Recent Articles

Apr 2023 : Holder’s Interest Value to the Owner Cuts Both Ways

View / Download April 2023 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


The Michigan Court of Appeals has ruled in a number of cases that, if is a business providing personal services is worth more to the owner than the price at which it could be sold, the value for divorce purposes is value to the owner – sometimes called “holder’s interest value” – on a going concern premise unless there is reason to believe the enterprise will be sold or discontinued.

But what about the reverse situation – the sale value – that is, fair market value (FMV) – is higher than the value to the owner?

Premise of Value to Owner

If there is no intent to sell or discontinue a business or professional practice, it should be valued for divorce based on its intrinsic value to the owner on a going concern basis. The financial benefits from that value are what have been conferred on the family while intact and will be conferred solely on the owner post-divorce.

SupportKowalesky, 148 Mich App 151 (1986) and several other Court of Appeals (COA) cases.

Logic – If there is no intent to sell, under what rationale should any value other than the value based on current financial benefits provided by the business be used in a divorce settlement?

No other value is relevant to this family or, hence, to this divorce.

However, Value to Owner Cuts Both Ways

Value to Owner Higher than FMV – The value of a neurosurgeon’s practice – dependent solely on established referral sources to this particular doctor – is worth much more assuming the doctor will continue the practice than to sell it. According to the COA, the higher value applies in divorce if there is no reason to believe the practice will be sold or discontinued.

FMV Higher than Value to Owner – Several years ago consolidators were “rolling up” funeral homes to add value via economies of scale – synergistic value. But, if a family-owned funeral home intended to remain as such and had no intention of “going corporate”, would it make any sense to use the higher potential sale value which is, essentially, irrelevant to this family, this divorce?

Logic – What possibly supports applying value to owner if higher, but not if lower? Either way, should not the value to this particular family be used?

Clawback Provision

If potential sale value is significantly higher than value to owner, the non-owner can be protected by use of a clawback provision which provides that, in the event of sale within a certain time frame, the non-owner will receive some percentage of net sale proceeds in excess of the value used in the divorce.

Depending on the circumstances, a declining percentage may be appropriate – e.g. 50% of the excess if the sale occurs within a year of divorce, 40% within two years, and so on.

Such a provision should be considered particularly if there is reason to believe a sale may occur in the near term.

It is not a failsafe method for safeguarding the non-owner, but does afford some measure of protection.


About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Holder’s Interest Value to the Owner Cuts Both Ways”
View / Download April 2023 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Mar 2023 : Tailored Installment Payments to Balance the Scales without Breaking the Bank

View / Download March 2023 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


The value of a closely held business or professional practice often dwarfs the value of other marital assets. If there are not sufficient suitable assets to award the non-owner spouse, installment payments are frequently used to balance the settlement.

In structuring the payments, two objectives often compete with one another:

  1. Don’t Kill the Golden Goose – It is important not to impose an undue strain on the owner’s cash flow, part of which may also be required for spousal and/or child support.
  2. Don’t Make Me Wait ‘Til I’m Old and Gray – On the other hand, it is generally not fair to require the non-owner spouse to wait a long period of time to receive his or her share of the marital value of the business.

Tailoring payments around other divorce obligations is a way to achieve both objectives.

Example

As part of their divorce settlement, H and W have agreed that he will pay her $200,000 for her one-half marital interest in his business. He will also pay combined transitional alimony and child support for their youngest child totaling $30,000 for each of the next 3 years.

H receives an annual salary of $60,000, supplemented by a bonus depending on company profit. He proposes that he pay the $200,000 by transferring a sufficient amount of his 401(k) plan to net W $50,000 after tax and that the $150,000 balance be paid over 15 years with interest at 4%, resulting in monthly payments of $1,110.

W responds that this is unacceptable; that it is unreasonable to expect her to wait so long for her share of the marital value of the business. She demands payment over 7 years, resulting in monthly payments of $2,050, almost twice what H proposed.

However, H claims he cannot afford to pay that much since the business has not been able to pay bonuses of late and the near future looks no brighter. In particular, he’ll be tight over the next few years with the alimony and child support obligations.

The attorneys meet with their joint CPA expert and work out the following payment terms to achieve both objectives.

No payments of principal and interest for three years. Adding the $18,000 of unpaid compound interest brings the principal to $169,655 as of the beginning of the fourth year.

  • Years four and five – $1,500 per month
  • At end of year five – $50,000 balloon payment
  • Years six and seven – $2,000 per month
  • At end of seven years – $55,500 balloon payment.

