Kean v. C.I.R.

• Decision Date: 10 May 2005
• Docket Number: No. 04-2931.,No. 04-3018.,04-2931.,04-3018.
• Citation: 407 F.3d 186
• Parties: Patricia P. KEAN, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee Robert W. Kean, III, Appellee, v. Commissioner of Internal Revenue, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

407 F.3d 186

Patricia P. KEAN, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee Robert W. Kean, III, Appellee, v. Commissioner of Internal Revenue, Appellant.

No. 04-2931.

No. 04-3018.

United States Court of Appeals, Third Circuit.

Argued March 8, 2005.

Filed May 10, 2005.

Alan R. Adler (Argued), Morristown, NJ, Counsel for Appellant Patricia P. Kean.

Bethany B. Hauser (Argued), David I. Pincus, Teresa E. McLaughlin, United States Department of Justice, Tax Division, Washington, DC, Counsel for Appellee/Appellant Commissioner of Internal Revenue.

Jeffrey M. Garrod (Argued), Orloff, Lowenbach, Stifelman & Siegel, Roseland, NJ, Counsel for Appellee Robert W. Kean, III.

Before: SCIRICA, Chief Judge, and ROTH and VAN ANTWERPEN, Circuit Judges.

OPINION

VAN ANTWERPEN, Circuit Judge.

These consolidated tax appeals arise from the Commissioner of Internal Revenue's tax treatment of payments made by Robert Kean, pursuant to a series of support orders issued pendente lite during a divorce proceeding. The recipient of those payments, Patricia Kean, argues that the Commissioner and Tax Court erred in concluding that those payments were "alimony or separate maintenance payments" (hereinafter "alimony") as defined by I.R.C. § 71(b).

I. FACTUAL AND PROCEDURAL HISTORY

Patricia P. Kean (Ms. Kean) and Robert W. Kean, III (Mr. Kean) were married on September 12, 1970 and have three children. In October 1991, Ms. Kean brought an action for divorce from Mr. Kean in the Superior Court of New Jersey, Chancery Division-Family Part, Somerset County. On April 7, 1992, while the action was pending, Judge Graham T. Ross, J.S.C., P.J.F.P., issued an order (the "April 7, 1992 Order") which required Mr. Kean to deposit $6,000 each month into a joint checking account maintained by Mr. and Ms. Kean. Ms. Kean was instructed to use the funds from the joint checking account to maintain herself, the children and the household. The court also required Mr. Kean to pay all household expenses, including the mortgage, taxes and utilities; pay all expenses for the children, including private school tuition; and maintain health insurance coverage and pay all unreimbursed medical expenses for Ms. Kean and the children.

On November 25, 1992, the court issued an order denying the parties' separate applications for physical custody of the children and required them to continue with the existing custodial arrangement. The order also instructed the parties to share equally in the legal authority and responsibility for major decisions concerning the children.

On March 5, 1993, the court stated that Ms. Kean had exclusive use of the $6,000 deposited in the joint checking account for the support of herself, the children, and the household (the "March 5, 1993 Order"). On April 23, 1993, the court further explained that the monthly $6,000 was to be used to pay for all shelter, transportation, and personal expenses of Ms. Kean and the children. On January 30, 1995, the court ordered Mr. Kean to make all future payments to Ms. Kean through the applicable probation department (the "January 30, 1995 Order").

On January 9, 1996, the court issued an order which continued the Kean's joint legal custody of the children and specified how physical custody of the children should be shared. On April 11, 1996, the court reduced Mr. Kean's pendente lite support obligation from $6,000 to $1,600 and required him to pay all of the household bills and expenses of the children. The court issued a Final Judgment of Divorce on February 19, 1997.

Pursuant to the applicable court orders, Mr. Kean paid Ms. Kean $54,000 for the taxable year 1992, $57,388 for the taxable year 1993, and $71,500 for the taxable year 1994.

From January 1 through February 10, 1995, Mr. Kean paid Ms. Kean $9,000 pursuant to the applicable court orders. From March 6 through December 7, 1995, Mr. Kean continued his obligation by paying Ms. Kean $61,200 through the Somerset County Probation Department as required by the January 30, 1995 Order. Ms. Kean reported no alimony income on her 1995 U.S. Individual Income Tax Return. Mr. Kean claimed a $72,000 deduction for alimony paid on his 1995 U.S. Individual Income Tax Return.

For the taxable year 1996, Mr. Kean paid Ms. Kean $32,400 pursuant to the applicable court orders, through the Somerset County Probation Department. Ms. Kean reported $14,400 in alimony income on her 1996 U.S. Individual Income Tax Return. Mr. Kean claimed a $37,715 deduction for alimony paid on his 1996 U.S. Individual Income Tax Return.

