Posts by Joseph W. Cunningham, JD, CPA

December 2016 : Nontaxable/Nondeductible Designation of Payments

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

General

A question put to me recently was, essentially – Can payments that may qualify as taxable/deductible be stipulated as nontaxable/nondeductible with assurance they will be so treated for tax purposes?

The answer is “yes”, pursuant to IRC 71(b)(1)(B). Just as it is important to include a “tax intent” provision when payments are intended to be taxable/deductible, the same is advisable when they are intended to be nontaxable/nondeductible. Tax intent provisions prevent misunderstandings down the road. Sometimes a tax preparer may suggest payments are deductible by the payer when such was not intended. A tax intent provision prevents this.

The following is sample generic language for a nontaxable/nondeductible tax intent provision:

“Defendant’s payments of [property/spousal support] to Plaintiff provided in paragraph [ ] are hereby designated by the parties, pursuant to IRC Section 71(b)(1)(B), as not includable in Plaintiff’s income under IRC Section 71 and, correspondingly, not deductible by Defendant under IRC Section 215. Plaintiff and Defendant agree that neither will file an income tax return on which subject payments are reported inconsistently with their expressly designated nontaxable/nondeductible status.”

Other Uses

Lump-Sum Payable on Death of Payer — The nontaxable/ nondeductible designation can be used to ensure that payments of life insurance proceeds or a lump-sum settlement from the estate of a deceased spousal support payer, which is not deductible as alimony on an estate’s income tax return, will not be taxable to the payee. This prevents the possibility of one party being taxed on a sizable payment for which there is no corresponding deduction by the other’s successor-in-interest.

It is common after the death of an alimony payer to con- vert the balance of the obligation to its lump-sum, present
value, after-tax equivalent (using the payee’s tax rate) and pay it in full with insurance proceeds. The nontaxable designation accommodates this practice.

Lump-Sum Payable for Other Reasons
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Continued in PDF file below… “Nontaxable/Nondeductible Designation of Payments”
View / Download December 2016 Article – PDF File

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

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November 2016 : Federal Income Tax Filing Tips and Related Info

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

As the end of the year approaches, income tax ling questions frequently arise. The following are selected tax filing tips and related information.

Joint Income Tax Returns

It is widely known that if a couple is legally married as of December 31, they may file a joint tax return for the year. This is often beneficial if one spouse has substantially more income than the other – usually resulting in the higher level income taxable in a lower tax bracket. In such situations, it is not uncommon for divorces concluding late in a calendar to defer entry of a judgment into the succeeding year to take advantage of joint tax return filing one last time.

However, under current tax rules – including the pernicious alternative minimum tax – it is generally advisable to “run the numbers” assuming, alternatively, joint tax return filing and separate tax return filing, to determine which will result in the lower combined tax. If the latter would result in the lower tax, entering the judgment in the current year should be considered.

Whenever a joint return may be filed for a year and it is certain the parties will be divorced in the following year, the following matters may be also relevant considerations:

Joint and Several Liability

If a joint return is filed, the parties will be jointly and severally liable for unpaid taxes and/or deficiencies later arising from an IRS tax examination. So, if it is suspected that one spouse is underreporting income and/or claiming excessive deductions, it is generally advisable that the other spouse not agree to file a joint tax return.

While Innocent Spouse Relief protects some unwary joint filers from liability, such protection may not be available if a spouse had reason to believe that income is understated or deductions are padded.

Take Away – Consider potential liability before deciding to file jointly to achieve tax savings.

Joint Tax Refunds

Most divorce settlements provide for the division of a tax refund on the final joint return. The check will be sent to the address on the return and will be payable to both parties. Thus, delay in receipt of a refund may result if the principal residence is used on the return and the refund is sent after the house is sold and the effective “forwarding address” period has expired. If this is foreseeable, use another address on the return (e.g. in care of the CPA/tax preparer).

Take Away – Consider any potential logistical problems concerning receipt of a joint tax refund and make appropriate arrangements.

Joint Tax Overpayments Applied to Estimated Tax

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Continued in PDF file below… “Federal Income Tax Filing Tips and Related Info”
View / Download November 2016 Article – PDF File

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

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October 2016 : Revisiting Holder’s Interest Value – or Value to the Owner

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Of late, the holder’s interest standard – or measure – of value for appraising professional and commercial enterprises for divorce has been subject to criticism. The following addresses issues raised.

Background

Holder’s Interest Value—“Holder’s interest” value – also referred to as investment value to the owner – of a business appraised for divorce settlement purposes is essentially the value to the current owner based on financial benefits consistently received from the business, unless there is reason to believe the business will soon be sold or discontinued.

The underpinning is that financial benefits provided by the company are often the product of contributions by both spouses during marriage such that both should share in that value in a divorce settlement.

