Recent Articles

Oct 2020 : Court of Appeals Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download October 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W agreed to a divorce settlement at mediation which was then recorded and later incorporated into a Judgment of Divorce (JOD) entered in 2015.
  • H owned 102,857 shares of restricted stock which the JOD awarded to him except that –

    if the restricted stock were redeemed pursuant to a specific Company agreement – then W would receive 50% of the portion attributable to the years of marriage during which H owned the stock.

  • In pertinent part, the JOD provision stated that the marital portion of potential redemption proceeds would be:

    “proportional to the number of years Plaintiff owned said stock while the parties were married and the total number of years Plaintiff owned said stock prior to the date of redemption.”

  • The restricted stock was redeemed about a year after the divorce.
  • H applied the coverture fraction in determining the marital portion of which W was to receive 50%.
  • W filed a motion claiming that, according to the JOD, she was entitled to 50% of the total redemption proceeds.
  • The trial court, after (1) conducting a hearing on the issue, (2) reading briefs of both parties, and (3) reviewing a relevant portion of the transcript of the settlement recording, decided that (1) the JOD provision regarding the restricted stock was ambiguous and (2) W was entitled to 50% of the total redemption proceeds.

H appealed.

Court of Appeals Decision

  • The Court of Appeals (Court) found that the JOD provision regarding the restricted stock was not ambiguous but rather clearly set forth a formula for determining the portion of eventual redemption proceeds to be deemed marital.
  • The Court noted that the latter half of the JOD provision designates that W’s share of the proceeds to be “proportional” and would need to be ignored by the trial court to award W 50% of the total redemption proceeds.

Comments on the Case

  • Use an Example – For provisions regarding the future divisions of various forms of executive compensation, it is often advisable to include an example using hypothetical amounts. This significantly reduces the chance of differing interpretations down the road.
  • Provide for Tax Consequences – It is noteworthy that the JOD restricted stock provision in Blight was silent on tax consequences. Restricted stock is generally taxable on the expiration of the last of restrictions to which the stock is subject. It is advisable to provide for tax consequences when dividing various forms of compensation in a divorce settlement.
  • Skelly Does Not Prevent Parties’ Agreement – In the Court of Appeals published Skelly v. Skelly decision (286 Mich. App. 578 (2009)), the Court ruled that an executive benefit awarded during marriage but subject to a vesting event occurring after divorce was not marital property.

It has previously been expressed in this column that:

  • The Court’s decision in Skelly is over broad and arbitrary, and could result in inequitable divisions of property in fact attributable to years of the marriage.
  • However, parties, in reaching a divorce settlement, are free to disregard Skelly in reaching an equitable division of property. Whether done knowingly or not, that is what the Blights did in dividing H’s restricted stock which they knew would not vest until after the divorce.

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 Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)”
View / Download October 2020 Article – PDF File

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

Read More “Oct 2020 : Court of Appeals Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)”

Aug/Sep 2022 : Estimated Tax Payments; Tax Refunds & Overpayments

Posted by Joseph W. Cunningham, JD, CPA

View / Download Aug/Sept 2022 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Estimated tax payments made – and/or taxes withheld – during the year of divorce may be a marital asset. Tax refunds or, overpayments applied to next year’s tax, attributable to tax payments made during marriage may also be 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.
  3. The same applies to tax overpayments on the parties’ last joint return applied to the following year’s tax.
  4. 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 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 whose 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.
  3. Rather, the owner’s W-2 should be reviewed for the relationship between (1) income and (2) income tax withheld to discover whether there is excessive withholding.
  4. Specific Divorce Settlement Provisions – In addition to discovering the parties’ “tax situation,” the settlement agreement should include express provisions regarding matters such as division of refunds, splitting joint estimated tax on separate returns, and ensuring an equitable sharing of tax on marital income for the year of divorce.

IRS Publication 504 – “Divorced or Separated Individuals”

This an excellent 30 page summary of divorce taxation. It covers the following topics:

  • Filing Status
  • Exemptions
  • Alimony
  • QDROs & IRAs
  • Property Settlements
  • Tax Withholding and Estimated Tax

Publication 504 was updated in October 2021 and has a 2 page detailed index.

