November 2017 : Court of Appeals (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were separated in 2014, in part due to alleged multiple incidents of spousal abuse, and were subsequently divorced after 27 years of marriage.
  • At the time of divorce, H, 55, was receiving a pension of $51,880 annually while W, 54, was earning $15,058 at a parochial school district where she had worked for 22 years.
  • Part of H’s pension was accrued before the 1987 marriage.
  • H had health insurance as part of his retirement package while W did not have employer paid health insurance.
  • In view of (1) H’s fault for the breakdown of the marriage and (2) the disparate financial circumstances of the parties, the trial court awarded W 55% of H’s pension as spousal support.
  • H appealed, claiming that by awardingW 55% of his pension, the trial court inappropriately invaded his separate property.

Court of Appeals (COA/Court) Decision

  • The COA upheld the trial court decision and ruled that it did not invade H’s separate estate.
  • The COA stated the following regarding whether a trial court’s jurisdiction was limited to retirement plan contributions made during marriage:
[M CL 552.18(1)} does not expressly restrict the circuit court’s jurisdiction to pension contributions made within the confines of the marriage. Although that statutory provision
provides that pension contributions made during the marriage must be considered, it does not expressly provide that contributions made before the marriage may not be considered. That is, the language is inclusive and mandates what must be taken into account, but does not expressly exclude consideration of other contributions. [Boonstra, 209 Mich App at 562]
  • Further, the Court stated that the following rationale has been adopted regarding whether pension benefits accrued pre-marriage may be divided in divorce:

The major consideration is the security of the family and the court may utilize any property in the real and personal estate of either party to achieve suitable support for the family as the court considers just and reasonable after considering the ability of either party to pay and the character and the situation of the parties, and all the other circumstances of the case. [Booth, 194 Mich App 284,290(1992); Pickering, 268 Mich App 1,9(2005).

  • Thus, the COA decided that in light of the circumstances of the case,“it was ‘just and reasonable’ for the trial court to include in its considerations the portion of Defendant’s pension that had accrued before the marriage. Booth, 194 Mich App 291.”
  • Finally, the Court stated that because the trial court did not consider H’s pension accrued before marriage as his separate property, it did not have to consider the statutory exceptions (i.e., need or contribution) for invading a separate estate under MCL552.23.

Comments on the Case

  • Essentially, the COA ruled that when pre-marital retirement benefits are involved, a “just and reasonable” standard for providing “suitable support of the family” is the paramount consideration.
  • And, if awarded as spousal support, neither exception for invading separate property need be established to justify the award.
    Rather, ensuring the “suitable support of the family” takes precedence.
  • This seems to run counter to typical compliance with the Reeves mandate to first identify the (1) marital and (2) separate components of the parties’ various property interests.
  • What then is done in lock-step fashion is to treat the respective marital and separate property components of the total estate accordingly.
  • But, as we know, if one party establishes “need” under MCL552.23, the other’s separate property may be invaded to suitably provide for the need.
  • What the unpublished Koch decision indicates is that when a pre-marital retirement benefit is involved and need is established, paying it as spousal support vs. an invasion of separate property is an option.
  • This seems somewhat at odds with the 1997 Reeves decision mandate. However, if “need” is established, the substantive result is similar either way – that is, use of pre-marital retirement benefits to satisfy the need.

Food for Thought

  • “Need” sometimes consists of inadequate retirement security coupled with the lack of ability and/or time post-divorce to establish sufficient funds for support in retirement years.
  • In such a case, if the other party has a 401(k) or qualified plan savings account which includes a pre-marital component, the, “suitable support of the family” standard might justify use of one party’s pre-marital retirement account to provide for the other’s suitable support in retirement years.

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.

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Download the PDF file below… “Court of Appeals (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)”
View / Download November 2017 Article – PDF File

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

October 2017 : Court of Appeals Approves Trial Court’s (1) Disallowance of Some Business Expenses and (2) Imputation of Income to H in Determining His Income for Support – Bridge, No. 335453 (8/15/2017)

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were divorced in 2016 reaching a settlement with the assistance of a “conciliator.”
  • In 2015, H was an employee earning $300,000 as a salesperson.
  • But, in 2016, as an independent contractor, his income declined substantially to, H claimed, around $75,000.
  • Thus, he petitioned the court to reduce his spousal and child support obligations, and to do so retroactively.
  • The trial court acknowledged the steep decline of H’s income and that such was involuntary.
  • But the court disallowed some of H’s claimed business expenses and, further, imputed income to him based on what his partner, with whom he split commissions, was making, in deciding that his income was $132,000 for support purposes.
  • The reduction was not applied retroactively to extent petitioned by H.
  • H appealed.

Court of Appeals (COA/Court) Decision

  • The COA upheld the trial court decision.
  • Regarding business expenses disallowed, the COA cited the 2017 Michigan Child Support Formula Manual 2.01(E)(4)(e) which provides:

    For a variety of historical and policy reasons, the government allows considerable deductions for business-related expenses before taxes are calculated. Those same considerations are not always relevant to monies a parent should have available for child support. Therefore, some deductions should be added back into a parent’s income for purposes of determining child support ….

