The opinion
T.C. Memo. 2003-92
UNITED STATES TAX COURT
JANE GILBERT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
RICHARD C. HAWLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 1592-01, 4178-01. Filed March 28, 2003.
John W. Schmehl, for petitioner in docket No. 1592-01.
Charles F. Blumenstock, Jr., for petitioner in docket No.
4178-01.
Jack T. Anagnostis, for respondent.
MEMORANDUM OPINION
WELLS, Chief Judge: Respondent determined deficiencies in
the Federal income tax of petitioner Jane Gilbert, formerly Jane
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Hawley (Ms. Gilbert), for the taxable years 1993, 1994, and 1995
of $7,163, $8,922, and $6,157, respectively. Respondent
determined deficiencies in the Federal income tax of petitioner
Richard C. Hawley, M.D. (Mr. Hawley), for the taxable years 1993,
1994, and 1995 of $21,644, $23,261, and $19,355, respectively.1
After concessions, the issue remaining to be decided in the
instant cases is whether any part of the unallocated child and
spousal support payments constitutes alimony under section 712
that is deductible by the payor spouse, Mr. Hawley, under section
215, and includable in the gross income of the payee spouse, Ms.
Gilbert, under sections 61(a)(8) and 71(a). In the notices of
deficiency and on brief, respondent has taken inconsistent
positions, in that respondent disallowed deductions to Mr. Hawley
and required Ms. Gilbert to report alimony income. Respondent
asks us to allocate the subject payments consistently between
petitioners. Moreover, if we find that the payments constitute
alimony, then we must decide whether Ms. Gilbert is liable under
section 55 for alternative minimum tax because of the increase in
her gross income from the alimony adjustment.
1
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 petitioners.
2
All section references are to the Internal Revenue Code, as
amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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Background
The parties submitted the instant case fully stipulated,
without trial, pursuant to Rule 122. The parties’ stipulations
of facts are hereby incorporated by this reference and are found
as facts in the instant case.3
Petitioners were residents of Pennsylvania when they
petitioned this Court. On April 25, 1977, petitioners were
married in Buchanan, Georgia. Three children were born of
petitioners’ marriage: Charles R. Hawley (born September 7,
1978), Katherine G. Hawley (born July 9, 1980), and Margaret G.
Hawley (born August 25, 1983).
On September 22, 1990, petitioners separated and thereafter
were not members of the same household. On October 23, 1990, Ms.
Gilbert sued Mr. Hawley for divorce. On October 25, 1990, Mr.
Hawley answered and counterclaimed against Ms. Gilbert for
divorce. At the time petitioners initiated the divorce
proceedings, they were residents of Schuylkill County,
Pennsylvania.
On February 4, 1992, the Court of Common Pleas of Schuylkill
County entered an agreement and order of support (hereinafter the
February 4, 1992, separation instrument), which stated:
3
Respondent objects on grounds of relevance to stipulations
12, 13, and 23. Both Ms. Gilbert and respondent object on
grounds of relevance to stipulation 25. This Court finds these
objections to be moot because this Court does not rely upon those
stipulations in reaching our decision.
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AND NOW, this 4th day of February, 1992, upon
agreement of the parties, it is hereby ORDERED that the
Defendant is directed to pay the sum of $2,077.00 bi-
weekly for and toward the support of wife and three (3)
minor children. In addition, the Defendant is directed
to pay the sum of $100.00 bi-weekly on account of
accumulated arrearages, for a total sum of $2,177.00
bi-weekly. The first payment in the sum of $2,177.00
is to be made February 5, 1992 and a like sum each
second Wednesday thereafter.
As of February 5, 1992 the arrearage balance shall
be $2,224.00
This Order is to be effective February 5, 1992.
All payments are to be made to the Domestic
Relations Section of this Court and mailed to P.O. Box
1192, Pottsville, PA 17901. The number 18758 must
appear on all payments and correspondence mailed to
this office.
The parties are directed to make available to all
dependents named in this Order any employer-provided
medical or other benefits available at no cost as a
benefit of employment or at a reasonable cost. The
parties are directed to notify the Domestic Relations
Section in writing within seven (7) days of obtaining
coverage or any change in coverage.