It is available for download at http://www.irs.gov/pub/irspdf/p504.pdf

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… “Estimated Tax Payments; Tax Refunds & Overpayments”
View / Download Aug/Sept 2022 Article – PDF File

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

Read More “Aug/Sep 2022 : Estimated Tax Payments; Tax Refunds & Overpayments”

Aug / Sept 2020 : Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download Aug-Sept 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W, who married in 2007, were both attorneys and maintained separate legal practices.
  • They also maintained separate bank accounts during their marriage.
  • In 2016, they purchased the marital home for $375,000. W paid the purchase price with funds from her account.
  • However, H arranged for $100,000 to be transferred to W’s account in connection with the purchase.
  • Both parties’ names were on the deed.
  • In addition to his law practice, H spent 15 hours or so a week working at his father’s business without getting paid. However, his father provided H with rent-free space.
  • W claimed that, citing Hanaway,1 some value of the father’s business should be imputed to H in the division of the marital estate.
  • The trial court treated the marital home as a marital asset and rejected W’s claim about the father’s business.
  • W appealed.

Court of Appeals Decision

  • The Court affirmed the trial court’s division of property.
  • In so ruling, the Court noted that the money in W’s account used to purchase the home consisted of her earnings during the marriage.
  • In this regard, the Court stated “that funds earned during a marriage are to be considered marital property.”
  • And, further, that “regardless of the parties’ intentions with their separate bank accounts, they agreed to jointly purchase the home by combining their separate funds and to hold the home in both of their names.”
  • On the other issue, the Court ruled that, unlike in Hanaway, H did not own a legal interest in his father’s business.
  • The Court also noted that H had testified that when his father died, his estate would pass to H’s mother and, further, that one of his brothers had special needs and that another had loaned money to the father over the years.
  • The Court said the trial court did not err in refusing to impute value to H of an asset in which he had no legal interest.

Comments on the Case

  • As the Court stated, money earned during marriage is marital regardless how disproportionately between the parties or whether it is deposited in a separate bank account.
  • However, a written separation agreement may provide that, as of a specified date, future earnings are no longer marital.
  • Regarding the other issue, there are cases involving family businesses owned by a parent but are essentially run by one of the parties who will clearly inherit the business.
  • If this has occurred during much of a long-term marriage, equity often screams that the business should be taken into account in a divorce settlement.
  • Should the mere fact that a party does not currently own a legal interest in a business of which he/she is CEO and certainly in line for future ownership be the overriding factor in fashioning an equitable divorce settlement in a long-term marriage?
  • That is the current state of the law which clearly frowns on any degree of speculation on what might happen going forward, despite how probable and significant it may be.
  • Of course, in “amicable” divorce settlements, provisions can be made to assure equitable results in such cases.

Endnote

1 Hanaway v Hanaway, 208 Mich App 278; 527 NW2d 792 (1995).

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… “Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)”
View / Download Aug-Sept 2020 Article – PDF File

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

Read More “Aug / Sept 2020 : Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)”

June / July 2020 : Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download June-July 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W both had pensions to divide after a nineteen year marriage.
  • W had a Michigan county pension and H a Michigan public school pension.
  • A CPA testified that there were two basic differences in the pensions:
    1. H’s school pension included an automatic COLA provision (MIP) by which it would increase by 3% a year. W’s county pension had no such provision.
    2. Also, H’s school pension allowed an alternate payee to access his/her share before the participant retired.
      W’s county pension, however, did not allow alternate payee access until the participant actually retired.
  • H, 45 years old, could retire at age 48 and intended to do so. He was free to seek other employment after retiring. W, also 45, had to wait until age 60 to retire.
  • The CPA proposed a partial offset method to adjust for the differences in the two pensions.
  • The trial court ruled that “the most equitable method for division” was to award each party a 50% interest in the other’s pension.
  • H appealed, claiming in part that when he retired at age 48, he could not live on half of his pension.
  • He also claimed that his ability to work after retiring would be relevant only if the court were determining an award for spousal support.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision.
  • Essentially, the Court ruled that both pensions, with their respective features, were marital assets and that dividing them equally was appropriate.
  • The Court also noted that earnings ability is relevant to property distribution as well as to spousal support.

