Tax Issues Related to Divorce
TAX ISSUES RELATED TO DIVORCE
The Bank of New York
Howell Bramson, Esq.
Kathleen Donelli, Esq.
11 Martine Avenue
White Plains, New York 10606
Table of Contents
4 I. Ownership of Marital Residence
4 II. Marital Property Divisions – §1041
5 III. Sale or Exchange of Personal Residence
6 IV. Deduction for “qualified residence interest.”
6 V. Dependency Exemption
6 A. Qualification of the Child as Dependent
7 B. Who Can Claim the Dependency Deduction?
8 C. Pre-1985 Separation Agreements
9 D. Phase-Out Limitations
10 VI. Head of Household Designation
10 VII. Innocent Spouse
10 A. Means For Obtaining Relief
10 B. Requirements for Innocent Spouse Relief
11 C. Separation of Liabilities
11 D. Election of Separate Liability
11 E. Equitable Relief
12 F. Proposed Language for Separation Agreements
12 VIII. Alimony/Maintenance/Spousal Support
12 A. IRC §§215 and 71
12 B. Alimony or separate Maintenance payments defined
14 C. Recomputation where excess front-loading of alimony payments
16 D. Alimony and separate maintenance payments
20 IX. Qualified Domestic Relations Orders
20 A. QDRO
20 B. Types of Plans
21 C. Plan Categories
21 X. Practical Advice
21 A. Deducting legal fees on income tax returns
21 B. Applying pre-commencement income tax overpayments to post-commencement income tax payments
21 C. Need to tax impact capital gains taxes on:
· Sale of marital residence
· Transfer of securities
· Distribution on options that cannot be transferred
· Transfer of retirement benefits
I. Ownership of Marital Residence
A. Only owner can deduct taxes and interest on mortgage payments. Can avoid the problem by structuring payments as spousal support.
B. Payor of spousal support can deduct as alimony interest and property taxes paid directly to mortgagee or taxing authority if payments are required by agreement.
II. Marital Property Divisions – §1041
A. No gain or loss recognized upon transfer of property between spouses or former spouses if transfer is incident to a divorce. (Overrule Davis Case.)
B. Equitable distributions are not taxable.
C. Applies to sales and exchanges, inter-spousal gifts and in-kind distribution of property.
D. Applies to losses as well as gains. “Passive activity losses” is exception to carryover basis. If H transfers property with suspended losses to W, W will not be able to deduct the suspended losses. Instead, added to basis.
E. Holding period tacks.
1. Applies to transfer of property between spouses and between former spouses if the post-divorce transfer is incident to divorce.
2. “Incident to Divorce” – – safe harbor –
a. Transfer occurs not more than one year after divorce or
b. Transfer is related to cessation of marriage if:
(i) Pursuant to divorce or separation instrument, and
(ii) Transfer occurs not more than six years after the
divorce (payments could be later).
If both of the above are not met, presumption that not
covered by 1041. Presumption can be rebutted.
3. What if no transfer is made?
See LTR 9143050 (H was plaintiff in patent infringement suit. Under divorce court’s order, had to pay W 25% of amount received). Held – – no transfer. H is taxed on full amount.
G. Carryover Basis – – must consider tax consequences.
H. Installment Obligations – – can transfer without acceleration.
I. Sometimes taxable transfer is desirable.
J. Installment sale between spouses
Interest is taxable to recipient. Interest may or may not be deductible by payor.
(i) Deductible if secured by house
(ii) Deductible if business and investment interest
(iii) No imputed interest in 1041 transaction (see Treas. Reg § 1.1274-1(b)(3)(iii))
K. Business Interests
Consider use of preferred stock (if C corp., partnership, or LLC)
III. Sale or Exchange of Personal Residence
A. Gain on sale of principal residence is excluded up to $250,000 (or
$500,000). See Section 121.
B. Requirements for Exclusion
1. Owned and used as principal residence for periods aggregating two years or more in the five-year period ending on date of sale.