Both parties shall inform the Domestic Relations
Section in writing of any change in employment, change
of address or change of address of a child receiving
support within seven (7) days of such change.
An automatic wage attachment shall be issued
without notice on Defendant upon default of an amount
equal to one month’s support obligation or at such
other time as the Court may designate.
Plaintiff will be responsible to pay the first
$1,000.00 per year for uninsured medical expenses
including dental, orthodontic, optical and prescription
drugs. Any uninsured medical expenses in excess of
$1,000.00 per year shall be divided between the
parties: Plaintiff 35% and Defendant 65%.
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Commencing with the payment due March 1, 1992
Plaintiff shall be obligated to make the monthly
mortgage payments on the residence located at 365
Pershing Drive, Orwigsburg, Schuylkill County,
Pennsylvania.
Mr. Hawley deducted $54,100 in 1993, $54,100 in 1994, and
$51,565 in 1995 as alimony paid to Ms. Gilbert.
Ms. Gilbert did not report the receipt of any payments from
Mr. Hawley for 1993, 1994, and 1995.4
On July 18, 1995, petitioners divorced. On November 20,
1995, pursuant to a petition to the Court of Common Pleas of
Schuylkill County, that court terminated Mr. Hawley’s obligation
to provide spousal support for Ms. Gilbert and transferred the
matter to the Domestic Relations Office for “a determination of
the appropriate amount of child support.”5
4
Ms. Gilbert filed tax returns for 1993 and 1995 but not for
1994. Ms. Gilbert qualified for head-of-household filing status
for 1993, 1994, and 1995.
5
The order granting Mr. Hawley’s petition to terminate
spousal support stated:
AND NOW, this 20th day of November, 1995, at 9:00 a.m.,
the Court hereby ORDERS the following:
1. The defendant’s Petition To Terminate Spousal
Support is GRANTED as the obligation for spousal
support is terminated as a matter of law by the entry
of the July 18, 1995 Decree in Divorce; and
2. This matter is TRANSFERRED to the Domestic
Relations Office for a determination of the appropriate
amount of child support.
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Discussion
We must decide whether all or any part of the predivorce
unallocated support payments made by Mr. Hawley to Ms. Gilbert
qualify as alimony to the payee spouse, Ms. Gilbert, includable
in gross income under sections 61(a)(8)6 and 71(a)7 and
deductible by the payor spouse, Mr. Hawley, under section 215.8
To be considered alimony unallocated support payments must
conform to the requirements of section 71(b). Lovejoy v.
Commissioner, 293 F.3d 1208 (10th Cir. 2002), affg. Miller v.
Commissioner, T.C. Memo. 1999-273; Zinsmeister v. Commissioner,
T.C. Memo. 2000-364; Gonzales v. Commissioner, T.C. Memo. 1999-
332. Section 71(b) provides in part:
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–
6
SEC. 61(a). General Definition.--Except as otherwise
provided in this subtitle, gross income means all income
from whatever source derived, including (but not limited to)
the following items:
* * * * * * *
(8) Alimony and separate maintenance payments; * * *
7
SEC. 71(a). General Rule.-–Gross income includes
amounts received as alimony or separate maintenance
payments.
8
SEC. 215(a). General Rule.–-In the case of an
individual, there shall be allowed as a deduction an amount
equal to the alimony or separate maintenance payments paid
during such individual’s taxable year.
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(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 includable 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.
In the instant case, the parties agree that the unallocated
support payments meet the requirements subparagraphs (A), (B),
and (C) of section 71(b)(1). The parties, however, dispute the
application of subparagraph (D) of section 71(b)(1). If Mr.
Hawley is obligated to make one or more substitute payments after
the death of Ms. Gilbert, then none of the unallocated support
payments will be considered alimony. See Gonzales v.
Commissioner, supra; sec. 1.71-1T(b), Q&A-13, Temporary Income
Tax Regs., 49 Fed. Reg. 34456 (Aug. 31, 1984).9
9
Mr. Hawley contends that we should follow Simpson v.
