Child support represents the fulfillment of a parental obligation. Both parents have this obligation. Fulfillment of this obligation does not create any right to a deduction, but only to a dependent deduction of the exemption amount. The same is true after dissolution of the marriage. The Code has some special rules for allocation of the dependent deduction in its definitions of “qualifying child” and “qualifying relative,” supra. Furthermore, receipt of child support payments is not gross income to the payee. See § 71(c)(1).
Taxpayer may try to exploit the treatment of alimony and so characterize child support payments as alimony. The Code has some rules for identifying a portion of payments the parties may label as alimony that are in fact child support. § 71(c)(2) (carryout ¶). A characteristic of child support is that its amount should decrease (or disappear) on certain occasions in the child’s life, notably attaining a certain age. Thus –
- if the divorce instrument specifies that payments will be decreased on the happening of a contingency relating to the child (e.g., attaining a certain age, marrying, dying, leaving school (as well as leaving the spouse’s household or gaining employment, Reg. § 1.71-1T(c) (Q&A 17)), then the amount of the decrease will be treated as child support. § 71(c)(2)(A).
- if the divorce instrument specifies that payments will be decreased at a time “which can clearly be associated with a contingency” of the sort just noted, then the amount of the decrease
will be treated as child support. § 71(c)(2)(B).
- Reg. § 1.71-1T(c) (Q&A 18) creates presumptions about whether a reduction occurs “at a time which can clearly be associated with the happening of a contingency relating to a child
of the payor[.]” Rebuttal of either presumption may occur “by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to
the children of the payor.” For example, a presumption may be rebutted “by showing that alimony payments are to be made for a period customarily provided in the local jurisdiction, such
as a period equal to one-half the duration of the marriage.”
- Payments that are to be reduced not more than six months before or after attaining the age of 18, 21, or the local age of majority are presumptively “clearly associated with the happening of a contingency relating to a child of the payor.”
- This presumption is conclusively rebutted by showing that the “reduction is a complete cessation of alimony or separate maintenance payments during the sixth post-separation year ... or upon the expiration of a 72-month period.” Id.
- Payments that are to be reduced on two or more occasions which occur not more than one year before or after a different child of payor spouse attains an age between 18 and 24 are presumptively “clearly associated with the happening of a contingency relating to a child of the payor.”
- Reg. § 1.71-1T(c) (Q&A 18) creates presumptions about whether a reduction occurs “at a time which can clearly be associated with the happening of a contingency relating to a child of the payor[.]” Rebuttal of either presumption may occur “by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to the children of the payor.” For example, a presumption may be rebutted “by showing that alimony payments are to be made for a period customarily provided in the local jurisdiction, such as a period equal to one-half the duration of the marriage.”
When reading the following case and revenue ruling, consider whether you feel the issues are resolved correctly – and why.
Faber v. Commissioner, 264 F.2d 127 (3rd Cir. 1959)
BIGGS, Chief Judge.
This case comes before us on a petition to review a decision of the Tax Court, 1958, 29 T.C. 1095. The issue presented is: Is the taxpayer, Faber, entitled to deduct under § 23(u) [now §§ 215/62(a)(10)] , Internal Revenue Code of 1939, a portion of an annual $5,000 payment, made to his divorced wife, Ada, namely $2,700, designated in the separation agreement incorporated in the divorce decree for the support of his divorced wife’s son?
The taxpayer and his wife, Ada, were divorced in 1952. The former Ada Faber had been previously married and had a son by this former marriage, William Black, who adopted his stepfather’s surname but was never legally adopted by his stepfather. The taxpayer and his wife entered into a separation agreement which was made part of the final decree of divorce. The agreement provided in pertinent part:
‘The Husband covenants and agrees to pay to the Wife in settlement of her property rights and the obligation of the Husband for her future care, support and maintenance, and for the care of the Wife’s child, William, the sum of Fifty-five thousand dollars ($55,000), payable Five thousand dollars ($5,000) annually, beginning the first day of January, 1952, to and including the first day of July, 1962, or for a period of eleven years. * * * ...
‘Said payment or payments are to be allocated Two thousand three hundred dollars ($2,300) annually for the Wife, and Two thousand seven hundred dollars $(2,700) annually for the support and care of his Wife’s son, William.
‘In the event that the Wife or her son die before all payments have been made, then the allocated part of the payment, as above set forth, shall cease, and the future payments reduced, and the estate of the one so dying shall have no claim against the Husband for future ‘payments’.’ [footnote omitted].
