The Impact of Tax Laws on Divorce
| Publication year | 1991 |
| Pages | 8 |
August, 1991
David S. Dolowitz, J.
INTRODUCTION
A lawyer representing a client in a marriage termination action in a no-fault jurisdiction will recognize that there are three major areas of concern: division of property, support and custody of children. For example, in the state of Utah, §30-3-5(1) of the Utah Code provides, in relevant part:
When a decree of divorce is rendered, the court may include in it equitable orders relating to the children, property, and parties. This statute has been interpreted by the Utah Supreme Court to require an equitable division of marital property. As the Utah Supreme Court has declared:
There is no fixed formula upon which to determine a division of properties, it is a prerogative of the court to make whatever disposition of property as it deems fair, equitable, and necessary for the protection and welfare of the parties. Fletcher v. Fletcher, 615 P.2d 1218, 1222 (Utah 1980).
Consequently, a lawyer conducting a divorce action will seek to effect that property division which will be most equitable and protect the welfare of the client within the parameters of equitable distribution. If the lawyer is conversant with general principles of Utah law, she will recognize that the court will generally take the position that the property should be valued and divided equally. Consequently, the initial focus of counsel will be to determine what is in the marital estate and to value it, then will turn to seeking a division which will best serve the interests of her client.
In terms of alimony, the Utah Supreme Court has articulated:
An alimony award should, ... to the extent possible, equalize the parties' respective standards of living and maintain them at a level as close as possible to that standard enjoyed during the marriage. Gardner v. Gardner, 748 P.2d 1076, 1081 (Utah 1988).
In Jones v. Jones, 700 P.2d 1072, 1075 (Utah 1985), the court enumerated three factors which are to be considered in setting an alimony award: (1) the financial conditions and needs of the obligee spouse; (2) the ability of each spouse to produce sufficient income to pay living expenses; and, (3) the ability of the obligor spouse to provide support. Jones, 700 P.2d at 1075; see also Gardner, 748 P.2d at 1081. With these factors in mind, counsel will focus on establishing the standard of living enjoyed by the parties during the marriage and securing or limiting the alimony award to maintain her client at that level as nearly as possible.
In terms of child support, the state of Utah, like most other states, has adopted a guideline system. See Utah Code §§78-45-7 to -7.19 (1990). The Utah Uniform Child Support Guidelines are mandatory, unless the court determines there is sufficient evidence to rebut application of the guidelines. If application is rebutted, then the court will consider: All relevant factors including, but not limited to:
(a)the standard of living and situation of the parties;
(b) the relative wealth and income of the parties;
(c) the ability of the obligor to earn;
(d) the ability of the obligee to earn;
(e) the needs of the obligee, obligor and the child;
(f) the ages of the parties; and
(g) the responsibilities of the obligor and the obligee for the support of others.
Utah Code §78-45-7(3) (1990).
Finally, counsel will note that custody of a child is awarded in the best interest of the child based on function-related factors r evolving around who has been the primary caretaker parent. Pusey v. Pusey, 728 P.2dll7, 120 (Utah 1986).
In planning and preparing a case for a divorce client, the family lawyer will seek to identify and value the assets of the parties, discern the income and cost of living factors necessary to provide appropriate levels of support in terms of alimony and child support and evaluate the child custody factors. If the lawyer consider taxes in any respect, he might be aware of the general articulations of the Utah Supreme Court in Savage v. Savage, 658 P.2d 1201, 1204 (Utah 1983), or the Utah Court of Appeals in Alexander v. Alexander, 737 P.2d 221, 224 (Utah App. 1987), where the court affirmed the trial court's refusal to determine the tax consequences of its proposed order until they actually occurred. The rationale behind each decision was the fact that the trial court maintains continuing jurisdiction to make equitable adjustments if tax consequences produce a material result. As the Utah Court of Appeals stated:
We do not think the trial court's refusal to speculate about hypothetical future consequences was an abuse of discretion.
Alexander, 737P.2d at 224.
