Tax Tip of the Week*

INTEREST ON BUY-OUT
It is not unusual for a property distribution payment to be stretched out over some years, and in that case it is also not unusual for there to be interest paid on the outstanding balance (sort of like on a mortgage). While it is clear that the principal payments are tax free, that is not the case with the interest. If there is interest stated on the installment payment of the property distribution, that interest is taxable income to the recipient. Interestingly, it may or may not be deductible to the one making the payments – that depends on a number of complex tax factors.

Kal's Kweries**

KWERY:I have a small business, and I’m getting divorced, and my wife’s financial expert has put a number on it that is simply unreasonable. I want to be fair, but I don’t want to be taken advantage of.


RESPONSE:Everyone has a different idea as to what is a reasonable for what a business is worth and what is a fair split between spouses. Besides your attorney, you need your own financial expert who can either do a full valuation to counter your wife’s, or at least advise you in sort of a consulting fashion as to whether the number is within reason. If the number isn’t too far off, the practical thing to do is to negotiate some reasonable compromise – and keep in mind that both of you need to compromise or you both will lose. If the number is really unreasonable, then you will certainly need your own financial expert as part of your team to counter your wife’s number.

Tax Tip of the Week*

PAYING FOR AN ASSET

One of the more frustrating realities of the tax law is that as part of a divorce process, when one spouse buys out the other spouse’s interest in a piece of property, it is a non-tax event. A common and simple example is that the wife keeps the house, and pays the husband let’s say $200,000 for his interest in the house. That exchange of money is, from a tax point of view, a non-event. That $200,000 does nothing as to the tax basis in the house. It is the same situation when one spouse buys the other out of an interest in a business, or a stock portfolio.

Kal's Kweries**

KWERY:I own 50% of a business, along with my partner who owns the other 50%, and we are not getting along. I want to get bought out at a fair value for my interest, but we don’t have a buy/sell agreement. What can I do?


RESPONSE:Hindsight of course is wonderful, a buy/sell agreement would have helped (maybe). However, in the absence of that, you either need to discuss the matter with your partner and see if the two of you can work it out; or you are going to have to initiate a suit, perhaps for the dissolution of the partnership, and see if that triggers negotiations between the two of you. Generally speaking, without some form of a written agreement, neither one of you is obligated to buy out the other. However, without one of you buying out, the resolution very well may be the liquidation of your business – in which case both of you will probably lose.

Tax Tip of the Week*

ASSETS AND BASIS
As part of the divorce process, typically assets are divided up between husband and wife. Some assets – such as stocks, mutual funds, real estate – can create a tax when sold (or if sold at a loss might create a loss for tax purposes) which will in turn need to be reported on the then asset owner’s tax return. The critical issue for such an asset is its basis – which for the most part means its cost. For tax purposes, the gain is the difference between the sales price and the cost (basis). As part of dividing up the property, the spouse receiving a certain piece of property/asset is entitled to also receive documentation in support of the cost/tax basis in that property.

Tax Tip of the Week*

CHILD SUPPORT VERSUS ALIMONY It is fairly common in divorce actions that the higher earning spouse will be obligated to pay both alimony and child support. For instance, think in terms of $3,000 a month alimony plus $1,000 a month child support. What happens sometimes is that the entirety of the payments are not made – perhaps a couple of months are skipped, or a few months are shortchanged. When that happens, the tax law is clear that monies are treated as first being for child support (meaning not deductible by the payor and not taxable to the recipient); and then only after that year’s child support obligation is met is the remainder allowed to be treated as alimony.

Kal's Kweries**

KWERY:A number of years ago, while I was married, my parents gifted me a 5% interest in a family business. I don’t work in that business, I just get dividends every once in a while. I’m getting divorced now, and my husband is demanding that we value this 5% interest and he get a piece of it.

RESPONSE:In virtually every jurisdiction, the value of a gift (or inheritance) is not up for grabs in a divorce – except to the extent there has been an increase in the value during the divorce and further (and this may depend on which state you are in) only where either or both spouses played a role in increasing that value. What you are describing sounds like a situation where your husband will have no claim to any part of that value since you had no role in increasing it (if it went up) during the marriage, and further the starting point is that it was a gift.