Unallocated alimony and child support can be all taxable/deductible alimony.

• Author: Frumkes, Melvyn B.

Alimony, if in compliance with the provisions of I.R.C. [section] 71, is taxable to the payee and deductible to the payor pursuant to I.R.C. [section] 215 [hereafter "taxable/deductible"]. Child support is not taxable/deductible. (1) To qualify as taxable/deductible alimony, a stream of payments must be cash (2) received by or on behalf of a spouse (3) under a divorce or separation instrument (4) which does not designate such payments as not taxable/deductible. (5) If divorced or legally separated and not living in the same household, 6) the spouse's liability for payments ceases upon the payee's death, (7) no part of which is "fixed" as child support. (8) The payments cannot qualify if the parties file joint returns. (9)

An award of, or an agreement for, unallocated alimony and child support, sometimes referred to as "family support," (10) can be all taxable/deductible; but only if all the requirements of I.R.C. [section] 71 are met.

The Third Circuit, in Kean v. Commissioner, 407 F.3d 186 (3d Cir. 2005), put it another way, stating:

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. Consequently, an unallocated payment order not only frees the parents from restrictive court instructions that dictate who pays for which, 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.

The benefit of an unallocated amount of alimony and child support was articulated by the court in Miller v. Commissioner, T.C. Memo 1999-273:

Unallocated family support is a technique sometimes used in domestic relations cases to encourage sensible cash-flow planning between separated spouses. 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 allocated family support payments are structured to be deductible as alimony. The unallocated payments, while typically temporary, can facilitate the economic transition that must occur as a result of a divorce or separation, provided that parties understand and agree to the tax consequences. (See Appendix prepared by Norman H. Kronstadt, CPA/ ABV/ASA/CVA of Plantation, Florida, demonstrating a tax savings using family support.)

As to the code prohibition of an amount being fixed as child support being treated as alimony, the unallocated sum for both spousal support and child support is all allowable as taxable/deductible alimony because it does not "fix" an amount for child support.

Florida courts have recognized this form of support. In dicta, the court in Friedman v. Friedman, 844 So. 2d 789 (Fla. 4th DCA 2003), articulated that

unallocated support awards of alimony and child support have been approved in special circumstances, see, e.g., Pastore v. Pastore, 497 So. 2d 635, 637 (Fla. 1986) (awarding unallocated child support and alimony award consisting of house payment, taxes, and insurance); McKelvey v. McKelvey, 534 So. 2d 801, 801 (Fla. 3d DCA 1988) (awarding undifferentiated temporary alimony and support of $10,000 per month).

In Wallace v. Wallace, 605 So. 2d 504 (Fla. 4th DCA 1992), the court affirmed an award of undifferentiated temporary alimony and child support. Of course, in making such award, the court should consider (11) child support guidelines. (12)

Lawton v. Commissioner, T.C. Memo 1999-243, held child support guidelines do not fix a portion of an unallocated temporary award of support as "child support." In Lawton, the court dealt with a Pennsylvania court's temporary order "for support of spouse and one child" (unallocated temporary support for the wife and child). The court rejected the wife's argument that a portion of the payments were not alimony taxable to her because all awards for support must conform to the federally mandated child support guidelines. The ruling was that I.R.C. [section] 71(c)(1) requires that the amount of child support must be fixed by the terms of the divorce or separation instrument (here, the order for temporary support), not outside of the instrument. The Tax Court concluded that the wife could have sought allocation in the Pennsylvania...