Federal Income Tax Outline – Page 4 Divorce & Other Exclusions

Settlement and Divorce – Chapter 10

71 (income rule); 215 (deduction rule)

You cannot take a 215 deduction unless the other spouse counts it as income under 71

 

Alimony

  • Payments that qualify as alimony or separate maintenance are gross income to the payee spouse under Section 71(a) and deductible by the payor spouse under Section 215(a).
  • Must meet five requirements:
    • Four listed in 71(b)(1) and the payment is not for child support.
  • Transfers of property, incident to divorce, will be treated as a gift and the transferee will receive the property at the transferor’s basis

 

Alimony Recapture

  • Purpose: To prevent property settlements from being categorized as alimony
  • If the alimony is front-end loaded, it looks like a property division (settlement)

3 years is the most that you will have to worry about. The alimony will be recaptured in Year 3.

Steps for Recapture

  1. 71(f)(4) – Year 2
  2. 71(f)(3) – Year 1
  • Exception to Recapture – 71(f)(5) – death in 3 years


Alimony Trusts

  • Income of alimony trusts is excluded from the payor’s gross income (no deduction) and is taxable to the payee.
  • The payee is treated as the beneficiary
  • Example of why you would use an alimony trust: Payor husband is a gambler and may lose all of his money.

 

Cases:

Young v. Commissioner

The code uses the language “incident to divorce” if it (1) occurs within 1 year after the date on which the marriage ceases (the regulations extend a safe harbor to transfers made within six years of divorce), or (2) is related to the cessation of the marriage

 

Other Exclusions – Chapter 11

 

Gain from the Sale of a Principal Residence – 121

  • A taxpayer can exclude up to $250,000 ($500k if married filing jointly) of gain realized on the sale or exchange of a principal residence.
  • Cannot take this exclusion more frequently than once every two years and the taxpayer must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange.
  • Also, cannot include a loss from sale of personal residence:

Example:

Amount Realized = 200
Adjusted Basis = 500

Loss Realized = <300>

Loss Recognized = 0

  • 121(d)(3) – Property owned by spouse or former spouse; (see drawing in Evernote)
  • 121(d)(11) – Decedent; If the decedent used it for 20 months, the beneficiary is deemed to used it for that time period

 

Items not deductible

  • 262 – Personal, living, and family expenses (generally, no deduction)

Assignment of Income – Chapter 12

Cases:

Lucas v. Earl

“The fruit must be attributed to the tree from which it grew;” husband attorney had a written agreement with his wife

Commissioner v. Giannini

Board of director who had an agreement to be paid 5% but then after the first payment he said he would not accept any further compensation and said “do something worthwhile with the money.” Further compensation NOT income. He did not direct the disposition of the money

Blair v. Commissioner

G -> Will -> Trust; income for life to Blair. Blair was to get the income for life but he assigned a portion of all of his future unearned income from the trust to his children.

 

Executor/Administrator of an estate working for free:

  • The requisite intention to serve on a gratuitous basis will ordinarily be deemed to have been adequately manifested if the executor or administrator of an estate supplies one or more of the decedent’s principal legatees or devisees, or of those principally entitled to distribution of decedent’s intestate estate, within 6 months after his initial appointment as such fiduciary, with a formal waiver of any right to compensation for his services.

 

Federal Tax Outline – Page 3

Federal Tax Outline – Page 5

 

This Federal Tax Outline is keyed to Fundamentals of Federal Income Taxation, 15 edition, Foundation Press.


Leave a Reply