Tag Archives: tax court

Family Law Case Studies: Part I

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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.

Converting Personal Use Property to Rental Property

In a recent court case, the Tax Court ruled that the taxpayers did not effectively convert their vacation home to a rental property because they did not expend any “meaningful effort” to get the home rented. The taxpayers had deducted rental losses and deducted the overall loss on the property upon sale.

Though the taxpayers listed their home for rent with a local agent who merely kept the listing in a portfolio in the agent’s office, no evidence was provided that the taxpayers or the agent engaged in any meaningful efforts. As a result, the Court ruled in favor of the IRS, disallowing the losses claimed and upholding the 20% accuracy related penalty.

When converting a personal use property to a property held for the production of income, the Court evaluates five factors in determining the intent of the taxpayer, and outlined the following in its ruling:

  1. the length of time the house was occupied by the individual as his residence before placing it on the market for sale;
  2. whether the individual permanently abandoned all further personal use of the house;
  3. the character of the property (recreational or otherwise);
  4. offers to rent; and
  5. offers to sell.

All facts and circumstances are considered, and no one of the above factors is determinative.

Not brought up in this case because the point was moot is the loss on sale and the proper computation of basis. The basis of a property converted from personal to business use is equal to the lesser of the basis immediately prior to conversion or the fair market value of the property at time of conversion. Thus, a property that has declined in value will have a lower basis for business purposes. The impact of this is that depreciation is based on the lower amount, and if the property sells at a loss, the loss is limited to the difference between the sale price and the lower basis amount.

If you are contemplating converting personal use property into rental or other income producing property, care must be taken to ensure that the transaction holds up against IRS scrutiny and that the basis at time of conversion is properly documented.

For questions about your specific tax situation, please contact Larry Rubin, CPA, Aronson’s tax controversy practice lead, at 301.222.8212.

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