Tailored to Fit – The above indicates the way in which payments can be tailored to accomplish both objectives. The use of balloon payments enables the non-owner spouse to receive his or her share within a reasonable time frame. It also gives the owner spouse ample time to make arrangements to fund the balloon payments.

Related Matters

Provide for Acceleration – It is generally advisable to provide for acceleration of the balance due in the event the owner sells his interest in the business or the company receives a substantial influx of cash available to the owner, such as from refinancing.

Restrictions May Be in Order – In addition to normal security provisions, it is sometimes advisable to place restrictions on (1) the amount of compensation and/or distributions to the owner spouse and (2) the investment of business funds in non-operating assets (e.g., cabin up north or Florida condo “used for business”). Usually this can be done only if the owner spouse has a controlling interest.

Provide for Prepayment Option – Finally, it is often appropriate to provide for prepayment of the obligation at the option of the owner spouse.

Saving the Interest Deduction

The IRS has taken the position that interest paid on a divorce-related obligation from one ex-spouse to the other is “personal” interest and, hence, non-deductible. This results in a tax “whipsaw” since the payee ex-spouse receiving the interest must report it as taxable income notwithstanding that the payer cannot deduct it.

There have been a couple tax cases in which, under the circumstances of the case, the IRS position was rejected and the interest deduction was allowed as investment interest expense. However, the IRS has not acquiesced with these decisions and, further, investment interest expense can only be deducted to the extent of investment income (e.g., interest, dividends, etc.).

Aware of the IRS’s position, H’s CPA in the above example suggests that there is a way to avoid the loss of the interest deduction.

  1. This method is to “impute” interest at a rate approximating the after-tax equivalent of the agreed-on interest rate. The IRS and U.S. Tax Court have ruled that the imputed interest rules otherwise applicable to below market or no interest loans do not apply to divorce related obligations between ex-spouses. Under this approach, there is no loss of interest on the payee’s death.

So, H’s CPA proposes using 2.75% unstated, “baked in” interest rate as the approximate after-tax equivalent of 4.00%. This is done by running the amortization schedule with 2.75% as the interest rate to determine the payments. And, in the settlement agreement, the obligation to make the resulting payments is stated without reference to any interest rate.

Substituting 2.75% for 4% on the $150,000 obligation results in the following changes – within the target seven year period:

A prepayment provision with unstated, “baked in” interest would include a prepayment discount equal to the unstated rate of interest (2.75% in this case) applied to the outstanding balance at the time of prepayment over the period during which the balance was otherwise scheduled to be paid.


About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Tailored Installment Payments to Balance the Scales without Breaking the Bank”
View / Download March 2023 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Feb 2023 : Tax Return Filing Status and Related Matters

View / Download February 2023 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


At this time of year, parties who have recently divorced or are in the process of obtaining a divorce must consider how to file their federal income tax return.

The following present the options available, the rules regarding filing status, and planning opportunities.

Options

The filing options are, essentially:

  • Joint tax return at the lowest rates.
  • Single tax return with higher rates
  • Head of Household with rates between the joint and single rates.
  • Married filing separately with the highest rates.

For example, the tax on $60,000 taxable income in 2022 and the 2022 standard deduction are as follows:

As this shows, the difference between filing jointly and married filing separately is considerable, particularly at higher income levels. But, even at lower levels, the difference in the standard deduction is significant – a 100% higher joint vs. married filing separately.

Rules

Parties Divorced in Prior Year

How parties may file is determined by whether they were divorced as of December 31 of the prior year. If they were, the parties cannot file a joint return. Rather, they must file as single taxpayers or, if certain qualifications are met, as head of household.

Parties Not Divorced in Prior Year

If parties were still married at December 31, they may file a joint return for the prior year or may file married filing separate returns – at the steepest rates.

However, one (or possibly both) of them may qualify as married head of household as follows:

  • Must provide more than half the cost of maintaining a household;
  • Have a qualifying child or dependent who lived in the household more than six months of the year; and,
  • At the end of the year must be considered unmarried.

“Considered unmarried” though still legally married requires that a party satisfy the head of household requirements and, in addition, that the other spouse did not live in the home during the last six months of the year.

Planning Considerations

Joint or Separate Return?

If a divorce process is in the latter part of a calendar year, it is generally advisable to “run the numbers” both ways – that is, joint filing and separate return filing – especially if one spouse may qualify as head of household – to determine which way yields the lower overall tax.

In general, joint filing will typically result in lower overall tax if one party has significantly more income than the other. Because of this, it is not uncommon in such cases to finalize the divorce in all respects but to postpone filing the judgment until early January so a joint return can be filed.