  • In this regard, the Court stated that H did not explain how expenses paid for a conference in Wyoming related to his Lansing based business.
  • There was also not an adequate allocation of his auto expenses to personal use.
  • The Court noted that “the trial court must add back into a parent’s income insurance, utility, entertainment, and automobile expenses, as well as travel expenses, unless they are ‘inherent in the nature of the business or occupation,’ even if those expenses are tax deductible. See 2017 MC- SFM 2.01(E)(4)(e)(iv).”
  • The COA also upheld the trial court’s imputation of $132,000 annual income to H. His partner, with whom he split commissions, testified that he made $76,604 for the first 7 months of the year – a monthly average of $10,943, and an annual total of $131,322.
  • Finally, the Court also ruled that modification of a support order that is part of a judgment of divorce may apply only for the period during which there is a pending petition for modification.

Comments on the Case

  • Money spent on necessary business expenses is not available for support.
  • But, if such expenses are not demonstrated as “inherent in the nature of the business or occupation” they may be added back to income available for support.
  • Further, as noted in 2017 MCSFM 2.01(E)(4)(e), “That the IRS may find the expenses reasonable is not determinative.”
  • With automobile and cell phone expenses, it is important to have a reasonable allocation to personal use.
  • And, for travel and entertainment expenses, it is required for tax purposes that documentation of date, business purpose, and expense is maintained. the same information should be on hand if requested for determining income for support.

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… “Court of Appeals Approves Trial Court’s (1) Disallowance of Some Business Expenses and (2) Imputation of Income to H in Determining His Income for Support – Bridge, No. 335453 (8/15/2017)”
View / Download October 2017 Article – PDF File

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

October 2015 : Overview of Unallocated Family Support Payments

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Tax Benefit

  • Combined payments of spousal support and child support – referred to as “family support” – are taxable/deductible under IRC Section 71.
  • Family support is advantageous from a tax standpoint if the support payer (assume H) is in a significantly higher tax bracket than the payee (W).
  • By structuring payments as family support, the child support component – which is generally nontaxable/nondeductible – is converted to taxable/deductible.
  • However, so W is not short-changed, the child support component of the family support payment must be in- creased to cover the tax thereon.
  • To illustrate:
    • H’s average combined federal and state tax bracket is 40% and W’s is 20%.
    • In their divorce settlement, spousal support is $2,500 a month and child support is $1,000.
    • After-tax, the payments are as follows:
      (Table in PDF file)
    • If the child support component is increased to $1,450 and included with spousal support as $3,950 family support, the result is:
      (Table in PDF file)
    • So, by converting child support to family support, Uncle Sam kicks in $3,420 a year, split approximately evenly between H and W.

Requirements to Qualify as Family Support

Continued in PDF file below… “Overview of Unallocated Family Support Payments”
View / Download October 2015 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section

November 2014 : Estimated Tax Payments Part II: Requirements for Spousal Support Recipients to Make Payments–Trap for the Unwary

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Last month’s column covered the need for divorce attorneys to appropriately “capture” as a marital asset estimated taxes paid or withheld in excess of the actual tax liability for the final year of the marriage, or part of a year, as the case may be.

There is also a need for spousal support recipients to be aware of requirements to make federal and state estimated tax payments on alimony income. Unlike with wages and salaries, tax is not withheld on spousal support payments. And, it is not uncommon for newly divorced spousal support recipients to be unaware of the obligation to make estimated tax payments on alimony income.

For federal, state, and, where applicable, city income tax purposes, estimated tax payments are due by April 15, June 15, September 15, and January 15 of the succeeding year. Forms 1040ES and MI 1040ES are used for this purpose for federal and Michigan estimates.

A consequence of not making required estimated tax payments is an underpayment penalty. In addition, of course, it may also result in an unexpectedly large tax liability when April 15 rolls around.
Two exceptions to the imposition of the underpayment penalty are:

  1. The total of tax withheld and timely made estimated tax payments exceeds 90% of the current year’s tax liability.
  2. The total of tax withheld and timely made estimated tax payments exceeds 100% of the prior year’s tax liability.

Example 1 – 90% of Current Year Tax Exception

  • W has annual W-2 earnings of $30,000 and receives spousal support of $4,000 a month.
  • Withholdings of $3,500 more than cover the tax on her $30,000 W-2 income (after reducing same by the standard deduction and exemptions). But, her federal income tax on the $48,000 of alimony income is $10,000 (all taxed at a higher bracket).
  • W should make federal estimated tax payments of $2,500 quarterly to avoid being subject to the underpayment penalty. She should do the same with respect to her state tax on the alimony income, and her city income tax, if applicable.
  • If she does, her $13,500 combined federal tax withheld and timely made estimated tax payments will exceed 90% of her current year tax liability.

Example 2 – 100% of Prior Year Tax Exception in First Year After Divorce
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Continued in PDF file below… “Estimated Tax Payments Part II: Requirements for Spousal Support Recipients to Make Payments–Trap for the Unwary”
View / Download November 2014 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section