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Sharp v. Comm’r, T.C. Memo. 2017‑208, 2017 WL 4973234 (2017)

 

(a) Facts:    A woman lived with a man in California.  The couple was not married.  The man had a child by a prior relationship, and the child had two minor children.  The man was, therefore, the children’s biological grandfather.

 

The mother of the two children signed a guardianship agreement giving temporary custody of the children to the man (the children’s biological grandfather) and the woman.  She did this because she did not believe she was capable of caring for the children.  The agreement was valid from July 16, 2013, to July 16, 2014.  The children returned briefly to the mother in September of 2013; she concluded that she was still not ready to care for them, and she returned them to the man and woman.

 

The children returned to the mother on August 18, 2014.  In October of 2014, one of the children, MLS, returned to the custody of the man and woman because he was having behavioral problems at school that his mother could not handle.  No formal extension of the guardianship agreement was signed.

 

Legal custody of the children remained with the mother during the entire period at issue.  No court ever issued a temporary or permanent custody order; no abuse and neglect action was ever filed; all changes in de facto custody were made by private agreement.

 

On her 2014 federal tax return, the woman claimed a dependency exemption for each of the two children.  The IRS disallowed the deduction, and the woman sought relief in the Tax Court.

 

(b) Issue: Was the woman entitled to claim the dependency exemption?

 

(c) Answer to Issue: No.

 

(d) Summary of Rationale: The exemption is available only for a “qualifying child.”  To be a “qualifying child,” the dependent must first be a “child.”  A “child” is defined as either “a son, daughter, stepson, or stepdaughter of the taxpayer,” or “an eligible foster child of the taxpayer.”  I.R.C. § 152(f)(1)(A).

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Seeliger v. Comm’r, T.C. Memo. 2017‑175, 2017 WL 4012872 (2017)

 

(a) Facts: A husband and wife divorced in 2006.  The decree permitted the husband to take the dependency exemption for the child in odd-numbered years provided that he paid all court-ordered support.

 

In 2013, the wife had custody of the child.  The husband was current on child support.  The father claimed the dependency exemption on his tax return.  He did not file a copy of Form 8332 signed by the wife.

 

The IRS disallowed the exemption and assessed a deficiency.  The husband appealed to the Tax Court.

 

(b) Issue: Was the husband permitted to take the dependency exemption?

 

(c) Answer to Issue: No.

 

(d) Summary of Rationale: The divorce decree was entered in 2006. For exemptions transferred before July 2, 2008, the transfer may be enforceable even without Form 8332 if the transfer meets the requirements in force in 2006.  To claim such a transfer, however, the husband was required to attach a copy of the divorce decree to his 2013 tax return.  He did not do that.

 

Even if the husband had attached a copy of the divorce decree to his return, the exemption would still not have been transferred.  “Under the decree, petitioner’s entitlement to the dependency exemption deduction was conditioned on his payment of child support for the year. The decree, therefore, does not conform to the substance of Form 8332 or satisfy the requirements of sec. 152(e)(2).”  2017 WL 4012872, at *3 n.6.  The exemption is transferred only by an unconditional statement.

 

Finally, the husband could still have claimed a valid transfer if he had obtained a signed copy of Form 8332 and attached it to his 2013 return, but he did not do that, either.

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Sun Life Assur. Co. of Canada v. Jackson, 877 F.3d 698 (6th Cir. 2017), cert. denied, 138 S. Ct. 2624 (2018)

 

(a) Facts: The parties were divorced in 2006.  The divorce decree, which incorporated a separation agreement, ordered the husband to maintain any employer-provided life insurance policies for the benefit of the parties’ daughter until her emancipation.

 

The husband had such a policy, but his uncle was the sole beneficiary.  The husband died in 2013, with the uncle still the only person on the policy.  The daughter, still a minor, made a claim to the policy proceeds, but the insurer paid the uncle. The daughter then sued the insurer in federal court.

 

(b) Issue: Who is entitled to the policy proceeds?

 

(c) Answer to Issue: The daughter.

 

(d) Summary of Rationale: Employer-provided life insurance policies are regulated by ERISA.  Therefore, the plan must pay the named beneficiary, and it cannot follow any contrary state court order.

 

As an exception, however, contrary state court orders are not preempted if the state court order is a QDRO.  Thus, the result in Jackson turned on whether the divorce decree met the QDRO requirements.

