Recent Articles

March 2017: Value to the Owner Cuts Both Ways

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

It was recently asserted in a case that if a business could be sold for more than it is worth to the owner, then the higher sale value should be used for divorce settlement purposes.

This case involved a minority shareholder who had no authority to sell the business, and the shareholders holding a majority interest had no intention of selling the company.

As recently summarized this column (October 2016), the Michigan Court of Appeals has ruled in a number of cases that if 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” – unless there is reason to believe the enterprise will be sold.

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.

Support – Kowalesky, 148 Mich App 151 (1986) and several other Court of Appeals (COA) cases (see October 2016 Tax Trends column).

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.

Value to Owner Cuts Both Ways

Value to Owner Higher than FMV –
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Continued in PDF file below… “Value to the Owner Cuts Both Ways”
View / Download March 2017 Article – PDF File

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

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February 2017: Dependency Exemptions for Divorced or Separated Parents

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

At this time of year, questions often arise as to which of two parents—recently divorced or presently separated—is entitled to the dependency exemption for a child of the marriage.

General Rule under IRC Section 152(e)

IRC Section 152(e) provides a special rule for the right to claim an exemption of a child of divorced or separated parents who, for the year in question:

  • Are divorced or separated under a decree of divorce or separate maintenance at year end; or,
  • Are separated under a written separation agreement at year end; or,
  • Have lived apart at all times during the last six months of the year.
  • And, on a combined basis, had custody of the child for more than half the year; and,
  • On a combined basis, provided more than half the child’s support for the year (support received from a new spouse of a remarried parent is considered provided by that parent).

If these conditions are satisfied, the custodial parent (defined as the parent having physical custody for more than half the year) is automatically entitled to the exemption for a child regardless of:

  • of what the decree or agreement provides
  • which parent furnished more than half of the child’s support.

Waiver Exception to General Rule

For any specified year, or years, or for all future years, the custodial parent may release his or her right to claim the exemption for a child to the noncustodial parent.
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Continued in PDF file below… “Dependency Exemptions for Divorced or Separated Parents”
View / Download February 2017 Article – PDF File

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

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January 2017 : 2017 Federal Income Tax Rates & Brackets, Etc., Selected IRS Publications, and Attorney “Tax Deduction” Letters

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

In Rev. Proc. 2016-55 (IRB 2016-45), the IRS released the 2017 tax rates applicable to taxable income of taxpayers ling tax returns as single, married filing jointly, or head of household.

[TABLE INCLUDED IN PDF FILE]

Standard Deduction

  • Single … $6,350; $7,900 if 65 Years Old
  • Married Filing Jointly … $12,700; $13,950 if One Spouse is 65, $15,200 if Both Are 65
  • Head of Household … $9,350; $10,900 if 65

Personal Exemption

The personal exemption for 2017 is $4,050. However, 2% of the personal exemption is “phased out” – or reduced – for each $2,500, or part of $2,500, if a taxpayer’s adjusted gross income (AGI) exceeds the statutory threshold for subject filing status, as follows:

[TABLE INCLUDED IN PDF FILE]

Long-Term Capital Gain Rates

  • 0% for taxpayers in the 10% or 15% brackets.
  • 15% for:
    • Single Filers with taxable income between $37,950 and $416,700
    • Married Filing Jointly with taxable income between $75,900 and $470,700
    • Head of Household with taxable income between $50,800 and $444,550
  • 20% for taxpayers with taxable incomes exceeding the high end of the above ranges

Selected IRS Publications
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Continued in PDF file below… “2017 Federal Income Tax Rates & Brackets, Etc., Selected IRS Publications, and Attorney “Tax Deduction” Letters”
View / Download January 2017 Article – PDF File

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

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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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