However, there are instances where one party suspects the other of fraudulent or highly aggressive tax positions and does not want to be subject to the potential “joint and several” liability that applies to joint return filers. Further, awareness of such tax positions may preclude a claim of “innocent spouse.”

Thus, it may be advisable for the suspecting party to consider filing a separate return.

Or, if a joint return is filed, for him or her to secure a “hold harmless” provision regarding any tax deficiencies, penalties, and professional fees attributable to fraudulent or highly aggressive filing positions taken by the other spouse.

Estimated Tax Payments; Tax Refunds & Overpayments

Another important consideration for a divorce related tax return filer is the area of estimated tax payments; tax refunds & overpayments. Below is the August 2022 column regarding this matter.

Estimated tax payments made – and/or taxes withheld – during the year of divorce are generally a marital asset. Tax refunds or, overpayments applied to next year’s tax, attributable to tax payments made during marriage are also a marital asset.

And, it may cut the other way – that is, estimated tax payments and/or taxes withheld may be less than the actual tax on marital income received and shared during the year of divorce.

In this regard, note the following:

  1. Separate Returns for Year of Divorce – Whether divorcing parties can file a joint return or must file separate returns depends on their marital status as of December 31. If divorced as of that date, they must file separate returns for their respective separate incomes and deductions.
  2. Estimated Payments Automatically Are Credited to the Husband – Since the husband’s social security number (SSN) is generally listed first on joint estimated payment vouchers (Form 1040ES) made during marriage, such payments will automatically be credited to him unless there is a written alternative provision agreed on by the parties.
    The same applies to tax overpayments on the parties’ last joint return applied to the following year’s tax.
  3. Estimated Tax Payments and Tax Withheld During Marriage Are Marital Funds – Absent unusual circumstances, estimated tax payments and tax withheld during marriage are made with marital money – essentially half by each party.

The above matters are often not addressed in divorce settlements. The following presents (1) observations on such tax payments and (2) applicable tax law.

Tax Payments Made During the Year of Divorce

Example – Assume the following alternative facts for joint estimated tax payments made by – and/or withheld on behalf of H – during the year of a divorce for which the judgment is entered on December 30.

So, in Case #1, H will receive a windfall unless W’s attorney identifies the overpayment and makes an offsetting adjustment. Half of H’s $10,000 overpayment was made with W’s share of marital funds.

In Case #3, it is H’s attorney who needs to (1) identify that H will pay $10,000 of his own funds on income equally shared with W and (2) make an offsetting adjustment. When paying the $10,000, H will, in effect, be paying both his and W’s $5,000 shares of the tax on marital income.

Agreement to Apportion Joint Estimated Tax Payments

IRS Publication 504 – “Divorced or Separated Individuals” – provides that divorced parties may agree on the division of joint estimated tax payments made during marriage.

Because the IRS credits the account of the spouse who’s SSN appears first on the estimated tax voucher (Form 1040ES) – almost always the husband’s – if the other spouse (assume W) claims any of the joint estimated tax payments on a separate return, W should indicate the ex-spouse’s SSN on page one of his or her IRS Form 1040 in the designated space. If W has remarried, she should enter the current spouse’s SSN in the appropriate space and enter the ex-spouse’s SSN, followed by “DIV,” on the line at the bottom of page one, where estimated tax payment credits are claimed.

Tax Refunds and Overpayments Applied to Next Year’s Tax

It is common practice to provide for the division of tax refunds resulting from the parties’ final joint income tax return.

But, in some cases, parties filing a joint return will apply all or a part of any tax overpayment to the following year’s tax rather than having it refunded. This frequently occurs when a return is on extension and filed after April 15 and the prior year overpayment is needed to cover current year tax to avoid the underpayment penalty.

The IRS has ruled that it will abide by an agreement of spouses who are no longer married regarding the apportionment of an overpayment of tax on a prior year’s joint income tax return that the parties elected to apply to the following year’s tax liability. Rev Rul 76-140.

However, here, too, because the IRS credits the account of the spouse who’s SSN appears first on the tax return, if the other spouse claims any of the applied overpayment, the other spouse should indicate the ex-spouse’s SSN on page one of his or her IRS Form 1040 in the designated space. If the other spouse has remarried, he or she should enter the current spouse’s SSN in the appropriate space and enter the exspouse’s SSN, followed by “DIV,” on the line at the bottom of page one, where estimated tax payment credits are claimed.