Comments on the Case

  • Since H stated no reason (e.g., health) why he could not work after retiring at age 48, his claim was not very persuasive.
  • Determining the present values of the two pensions would not likely have provided a workable solution in this case. Reason – H’s pension would probably have been far more valuable than W’s pension – making an offset not feasible because:
    1. It was payable from age 48 for life vs. W’s being payable from age 60 for life.
    2. The twelve extra years were earlier, more valuable years in the present value calculation.
    3. H’s pension increased each year whereas W’s did not.
  • Though not an issue in the Reed case, whenever dealing with a Michigan public school pension, one needs to be mindful of recoupment.
    Recoupment occurs if (1) the alternate payee begins drawing his/her share before the participant (1) is age 60 and (2) retires, and (2) the participant works beyond normal retirement age of 60. The resulting reduction of the participant’s bene.t is drastic.
    A way to prevent recoupment is to provide that the alternate payee cannot begin drawing before the participant reaches age 60.

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… “Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)”
View / Download June-July 2020 Article – PDF File

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

Read More “June / July 2020 : Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)”

May 2020 : “Double Dipping”

Posted by Joseph W. Cunningham, JD, CPA

View / Download May 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Similar to Michigan law, the Ohio Court of Appeals rejected the arbitrary limiting of owner spouse’s income in determining spousal support to avoid “double dipping.” Kim v. Kim, 2020-Ohio-22 (1/8/2020).

Background

So-called “double dipping” occurs if these four conditions are met:

  1. The business or professional practice (enterprise) owned by one spouse (owner spouse) is valued by capitalizing excess earnings (or cash flow).
  2. Part of such excess earnings results from reducing owner spouse’s actual compensation from the enterprise to a “market” – or, “normal” level, reasonable compensation.
  3. The capitalized value of the enterprise is included in the marital estate divided between the parties.
  4. The total amount of the owner spouse’s compensation is included in determining income available for spousal support.

Example: H owns 100% of ABC Company (ABC). His average compensation from ABC is $200,000 annually. Reasonable compensation for his services, based on industry statistics, is $100,000.

If H’s actual compensation of $200,000 is used for determining spousal support, “double dipping” occurs since $100,000 of his actual compensation has been incorporated in the $1,200,000 value of ABC included in the marital estate divided between him and W. To avoid double dipping, H’s income for determining spousal support would be limited to $100,000.

Kim Case

Facts

  • H owns and works at two businesses from which his average compensation is $520,000 annually.
  • In calculating the value accepted by the trial court, H’s expert determined H’s “reasonable” or “market” compensation at $416,000.
  • The trial court used H’s total compensation – $520,000 – in determining spousal support.
  • It stated that, based on the circumstances of the case, equity does not require limiting H’s income for support purposes to avoid double dipping. In this regard, the court noted various factors indicating that H was in a much stronger financial position than W.
  • H appealed the court’s decision.

Court of Appeals Decision

  • The Court of Appeals (Court) upheld the trial court decision.
  • In so ruling, the Court stated that it agreed with the analysis made in another Ohio case that the statute “precludes an outright prohibition of double dipping” and that the trial should, “in the interest of equity,” consider the effects of double dipping.
  • In Kim, the Court noted that the trial court cited circumstances that were “overriding the unfairness of double dipping.”

Relevance to Michigan

Ohio, like Michigan, is an “equitable distribution” state. As we know, equitable distribution does not mean equal distribution to divorcing parties. Rather, trial courts have considerable discretion in tailoring a settlement to the equities of a case.

Double Dipping in Michigan – Loutts v. Loutts, Mich App No. 297427 (9/4/12)

  • The Michigan Court of Appeals (COA) published decision in Loutts is consistent with the Ohio Kim decision and COA decisions in four previous Michigan unpublished decisions on “double dipping.”
  • Essentially, the COA ruled that:
    • The effect of “double dipping” can be taken into account in determining spousal support to achieve a proper balancing of incomes and needs.
    • Hence, arbitrary limiting of the owner spouse’s income to avoid double dipping on a “bright line” basis is improper pursuant to MCL 552.23 and case precedents on using formulaic approaches to determining spousal support.
    • However, if not needed to achieve a proper balancing of incomes and needs, double dipping should be avoided.

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… “Double Dipping”
View / Download May 2020 Article – PDF File

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

Read More “May 2020 : “Double Dipping””