The taxpayer paid Ada $5,000 in 1952. He deducted the $5,000 as an alimony payment in his individual tax return for that calendar year. The Commissioner allowed $2,300 but disallowed the remaining $2,700 as a deduction on the ground that this amount represented ‘payment for care, support and maintenance of William Faber, under § 23(u) of the Internal Revenue Act of 1939.’
The pertinent statutory provisions of the Internal Revenue Code of 1939 are set out in the footnote. 1
Whether the taxpayer may deduct, under § 23(u), the amount of any payment to his wife depends on whether the payment is properly includible in the wife’s income under § 22(k) [now § 61(a)(8)]. Eisinger v. C.I.R., 9 Cir., 1957, 250 F.2d 303, cert. denied, 1958, 356 U.S. 913.
The taxpayer contends that the second sentence of § 22(k) is exclusionary in effect and meaning and that William Faber is not within the classification of ‘minor child.’ We agree. William was a stepchild of the taxpayer and was not the taxpayer’s child. 2 But it does not follow, as the taxpayer contends, relying on our decision in Feinberg v. C.I.R., 3 Cir., 1952, 198 F.2d 260, that since the exception contained in the second sentence of § 22(k) does not apply, the full amount of $5,000 automatically must be included in the wife’s income and hence must be deducted from the husband’s. The Feinberg decision does not support the taxpayer’s view for if the whole payment is to be considered as income to the wife the requirements of the first sentence of § 22(k) must be satisfied independently. The Feinberg decision does not hold that those requirements do not have to be met. The second sentence of § 22(k) deals only with one specific type of payment which is not includible in the wife’s income.
It remains to be determined whether under the first sentence of 22(k) the entire $5,000 should constitute income to Ada Faber. The Tax Court has concluded that ‘the amounts paid to William were purely voluntary on the part of the petitioner so far as this record shows, and therefore not within the intendment of Subsection 22(k).’ With this conclusion we cannot agree.
Suppose that in this case it was clear that Ada had the legal obligation to support William 3 and the agreement had recited that the amount for William’s care was for and in Ada’s behalf. It would then be apparent that $2,700 would have been includible in Ada’s income and deductible from the taxpayer’s. Robert Lehman, 1951, 17 T.C. 652. 4 Here, a recital to such effect is missing but the mere absence of the appropriate language from the agreement does not resolve the issue and it becomes pertinent to inquire whether the payment of the $2,700 was made for and in behalf of Ada. Relevant to this inquiry is the answer to the question whether Ada acquired an economic benefit of such nature that the payment may be said to be for and in her behalf. In Mandel v. C.I.R., 7 Cir., 1956, 229 F.2d 382, the taxpayer-husband agreed to pay his wife $18,000 a year, the separation agreement further providing that should she remarry, the payment would be reduced to … $10,000 a year, and that if a child, there being two children of the marriage, should marry, or on reaching 21 live apart from the wife, the husband could elect to pay directly to the child … $5,000 per year.
Before the tax years in question, Mandel’s wife remarried, and the two children of Mandel had married and were living apart from their mother, the wife. Mandel paid to his former wife amounts as specified in the separation agreement which she in turn paid to the two children. The court did not allow the taxpayer to deduct the amounts so paid, since the amounts were not income to the wife. The court stressed the point that, by the terms of the agreement and under the circumstances, the wife had received no economic or personal benefit from the payments made to her after her remarriage and the emancipation of the two children. ‘No legal obligation to support the children after they arrived at their majority was imposed upon Edna.’ 229 F.2d at 387. In the case at bar the existence of a legal obligation of the wife to support her son has been assumed by us to be present. [footnote omitted] Under this assumption aid in the satisfaction of Ada’s obligation by the payments of the separation agreement was for her benefit and hence was ‘for and in behalf of’ Ada. Lehman, supra, 17 T.C. at 653. That the payment also benefits another person, William, does not remove it from the ambiency of § 22(k). This payment was made in discharge of a legal obligation, which because of the ‘marital or family relationship,’ was incurred by the taxpayer. Lehman, supra. Cf. Treasury Regulations 118, 39.22(k)-1(a)(5). Accordingly, under this assumption, the entire $5,000 would be includible in Ada’s income.
Merely because Ada’s obligation, if it exists, may be limited to the providing of necessaries for William, it does not follow that only the amount required for necessaries is to be includible in her income. The provisions of § 22(k) do not limit includible alimony payments to the wife to necessaries and we cannot say that payments to another person on her behalf should be so limited. While Ada may not be legally responsible for more than necessaries, it may still be to her economic advantage to have funds supplied which exceed the legally required amount. We cannot say that the payment is so large that it becomes unrelated to the economic advantage which is Ada’s by virtue of the payment of $2,700 made for William.
