Tax Presentation v1

Frumkes on Divorce Taxation - Presented by Will Geer & Wayne Morrision

Frumkeson

DivorceTaxation

Ninth edition

Melvyn B. Frumkes

Copyright © 2012 James Publishing, Inc.

Federal Tax Law vs. State Law Property Aspects: Distributions of Assets

and Liabilities Alimony & Separate Maintenance Child Related Exemptions Joint Returns Innocent Spouse Relief Qualified Retirement Benefits (QDRO) Individual Retirement Benefits

Topical Index

Frumkes on Divorce Taxation - Presented by Will Geer & Wayne

Morrision


Divorce decree does not determine Federal Income Tax consequences

Tax law and state law are not coterminous Accuracy related penalties not relieved due

to reliance on divorce attorney advise.

Family Law vs. Tax Law


Property Transfers IRS Code Section 1041-Incident to divorce Incident to divorce Cessation of marriage Not applicable when asset basis less than

debt Not applicable with resident aliens Recipient gets basis of former spouse Transfer to third party on behalf allowed Redemption by close corporation allowed

Property Aspects:Distributions of Assets and Liabilities


Accrued interest taxable to transferor Non-statutory stock options v. statutory IRS originally followed assignment of

income doctrine Finally conceded section 1041 for Non-

statutory Recipient taxed at ordinary income tax rates Recipient taxed FICA and Medicare by

employer IRS requires former spouse to provide

records

Property Distributions: Stock Options


Title controls liability for tax purposes Owners of single owner entities receive

liability and benefits of underlying assets Owners of trust receive liability and benefits

of underlying assets Use test and/or mortgage interest satisfied

◦ Relief granted – Divorce or separation instrument◦ Court order qualifies for mortgage interest

purpose◦ Voluntary removal does not qualify

Property Distributions: Tax Liability Issues


Jointly liable- Joint and several liability-Benefit test

Sole liability-income used by husband in non-marital pursuit- Issue of equity

Separate returns does not relieve liability if there is a benefit by spouse

If married, tax refunds could be distributed equally

Property Distributions: Tax Liability Issues


Stream of payments conforming to IRC Sec 71

Support requirement is eliminated Periodic requirement is eliminated Label, Term or Title Immaterial Alimony is a tax subsidy-Contrast IRC 1041 Payments after remarriage acceptable Intent of the parties is meaningless

Alimony and Separate Maintenance


Dollars-Cash received by or on behalf Documents-Divorce or separation

instrument Designation-Not designated as “Not

Includible” Distance-Not members of the same

household Death-Payments must cease upon death Dependents-payment not child support Dual-Separate returns filed

Alimony and Separate Maintenance- 7 “D”s


Divorce or Separation Instrument◦ Decree of divorce or separate maintenance or a

written instrument incident to such a decree◦ A written separation agreement◦ A decree requiring a spouse to make payments

for payments for the support or maintenance Letters between attorneys satisfactory Must be a meeting of the minds with letters



Can designate as not taxable or deductible Two differing streams of payments Not required to designate includible Lump sum settlement of alimony may be

designated as non-taxable/deductible Copy of the instrument attached to first

return Original and temporary orders must

designate nondeductible and excludible Life insurance on death of payee,

permissible



Form 8332 revised January 2010 Declaration must conform to the substance

of the form◦ Name of the child exemption released◦ The year the exemption released◦ Signature, date of signature, and SS# of custodial◦ Name, SS# of the noncustodial parent

Bring the 8332 to the mediation or settlement conference

Child-Related Exemptions, Credits and Deductions


Exemption released for a single, specific or all future years

Must be attached to the non-custodial parents return for each year claiming

Child-Related Exemptions, Credits and Deductions


Head of Household◦ Single or legally separated◦ Abode for parent, child, stepchild, grandchild◦ Provide over half support

Decree of Separate Maintenance Required◦ Decree, order, or judgment of separation◦ Agreement is not sufficient

Date of judgment is important Legally separated cannot file joint return Annulled marriages must amend prior returns Title dictates deductions

Joint Tax Returns


Divorce court has no effect on IRS liability Innocent spouse relief has no effect on

divorce court findings Deficiency Notice

◦ Last known address◦ Notice tolls the statute of limitations◦ File Form 8822

Joint Returns


Joint return filings◦ Original joint return filed◦ Married filing separate can amend to joint return◦ Three years from proscribed time-original due date