Those who have considered the question of whether taxes should have an impact on divorce would, however, have been aware of the decision of the Utah Court of Appeals in Home v. Home, 737P.2d 244 (Utah App. 1987), where the court reversed a trial court order that had a significant impact only because of a change in tax law. In the Home decision, the Court of Appeals (for the first time in Utah), recognized the impact that tax law can have on a divorce and in doing so, placed upon counsel the responsibility of bringing to the attention of the trial court the impact of tax law on either the agreement of the parties or the decision of the court.
In the recent decision of Morgan v. Morgan, 795 P.2d 684 (Utah App. 1990), the Utah Court of Appeals ruled that where evidence that an immediate tax impact would occur was presented to the trial court, the court must recognize that effect in its decision. Competent representation of a client in a divorce requires counsel to be aware of the tax implications arising from a divorce.
There are many esoteric twists and turns that can occur in a case which produce tax results which greatly change the apparent income or property award. Thus, the more complex the case, the greater the need for expert tax analysis. Counsel should also be aware that bankruptcy can follow a divorce and planning for this problem, not explored in this article, is also vital in protecting a client's interests. The tax problems that will be discussed in this article are those that do arise in most divorces and can be managed by the family law practitioner. They are legal, not accounting, problems which must be recognized and dealt with by the lawyer handling the divorce if competent representation of the client is to be effected.
In an extremely complex marital estate, it is recommended that a tax lawyer be brought in to deal with the problems. Those types of problems, however, are not what will be addressed in this discussion, which will address the types of problems which would ordinarily be encountered by a lawyer handling a divorce.
I. TAX CONSIDERATIONS WITH ALIMONY AND CHILD SUPPORT
Alimony comes in many forms but there are three basic structures that have evolved over the years in the state of Utah:
(1) Rehabilitative alimony, that is, a set amount of alimony paid over a given period of time to permit the payee time to become self-supporting. See, e.g., Smith v. Smith, 751 P.2d 1149 (Utah App. 1988);
(2) Support alimony, that is, an amount that is ordered paid by the obligor to the obligee for an indefinite period of time to realign the disparity in the parties' standards of living. See e.g., Gardner v. Gardner, 748 P.2d 1076 (Utah 1988); Paffel v. Paffel, 732 P.2d 96 (Utah 1986); Rasband v. Rasband, 752 P.2d 1331 (Utah App. 1988); and
(3) Equitable restitution, that is, alimony paid to produce an equitable balancing of property and income that cannot be otherwise effected. Martinez v. Martinez, 754 P.2d 69 (Utah App. 1988); Petersen v. Petersen, 737 P.2d 237 (Utah App. 1987).
In representing a client in need of alimony, a family lawyer would seek, pursuant to the directives of the statute and declarations of the Utah appellate courts, alimony at a level that would allow his client to be maintained as nearly as possible to the standard of living enjoyed during the marriage and to equalize the standard of living of the parties. See Jones, 700 P.2d at 1075. In seeking a permanent alimony award, adjustment of the living standard of each of the parties considering their income and property would be necessary. In those cases where a rehabilitative award is sought, the amount and duration of any award would be built upon rehabilitative necessity. In seeking an equitable restitution award, an analysis of the significant efforts and sacrifices made to enable the other spouse to greatly increase his or her income would be involved. All of these factors would be addressed in terms of applicable state law. The tax problems the family lawyer faces arise because the Internal Revenue Code is focused on tax and revenue issues, while alimony awards are made under state law by state courts effecting state policies. Both areas of law have different criteria and different impacts upon a family.
It is generally understood that under the Internal Revenue Code alimony is tax deductible to the payor and taxable to the payee. Unfortunately, it is not that simple. The Internal Revenue Code has its own requirements which must be met. These are set forth in §71 of the Internal Revenue Code (Title 26 of the United States Code, hereinafter referred to as I.R.C.). If all of the requirements of §71 I.R.C. are met, then under §215 I.R.C, the payor may deduct and the payee must include as income all sums paid as alimony. If those requirements are not met, the payments are not deductible to the payor nor includible in the income of the payee. This occurs even if the intent of the parties or the court was to make the alimony award tax deductible to the payor and taxable to the payee. In other words, the state laws of alimony are governed by support considerations and I.R.C. laws are governed by technical internal revenue tests which must be...
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