Accordingly, the decision of the Tax Court will be vacated and the case remanded in order to determine whether Ada had, in the Tax year in question, an obligation to support her son William. If it be found to be a fact that Ada had such an obligation, the Tax Court should enter its decision in favor of the taxpayer. If it be found that Ada had no such obligation the Tax Court should again enter its decision in favor of the Commissioner. [citations omitted].
Notes and questions”
1. A parent has some obligation to support his/her minor children. If someone else fulfills that obligation, it seems that the parent has realized gross income. When that “someone” is a former spouse, the former spouse may treat it as alimony – provided all of the other elements of alimony are present.
2. What were the distinguishing facts in Mandel that made the result in that case different?
3. Change the facts of Faber: instead of a person with no parental obligation making payments, it is a person with a parental obligation who fails to make payments (an all-too-frequent occurrence). It is the former spouse who must make up the difference.
Rev. Rul. 93-27
Is a taxpayer entitled to a nonbusiness bad debt deduction under § 166(a)(1) of the Code for the amount of the taxpayer’s own payment in support of the taxpayer’s children caused by an arrearage in court-ordered child support payments owed by a former spouse?
The taxpayer, A, was divorced in 1989 from B and was granted custody of their two minor children. Pursuant to a property settlement and support agreement that was incorporated into the divorce decree, B agreed to pay to A $500 per month for child support. During 1991, B failed to pay $5,000 of this obligation. Because of B’s arrearage, A had to spend $5,000 of A’s own funds in support of A’s children.
LAW AND ANALYSIS
Section 166(a)(1) of the Code allows as a deduction any debt that becomes worthless within the taxable year.
Section 166(b) of the Code provides that for purposes of § 166(a), the amount of the deduction for any worthless debt is the adjusted basis provided in § 1011 for determining the loss from the sale or other disposition of property.
Section 1011 of the Code generally provides that the adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, is the basis as determined under § 1012.
Section 1012 of the Code provides that the basis of property is the cost of the property.
In Swenson v. Commissioner, 43 T.C. 897 (1965), the taxpayer claimed a bad debt deduction under § 166(a)(1) of the Code for an uncollectible arrearage in child support payments from a former spouse. The Tax Court denied the deduction on the ground that § 166(b) precluded any deduction because the taxpayer had no basis in the debt created by the child support obligation. The taxpayer had argued that her basis consisted of the expenditures for child support she was forced to make from her own funds as a result of the father’s failure to make his required payments. The court pointed out, however, that the father’s obligation to make the payments had been imposed by the divorce court and was not contingent on the taxpayer’s support expenditures. It stated that those expenditures neither created the arrearage nor constituted its cost to the taxpayer. Swenson, at 899.
The Tax Court has followed the decision in Swenson on similar facts in Perry v. Commissioner, 92 T.C. 470 (1989); Meyer v. Commissioner, T.C.M. 1984-487; Pierson v. Commissioner, T.C.M. 1984-452; and Diez-Arguellos v. Commissioner, T.C.M. 1984-356.
In the present case, as in those above, B’s obligation to make the child support payments to A was imposed directly by the court. A’s own child support expenditures did not create or affect B’s obligation to A under the divorce decree. Accordingly, A did not have any basis in B’s obligation to pay child support, and A may not claim a bad debt deduction under § 166(a)(1) of the Code with regard to an arrearage in those payments.
A taxpayer is not entitled to a bad debt deduction under § 166(a)(1) of the Code for the amount of the taxpayer’s own payment in support of the taxpayer’s children caused by an arrearage in court-ordered child support payments owed by a former spouse.
Notes and questions:
1. A problem for “A” is that she wants a deduction but no other taxpayer realizes an equal amount of gross income.
- If the Commissioner determined that B should include $5000 in his gross income, should a court uphold the Commissioner’s position?
2. Aside from the technical requirements of § 71(f), is there any way that “A” could argue that she has paid “B” alimony by paying to support his children? If so, could the parties draft a sufficiently limited decree (“contingent alimony?”) that called for such treatment in the event he does not pay?
3. Could taxpayer or the Commissioner invoke the principles of § 7872(a)(1) and hypothesize a transfer from B to A and a retransfer from A to B?
- The transfer from B to A would be non-deductible child support.
- The retransfer from A to B would be a payment of alimony, deductible to A and taxable income to B.
4. Should the failure of one ex-spouse to make child support payments to other ex-spouse be a matter for the IRS? One suspects that IRS involvement might lead to fewer child support arrearages.