Joint return cannot be filed◦ After a timely tax court petition is filed by a spouse◦ Suit has commenced by either spouse◦ Either spouse has entered into a closing agreement or

compromised any civil or criminal case If a joint return is filed, an amendment cannot be filed for

separate returns Filing extensions does not commit to filing joint Making joint estimates does not commit to joint filing Warn client of the need to make estimates

Joint Returns


Net operating loss (NOL)◦ Carry back 2 years◦ Carry forward 20 years

NOL prior to marriage cannot be used on subsequent joint return

Each spouse may carry NOL from joint to separate returns◦ Complexities arise in carrying joint to separate◦ Special allocations required

Joint Returns


Charitable contributions◦ Carried forward 5 years◦ Can be allocated between spouses

Investment interest expense◦ Limited by investment income and carried forward◦ Need future investment income in order to use

Capital loss carryforwards◦ Excess loss limited to $3000 against ordinary income◦ Excess carried forward indefinitely◦ Carried forward to separate returns after divorce

allocated: Based on net long-term and short-term from preceding year..

Joint Returns


Is it proper for a Court to require joint return?

Forces parties to be subject to criminal and civil liabilities

Court can require compliance with an agreement to sign

Obtain an Indemnification and Hold Harmless

BAPCPA 2005-Obligations non-dischargeable Court can allocate assets and liabilities Filing a joint return does not convert assets

to marital

Joint Returns


Estimated taxes when filing separate◦ Allocated according to agreement◦ Allocated proportionate to tax amounts

S-Corp Issues◦ Former spouse should file revocation◦ Requires 50% of shareholders to revoke◦ Effective Jan 1. if done by Mar 15◦ After the 15th, get indemnification from other sh-holders

S-Corp suspended losses-lack of basis◦ Could not be transferred previously◦ Can now be transferred and used by former spouse◦ Must transfer the shares for loss to transfer

Joint Returns


Three theories to get relief after 1998◦ Erroneous understatement by other spouse◦ Separation of tax liability◦ Equitable relief

Form 8857 required IRS informs former spouse “full player” Request for relief timing

◦ Within two years of collection beginning◦ Not prior to collection process◦ Last known address is important

Innocent Spouse Relief


Participating in tax litigations bars ISR Non-electing spouse can participate Depositions are very important



Erroneous understatement◦ Can’t have knowledge-reasonable person standard◦ Taxpayer has burden of proof◦ Facts and Circumstances

Nature of the error Financial situation Education and experience Participation Spouse failed to inquire Departure from recurring pattern Lavish or unusual Culpable spouses evasiveness



Inequity facts and circumstances◦ Culpable spouse wrong doing to requestor◦ Requesting spouse actual knowledge or reason to

know◦ Benefit received by requesting spouse

Transfer of property Receipt of more than otherwise in settlement Accumulation of savings in lieu of consumptionCurrent marital statusProbable hardship that might be caused.



Separate liability election◦ Requirements

No longer married Legally separated Not members of same household

Must not have had knowledge (Depositions) Duress with knowledge still qualifies Actual liability determined by amount of separate return filing Credits and deductions may change Cannot be used to get a refund

Eligibility must be met as of the date of election Temporary absences are still part of same household Separate dwellings could still be part of same household Taxpayer has burden of proof regarding liability items IRS has burden as to the actual knowledge element



Equitable Relief◦ Procedures described by IRS◦ Inequitable to hold request liable◦ The requestor would suffer economic hardship

Economic hardship –◦ Reasonable basic living expense◦ Reasonable varies according to circumstances

Innocent Spouse


QDRO◦ IRC Section 401

Defined Benefit Plans Defined Contribution Plans

Profit sharing Stock ownership plans ESOP’s

Section 401(k) Keogh plans Hybrids Tax sheltered annuities

QDRO may be used◦ Church plans◦ Government agency plans

QDRO vs. IRA Accounts


QRDO not used◦ Disability insurance◦ Unfunded excess benefit plans◦ Unfunded deferred compensation◦ Individual retirement accounts◦ Simplified employee retirement accounts



The 10% early withdrawal penalty which otherwise would be imposed is not applicable to distributions to the alternate payee if the alternate payee takes a taxable distribution from a qualified plan

½, a 10% penalty is applicable as the exception under I.R.C. §72(t)(2)(C) applies only to distributions to alternate payees pursuant to a QDRO. A QDRO is not apropos to IRAs. Thus, the exception afforded for distributions to alternate payees from qualified plans are not available to distributions from IRA.


Tax Presentation v1

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