2. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
3. 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.
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
4. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
5. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
6. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
7. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
9. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
10. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
11. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
12. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
14. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
15. Exemption released for a single, specific or all
future years
Must be attached to the non-custodial
parents return for each year claiming
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
16. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
17. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
18. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
19. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
20. 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..
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
21. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
22. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
24. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
25. Participating in tax litigations bars ISR
Non-electing spouse can participate
Depositions are very important
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
27. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
28. 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.
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
29. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
30. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
32. 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
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
33. QRDO not used
◦ Disability insurance
◦ Unfunded excess benefit plans
◦ Unfunded deferred compensation
◦ Individual retirement accounts
◦ Simplified employee retirement accounts
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
34. 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.
Frumkes on Divorce Taxation -
Presented by Will Geer & Wayne
Morrision
