Tag Archives: divorce

Family Law Case Studies: Part I

family law

On a quarterly basis, Aronson’s Financial Advisory Services Group experts will provide synopses’ on recent court decisions on tax, financial, and valuation issues. This case studies series aims to showcase current trends for family relations attorneys in the Washington D.C. Metro Area.

U.S. Supreme Court

May 15, 2017Federal law preempts state as to veteran’s waiver of retirement pay. In Howell v. Howell, SCOTUS held that federal law prevents a state court from ordering a veteran to “indemnify” a divorced spouse for the loss of a portion of the veteran’s retirement pay caused by the veteran’s waiver of retirement pay to receive service-related disability benefits.

 

U.S. Tax Court

June 1, 2017Alimony: Requirement that payments be “under a divorce or separation agreement.”  Evidenced in Paul S. Mudrich, TC Memo 2017-101, Paul earned a bonus in 2006 while he was still married to Lauri. In 2007, Paul divorced Lauri and married Kyera. Paul and Lauri had executed an agreement stating that the bonus was community property. Paul would pay Lauri half of the bonus net of taxes and report the bonus on his return. Paul filed a 2007 return claiming an alimony deduction equal to half of the gross amount of the bonus. The IRS disagreed on the basis that the payment was not paid pursuant to a written divorce or separation agreement. The Tax Court sided with the IRS.

May 15, 2017Divorce agreements are not binding on the IRS. In T.C. Memo. 2017-80, the Tax Court reminded couples that the IRS is not a party to their divorce. The terms agreed to in a settlement agreement are not binding on the IRS. In this particular agreement, the separating couple agreed to a 50/50 split of any tax liabilities arising from joint returns filed during their marriage. The IRS disagreed, stating that the taxpayers were jointly and severally liable. The Tax Court ruled in favor of the IRS. For more details on this particular case, please read our blog The IRS is Not a Party to Your Divorce, Your Agreement Does Not Bind Them.

 

District of Columbia

April 20, 2017Equitable, not equal distribution of marital property; preexisting retirement funds are separate property unless transformed to marital. In Fleet v. Fleet, the D.C. Court of Appeals found that the trial court’s record of factual findings was inadequate to support its distribution of the marital home and the retirement account between the parties. In this particular situation, two questions went before the Court. First, Mr. Fleet contended that in dividing the marital home, the trial court applied an improper presumption of equal rather than equitable distribution. Second, Mr. Fleet claimed the trial court made a mistake in awarding a portion of his pre-marital retirement account to Mrs. Fleet. The Court of Appeals reversed and remanded the case for further consideration.

 

Virginia

May 30, 2017Presumptive income must first be based on current year income; gross income from self-employment is subject to reasonable business expenses. The Court of Appeals of Virginia ruled in Tidwell v. Late that the trial court erred when it used the average gross income over four years for a self-employed father whose annual income fluctuated in order to calculate his income for child support purposes. Further, the Court pointed out that the gross income should be subject to reasonable business expenses. The Court clarified that the trial court must first calculate a presumptive support amount based on current year income, and then they could explicitly analyze whether higher income in prior years manifested a greater capacity that rendered the presumptive award inappropriate or unjust. If the trial court then determined that it should deviate from the child support guidelines, it could be within its discretion to average a party’s income over a reasonable period of time.

April 18, 2017Court could not grant to wife GI Bill benefits which husband was unable to transfer; non-modifiable support prohibited by statute; distribution of more than 50% of marital share of military pension prohibited. In an unpublished Memorandum Opinion, the Court of Appeals of Virginia found in Garrett v. Garrett that the trial court incorrectly granted 18 months of GI Bill educational benefits after Mr. Garrett was discharged from service and unable to transfer his benefits under the bill; provided for non-modifiable spousal support because the court’s award of non-modifiable support was prohibited by statute; and, it awarded the wife 100% of the marital share of her husband’s military pension, when Virginia law prohibits the distribution of more than 50% of the marital share of the cash benefits actually received. The Court ruled that the trial court was not in error when it imputed income to the husband for the purposes of calculating spousal support.

February 28, 2017Coverture fraction applied to company stock sold pre-separation. In an unpublished Memorandum Opinion, the Court of Appeals of Virginia found no error and affirmed the trial court’s ruling in Allen v. Allen on the distribution of marital property and spousal support. Notably, the Court agreed with the trial court’s use of a coverture fraction applied to the stock of a company created by the husband during the marriage and sold pre-separation where the husband was required to provide post-separation services in order to receive payment.

 

For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services, contact Sal Ambrosino at 301.231.6272 and sambrosino@aronsonllc.com.

The IRS is Not a Party to Your Divorce, Your Agreement Does Not Bind Them

Divorce IRA

When a couple signs the dotted line of their divorce agreement, they should know that the IRS is not bound by the terms of that agreement. Evidenced in the case T.C. Memo 2017-80, the Tax Court has sided with the IRS in saying that it is not bound by the terms of a couple’s divorce agreement.

