Law.com has an interesting article on this week’s Third Circuit decision, Kean v. Commissioner, Nos. 04-2931 & 04-3018 (3rd Cir. May 10, 2005), holding that unallocated support payments during divorce should be treated as alimony (and hence as income to the payee spouse).

Where support payments are unallocated, as in this case, the entire amount is attributable to the payee spouse’s income. Otherwise, we would be left with a situation in which the portion of the unallocated payment intended for the support of the payee spouse would be taxable to the payor spouse. This treatment of support payments is not accidental, and can benefit families going through a divorce.

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 what, 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 Third Circuit’s decision is contrary to that reached by the Tenth Circuit in Lovejoy v. Commissioner, 293 F.3d 1208 (10th Cir. 2002).