2. Once every two years.
3. If married couples file a joint return in year of sale, either spouse’s ownership and use qualifies.
4. Special rules for separated and divorced taxpayers (71(d)(3))
a. If selling T/P previously obtained the home from spouse or former spouse in 1041 transaction, the T/P’s holding period includes that of spouse or former spouse.
b. If spouse or former is granted use of home under a divorce instrument, that occupant’s use of property as his or her residence during that period is imputed to other spouse.
5. Amount of Exclusion – $500,000 if (a) joint return in year of sale; (b) either spouse meets ownership requirements; (c) both meet use requirement; and (d) neither has used exemption in last 2 years.
IV. Deduction for “qualified residence interest.”
A. What is the meaning of “one other residence of the taxpayer?”
1. Probably requires the residence to be owned, in whole or in part, by T/P. If ownership transferred to ex-spouse, T/P can’t deduct interest (unless qualifies as alimony).
2. Only needs to own portion. Thus, portion T/P pays which does not qualify as alimony can be deducted as qualified residence interest.
B. Use as residence – – Does it qualify as “second residence” if non-occupant spouse? As long as someone uses it as “residence,” probably qualifies, but not clear.
C. If taxpayer owns portion of property and ex-spouse occupant owns part, payments of his own share of housing expenses cannot qualify as alimony (not payments “on behalf of” payee).
V. Dependency Exemption
A. Qualification of the Child as Dependent
For a child to qualify as a dependent for the dependency deduction, both parents together must provide more than one-half of the child’s support during the year and the child is either:
1. Less than 19 years old;
2. Less than 24 years old and a full-time student;
3. The child is 19 years old or older and is not a student but has income during the year of less than the exemption amount.
Dependent must have a Social Security number, unless born in December. Omission of dependent’s Social Security Number will result in processing delay and possible $50 penalty. [IRC § 152]
IRC § 152 delineates a list of persons who may be considered “dependents”. The taxpayer seeking to claim such individual as a “dependent” must have provided over half of that person’s support for the calendar year. Besides children, parents, siblings, stepchildren, stepparents and in-laws are among the delineated individuals.
B. Who Can Claim the Dependency Deduction?
1. Generally, the parent who has custody of a child may claim the dependency deduction, unless otherwise released to the non-custodial parent, or the court otherwise determines. Custody is determined by the divorce decree or separation agreement. If the agreement is silent, custody is determined by which parent has physical custody during the greater portion of the calendar year.
2. There are certain situations in which a non-custodial parent may claim the dependency exemption:
a. A separation agreement is in effect that designates the non-custodial parent as the person entitled to claim the exemption. [Multiple parties provide support, but none provides over one-half (1/2) of the dependent’s support. Taxpayer contributed over 10% of support and other supporters are not claiming dependent.]
b. The custodial parent relinquishes his right to claim the exemption to the non-custodial parent. This is done by completing IRS Form 8332.
c. Court awards exemption [Sheehan v. Sheehan, 152 A.D.2d 942, 543 N.Y.S.2d 827 (A.D. ___ Dep’t 1989)]. Multiple rulings around the country have upheld trial court wards splitting dependents (multiple children) between the parents. Eickelberger v. Eickelberger, 93 Ohio App.3d 221 (Ohio App. 12 Dist. 1994); Pineiro v. Pineiro, 683 So.2d 148 (Fla.3d DCA 1996)] Get the court to order the releasing party to sign Form 8332; include release as part of separation agreement and divorce judgment along with language that the releasing party will not claim the dependent.
Notice, that the custodial parent has the control over the assignment of this exemption.
3. a. Pursuant to the authority accorded by IRC Section 152 (3) (2), successful completion and attachment of IRS Form 8332 enables the non-custodial parent to claim the dependency exemption. Satisfying the signature requirement is critical for this to occur.
b. Along with the signature of the custodial parent confirming his or her consent, Form 8332 requires the taxpayer to furnish:
(i) The names of the children for whom exemption claims were released;
(ii) The years for which the claims were released;
(iii) The Social Security number of the custodial parent;
(iv) The date of the custodial parent’s signature; and
(v) The name and the Social Security number of the parent claiming the exemption.