On May 26, 2000, the Commissioner of Internal Revenue (the "Commissioner") issued a notice of deficiency to Ms. Kean asserting deficiencies in federal income tax of $14,229 for 1992, $17,419 for 1993, $20,116 for 1994, $18,390 for 1995, and $4,393 for 1996. The Commissioner also assessed additions to tax under I.R.C. § 6651(a)(1) for failure to timely file returns for 1992 and 1994. Id. On August 22, 2000, Ms. Kean timely petitioned the Tax Court for a redetermination of the deficiencies and additions to tax.

On May 26, 2000, the Commissioner also sent a notice of deficiency to Mr. Kean, asserting deficiencies in federal income tax of $27,584 for 1995 and $16,781 for 1996. Mr. Kean also petitioned the Tax Court for a redetermination of the deficiencies.

On June 4, 2003, the Tax Court issued an opinion addressing both of the Keans' cases in which it concluded that the payments made by Mr. Kean to Ms. Kean met the definition of "alimony" as detailed in I.R.C. § 71(b). On April 16, 2004, the Tax Court declared Ms. Kean deficient in income tax due for the taxable years 1992, 1993, 1994, 1995, and 1996 in the amounts of $14,229, $16,490, $19,936, $17,821 and $4,393, respectively. The Tax Court also found additions to tax due for the taxable years 1992 and 1994 in the amount of $3,557 and $4,984, respectively. On the same day, the tax court issued a decision declaring Mr. Kean deficient in income tax due for the taxable years 1995 and 1996 in the amounts of $585 and $1,382, respectively.

Ms. Kean timely appealed the decision in her case to this Court on July 6, 2004 and the Commissioner timely appealed the decision in Mr. Kean's case to this Court on July 14, 2004. The sole issue for us to decide is whether the pendente lite support payments should be considered "alimony or separate maintenance payments" for federal taxation purposes.

II. JURISDICTION AND STANDARD OF REVIEW

The Tax Court had jurisdiction over the petitions of Mr. Kean and Ms. Kean pursuant to I.R.C. §§ 6213(a), 6214 and 7442. This Court has jurisdiction over appeals from decisions of the Tax Court pursuant to 26 U.S.C. § 7482(a)(1), and we exercise plenary review over the legal conclusion of the Tax Court, Lazore v. Commissioner, 11 F.3d 1180, 1182 (3d Cir. 1993).

We note at the outset that although the Commissioner argues strenuously against Ms. Kean's position, he took an inconsistent stance with respect to Mr. Kean's case. This is a permissible practice to protect the public fisc and prevent the "whipsaw" effect of a decision in Ms. Kean's favor. Gerardo v. Commissioner, 552 F.2d 549, 555 (3d Cir.1977). Mr. Kean does not dispute the relatively minimal deficiencies assessed to him by the Tax Court.

III. ANALYSIS

An individual may deduct from his or her taxable income the payments he or she made during a taxable year if those payments are for alimony or separate maintenance. I.R.C. § 215(a). Consequently, the recipient of alimony payments must include those payments when calculating his or her gross income. I.R.C. 61(a)(8). Therefore, a determination that a payment is or is not "alimony," is also a determination of who must shoulder the tax burden of that payment.

Alimony is defined in section 71(b) of the Internal Revenue Code.¹ This section was originally enacted to provide a uniform definition of alimony so that alimony payments could be distinguished from property settlements which receive different tax treatment. H.R.Rep. No. 98-432(II), at 1495 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 1137. As the Sixth Circuit explained in Hoover v. Commissioner, 102 F.3d 842, 845 (6th Cir.1996), "Congress specifically intended to eliminate the subjective inquiries into intent and the nature of payments that had plagued the courts in favor of a simpler, more objective test."

This objective test was necessary because state courts sometimes used the term "alimony" indiscriminately. For instance, in Hoover, an Ohio court awarded Mrs. Hoover "alimony as division of equity in the amount of $410,000," (which was later increased to $521,640). Id. at 844. The state court ordered Mr. Hoover to pay Mrs. Hoover $3,000 per month until the amount was paid in full, and granted Mrs. Hoover a lien on some of Mr. Hoover's shares as security for the alimony. Id. Even though the state court used the term "alimony," the Sixth Circuit found that the payments were actually part of a property settlement and therefore Mr. Hoover was not permitted to claim a deduction for alimony payments under I.R.C. § 215. Id. at 847-48.

Under section 71(b)(1), a payment or payments can only be considered "alimony" when: (A) the payment is received by (or on behalf of) a spouse under a divorce or separation instrument; (B) the instrument does not designate the tax treatment of the payments; (C) the parties are not members of the same household if legally separated by a divorce or separate maintenance decree; and (D) the payor spouse is not liable to continue making the payments after the death of the payee spouse, nor must the payor spouse make a substitute payment. I.R.C. § 71(b)(1)(A)-(D).

The parties in this case agree that the payments in question meet the requirements of section 71(b)(1)(B), and that section 71(b)(1)(C) is not applicable because Mr. and Ms. Kean were not legally separated under a decree of divorce or separate maintenance. The dispute is whether the payments meet the requirements of ...