Commissioner, T.C. Memo. 1999-251 (Pa. case), and Lawton v.
Commissioner, T.C. Memo. 1999-243 (Pa. case), which held that
unallocated payments are considered alimony. However, those
cases considered the application of sec. 71(c) and did not
directly address the application of subpar. (D) of sec. 71(b)(1)
(continued...)
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In deciding whether the payments were alimony, we examine
the language of the February 4, 1992, separation instrument to
ascertain whether it contains a termination upon death condition,
and, if it does not, whether State law supplies such a condition.
Hoover v. Commissioner, 102 F.3d 842, 847 (6th Cir. 1996), affg.
T.C. Memo. 1995-183; see Gonzales v. Commissioner, supra; see
also Cunningham v. Commissioner, T.C. Memo. 1994-474.
State law determines certain rights of the parties, and
Federal law determines the Federal income tax consequences of
those rights. Morgan v. Commissioner, 309 U.S. 78, 80 (1940);
Lucas v. Earl, 281 U.S. 111 (1930). The February 4, 1992,
separation instrument does not explicitly order that payments
terminate upon Ms. Gilbert’s death, and, thus, we examine
Pennsylvania law to determine whether the payments would
terminate by operation of Pennsylvania law. Hoover v.
Commissioner, supra at 847.
When examining a matter of State substantive law, we will
look to a State’s highest court to determine the rights of
parties under State law. See Estate of Bosch v. Commissioner,
387 U.S. 456, 465 (1967). The Pennsylvania Supreme Court has not
decided the narrow legal issue of whether an unallocated support
9
(...continued)
in deciding that the unallocated payments were alimony.
Therefore, those cases provide only limited guidance on the issue
before us.
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order covering spousal and child support terminates upon the
death of the payee custodial spouse.
Mr. Hawley contends that we must apply Pa. R.C.P. 1910.16-
4(f)(3), 42 Pa. Cons. Stat. Ann. (West 2002), to the instant
case, which provides: “Unallocated charging orders for child and
spousal support, or child support and alimony pendente lite,
shall terminate upon the death of the payee spouse or payee ex-
spouse.” Pa. R.C.P. 1910.16-4(f)(3) became effective on June 5,
2001. The years in issue are Mr. Hawley’s and Ms. Gilbert’s
1993, 1994, and 1995 tax years. Pennsylvania statues shall not
be construed to apply retroactively “unless clearly and
manifestly so intended by the General Assembly.” 1 Pa. Cons.
Stat. Ann. sec. 1926 (West 1995); see Barnes v. Barnes, 597 A.2d
89, 92 (Pa. 1991); see also Commonwealth v. Rockwell
Manufacturing Co., 140 A.2d 854 (Pa. 1958). Pa. R.C.P. 1910.16-
4(f)(3) does not indicate that it will have retroactive effect,
and consequently we will not apply it retroactively.
Twenty-three Pa. Cons. Stat. Ann. section 4352(a) (West
2001), which addresses the jurisdiction of Pennsylvania courts
over divorce proceedings, provides:
SEC. 4352. Continuing jurisdiction over support orders
(a) General rule.-– The court making an order of
support shall at all times maintain jurisdiction of the
matter for the purpose of enforcement of the order and
for the purpose of increasing, decreasing, modifying or
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rescinding the order unless otherwise provided by Part
VIII (relating to uniform interstate family support) or
VIII-A (relating to intrastate family support) without
limiting the right of the obligee, or the department if
it has an assignment or other interest, to institute
additional proceedings for support in any county in
which the obligor resides or in which property of the
obligor is situated. The Supreme Court shall by
general rule establish procedures by which each
interested party shall be notified of all proceedings
in which support obligations might be established or
modified and shall receive a copy of any order issued
in a case within 14 days after issuance of such order.
A petition for modification of a support order may be
filed at any time and shall be granted if the
requesting party demonstrates a substantial change in
circumstances.