Under Form 8332, the assignment of the dependency exemption can be released for the current tax year, or the assignor can release the claim to the dependency exemption for all future years or for a specified number of years. A signed form 8332 or its equivalent must be attached for each year the non-custodial parent is taking the exemption.
[NB. – If the assignor is the recipient of child support, a provision could be included in the separation agreement that the assignment of the dependency deduction(s) would only be effectuated if the payor/assignee is not in default with his/her child support payments. Thus, Form 8332 should be signed and delivered on an annual basis if such motive is sought.]
4. In order for assignment of the dependency exemption to be available, the assignor, spouse or former spouse [assuming both are the parents of the child] must (a) be divorced or legally separated; (b) have lived separate and apart at all times during the last six months of the calendar year; and (c) have a child that is in the custody of one or both of the parties (as parents) for more than half of the calendar year.
5. Paternity Actions. IRC § 152(e) refers to children of divorced or legally separated parents. The Code refers to child of “divorced” parents when addressing the support test. Cases around the country have followed the application of the dependency deduction to non-married persons. In Radim v. Commissioner, TC Memo 1987-348, the holding imposes the burden of proving payment of over one-half of the dependent’s support and disallows reliance upon a waiver from the other parent which is applicable only for separated or divorce parents.
6. The release by the custodial parent may be revoked. However, such revocation is only considered by IRS if the non-custodial parent refrains from claiming the child as a dependent. Thus, this is reason for annual signing of Form 8332 rather than open-ended assignment.
C. Pre-1985 Separation Agreements
For those who have been divorced under an agreement executed prior to 1985 in which it provides that the non-custodial parent is entitled to the dependency exemption, the non-custodial parent must provide at least $600 of child support to the child. In looking at whether or not this test is met, the child support owed for an earlier year, if paid, is considered support for the year paid, up to the amount of the required child support for that year.
D. Phase-Out Limitations
The IRC sets forth limitations as to the availability of the dependency deduction for higher income taxpayers. Do not argue over a dependency deduction where there may be no benefit to your client.
1. The deduction for personal exemptions is phased-out ratably for taxpayers once their income gets to a certain level. For the year 2006, these thresholds are as follows:
adjusted gross income of $150,500 for single individuals;
$225,750 for married individuals filing a joint return;
$188,150 for head of households; and
$112,875 for those married filing separately.
The exemption is phased-out once the threshold AGI is reached. These phase-out thresholds are adjusted annually.
2. These thresholds are to be adjusted annually for inflation. For tax years beginning in 2006 and 2007, the personal exemption phase-out amount is itself reduced by the applicable percentage. Specifically, in 2006 and 2007, the personal exemption reduction amount equals two-thirds of the otherwise applicable reduction amount. See Section 151(d)(3)(E) of the Code.
3. Negotiation of dependency deduction
a. Because of the phase-out tied to levels of income, in negotiating who will get the exemption(s), one should keep in mind the parties levels. This approach should maximize the tax benefit of the dependency exemptions. If the parties can agree and settle on allocating exemption back and forth every other year, why not expand the language in the agreement to include the following:
b. Possible language: If it is determined that the spouse who is allocated the dependency exemptions cannot obtain any tax benefit from them for a particular year, due to their level of income or any other reason, that spouse will agree to sign Federal Form 8332 allowing the other spouse to take the various dependency exemptions. Any tax savings generated to the other spouse who has now taken the dependency exemptions shall share the tax benefits received equally with the other spouse.
VI. Head of Household Designation
Under IRC §2(b)(1), “head of household” can only be claimed by the parent with whom the child primarily resides. Therefore, a parent having “joint legal custody” could not claim “head of household” status if the children reside with the other parent. However, if the parents have “shared physical custody,” there does not seem to be a prohibition against designating one child’s residential address with one parent and the second child’s residential address with the other parent.
