinion in Commissioner v. Lester, 366 U.S. 299 (1961). The Lester case involved a written agreement in which the taxpayer was required to make payments for spousal and child support. The agreement did not allocate the payments between alimony and child support. The Supreme Court held that an agreement directing a reduction by one-sixth of payments payable for the support of the taxpayer's children upon a child's marriage, emancipation, or death, did not adequately fix the payments as child support. The Court interpreted the word "fix" to mean that the allocations to child support must be "specifically designated" in the agreement and not left to "determinations by inference or conjecture." In 1984, the Congress effectively overruled the decision in the Lester case by adding section 71(c)(2). *** As long as the definitional requirements of section 71(b)(1) are met, the parties allocation of amounts are generally respected. Section 71(c)(2) represents one exception to this rule.” (internal citations omitted).
Comment: Repeal of §71(c)(2) Eliminates The Answer, Not the Issue
While today’s lesson certainly applies to divorce or separation instruments created before December 31, 2018, today’s lesson might actually have another application. It may help tell us which of two divorced parents can claim a child as a qualifying relative under §152.
Section 152(a) permits a deduction for a dependent. Dependents come in two flavors: qualifying child and qualifying relative. A taxpayer who wishes to claim a person as a qualifying relative must show, inter alia, that the taxpayer provided more than half of the relative’s support. §152(d)(1)(C). I emphasize to my students that taxpayers must show two numbers in order to meet this support requirement: (1) the amount spent by the taxpayer to support the qualifying relative and (2) the total amount spent on support of the qualifying relative, from any source. After all, you cannot know whether a person has provided more than half of the support until you know the total. Only when more than 50% of total support comes from the taxpayer does the taxpayer meet the §152(d)(1)(C) support requirement.
Thus, the question might arise as to what payments, if any, received from an ex-spouse under a divorce or separation instrument go into the “total support” bucket. The answer comes in §152(d)(5)(A), which says “payments to a spouse of alimony or separate maintenance payments shall not be treated as a payment by the payor spouse for the support of any dependent...” Congress then pasted into §152(d)(5)(B) most of the definition of alimony that one used to find in §71(b).
But Congress did not carryover the language in §71(c). That language is now gone. The issue, however, seems to remain.
The issue would now be how to distinguish child support payments (which count as support from someone other than the taxpayer) from alimony payments (which don't count). This seems the same issue that be-deviled the courts before Congress enacted the §71(c) statutory fix, a fix it has now repealed. It may well be that absent statutory language, the Tax Court would fall back to the Supreme Court’s 1961 Lester decision. If so, the labels used by parties would take on much more significance. Alimony so labeled would be alimony, even if it was really implied child support. In this case, for example, I would think that none of $1,600 per month labeled as alimony would count as support for §152(d)(1)(C) purposes. While Mr. Biddle’s arguments were unavailing in the face of contrary statutory language, once you take that language away the state court labels, and how the parties acted in reliance on those labels, become much more important.
As usual, there may well be something I am missing here. I do not practice in this area. I welcome corrections, annotations, stories and jokes in the comments.
Bryan T. Camp is the George H. Mahon Professor-of-Law-In-Exile Somewhere Near The Texas Tech University School of Law