Twenty-three Pa. Cons. Stat. section 4352 does not
explicitly provide that a Pennsylvania court’s jurisdiction
terminates upon the death of either party to a divorce
proceeding. It does, however, grant Pennsylvania courts
continuing jurisdiction over support proceedings. A party
seeking modification or termination of a support order must
petition the Pennsylvania court with jurisdiction over the
divorce proceedings. Barnes v. Barnes, supra at 92 (petition to
modify); see Soncini v. Soncini, 612 A.2d 998, 1000 (Pa. Super.
Ct. 1992) (petition to modify); see also Benjamin v. Benjamin,
596 A.2d 877, 878 (Pa. Super. Ct. 1991) (petition to terminate);
Mosier v. McCaughtry, 564 A.2d 241 (Pa. Super. Ct. 1989).
Twenty-three Pa. Cons. Stat. section 4352(a) provides strong
indication that a Pennsylvania court would retain jurisdiction
over a divorce. This would continue, at least temporarily, if
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the payee custodial spouse died, because the statute and caselaw
grant courts continuing jurisdiction over support matters and
require a petition to modify or terminate support payments. See
Edelstein v. Edelstein, 582 A.2d 1074, 1077 (Pa. Super. Ct.
1990). In Gonzales v. Commissioner, T.C. Memo. 1999-332, we held
(applying New Jersey law) that, when a separation instrument is
modifiable, the noncustodial payor spouse could have remained
liable to pay support under the separation agreement after the
payee spouse’s death.
Mr. Hawley contends that the doctrine of abatement applies
to the instant cases, and thus the unallocated support order
would terminate upon Ms. Gilbert’s death. Before the entry of
divorce in Pennsylvania, divorce actions abate upon the death of
one of the parties. Haviland v. Haviland, 481 A.2d 1355, 1356
(Pa. Super Ct. 1984) (citing Matuszek v. Matuszek, 52 A.2d 381
(Pa. Super. Ct. 1947)).10 Economic claims for equitable
10
Haviland v. Haviland, 481 A.2d 1355 (Pa. Super Ct. 1984),
held that the Pa. Divorce Code applies in pari materia with the
Probate Code, and the Divorce Code applies only to living
spouses. Id. at 1357. However, in dicta, Teribery v. Teribery,
516 A.2d 33, 37-38 (Pa. Super. Ct. 1986), stated that “Should
either party die or become disabled, for example, a petition for
modification can be filed to reflect changed circumstances.” A
court need not consider all contingencies in ordering unallocated
support, because it may consider a change in circumstances, such
as death, when raised by petition. Edelstein v. Edelstein, 582
A.2d 1074, 1077 (Pa. Super. Ct. 1990) (citing Teribery v.
Teribery, supra). Under those cases, unallocated support
payments may continue after the death of the payee custodial
spouse, at least temporarily, until there has been a petition
filed to modify the unallocated support order.
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distribution of marital property also abate upon the death of a
party to the divorce action. Reese v. Reese, 506 A.2d 471, 474
(Pa. Super. Ct. 1986); see Myers v. Myers, 580 A.2d 384, 385 (Pa.
Super. Ct. 1990) (ancillary economic claims abate). But see
Pastuszek v. Pastuszek, 499 A.2d 1069, 1070-1071 (Pa. Super. Ct.
1985) (no abatement if death occurs after a divorce decree, but
before the disposition of equitable claims).
Twenty-three Pa. Cons. Stat. Ann. section 3707 (West 2001),
which codifies the doctrine of abatement, provides: “Upon the
death of the payee party, the right to receive alimony pursuant
to this chapter shall cease.”11 We note, however, that a
similar provision does not exist for the termination of child
support pursuant to a divorce proceeding. See Garney v. Estate
of Hain, 653 A.2d 21, 23 (Pa. Super. Ct. 1995). In Pennsylvania,
both parents are equally responsible for their children who are
unemancipated and under the age of 18. 23 Pa. Cons. Stat. Ann.
11
We have examined a state statute similar to 23 Pa. Cons.
Stat. Ann. sec. 3707 (West 2001). See Ambrose v. Commissioner,
T.C. Memo. 1996-128 (Cal. Fam. Code sec. 4337 (West 1994) held to
terminate unallocated support payments upon death of custodial
spouse). But see Wells v. Commissioner, T.C. Memo. 1998-2 (Cal.