VII. Innocent Spouse
A. When one files a joint income tax return, both taxpayers are jointly and individually liable for the entire tax. However, if one spouse qualifies as an “innocent spouse”, he/she will be relieved of the tax, penalty and interest. A spouse can get innocent spouse relief through the following means:
1. Innocent Spouse relief
2. Separation of Liability
3. Equitable relief
B. Requirements for Innocent Spouse Relief
Qualified as an innocent spouse — to meet this test, one will need to meet the following requirements:
1. A joint return had been filed for the taxable year.
2. The joint return contains understatement of tax attributable to a grossly erroneous item of the other spouse.
3. The other spouse did not know and had no reason to know there was such an understatement of tax at the time the return was signed.
4. It would be inequitable to hold the innocent spouse liable for the deficiency attributable to the understatement, taking into account all facts and circumstances. (In this situation, the IRS will consider whether the spouse requesting innocent spouse relief received any substantial benefits from the other spouse’s tax deficiency.)
C. Separation of Liabilities
The spouse, who had previously filed a joint return, may elect to have the liability limited to the portion of the deficiency that is attributable to him/her. The burden is on the taxpayer electing the relief to prove that the allocation is proper (one way is to look at what would have been allocated to the individual if the spouse had filed a separate return for the year in question). The limitation of liability is to the extent that items giving rise to the deficiency are allocable to that spouse. To qualify for this exemption, the spouse electing the relief must be either:
1. No longer be married to the other spouse;
2. Legally separated from the other spouse; or
3. Living apart for at least twelve (12) months from the other spouse with whom he/she originally filed a joint tax return
Please note that this exception would not be available to the spouse if the IRS can show that assets were transferred between the joint filers as part of a fraudulent scheme, or that the electing spouse had actual knowledge-of the understatement.
D. Election of Separate Liability
1. The spouse may elect separate liability up to two (2) years after the date the IRS begins collection activities. The spouse may also petition the Tax Court within ninety (90) days after the IRS mails a notice denying innocent spouse relief.
2. The IRS will not automatically grant relief to the spouse even if all conditions are clearly met. The spouse requesting the relief must elect this treatment by filing IRS Form 8857, “Request for Innocent Spouse Relief”. If the spouse qualifies for relief under the innocent spouse rule, he/she is relieved of liability of tax, interest, and penalties.
E. Equitable Relief
Even if “innocent spouse” or separate liability elections are not available, the spouse will not be liable if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or deficiency.
F. Proposed Language for Separation Agreements
Language in separation agreements may assist the “innocent spouse” if a future tax liability issue arises.
Innocent Spouse Statement. Wife/Husband has no knowledge as to the contents of any of the parties’ federal and state income tax returns prepared by Husband/Wife or on his/her behalf, except as to any income that Wife/Husband has received. Wife/Husband has not been involved in Husband’s/Wife’s business and is not aware of the information provided by Husband/Wife to his/her accountant in connection with income and expenses or other deductions related to his/her business(es) or amounts included in their joint federal and state income tax returns. Husband/Wife has read, and it has been explained to him/her by his/her attorney and accountant, the definition of “innocent souse” and related rules as provided by Section 6015 and other related sections of the Internal Revenue Code. Husband/Wife hereby acknowledges that Wife/Husband is an innocent spouse, as defined by the Internal Revenue Code, with respect to the joint federal and state income tax returns filed or to be filed.
VIII. Alimony/Maintenance/Spousal Support
A. IRC § 71 — Alimony and separate maintenance payments.
Gross income includes amounts received as alimony or separate maintenance payments.
B. Alimony or separate maintenance payments defined.
For purposes of this section —
(1) In general. The term “alimony or separate maintenance
payments” means any payment in cash if —
A. such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
B. the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and is not allowable as a deduction under Section 215,
C. in the case of an individual legally separated from his spouse under a decree of divorce or under a separation agreement, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and
D. there is no obligation to make any such payment for any period after the death of the payee spouse and there is no obligation to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.
(2) Divorce or separation instrument. The term “divorce or separation instrument” means —
A. a decree of divorce or separate maintenance or a written instrument incident to such a decree,
B. a written separation agreement, or
C. a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.
(3) Payments to support children.
