Attorney-at-Law

TAXES AND THE FAMILY LAWYER

In Uncategorized on 01/19/2016 at 17:03

Once again the divorce lawyers mess up, and the clients take the hit. The pain comes to Richard W. Leavitt, a chiropractor, but all his skills cannot cure the pain Judge Dawson gives him in Family Chiropractic Sports Injury & Rehab Clinic, Inc., 2016 T. C. Memo. 10, filed 1/19/16, a very special day in our family.

When Rich and Heidi, his loved-once and fellow participant in the Family Chiropractic ESOP, divorced, the decree spoke of their shareholdings in Family Chiropractic, and split those fifty-fifty, but said nothing about the shares credited to her in the ESOP (and shares in Family Chiropractic, a C Corp, was all the ESOP held).

Then Heidi gave away her shares in the ESOP to Rich, “in accordance with the divorce decree.”

ERISA experts will see that this breaches the anti-alienation provisions of Section 401(a)(13)(A). Like life, liberty and the pursuit of happiness, you can’t give away your vested qualified ESOP benefits.

Judge Dawson waxes lyrical about protecting the poor workers from losing their vested, presumably hard-earned, benefits, but I’ll spare you.

Of course, once you’ve breached, you (or rather, your ESOP) is out, permanently. “In general, a qualification failure pursuant to section 401(a) is a continuing failure because allowing a plan to requalify in subsequent years would be to allow a plan ‘to rise phoenix-like from the ashes of such disqualification and become qualified for that year.’ Pulver Roofing Co. v. Commissioner, 70 T.C. 1001, 1015 (1978); see also Martin Fireproofing Profit-Sharing Plan & Tr. v. Commissioner, 92 T.C. at 1184-1189.” 2016 T. C. Memo. 10, at p. 12.

Now we know that Section 414(p) provides that a qualified domestic relations order (QDRO, pronounced “Quadro”) trumps the anti-alienation provisions. But the divorce decree (made under Iowa law) never cites to Section 414(p) and makes no attempt to comply; it doesn’t even mention the ESOP shares.

So Judge Dawson blows it off in a footnote. “Family Chiropractic admits that the divorce decree did not address Heidi’s benefits under the ESOP. Accordingly, we need not discuss sec. 414(p) qualified domestic relations orders, which are an exception to the antialienation provisions. See sec. 401(a)(13)(B).” 2016 T. C. Memo. 10, at p. 15, footnote 10.

Two sentences in the decree would have saved the ESOP’s qualification from the divorce year going forward.

I’ve blogged the family lawyers’ errors too many times, I know. And it sounds like I’m picking on them. And I know, believe me I know, that there but for the grace of you-know-Whom go I or any of us.

But guys, when there’s a business involved, or children, or dependents, or retirement plans, or anything beyond furniture-and-household-pets, get the tax guys on the horn. Please.

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