Attorney-at-Law

THIS IS MY QUEST

In Uncategorized on 12/04/2017 at 19:38

I echo Joe Darion’s lyrics from fifty-plus years ago, although my quest is not that of a chivalrous knight, but rather the humble blogger seeking blogfodder. While it’s premature to assert that any portion of either of the tax reform bills just passed will survive conference untouched, I was alarmed to read that the Section 215 alimony deduction was on the plank-walk list.

Whatever shall I do when the last dead spouse bounce finally works its way to 400 Second Street, NW, the Judge or STJ scuppers the deduction, and the curtain falls?

Well, for the moment the dead spouse bounce is really a side issue, as the Section 1041(a)(2) unrecognizable gain or loss scuppers the deduction for David W. Stapleton and Melinda Stapleton, 2017 T. C. Sum. Op. 87, filed 12/4/17.

Melinda’s just along for the ride. It’s Dave’s story, as he unloads the ranch formerly the property of himself and loved-once, ex-spouse Maureen Stapleton, the established real estate broker.

The parties enter into the usual marital settlement agreement, whereby the ex-couple’s worldly goods were disendowed, and Dave got to unload the horse ranch.

As is almost invariably the case, forced sales are a license to get plundered, and Dave wound up having to sell to Maureen after a couple years (hi, Judge Holmes) of busted deals or no deals at a scrap price.

Dave takes a capital loss that IRS disallows. The tax effect is under $50K, so Dave goes small-claimer and STJ Daniel A. (“Yuda”) Guy is on the case.

“The deed stated that petitioner was transferring the ranch property to her ‘as a part of the distribution of marital property in the dissolution of Case No. 07 DR 320’.” 2017 T. C. Sum. Op. 87, at p. 6. This drafting gem should put any gain or loss squarely within Section 1041(a)(2) “transfer is incident to divorce.”

It does, although STJ Yuda says it doesn’t. How long it takes to effect the transfer is nothing to the point, provided the six-year cutoff in Reg. Section 1.1041-1T(b), Q&A-7, has not yet been reached.

And here, it hasn’t.

“In defining the phrase ‘incident to divorce’ which appears in section 1041(a)(2), Congress adopted the blanket phrase ‘related to the cessation of the marriage’ in section 1041(c)(2). In the absence of a statutory definition of the latter phrase, and consistent with the legislative history quoted above, courts have concluded that the phrase should be broadly construed. See Young v. Commissioner, 240 F.3d 369, 375-376 (4th Cir. 2001), aff’g 113 T.C. 152 (1999); Blatt v. Commissioner, 102 T.C. 77, 79 (1994).

If you give STJ Yuda a chance to construe a statute broadly, he’ll make it broad where a broad should be broad, per Oscar Hammerstein II.

Shrugging off the deed language abovecited (although it has to have carried some weight), STJ Yuda comes down for IRS.

“What is clear on this record is that the division of the couple’s marital property, as prescribed by the [Marital Settlement Agreement], was not complete until the ranch property was sold. As discussed above, both petitioner and Maureen Stapleton had retained significant rights and obligations in respect of the ranch property after their marriage was dissolved. We therefore conclude that petitioner’s sale of the property to Maureen Stapleton was made to effect the division of property that the couple owned at the time of the cessation of their marriage within the meaning of section 1.1041-1T(b), Q&A-7, Temporary Income Tax Regs., supra. Moreover, the sale was ‘related to the cessation of the marriage’ when we construe section 1041(c) broadly in accordance with the legislative history of the provision and this Court’s caselaw.” 2017 T. C. Sum. Op. 87, at p. 16.

And the transfer doesn’t have to satisfy an outstanding marital obligation. It’s like winding up a corporation or dissolving a partnership; distribute or liquidate the assets, turn out the lights and lock up the door.

Hopefully Section 1041 survives. I need all the blogfodder I can get.

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