A. In general. Payments do not constitute alimony or separate maintenance payments to the extent the terms of the divorce or separation instrument fix (in terms of an amount of money or a part of the payment) such payments as a sum which is payable for the support of children of the payor spouse.
B. Treatment of certain reductions related to contingencies involving child. If any amount specified in the instrument will be reduced –
1. on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school, or a similar contingency), or
2. at a time which can clearly be associated with a contingency of a kind specified in subparagraph 1.,
an amount equal to the amount of such reduction will be treated as an amount fixed as payable for the support of children of the payor spouse.
C. Special rule where payment is less than amount specified in instrument. For purposes of this subsection, if any payment is less than the amount specified in the instrument, then so much of such payment as does not exceed the sum payable for support shall be considered a payment for such support.
For purposes of this section, the term “spouse” includes a former spouse.
E. Exception for joint returns.
This section and Section 215 shall not apply if the spouses make a joint return with each other.
C. Recomputation where excess front-loading of alimony
(1) In general. If there are excess alimony payments –
(A) the payor spouse shall include the amount of such excess payments in gross income for the payor spouse’s taxable year beginning in the 3rd post-separation year, and
(B) the payee spouse shall be allowed a deduction in computing adjusted gross income for the amount of such excess payments for the payee’s taxable year beginning in the 3rd post-separation year.
(2) Excess alimony payments. For purposes of this subsection, the term “excess alimony payments” means the sum of –
(A) the excess payments for the 1st post-separation year, and
(B) the excess payments for the 2nd post-separation year.
(3) Excess payments for 1st post-separation year. For purposes of this subsection, the amount of the excess payments for the 1st post-separation year is the excess (if any) of –
(A) the amount of the alimony or separate maintenance payments paid by the payor spouse during the 1st post-separation year, over
(B) the sum of –
(i) the average of –
(I) the alimony or separate maintenance payments paid by the payor spouse during the 2nd post-separation year, reduced by the excess payments for the 2nd post-separation year, and
(II) the alimony or separate maintenance payments paid by the payor spouse during the 3rd post-separation year, plus
(ii) $ 15,000.
(4) Excess payments for 2nd post-separation year. For purposes of this subsection, the amount of the excess payments for the 2nd post-separation year is the excess (if any) of –
(A) the amount of the alimony or separate maintenance payments paid by the payor spouse during the 2nd post-separation year, over
(B) the sum of –
(i) the amount of the alimony or separate maintenance payments paid by the payor spouse during the 3rd post-separation year, plus
(5) Examples of “Front Loading”
Hypothetical: Separation Agreement requires Husband to pay Wife alimony in the amount of $200,000 in 1st post-separation year, $75,000 in 2nd post-separation year and $20,000 in the 3rd post-separation year.
Computation of Excess Payment for 1st Post-Separation Year.
(A) $200,000, over
(B) sum of:
1. The average of $35,000 ($75,000 – $40,000) and $20,000, equals $27,500
Accordingly, the excess payment for the 1st Post-Separation Year is $157,500
Computation Excess Payment for 2nd Post-Separation Year
$75,000 – $35,000 = $40,000 excess payment for 2nd year
(A) Where payment ceases by reason of death or remarriage. The front-loading rule do not apply if –
(I) either spouse dies before the close of the 3rd post-separation year, or the payee spouse remarries before the close of the 3rd post-separation year, and
(II) the alimony or separate maintenance payments cease by reason of such death or remarriage.
(B) Support payments. For purposes of this subsection, the term “alimony or separate maintenance payment” shall not include any payment received under a decree requiring a spouse to make payments for the support or maintenance of the other spouse.
(C) Fluctuating payments not within control of payor spouse. For purposes of this subsection, the term “alimony or separate maintenance payment” shall not include any payment to the extent it is made pursuant to a continuing liability (over a period of not less than 3 years) to pay a fixed portion or portions of the income from a business or property or from compensation for employment or self-employment.