Practice Pointers

  1. Discover Tax Situation – As part of discovery, the tax overpayment or underpayment status of the parties should be determined. This can often be provided by the parties’ tax preparer.
  2. Over Withholding – The owner of a closely-held business can arrange excessive tax withholding. If undetected, the money that should be in marital accounts to divide will instead accrue 100% to the owner as a tax refund. The excessive withholding can be done on the last day of the year. So, the fact that withholding was not excessive on a September 30 pay stub is not a reliable safeguard against withholding manipulation.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Tax Return Filing Status and Related Matters”
View / Download February 2023 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Jan 2023 : Obtaining a Copy of a Tax Return Filed in the Past

View / Download January 2023 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


In divorce proceedings, it is sometimes necessary to obtain a previously filed tax return which is unavailable for one reason or another.

The IRS has provided methods for doing so – both a copy of the return as filed or a transcript of the return.

Copy of Individual Tax Return as Filed

To obtain a copy of a tax return, IRS Form 4506 is required. Copies are generally available for tax returns filed for the current year and for the past six years.

For jointly filed returns, either spouse may request a copy. Only the signature of the requesting spouse is required on Form 4506. There is a $43 fee for each return requested.

A signed Form 4506 for Michigan taxpayer should be mailed to:

Internal Revenue Service
RAIVS Team
P.O. Box 9941
Mail Stop 6734
Ogden, UT 84409

The check for the fee should be payable to “United States Treasury.” The requesting party’s SSN should be entered on the check along with“Form 4506 Request.”

Processing time usually runs around 75 days.

Transcript of an Individual Tax Return

A tax return transcript can be proceeded around 10 days from when the IRS receives the request. There is no fee for a transcript.

An automated request can be made as follows:

Go to www.irs.gov
Then, click on “Get a Transcript” under “Tools”

Or, an automated request can be made by calling 1-800-908-9946.

A transcript of Form 1040, W-2, or Form 1099 can also be obtained by filing Form 4506-T.

The signed form for a Michigan taxpayer should be mailed to:

Internal Revenue Service
RAIVS Team
Mail Stop 37106
Fresno, CA 93888

Or, the form can be faxed to – 856-800-8105

Corporations & Partnerships

Copies of corporate and partnership tax returns can also be obtained by filing Form 4506-T.

For corporations, the form must be signed by an officer or by a person designated to do so by an officer or the board of directors.

For partnerships, the form must be signed by a person who was a member or partner during the year of the return requested.


About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Obtaining a Copy of a Tax Return Filed in the Past”
View / Download January 2023 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Dec 2022 : 2023 Federal Income Tax Rates & Brackets, Etc., and 2022 Michigan Income Tax Rate and Personal Exemption Deduction

View / Download December 2022 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


As the year-end approaches, there are frequently choices to make involving taxes, such as when to take a taxable distribution from an IRA or retirement plan interest, perhaps obtained via a QDRO.

Also, an individual’s federal income tax rate may be significant in determining after-tax income available for spousal &/or child support.

The IRS annually adjusts tax brackets for inflation to prevent “bracket creep” – that is, an individual pays tax on some income in a higher tax bracket simply because inflationary increases in his/her income. Because of the relatively high rate of inflation this year, the tax bracket adjustments are higher than usual.

Thus, working people with the same income will have higher take-home pay in 2023 and, hence, more disposable income.

To assist with year-end tax planning, the 2023 brackets are presented at right.

Federal Income Tax

The following are inflation adjusted tax rates and standard deductions for 2023 as announced by the IRS (IR-2022-182, October 18, 2022).

Personal Exemption

There is no federal income tax personal exemption. It was eliminated by the Tax Cuts & Jobs Act. of 2018.

2021 Long-Term Capital Gain Rates

  • 0% for taxpayers in the 10% or 12% brackets.
  • 15% for:
    • Single filers with taxable income between $44,625 and $492,300
    • Married Filing Jointly with taxable income between $89,259 and $553,850
    • Head of Household with taxable income between $59,750 and $523,050
  • 20% for taxpayers with taxable incomes exceeding the high end of the above ranges

Child Tax Credit

The Child Tax Credit remains $2,000 for qualifying children. A qualifying child is, in general, a child of the taxpayer who resides with the taxpayer for more than half of the year.

Michigan Income Tax

Tax Rate

The Michigan income tax rate remains unchanged at a 4.25% flat rate.

Personal Exemption

The number of personal exemptions a Michigan taxpayer could claim had previously been tied to the number claimed for federal tax purposes. With the elimination of federal tax personal exemptions, Michigan enacted Senate Bill 748 (Bill), signed by Governor Snyder on February 28, 2018.

Under the Bill, the reference to federal exemptions is removed. The Michigan personal exemption deduction for 2022 is $5,000.


About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “2023 Federal Income Tax Rates & Brackets, Etc., and 2022 Michigan Income Tax Rate and Personal Exemption Deduction”
View / Download December 2022 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)