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.

Tax Tip of the Week*

EXEMPTION TAX BENEFIT
Many times in a divorce, even after custody of a child has been determined, there is an argument or battle over who is to get the exemption on the tax return for that child. The basic rule is that the exemption goes to the custodial parent; but that can be waived by signing off and giving that right to the non-custodial parent. However, it is important to recognize the economic realities of the exemption. Under current tax law, the exemption deduction is phased out above a certain level of income. Thus, for a “high earner”, there is no tax benefit to claiming the exemption.

Kal's Kweries**

KWERY:I own 25% of a business, and my partners are pushing me out. We need to get the business valued, but I’m concerned that they’re going to use all kinds of discounts to reduce what I should be entitled to. How do I handle that problem?

RESPONSE:Generally speaking, and by all means you need to check with legal counsel (it can depend on what state you are in), if you are being pushed out of a business, you might have a claim based on shareholder/partner oppression. If that’s the case, again generally speaking, discounts against the otherwise determined value would not be allowed. That is, in those situations typically fair value is considered the appropriate standard of value – not fair market value (which often includes discounts).

Tax Tip of the Week*

EXEMPTION FOR A CHILD
The rules for claiming a child as an exemption by a divorced parent are rather simple and straightforward. Barring a written agreement otherwise, only the parent who has custody of the child for more than half the year can claim that child as an exemption. It does not matter who is paying child support or how much the child support is. Custody determines the exemption. The exception is that through the use of Form 8332, the custodial parent can waive the exemption for any particular year of for a series of years. That form needs to be attached to the tax return of parent claiming the exemption

Anecdote of the Week

HE AIN’T COSTLY, HE’S MY BROTHER
We were investigating a car dealership, and one of our concerns was of course payroll, and whether there were any friends or family on the books that perhaps shouldn't have been. We were provided with a room to work in, and were told that the person who occupies that office wasn’t around that day so it was available for us. Interestingly, that office was bare of anything that made it personal, had a quarter inch layer of dust on all the surfaces – and, oh yes, was allegedly the office of a family member (one of our target payroll items). To top it off, in a brief discussion with the company bookkeeper, she advised that was an extra office, unoccupied

Tax Tip of the Week*

ESTIMATED TAXES
For many people receiving alimony, for the first time they will experience the need to make quarterly estimated taxes. Most of us are used to receiving our income in the form of a W-2 – with withholding taxes as part of that process. Thus, your taxes (whether some or all) are covered by withholding against your salary. Alimony payments are not subject to withholding. Thus, depending on various factors such as the amount of the alimony and whether or not you have other income, it is very possible that you will need to make quarterly estimated tax payments. Keep in mind that the obligation to make estimated tax payments will probably be not only to the IRS but also to your state.

Kal's Kweries**

KWERY:I’m going through a divorce, and my wife’s financial expert valued my business at some ridiculous number. The business is not worth anything without me. How do I counter the expert’s number?

RESPONSE:We experts hear the phrase “The business is not worth anything without me” all the time – and the reality is very few businesses are indeed so unique and the owners so special that the business is not worth anything without that owner. You need your own expert – but don’t expect your expert to simply buy your line that without you the business is not worth anything. While it might be true, the valuation process is far more complex than you might think.

Anecdote of the Week

A WALK ON THE WILD SIDE

It’s the little things that make a difference, that bring a smile to our faces, and a different view of a case. Because we had the same staff person working on two cases, we found out they were linked. The two cases were unrelated in every way – the businesses were completely different, the spouses weren’t related, the attorneys were different for all the parties, etc. However, there was a somewhat subtle link – which my staff person discovered, much to her amusement. It seems that when going through a box of financial records on one of the cases, she came across pictures that showed the wife of that case engaged in some very friendly activity with the wife of the other case

Tax Tip of the Week*

ALIMONY AND IRA
Alimony income qualifies as the equivalent of earned income for the purpose of making an IRA contribution. This is regardless of whether it is a traditional deductible IRA, a non-deductible IRA, a Roth IRA – any of those IRAs can be paid as the result of receiving alimony income, even if you have no other earned (for instance think of a W-2) income. Whether or not it is worth it for you to do so is a personal tax and cash flow matter.

Anecdote of the Week

TAKING PROTECTIVE MEASURES
Credibility is an all important aspect of dealing with clients, and when we feel they are not credible, we tend to be a bit more suspicious of their statements and representations. We were investigating an appliance repair operation where the husband’s business was servicing a lot of the neighborhood homes (what got him in trouble was that he was servicing more than just the appliances). Everything that we did relevant to reviewing lifestyle strongly suggested there was unreported income. We questioned the husband about his business, and asked him whether he had any cash income (from our review of the bank records, we already knew no cash was deposited). He explained to us that he was concerned for his safety, and thus refused to accept cash. That perhaps would have been somewhat believable had the husband not been 6’4”, 250 lbs. – and servicing (as we said in more ways than one) an upper class clientele

Tax Tip of the Week*

PAYING ALIMONY TO OTHERS

Most of the time, alimony is paid directly to the ex-spouse, even if it means going through a probation department. However, payments to third parties on behalf of the ex-spouse can also be considered and treated as alimony. For instance, paying the rent on the ex-spouse’s apartment, or paying for an auto lease – these can be considered as deductible alimony to the payor and taxable to the recipient. In order for that to be the case, the obligation to make those payments must be explicitly stated in writing. By the way, paying the mortgage on jointly owned property does not qualify as alimony because, from a tax point of view, you are merely paying your own existing liability (i.e. your mortgage).

Kal's Kweries**

KWERY:It is very likely that I or my wife will be filing for divorce pretty soon. My wife has a business, and I have always been kept out of the loop. I am not confident that she will cooperate in producing records, or may alter them. What can I do to protect myself?

RESPONSE:
Being prepared is always good advice for just about anything. See what you can do about getting copies of various documents – such as tax returns and investment statements – as soon as possible for as long a timeframe as possible. If you have access to these types of records, especially as to business records, copy what you can before the action starts so that you’ll have a greater comfort level of having at least some information.

Anecdote of the Week

YOU CAN CALL ME JOHNSON

Obviously, in doing divorce work, both of the litigants have the same last name (in about 95% of our cases). However, it’s far less customary for us to have a case where the attorneys also have the same last name. And, to take that one step further, imagine the confusion when we have a case where not only do the husband and wife of course have the same last name, and the attorneys have the same last name, but it’s all the same last name. Further, the husband was represented by a male; the wife by a female. Even the Mr. or Ms. designation didn’t alleviate the confusion.

Tax Tip of the Week*

ALIMONY AND CASH

The word cash here is not intended to mean Mr. Green, but rather the economic form of the payment. In order for alimony to be treated as such (deductible to the payor and taxable to the recipient), it must be made in cash or the equivalent. For instance, checks, cash, money orders, etc. What that also means is that if payment is made in the form of a note, or property (think in terms of transferring a car), that is not allowed to be treated as alimony.