(As an example, alimony can be taxable to the payee where additional alimony is based on a percentage or portion of a bonus.)
(7) Post-separation years. For purposes of this subsection, the term “1St year” means the 1st calendar year in which the payor spouse paid to the payee spouse alimony or separate maintenance payments to which this section applies. The 2nd and 3rd post-separation years shall be the 1st and 2nd succeeding calendar years, respectively.
D. IRC § 215 — Alimony and separate maintenance payments.
1. General rule.
In the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual’s taxable year.
2. Alimony or separate maintenance payments defined.
For purposes of this section, the term “alimony or separate maintenance payment” means any alimony or separate maintenance payment (as defined in section 71(b)) which is includible in the gross income of the recipient under section 71.
3. Requirement of identification number.
The Secretary may prescribe regulations under which —
(a) any individual receiving alimony or separate maintenance payments is required to furnish such individual’s taxpayer identification number to the individual making such payments, and
(b) the individual making such payments is required to include such taxpayer identification number on such individual’s return for the taxable year in which such payments are made.
4. Coordination with Section 682.
No deduction shall be allowed under this section with respect to (relating to income of alimony trusts); the amount thereof is not includible in such individual’s gross income.
5. Specifics of Requirements for “Alimony”
A. Cash payments.
· Cash, checks, money orders payable on demand, received by or on behalf of spouse (“spouse” includes former spouse).
· payment of “cash” to third party pursuant to divorce decree or matrimonial agreement for benefit of spouse deemed payment “on behalf of spouse”; would include rent, mortgage, tuition, etc.
CAVEAT: not the case if payments to maintain property owned by payor or spouse and used by payee spouse. 
· premiums for life insurance on payor’s life pursuant to divorce or separation instrument qualify as payments “on behalf of the payee spouse” to the extent the payee spouse is the owner of the policy.
B. Divorce or Separation Instrument.
All payments must be made pursuant to divorce or separation instrument defined as:
1. A decree of divorce or separate maintenance or a written instrument incident to such a decree. No need for legal obligation to support. Decree of divorce, separation, dissolution or separate maintenance is sufficient, notwithstanding enforceability; or
2. A written separation agreement. No need to be separated, but must have written agreement: an informal arrangement, or verbal agreement will not meet requirement; or
3. A decree (.not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse. Includes order for temporary or pendente lite support. Any order which is not divorce or separation decree.
C. Not designated as non-taxable or non-deductible.
If all other criteria are met, the payments will be taxable to recipient and deductible to payor, unless otherwise specified in the divorce or separation instrument as not taxable/deductible.
The court and/or the parties, as applicable, may alter the deductibility by simply so stating.
N.B. – If there is an intent for the payments to be taxable/deductible alimony, so state. If they are not so intended, so state in the text of the agreement.
A court may determine deductibility or not, and the IRS seeks such language if what otherwise qualifies as alimony is not to be deductible.
D. Different households.
If the spouses are separated under a decree (judgment) of divorce or legal separation, they must not be members of the same household at the time payment is made.
IRC § 71(b)(1)(C) provides that “In the case of an individual legally separated … under a decree of divorce or separate maintenance, the payee spouse and the payor are not members of the same household at the time such payment is made.”
Thus, physical separation within a single-dwelling unit is not sufficient. There must be two separate households.
Also, if the spouses are not legally separated under a final judgment of divorce or separate maintenance, payments under a written separation agreement or temporary order may qualify as alimony or separate maintenance payment under DRTRA notwithstanding that the parties are members of the same household at the time the payment is made, if the other requirements of DRTRA are made.
E. Termination on Death.
TRA 1986 eliminated, by technical correction, the DRTRA requirement that the divorce or separation instrument must state that the liability for payment ceases upon the death of the payee. Payments must cease upon the death of the payee, but if they cease pursuant to local law, that is sufficient.
To be includable in income of the payee and deductible by the payor, the liability for payments must actually terminate on the payee’s death under provisions of the law of the applicable state. An exception from disallowance is the payment of arrearages after the payee’s death.