 

The first requirement states that the DRO must specify the name and address of the alternate payee.  The daughter was not named in the insurance provision, but she was named in the agreement, and the agreement was incorporated into the decree.  The decree did not state the address of the daughter, but it also incorporated the parties’ parenting plan, which awarded both parties shared custody.  The daughter, therefore, resided with the parties, and the addresses of both parties were stated in the agreement.

 

The second requirement states that the DRO must state the amount of benefits awarded.  The divorce decree clearly required that the daughter receive 100% of the proceeds.

 

The third requirement states that the DRO must state the period of payment.  The decree required that insurance must be maintained until the child’s emancipation.

 

The fourth requirement states that the plan must be identified. The court held that “all employer-provided life insurance” was sufficient to identify the plan.

 

Because the divorce decree met the requirements for a valid QDRO, the plan was required to pay the proceeds to the daughter.

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In re Beeghley, ___ Fed. App’x ___, 2018 WL 3060089 (3d Cir. 2018) (unpublished)

 

(a) Facts: The parties were divorced in Delaware in 1995.  The trial court divided the husband’s pension and ordered the wife to prepare a DRO.  No DRO was ever signed.

 

The husband remarried, and he and his new wife filed a Chapter 13 bankruptcy case in 1997.  The wife intervened, asserting various claims.  She was so litigious that an order was entered requiring court approval for future filings.  A final order was entered in 2001; the wife still had no DRO.

 

The wife also filed a simultaneous claim in federal district court, seeking relief related to the parties’ assets.  Her claim was dismissed as frivolous, and she was again barred from future filings without court approval. The wife appealed and obtained a reversal, but her claim was then dismissed in 2004 for lack of prosecution.  She still did not have a DRO.  She filed some proceeding in Pennsylvania state court in 2011 but failed to serve the husband with due process.

 

In 2014, the wife filed still another federal court action, arguing that it was the husband’s duty to obtain a DRO, which had still not been entered in state court. She sought damages for the husband’s breach of this duty and also sought to reopen the husband’s bankruptcy.  Her claim was denied based upon res judicata and laches by both the bankruptcy and district courts, and the wife appealed to the Third Circuit.

 

(b) Issue: Is the wife entitled to pursue her claim?

 

(c) Answer to Issue: No.

 

(d) Summary of Rationale: The wife is guilty of laches.

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Stephens v. Alliant Techsystems Corp., 714 F. App’x 841 (10th Cir. 2017) (unpublished)

 

(a) Facts: A husband divorced in Utah.  A Utah state court entered at least two DROs dividing retirement benefits, each time reserving jurisdiction to amend the order in the future.  The plan qualified the DROs.

 

The husband retired, and the plan administrator, Fidelity Investments, started sending him checks.  “But rather than cash the checks, Stephens returned the unopened envelopes to Fidelity” on the ground that a QDRO “entered in his Utah divorce case rendered him liable for any amounts intended for his ex-wife (who was awarded a portion of the benefits) but accidentally mailed to him.”  714 F. App’x at 843.

 

Fidelity kept sending checks, and the husband kept returning them.  Finally, Fidelity sent a large check for $152,890.38 for all benefits due up to that point.  Fidelity also sent a 1099-R Form reporting the payment to the IRS as income.  The husband returned the check and filed a pro se action against Fidelity in federal court, seeking to cancel the 1099-R Form on the basis that no money had been distributed to him.

 

The husband further asked the federal court to hold that the most recent Utah QDRO violated ERISA and “to adopt a prior QDRO (with certain modifications) and enter various orders to implement it.”  Id. at 846.

 

The District Court entered summary judgment against the husband, and the husband appealed.

 

(b) Issues: (1) Was the 1099-R Form void, and (2) was the husband entitled to the orders he sought?

 

(c) Answer to Issues: No on both points.

 

(d) Summary of Rationale: The court lacked jurisdiction to rule on whether the1099-R Form was void, as a declaratory judgment action is not proper to determine a party’s tax liability.  See also Sterling Consulting Corp. v. United States, 245 F.3d 1161, 1166 (10th Cir. 2001) (reaching the same result).