If that value is not transferable in a sale – such as a surgeon’s referral sources or a widget maker’s personal relation- ship with a valuable customer – it will only be reflected in the business value if it is assumed the current owner will continue the enterprise after the divorce.

Fair Market Value—Holder’s interest value is distinguished from the most commonly known standard/measure of value – fair market value (FMV) – defined as the price at which a business would sell between a willing buyer and a willing seller, both well informed and acting at arm’s length, and neither acting under duress.

The principal difference is that holder’s interest value is premised on the current owner retaining the business post- divorce, whereas FMV is premised on a hypothetical sale to a third party.

In determining FMV of a non-marketable closely-held business, a lack of marketability discount, typically in the 25%-35% range, is deducted from the calculated value – that is, between 1/4 and 1/3 of the total value is eliminated based on the assumption of a hypothetical sale. Aside from this significant discount, valuable but non-transferable attributes of the enterprise – such as noted above – will not be captured in the hypothetical sale value.

Premise of Holder’s Interest Value—Jay Fishman, a nationally renowned business valuation expert, at an American Academy of Matrimonial Lawyers 2006 seminar, presented the following quote from the California appellate court in its landmark Golden v. Golden opinion in support of value to the owner:

“… in a matrimonial matter, the practice of the sole practitioner husband will continue, with the same intangible value as it had during the marriage. Under the principles of community property law, the wife by virtue of her position of wife, made to that value the same contribution as does a wife to any of the husband’s earnings and accumulations during marriage. She is as much entitled to be recompensed for that contribution as if it were represented by the increased value of stock in a family business.”

In this regard, there is no substantive difference between community property law and Michigan’s equitable distribution statute concerning contribution of the non-business owner spouse.

Michigan Court of Appeals Holder’s Interest Decisions

—As summarized at the end of this article, the Michigan Court of Appeals has consistently approved use of holder’s interest value where there is no indication that the owner will not continue to operate the enterprise post-divorce.
……

Continued in PDF file below… “Revisiting Holder’s Interest Value – or Value to the Owner”
View / Download October 2016 Article – PDF File

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

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Aug / Sept 2016 : Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Consider the following example:

  1. Parties – A and B – were married on 7/1/96 and divorced 20 years later on 6/30/16
  2. B has been a participant in her employer’s 401(k) plan since before marriage. At marriage, the account balance was $30,000.
  3. B had no plan loan balance at time of marriage, but she drew a $50,000 loan from the plan during marriage to provide funds for a family vacation home in northern Michigan.
  4. At divorce, the 401(k) account consisted of $100,000 in investments and a remaining loan balance of $20,000.
  5. Since the loan funds were used for marital purposes, the unpaid plan loan is a marital debt.
  6. Based on these facts, A and B will divide the $70,000 net increase in the account during marriage. A’s $35,000 will be paid from non-loan plan assets.
  7. B will also receive $35,000 of non-loan assets as well as the $20,000 plan loan receivable for which she is responsible to repay (essentially, to herself).
  8. The following presents the division of the account value, including the plan loan receivable.

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Continued in PDF file below… “Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?”
View / Download August/Sept 2016 Article – PDF File

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

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June / July 2016 : Changing Beneficiary Designations

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Two recent Court of Appeals decisions on disposition of (1) 401(k) account and (2) life insurance proceeds in disputes between decedents’ estates and former spouses who were the named beneficiaries. Patrick Estate v. Freedman, Mich App No. 324438 (2/11/16); Lett Estate v. Henson, Mich App No. 326657 (3/17/16).

Facts – Patrick Estate v Freedman (Unpublished)

  • During their marriage, H designated W beneficiary of his 401(k) plan account.
  • In their 2007 consent judgment of divorce (JOD), it was provided that W be designated beneficiary for the amount assigned to her if H died before her share was segregated into an account for her.
  • e JOD also provided – “Except as otherwise provided herein, any rights of either party as beneficiary in any pol- icy or contract of life, endowment or annuity insurance of the other, as beneficiary, are hereby extinguished.”
  • And further – “Except as otherwise stated herein, each party shall retain exclusively any retirement benefits to which they are or shall become entitled to due to their employment, and any claim thereto by the other as beneficiary or otherwise is extinguished.”
  • H died in 2014 without having changed the beneficiary designation.
  • At W’s request, the plan administrator distributed the proceeds of H’s 401(k) account to her.
  • H’s estate led a complaint claiming that she was not en- titled to the 401(k) account.
  • e trial court ruled that while it was proper for the plan to distribute the 401(k) account proceeds to W, the beneficiary on record, but, under the terms of the JOD, she did not have the right to retain them.
  • W appealed.

Court of Appeals Decision…

Continued in PDF file below… “Changing Beneficiary Designations”
View / Download June/July 2016 Article – PDF File

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

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