Caveat: Including termination language is safer, than relying on
interpretation of local law.
F. Non-Modifiable Alimony.
Non-modifiability of alimony payments will not affect its taxability/deductibility so long as the criteria of IRC § 71 are met, particularly the requirement that the liability for payment ceases upon the death of the payee.
G. Alimony vs. Child Support.
Alimony must not be fixed as child support.
The payment must not be treated as child support, that is, fixed as payable for the support of a child of the payor spouse. A payment is so fixed if the divorce or separation instrument specifically designates some sum or portion (which sum or portion may fluctuate) as payable for the support of a child of the payor• spouse. A payment will be treated as fixed for the support of a child of the payor spouse if the payment is reduced (a) on the happening of a contingency related to a child of the payor, or (b) at a time which can clearly be associated with such a contingency. A payment may be treated as fixed as payable for the support of a child of the payor souse even if other separate payments specifically are designated as payable for the support of a child of the payor spouse.
A contingency relates to a child if it depends on any event relating to that child, regardless of whether such event is likely to occur. Events that relate to a child include: the child attaining a specific age or income level, dying, marrying, leaving school, leaving the spouse’s household, or gaining employment.
A payment will be presumed (rebuttable) to be reduced at a time clearly associated with the happening of a contingency relating to a child where payments are to be reduced not more than six months before or after the date a child is to attain the age of 18, 21, or local age of majority.
Also there will be a similar presumption where payments are to be reduced on two or more occasions which occur not more than one year before or after a different child of the payor spouse attains a certain age between the ages of 18 and 24, inclusive, and is the same age for each child.
Payments are not “fixed as to, child support” where the divorce instrument provides that spousal support will be reduced by any court-ordered increase in child support.
Unallocated awards of child support and maintenance, if meeting all other “alimony” requirements, may be treated as alimony because no amount is fixed as child support and none is deemed contingent on an event related to a child.
IX. Qualified Domestic Relations Order (“QDRO”)
A. A QDRO is required before a plan administrator may pay benefits to a former spouse. IRC §414(p). The term “alternate payee” means any spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.
B. Types of Plans
1. ERISA (Employee Retirement Income Security Act of 1974) Plans
a) Plans of private, public and non-profit entities
b) Accept QDROs
c) “Separate” benefits permissible
2. Non-ERISA Plans
a) Plans of municipal, city, state and federal government
Will not accept QDROs
· Drop the “Q” – DRO
Only “shared” benefits permitted
3. Non-Qualified Plans
SERPs, Top Hat, Options
Almost universally non-assignable
a. Need separate Agreement between Husband and Wife
4. Local plans of municipalities
a. LOSAP (Length of Service Award Program)
Volunteer fire departments
b. SCAT (vacation / sick days) – See Grund Sup. Ct. Suffolk
573 NYS 2d 840 (1991)
· Police and/or fire departments
· Sometimes other municipal employees
C. Plan Categories
1. Defined Benefit – (Pension Plans)
· Pension divided using coverture fraction formula
Majauskas – 61 NY 2d 481, NYS 2d 699 (1984)
The wife is to receive 50% of a percentage of the amount of each pension payable to the husband. That percentage is to be determined by dividing the number of months the parties had been married before the commencement of this action by the total number of months of credits the husband will have earned toward his pension as of the date of retirement.
· Must consider pre- and post-retirement survivor benefits
2. Defined Contribution – (Account Balance Plans)
· Participant receives contribution annually, normally based on a percentage of salary
a. Made by a specific date or made for a specific period
· Accumulation paid as a lump sum
· Treatment of investment earnings / losses must be addressed
X. Practical Advice
A. Deducting legal fees on income tax returns
B. Applying pre-commencement income tax overpayments to post-commencement income tax payments
C. Need to tax impact capital gains taxes on:
· Sale of marital residence
· Transfer of securities
· Distribution on options that cannot be transferred
· Transfer of retirement benefits
 If jointly owned, one-half of payment may be considered alimony (attributable to payee spouse) if all other alimony requirements are met.