 

The order requested by the husband could not be entered, as a federal court lacks jurisdiction to enter DROs:

 

Stephens’ proposed amendment raised an additional claim that parts of the QDRO violated ERISA. To remedy this violation, Stephens asked the district court to adopt a prior QDRO (with certain modifications) and enter various orders to implement it. The district court found it could not give Stephens the relief he sought because (1) the Utah state court that entered the QDRO explicitly reserved jurisdiction to modify it, see R. Vol. I at 357, and (2) QDROs are not subject to ERISA’s preemption provision, see 29 U.S.C. § 1144(b)(7).

 

Stephens does not meaningfully contest either point. Additionally, the QDRO was part of Stephens’ divorce decree, see R. Vol. I at 353, and Stephens fails to explain why the “domestic relations exception” to federal jurisdiction did not prevent the district court from modifying and reissuing a part of his divorce decree, see Leathers v. Leathers, 856 F.3d 729, 756 (10th Cir. 2017) (“The domestic relations exception divests federal courts of the power to issue [or modify] divorce . . . decrees.”).

 

Stephens, 714 F. App’x at 846.

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Kirkpatrick v. Comm’r, T.C. Memo. 2018-20, 2018 WL 1040955 (2018)

 

(a) Facts: The wife sued the husband for divorce in Maryland.  A Maryland court issued a pendente lite order, providing for temporary support.  In addition, the order required the husband to “transfer to Ms. Kirkpatrick the sum of One Hundred Thousand Dollars ($100,000.00) directly (and in a non‑taxable transaction) into an IRA appropriately titled in Ms. Kirkpatrick’s name” and to “pay to the Plaintiff a lump sum of Forty Thousand Dollars ($40,000.00) . . . for Pendente Lite Attorney’s Fees and Suit Money.”  2018 WL 1040955, at *4.  The parties were eventually divorced.

 

The husband did not transfer any money into an IRA in the wife’s name, but he did make a series of payments to her in the amounts required by the above order.  The payments were made with funds withdrawn from two IRAs.

 

The parties filed a joint tax return for the year in which the payments were made.  They reported distributions of $411,155, of which only $116,489 was reported as taxable.  Among the deductions claimed was a $140,000 deduction under § 408(d)(6) for payments under the Maryland order.  The IRS disallowed the deduction, and the parties sought relief in the Tax Court.

 

(b) Issue: Were the parties entitled to a deduction under § 408(d)(6)?

 

(c) Answer to Issue: No.

 

(d) Summary of Rationale: The parties were not entitled to deduct the $40,000 in temporary attorney’s fees.  The Maryland court simply ordered payment of that amount; it did not order that payment be made from an IRA or, indeed, from any specific source.  Section 408(d)(6) applies only where the order or agreement requires “[t]he transfer of an individual’s interest in an individual retirement account.”  I.R.C. § 408(d)(6) (emphasis added).

 

The $100,000 payment was also not deductible.  “[T]his Court has held that for section 408(d)(6) to apply . . . there must be a transfer of the IRA participant’s interest in the IRA to his spouse or former spouse.”  Kirkpatrick, 2018 WL 1040955, at *15.  The Maryland order did not require the husband to transfer to the wife an interest in an IRA.  It required him to pay $100,000 into an IRA and to do so in a nontaxable manner, but it did not state a specific source from which the payment had to come.

 

Because the husband was free to make the payment from any source he desired, the order did not require the husband to transfer to the wife an interest in an IRA.  “[T]aking distributions from IRAs and writing checks to one’s spouse is not the appropriate form for a tax-free transfer of an account incident to divorce under section 408(d)(6).”  Id. at *17.  The court relied directly on Bunney v. Commissioner, 114 T.C. 259 (2000), which reached the same result.

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Lucas v. Comm’r, T.C. Memo. 2018‑80, 2018 WL 2948427 (2018)

 

(a) Facts: The parties divorced in Florida in 2011.  While the divorce was pending, the husband was in the process of liquidating his business, Vicis Capital, LLC.  He received, while the action was pending, $4.7 million in distributions.

 

Florida classifies the marital property as of the date of filing.  Nevertheless, the divorce court found that $4.7 million of the distributions was deferred compensation for services rendered to Vicis before the action was filed and thus was marital property.  The remainder of the distributions were held to be nonmarital property, apparently on the theory that they were compensation for efforts after the date of filing.