Sam and Mae signed a divorce agreement in 2013 in which the parties agreed that each would both be liable for 50% of their tax liabilities from prior years. In 2013, the couple received deficiency notices for their 2008 and 2009 jointly filed tax returns. In the notice, the IRS disallowed the deductions for rental property losses claimed during those years. In 2014, Mae requested that the IRS relieve her of joint and several liability for those years. In 2015, Sam made his own request for relief. The IRS denied both requests and the parties took the matter to the US Tax Court.

Shortly before trial, the IRS conceded that for each year Mae should be relieved of her joint and several liability for the deficiencies caused by the denial of the rental losses from Sam’s rental property, 28% and 41% of the total rental losses for 2008 and 2009. The IRS also conceded that Sam should be relieved of his joint and several liability for the adjustments arising from Mae’s property, 72% and 59% respectively. Sam and Mae did not contest to the IRS’s concessions. However, they stated that as an alternative to the IRS’s concessions, they would be willing to each be liable for 50% of each year’s notice of deficiency liabilities.

Unsurprisingly, the Tax Court ruled in favor of the IRS. The Court observed that while the divorce agreement establishes the parties’ rights against each other under state law, it does not control their liabilities to the IRS. The Court quoted a General Accounting Office report which stated: “Divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior returns are handled, i.e., one spouse is entirely liable, both spouses are equally liable, or some other permutation. However, the IRS is not bound by these divorce decrees because it is not a party to the decree.”

For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services, contact Sal Ambrosino at 301.231.6272 and sambrosino@aronsonllc.com.

What You Need to Know About Divorce and Taxes

While many of us routinely find ourselves burdened with a host of issues when preparing our tax returns, those who got divorced last year or are in the midst of a divorce may find themselves dealing with new tax issues. A recent article on avvo.com lists some of the most common tax questions that arise for divorced or divorcing individuals.

Find the full article here.

Not only is Aronson’s Tax team comprised of leading tax experts, Aronson also has a dedicated group of professionals who handle litigation support, and specialize in divorce and family law matters. For more information, please contact Sal Ambrosino, CPA, ABV at 301.231.6272.

Tax Planning Opportunity for Divorcing or Yet-To-Be-Married Couples?

The IRS has just announced that it has acquiesced and will follow the Ninth Circuit’s ruling that the qualified residence interest limitations described in IRC Section 163(h)(3) should be applied on a per-individual basis, and not per residence.

Bruce Voss and Charles Sophy were registered as domestic partners (for federal tax purposes unmarried) in California. The two co-owned, as joint tenants, two properties located in Beverly Hills and Rancho Mirage. Each property was financed with a mortgage secured by the property for which the Taxpayers were jointly and severally liable. The total average balance for the mortgages was $2.7 million for the years challenged by the IRS. Each Taxpayer reported an interest deduction for half of the mortgage interest paid on the properties. The IRS audited their returns and calculated the limitation for the interest deduction by aggregating the total debt of both properties, and then limited the Taxpayers to their proportionate share of a qualified residential interest deduction on $1.1 million of debt. The Tax Court agreed with the IRS.

The Taxpayers appealed the Tax Court’s ruling to the Ninth Circuit where the court determined that the Tax Court and the IRS had erred in aggregating the debt of these non-married individuals and ruled in favor of the Taxpayers. The Ninth Circuit explained that when there are two or more unrelated owners of the same property, each owner’s undivided interest is considered a separate residence and the use of even a portion of a property may meet the definition of a “qualified residence.” The ruling further explained that a co-owner’s fractional share of the mortgage debt should be considered separately when calculating the interest deduction. Therefore, each Taxpayer was entitled to claim a deduction for qualified residence interest on debt up to the statutory limit of $1.1 million.

What does this mean for you?

If you are unmarried and you and your partner own two homes, which you use as residences with mortgage and home equity indebtedness in excess of $1.1 million, you should review your tax returns with your CPA to see if previously filed returns should be amended to claim additional interest deductions. If you are contemplating marriage, this may also be a consideration in your financial planning as the loss of the mortgage interest deduction may be a significant cost of marriage.

If you are married and in the process of divorce, this may be a planning opportunity for additional tax savings. There are rules which allow an ex-spouse to treat the former family residence as a principal residence even after moving out. Under the right circumstances, you may be able to claim an interest deduction on up to an additional $1.1 million of mortgage debt.

Please contact Aronson if you’d like to know if this opportunity is right for you.

For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services we provide, click here or call Sal Ambrosino at 301.231.6272

Tax Issues for Newlyweds

Hopefully you’ve seen our recent blog posts related to the tax aspects of divorce. As a bit of a break this summer, I thought I would share thoughts from the IRS on How a Summer Wedding Can Affect Your Taxes, from their website.

The article touches on some of the basic changes that affect a taxpayer’s return. If the article applies to you, congratulations and best wishes for a lifetime together.

For more information regarding Aronson’s Financial Advisory Services Practice, and the forensic accounting and litigation support services we provide, click here or call Sal Ambrosino at 301.231.6272.

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