Articles Tagged with IRS

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Dear Carolyn:

My ex and I share the children fifty-fifty.  We have three children.  I make approximately $25,000 more than the other parent.  I pay child support even though I have them half the time.  Our child support order says nothing about who gets the dependency exemptions, and I get in a fight with my ex every year over the dependency exemptions.  Who should get the three dependency exemptions?

Carolyn Answers….

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Dear Carolyn,

It is tax time.  I am divorced and have two children.  I pay $2000 per month in child support, and my ex (the mother) doesn’t even work.  She will not give me the dependency exemptions for the children.  The judge didn’t give them to me either.  They live with her and I visit every other weekend and half the holidays.  I am paying for the children, so why can’t I have the tax benefit?

Perturbed

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Forget it!

Forget about the alimony deduction for all new decrees or instruments post-2019. (See Part I for modification of pre-2019 alimony orders and agreement, as modification has a separate set of rules.) The deduction is gone absent a congressional miracle. That means on December 31, 2018, or before you must have alimony that qualifies under IRC Section 71 before it is repealed. The alimony must meet the terms of Section 71, pre-TCJA and pre-2019, which are as follows:

a. You must have a qualifying decree or instrument;

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Previously, we examined the paragraph and subparagraphs defining “divorce or separation instruments.” Now let’s take a look at which sections of TCJA incorporate these subparagraphs.

Sections incorporating all three subparagraphs of the definition of divorce or separation instrument Post-2018.

The two sections of TCJA that adopt all three subparagraphs of the definition of divorce or separation instrument post-2018 are as follows:

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The repeal of the alimony tax sections for the inclusion of income and deduction has an ancillary impact on other divorce tax issues. The effective date for all ancillary issues discussed in this article is December 31, 2018, the same as the alimony repeal. These December 31, 2018, changes shall be referred to herein as “post-2018” changes.

The law before TCJA will be referred to as “pre-2019.”

In this first section, we’ll look at what a divorce or separation instrument is.

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Divorce was hard enough, and now alimony tax reform. Do you feel good or bad about alimony? No matter your answer, this alimony tax reform revolutionizes the divorce arena, and you need to know how it may affect you and your clients. Judges need to know how it might affect those whose appear before them as litigants. So let’s dig in.

This article is Part I of three parts. Part I deals with the basics of the alimony taxation changes under the Tax Cuts and Jobs Act (“TCJA”), referred to herein as the “new Alimony Statute.” Multiple sections of the Internal Revenue Code related to alimony are changed under the TCJA. The new Alimony Statute is contained in Section 110151 named “Repeal of Deduction for Alimony Payments” in PL 115-97, HR1, December 22, 2017, 131 Stat 2054.  When I refer from now on to the “old Alimony Statute,” I am referring mainly to Internal Revenue Codes Sections 71 and 215 as they existed before the TCJA.

Part II will deal with ancillary federal tax considerations of the new Alimony Statute, of which there are many.  Part III will discuss considerations of the new Alimony Statute under North Carolina domestic relations law and explore creative possibilities for the use of the new Alimony Statute.

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Yancey v. Comm’r, T.C. Memo. 2017-59, 2017 WL 1289451 (2017)

Facts: A husband and wife filed joint returns. The returns were prepared by the wife. The returns understated the amount of tax due, mostly because they wrongly double-counted certain gambling losses incurred by the husband.

The IRS assessed a deficiency. The wife filed a petition for innocent spouse relief, the IRS denied it, and the wife appealed to the Tax Court.

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Stapleton v. Comm’r, T.C. Memo. 2015-171, 2015 WL 5049758

Facts: A father and mother had two children. The parents were never married. No court was ever asked to decide custody, but the parents agreed that the father would have the children every Monday and Wednesday night and every other weekend. In 2011, the father had custody of the children for 176 days.

The father claimed the dependency exemption for both children on his 2011 tax return. The IRS disallowed the exemption, and the father appealed to the Tax Court.

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Family Chiropractic Sports Injury & Rehab Clinic, v. Comm’r, T.C. Memo. 2016-10, 2016 WL 234515 (2016)

Facts: Husband and wife operated a chiropractic The practice had an Employee Stock Ownership Plan (“ESOP”). Husband and wife were the only participants.

The parties were divorced in Iowa. The decree was silent on the ESOP, but the wife agreed to transfer her interest in the ESOP to the husband. She later did so.

The IRS decertified the ESOP, resulting in the loss of valuable tax benefits, on the ground that the transfer to the wife violated the antiassignment provision of the plan and the antiassignment provision of ERISA. The practice filed a declaratory judgment action questioning the decertification.

Issue: Did the IRS err in decertifying the ESOP?

Answer to Issue: No.

Summary of Rationale: The plan provided that vested benefits could not be transferred. There was no divorce exception. The wife’s vested benefits were transferred to the husband. Therefore, the provision was violated and the ESOP was correctly decertified.

Observations: Continue reading →

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Belot v. Comm’r, T.C. Memo. 2016-113, 2016 WL 3248031 (2016)

Facts: During their marriage, the parties operated a dance studio. The business consisted of an S corporation which was the actual studio, an LLC which operated a boutique selling dance clothing, and another LLC which owned the real estate on which the studio operated. The parties owned each of these entities in different percentages.

The parties were divorced in New Jersey in 2007. The decree incorporated an agreement signed by the parties, in which they agreed to convey interests in the entities so that each of them owned 50% of all three entities. The decree therefore left the divorcing parties as joint owners of the business.

Later in 2007, the wife filed a complaint against the husband, alleging that he had mismanaged the studio, and seeking to remove him as director and employee. This action was settled in 2008 by an agreement, in which the wife agreed to buy the husband’s interest in the business for $900,000 to be paid at closing, and $680,000 to be paid over 10 years.

The husband filed tax returns which claimed that the sale of the business under the 2008 agreement was a § 1041 exchange. When the IRS assessed a deficiency, the husband then appealed to the Tax Court.

Issue: Was the transfer required by the 2008 agreement a 1041 exchange?

Answer to Issue: Yes

Summary of Rationale: The IRS relied upon Reg. § 1.1041-1T(b), Q&A-7, which provides:

Continue reading →