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

? 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
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.
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? Exemption released for a single, specific or all
future years
? Must be attached to the non-custodial
parents return for each year claiming
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

? 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..
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

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

? 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
Morrision

? 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 consumption
Current marital status
Probable hardship that might be caused.
Morrision

? 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
Morrision

? 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
Morrision

? 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
Morrision

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

? 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
? ?, 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.
Morrision

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