Equitable Distribution and Support

Harris v. Harris, 352 S.E.2d 869, 84 N.C.App. 353 (N.C. App. 1987)

In the case above, the plaintiff was ordered to pay to defendant an Equitable Distribution (ED) distributive award in the amount of $23,706.82, but payment of the award was postponed until the parties’ youngest child reached age 18 or graduated from high school. The Court of Appeals reversed because, at the time, such a postponement would have extended the distributive award to seven years after the termination of the marriage. This was significant, as the court is not to order a distributive award that would be paid “over such an extended time period that the payment thereof will be treated by the Internal Revenue Service as ordinary income.” Here, the courts look to IRS regulations to prevent taxes on the transfer of property incident to divorce, and IRS rules say gains or losses that result from transfers are not treated as ordinary income if they relate to the cessation of the marriage. However, if a transfer occurs more than six years after the termination of the marriage, one presumes it is not related to the cessation of the marriage. 26 CFR § 1.1041-1T. That would be rebuttable but involves more work.

The Court made an interesting comparison regarding the provision of the order wherein the plaintiff delayed payment of the distribution until the youngest child reached majority, saying it “bears resemblance to a child support feature.” The Court reminded the trial court that “equitable distribution of marital property is to be carried out without regard to child support,” and that, after the distribution has been determined, either party may request modification of previously ordered child support. This line is lifted straight from the statute. But it seems rare that any party actually utilizes this built-in review of an alimony or child support order. So what exactly does this review entail?

From Harris, a few observations can be made: 1) that ED judgments are crafted in a way to avoid having any transfer of property be treated as ordinary income under IRS regulations; 2) that ED and support are not to consider one another when determining the judgment; 3) that the built-in method for revisiting child support after the ED judgment is most likely contemplating a situation where some income-producing/reducing properties are distributed to a party, which would then affect that party’s income; 4) that income comes into play for child support and alimony calculations. What this case leaves unclear is whether the built-in review needs to meet the standard for traditional modification, where there has been a substantial change in circumstances.