Tax Law Impacting Divorce

• Jurisdiction: Utah,United States
• Citation: Vol. 5 No. 10 Pg. 8
• Pages: 8
• Publication year: 1992

Tax Law Impacting Divorce Vol. 5 No. 10 Pg. 8 Utah Bar Journal December, 1992

David S. Dolowitz, J.

The following is part 1 of a two-part article on "Tax Law Impacting Divorce".

There are certain areas where tax law impacting divorce can produce results which are different than those anticipated by lawyers following and utilizing state divorce statutes and decisions. Lawyers handling divorce cases encountering these problems can find themselves mislead and their clients harmed if proper recognition is not given to the problems. To assist in recognizing some of these problems and adjusting to them, the fol lowing description and analysis is presented.

DEFINITION OF INCOME

State law requires that income be determined to set both alimony and child support.

The Utah Supreme Court has declared that the purpose of alimony is to maintain the standard of living of the recipient spouse as nearly as possible to that maintained during the marriage and to prevent the recipient from becoming a public charge. In order to effect this result, the trial court must consider the income produced by the payor, the needs of the payee and the income-earning potential of the payee. The court has also indicated that the income of the parties may properly be divided equally between them to effect these goals. Gardner v. Gardner, 748 P.2d 1076 (Utah 1988).

The Uniform Child Support Guidelines ! require as their first step in establishing child support that the income of each parent be determined. The amount of support is the adjusted gross income of each parent. Utah Code Ann. § 78-45-7.5 (1992).

Thus, when determining either child support or alimony, the practitioner finds that the first step is to define and establish income. Where all of the income earned by the obligor comes from W-2 earnings or 1099 interest or dividends, the inquiry is easy. However, the question is often not that simple.

The first inquiry is establishing the time frame of the income. The Utah Court of Appeals in Howell v. Howell, 806 P.2d 1209 (Utah App. 1991) cert, denied, 817 P.2d 327 (Utah 1991) ruled that to set alimony, the income being used should be ' that earned as of the date of trial. This is also the date upon which the determination of need and the recipient's ability to earn should be established. The same test was mandated in child support in Thronson v. Thronson, 810 P.2d 428 (Utah App. 1991) cert, denied, 826P.2d651 (Utah 1991).

The second area of inquiry is that of defining income. The courts and legislature in Utah have had to examine the concept of "income" to define precisely what it was or is. In Jones v. Jones, 700 P.2d 1072 (Utah 1985), the court confronted the situation where Mr. Jones operated a business. The business had a net profit of $90, 000.00 per year. Mr. Jones took $45, 000.00 of that profit each year as his income and reinvested $45, 000.00 into expansion of the business. The trial court determined for support purposes that Mr. Jones had an income of $45, 000.00 per year, precisely what was declared on his tax return. The Utah Supreme Court ruled that was not a correct determination of income. The court ruled that, as Mr. Jones was the sole proprietor of the business, he was in a position to determine how much income he would take and his true income was $90, 000.00 per year for the purpose of determining his support obligation, not $45, 000.00. The case was remanded to the district court to re-examine the level of alimony that should be set based upon Mr. Jones' real income.

Examination of Mr. Jones' tax returns would have revealed an income of $45, 000.00 per year. Examination of his business return was required in order to find out his true income. In terms of tax law it is important to note that if Mr. Jones had operated his business as a proprietorship, the income of $90, 000.00 would have appeared on Schedule C of his tax return. If he had operated the business as either a partnership or a Sub "S" Corporation, the full income of $90, 000.00 would have appeared on Schedule E of his tax return. It is only if he conducts his business as a "C" corporation, that Mr. Jones can keep the business income off his tax return. Each of these methods of conducting business and reporting income for tax purposes is legal and appropriate. Consequently, if you are working in a case where an owner or substantial shareholder of a "C" corporation is involved, simply accepting the W-2 and/or 1099...