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The Professor Nedley Series
The Tax Page
The "Tax Page" is the page where the Professor will put up the most current tax information that strikes him as being of importance to either the divorcing couples, domestic partners or lawyers and judges themselves. The Professor subscribes to the Kiplinger Tax Letter which keeps up with new and proposed legislation and which provides clear, concise year-round tax-saving help for non-experts as well as tax professionals.
Bonus Depreciation for 2009 - If your in business and want to or have purchased new equipment in 2009, it is likely that you'll get to write off 50% of the cost. This law is expected to stay in effect through at least 2010.
Health Coverage for Terminated Workers - For employees let go before 1/1/10 and after 8/31/08 they can get a federal subsidy equal to 65% of the cost of the premiums for so-called COBRA coverage for up to nine months if they pay 35% of the cost. Congress is considering extending this to workers terminated after 1/1/10 and they're considering expanding the length of the subsidy.
Alternative Minimum Tax – Congress will no doubt implement and inflation adjustment for the AMT, otherwise the levels of taxation under AMT will revert to 2001 levels (that’s bad).
Deductibility of Special Clothing A concert pianist wasn't allowed to deduct all of the fancy clothing she had to wear as a pianist because other people wore similar clothing in other venues
Judges make sure you download the Form W-5 and peruse the instructions. We routinely charge working wives with what amounts to phantom income if the mother has low income. W-5 will explain why and tell her how to actually benefit from the rule. - If it doesn't make any sense to you, call me and we'll go over it. - there have been some favorable changes this year that will increase a party's take home IF they know how to do it This benefit is essentially reverse withholding and permits the taxpayer to recover money during the year. The guidelines are going to charge the person with the income, so we darn well should help them find it - Go to the tax tips page for more on the Earned Income Credit..
1st Time Home Buyers Credit - For you younger judges or lawyers, there still may be as first time home buyers credit awaiting you. The credit is still $8000, but it has been extended until May 1st of next year. Your income as a couple must be under $225,000. For singles the income cap is $125,000. Both caps phase in totally over the next $20,000 of income. Ask your CPA about closing date details.
Mandatory I.R.A. payments – I know that most, if not all, of you knew that distributions to the owner of an I.R.A., had to begin no later than April 1st, in the year following the year in which the owner turns 70½. (Reg. Sec. 1.408-8). That rule has simply been suspended for 2009. No withdrawal is required this year. The rule resumes in 2010, without any catchup.
Finally an Important &
Definitive
Tax Case for Divorces
Johanson & Melzig
vs.
Commissioner of Internal Revenue
aka "The Respondent"
Before the United States Court of
Appeals (9th) (That's Us!)
This is an appeal from the Tax Court
Daily Journal Cite is 2008
DJDAR 13941
Tax Court Number 2490-05
2008 Lexis 18797
The very first item of note is that the attorney for the appellants is
Marjorie O'Connell from Washington D.C.. She has, for quite a long
period of time, been the preeminent divorce/tax attorney on the east coast and
nationally recognized as such by the American Bar and fellow divorce/tax
practitioners. The very fact that she would take the case on appeal and
have the Tax Court's decision in favor of the Service affirmed indicates that
the Petitioner was going up against strong tax policy.
In understanding tax court cases (not
tax law) you need to understand that the Tax Court is not a court of justice.
They are there to interpret the rules and if the Service has played within the
rules set by the Code and Regs then the Service wins. The District Courts and
the Court of Appeals have much broader discretion to interpret the meaning and
intent of the rules.
Fact
Summary: This is a case from San Francisco. Carol Johanson and
John were married for 30 years. The MSA reached sometime prior to 2002
provided for John to pay alimony (also called spousal support or maintenance)
until 2010. Carol remarried in 2002 and filed jointly with her new
husband. in 2002 Carol and H2 received $63,000 in alimony. For
whatever reason they did not report the alimony as income, but John, of course,
deducted it under
Section 215 of the Internal Revenue Code. The IRS put two and two together
and determined that someone owed them money and following tradition they gave
Carol a Notice of Deficiency saying that she owed them taxes on her receipt of
income.
Note 1 This is the most common way for the IRS to pick up taxable income is by two conflicting returns. if alimony is reported by one spouse, they are required to submit the name of the payee along with contact information.
Note 2 Caution is the byword here for the practitioner or the client because the Service usually will notice both sides of the controversy and thus force them to litigate or otherwise resolve the issue and then the IRS collects from the loser.
The Tax Court, looking to California Family Code Section 4337, determined that the alimony provisions in the MSA met the definition of alimony found in Sec. 71 of the Internal Revenue Code. There are essentially six elements of alimony in Sec. 71. (1) Cash or its equivalent (2) Divorce or Separation agreement (3) Instrument doesn't say it's NOT deductible (4) Separate Households (5) No liability for payments after the death of the Payee or a substitute for such payments after death (6 Can't be disguised Child Support. Family Code Sec. 4337 saves the forgetful practitioner by stating that if it's not "otherwise stated" alimony terminates on either the death or remarriage of the payee.
Carol attempted to assert that since their agreement failed to state that the payments stopped at her death that the logic that followed was that the MSA simply did not meet the basic six requirements for alimony and therefore were simply not deductible under Sec. 215 (which permits a tax deduction for instruments that meet the requirements of Sec. 71).
Note 3 Stop here and make an important mental note. The Internal Revenue Code is a very literal code and is to be read and interpreted as such. In short that could have meant that if any one of the six elements were missing none of the alimony would have been deductible in spite of the best intentions of the drafters. (That's why Sec 4337 is the forgetful lawyers savior.)
In their agreement the term of the alimony was clearly set out and was very specific. The amount was set and was determined to be absolute and non-modifiable. It provided for two exceptions to its non-modifiability - first was in the event of John's death and second was in the event of John's prolonged unemployment or disability. The dollar amount was also fixed and not modifiable except as stated.
Note 4 John being the payor, his death as spelled out in the agreement was not the termination of payment upon the death of the payee as required by the code.
The Court of Appeals found that under California law that a waiver of Sec. 4337 must be "specific and express" and in the instant case where the agreement did not provide that payments of alimony would continue after Carol's death Sec. 4337 controlled and the payments would terminate upon the Payee's death. Petitioner's argument that the earlier drafts of the agreement had a provision that support terminated upon the deaths of either party and that that provision had been removed was extrinsic evidence of a clear intent to provide that support would continue past the payee's death and therefore take it out of Sec. 71 alimony fell on deaf ears.
What Did We Learn?: As always put in the language that you intend to put in and make it clear. Remember that alimony has six elements. Remember that both parties have to report consistently or the IRS will pick it up. The Code is literal and you must comply with all of its requirements-literally. Sec. 4337 terminates alimony in the event of death or remarriage whether you say so or not. If you don't want it to terminate, you must specifically say so. You screw up, even a big-time Washington lawyer may not be able to save you.