 

On his 2010 and 2011 tax returns, the husband deducted over $1 million each year in divorce-related legal and professional fees spent litigating Vicis-related issues in the divorce case.  The IRS disallowed the deduction, and the husband sought relief in the Tax Court.

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Barry v. Comm’r, T.C. Memo. 2017-237, 2017 WL 5899406 (2017)

 

(a) Facts: When the parties were divorced, the husband agreed to pay the wife $2,400 per month in alimony.  Twenty-four years later, the husband filed an action against the wife in federal court for breach of contract, arguing that he had overpaid alimony and that the wife was required to return the overpayment.  The action was dismissed quickly as time-barred.

 

On his 2013 tax return, the husband took a deduction of $34,250 for legal fees paid in the dismissed action.  The IRS disallowed the deduction, and the husband petitioned for relief in the Tax Court.

 

(b) Issue: Was the husband entitled to claim the challenged deduction?

 

(c) Answer to Issue: No.

 

(d) Summary of Rationale: The husband argued that if he had prevailed in the dismissed action, the overpayments he recovered would have been taxable income.  The husband, therefore, argued that his legal fees were expenses incurred “for the production or collection of income” under I.R.C. § 121(1).

 

The U.S. Supreme Court has held that attorney’s fees in a divorce case are generally not deductible expenses because they arise from the taxpayer’s marital relationship and not from any profit-seeking activity.  United States v. Gilmore, 372 U.S. 39 (1963).  Stated differently, taxpayers do not engage in divorce litigation to seek profit.

 

The husband argued that Gilmore was based only upon what is now § 212(2), allowing a deduction “for the management, conservation, or maintenance of property held for the production of income.”  Barry, 2017 WL 5899406, at *2 n.4.  The court disagreed, and Gilmore applies under § 212(1) as well.  A divorce case is not a device “for the production or collection of income.”

 

The husband argued that case law under former I.R.C. § 71 allows alimony recipients to deduct legal fees under § 121(1) as an expense incurred to produce income.  See, e.g.Wild v. Comm’r, 42 T.C. 706 (1964).  But those cases relied in part upon a specific IRS regulation permitting such a deduction.  Treas. Reg. § 1.262-1(b)(7).  The same regulation refuses to create a broader exception.  “Generally, attorney’s fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife.” Id.  The court held that the rule stated in the Regulation applied and that the husband was not entitled to take the challenged deduction.

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By Carolyn Woodruff, JD, CPA, CVA, North Carolina Family Law Specialist

Often questions arise when domestic violence involves an assault in North Carolina. I write for the Rhino Times and have for several years. My column is Ask Carolyn. Here is a question and answer on the domestic violence topic in August 2019. Whether it is Greensboro, Asheboro, or any other North Carolina area, these issues of domestic violence are serious and affect all of us. A reader wrote:

Dear Carolyn,

My husband has a DVPO order on me based on scratches he self-inflicted. He was given possession of our house.
We have a criminal case coming up regarding this. If he is found guilty, will his DVPO order be lifted and will I be able to move back into the house?

WR
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Logue v. Comm’r, T.C. Memo. 2017‑234, 2017 WL 5713945 (2017)

 

(a) Facts: The parties entered into a premarital agreement.  The agreement provided, among other things, that the wife would receive, upon divorce, a lump sum of $100,000, plus $10,000 for each year the parties were married.

 

The parties married but divorced after four years.  A separation agreement required the husband to pay the wife $140,000, exactly the amount that the above provision would require for a four-year marriage.  The agreement further provided:

 

The parties each acknowledge that this agreement, and each provision of it, is expressly made binding upon the heirs, assigns, executors, administrators, representatives and successors in the interest of each party.

 

2017 WL 5713945, at *4.

 

A modified separation agreement then reduced the payment from $140,000 to $117,970.97 on the ground that the husband had already paid $22,029.03 in expenses for the wife.  The husband’s total liability, including the expenses, remained at exactly $140,000.  The modified agreement was incorporated into a Texas divorce decree.

 

The husband paid the wife the $117,970.97.  On his next tax return, he took an alimony deduction of $170,000.  Of this amount, $32,000 was for alimony paid to a prior spouse, and $140,000 was for the payments made to the wife.

 

The IRS disallowed the deduction above the $32,000 paid to the former spouse, and the husband petitioned for relief in the Tax Court.

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