Breaking Up is Hard to Do

This was originally published on PAOO June 27, 2010.

There are quite a few developments in the last few months I am hoping to spout about, but I am going to skip straight to PLR 201024005. The situation is not a common one , but it is a good starting point for a discussion of the tax aspects of divorce. The taxpayer held securities that were qualified replacement property from the sale of stock to an ESOP. The requested ruling , which is favorable, holds that the transfer of the securities to the taxpayer’s spouse will not be a gain recognition event.



All well and good. The question that intrigues me is whether taxpayer’s spouse knows the implications of the settlement. In my fantasy spouse will turn the securities over to a money manager who will sell them all and end up being shocked with the resulting tax bill. There used to be a joke that there are three ways to get out of a burned out tax shelter. The first was to put the interest into a defective grantor trust and then cure the defect . It was a really neat idea. It doesn’t actually work, but it was clever. Then there was dying. Pretty drastic, but it worked (until this year anyway). Finally there is giving it to your spouse and getting a divorce. Still works.




The important thing to remember is that property received in a divorce has the same basis that it had to the couple. So if one spouse gets a pile of money and the other spouse gets a pile of low basis assets of equal gross value, there really hasn’t been an even split. If the couple has significant assets, this could be a much more important issue than who gets the dependency deduction. The dependency deduction seems to garner much more attention than it is worth. Ironically, despite all the attention it is not unusual to neglect to follow through on the requirement that non-custodial parents obtain a release form.






Filing joint returns, in my experience, seems to usually be taken as a given. In situations where you have reason to believe that your spouse has unreported income or even when they have a high exposure return, the smart thing could be to forgo some savings in the interest of peace of mind.






Finally, if alimony is involved you need to be aware that there are fairly complex rules to prevent alimony treatment for payments that are more in the nature of property settlement or child support.