Fam. Code sec. 4337 does not automatically terminate unallocated
support payments upon death of payee custodial spouse).
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sec. 4321 (West 2001);12 see Oeler v. Oeler, 594 A.2d 649, 651
(Pa. 1991). In construing an unallocated support agreement, a
Pennsylvania court must promote the best interests of the
parties' children, Oeler v. Oeler, supra, and assure their
uninterrupted maintenance, Ritter v. Ritter, 518 A.2d 319, 322-
323 (Pa. Super. Ct. 1986). For the tax years in issue, the
treatment of an unallocated support instrument is ambiguous under
Pennsylvania law. If the instrument addressed only alimony, Mr.
Hawley’s duty to make payments would terminate on Ms. Gilbert’s
death. See 23 Pa. Cons. Stat. sec. 3707. However, the
unallocated separation agreement also covers child support, and
Pennsylvania law is ambiguous on that issue.13 See Garney v.
Estate of Hain, supra (an equivalent to 23 Pa. Cons. Stat. sec.
3707 does not exist for child support); see also Oeler v. Oeler,
supra (courts must promote the best interests of children);
Ritter v. Ritter, supra (court must ensure the uninterrupted
12
SEC. 4321. Liability for support.
Subject to the provisions of this chapter:
* * * * * * *
(2) Parents are liable for the support of their
children who are unemancipated and 18 years of age or
younger.
13
Pennsylvania law treats alimony support orders and child
support orders differently. Pa. R.C.P. 1910.16(b), 42 Pa. Cons.
Stat. Ann. (West 2002), provides that child support orders are
considered to be final and immediately appealable, whereas
support orders are considered to be interlocutory. Mosier v.
Mosier, 518 A.2d 843, 847 n.1 (Pa. Super. Ct. 1986).
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maintenance of children). Furthermore, State courts maintain
continuing jurisdiction over separation instruments, and
petitions are required for modification of such instruments. 23
Pa. Cons. Stat. sec. 4352; see Barnes v. Barnes, 597 A.2d 89 (Pa.
1991).
For the years in issue, Pennsylvania State law does not
provide an explicit termination condition on separation
instruments. Nor do we find such a condition in the language of
the February 4, 1992, separation instrument itself.
In pertinent part, the February 4, 1992, separation
instrument orders: “An automatic wage attachment shall be issued
without notice on Defendant upon default of an amount equal to
one month’s support obligation or at such other time as the Court
may designate.” Mr. Hawley is designated the defendant in the
February 4, 1992, separation instrument. The unallocated support
payments do not necessarily cease upon the death of Ms. Gilbert
because the Pennsylvania court may attach Mr. Hawley’s wages for
failure to pay an unallocated support obligation, or attach Mr.
Hawley’s wages “at such other time as the Court may designate.”
As a result of such an attachment, Mr. Hawley’s liability under
the February 4, 1992, separation instrument may extend beyond Ms.
Gilbert’s death.
In Miller v. Commissioner, T.C. Memo. 1999-273, we examined
a provision of an unallocated support order arising from a
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divorce in Colorado, which ordered that unallocated support
payments continue “until further Order of Court.” We conclude
that the provision in issue in Miller, is similar to the
provision in issue in the instant case because the unallocated
support payments may continue beyond the death of the payee
spouse at the discretion of the Pennsylvania court.
Consequently, we have no reason to conclude that Mr. Hawley’s
obligation to make unallocated support payments under the
February 4, 1992, separation instrument terminates upon the death
of Ms. Gilbert. See generally Hoover v. Commissioner, 102 F.3d
at 848.
Accordingly, we hold that Mr. Hawley’s obligation to provide
unallocated support to Ms. Gilbert and their children may
continue after the death of Ms. Gilbert and consequently hold
that subparagraph (D) of section 71(b)(1) has not been satisfied.
Having found the unallocated support payments do not constitute
alimony, we hold that Ms. Gilbert is not liable for the section
55 alternative minimum tax.
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, or moot.
To reflect the foregoing,
Decisions will be entered
under Rule 155.