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Divorce Mediation Blog

The Goose, the Gander and the TCJA

Wednesday, February 20, 2019

Levine Dispute Resolution - Alimony

We know that under the federal Tax Cuts and Jobs Act of 2017 (TCJA) alimony instruments executed before December 31, 2018 will carry over deductibility when modified thereafter so long as the parties (or the court?) don’t opt out of that treatment. While we all hope that we can successfully maintain this important tax leverage for the sake of restructured families by incorporating existing temporary (interlocutory) orders into 2019-and-later agreements, a question (among many) that continues to nag is, just how malleable is this rule?

It seems clear that if one modifies former Spouse A’s alimony by reducing the sum or increasing it, deductibility remains intact.

I also assume that if we change former Spouse A’s alimony from an expressed sum to a formula, in whole or in part (i.e., $5000 per month to .325 of gross pay, or $5,000 per month to $4,000 per month plus .325 of future bonuses) deductibility is not jeopardized.

And, if former Spouse A’s alimony durational term is reduced or extended, there seems to be no reason why the opt out rule should not apply.

But, here is the payoff question:

    What if former Spouse A loses her job, former Spouse B’s career has taken off, and the modification shifts the payment obligation from A to B, is deductibility still available for this new obligation?

If this sounds a bit familiar, we wondered in an earlier blog entry if the durational limits of the Massachusetts Alimony Reform Act (eff. 3.1.12) apply to one spouse, or to both when they trade alimony places. As in, if the presumed duration is 7 years, and halfway through, the alimony obligation shifts, does the clock re-set, or does the second payor get credit for the former payor’s time served?

In an era of 2 partner family income predominance, this is not a far-fetched scenario — and now we have to worry about deductibility, too.

What do you think?

 

Dreaming About Alimony…

Wednesday, February 06, 2019

Levine Dispute Resolution Center - Alimony

In 2017, any waking person knew that Congress and the administration were furiously digging for ways to stem the flood of money out of the U.S. Treasury that they were about to cause by cutting corporate and top individual income tax rates. After all, “elections have consequences.”

In the fourth quarter, it became apparent that Congress had the alimony deduction – a longtime GOP target -- in its crosshairs. As a fiscal matter in context, its cost was marginal, but the decades-old subsidy for divorcing families offended some on moral grounds and compliance was poorly enforced by the IRS, causing greater treasury losses.

But, while the potential yield was small (see our August 15, 2018 post “Alimony and TCJA: Less A Misconception than a Worry…at www.levinedisputeresolution/divorce-mediation-blog/) but the target was rich: middle income and upper middle-class families – many professional – many Democrat – families with large tax rate gaps between spouses, where the alimony deduction helped most. (Low marginal tax rate families gained little from the alimony deduction while both spouses of the uber-rich donor class live at the highest rates, eliminating the value of leveraging family dollars with alimony.)

By December 2017, EVERYONE knew that Congress had repealed the alimony deduction, but had deferred the effective date of repeal by a full year, being effective January 1, 2019.

That’s when Massachusetts’ prominently specialized court, its sophisticated family law bar, financial expert cohort and state legislature all kicked into high gear, to buffer the impact of the family losses engineered by Congress that would soon impact a significant portion of their constituency…

… bar groups immediately conferred on how to press the state legislature to amend the Alimony Reform Act (eff. 3.1.12) in plenty of time to be sure that by January 1, 2019, the courts would have an alimony statute (initially based and passed on presumed deductibility) that is reconciled with the new reality that the federal deduction is gone…

… as they did so, the Probate and Family Court swung into action, setting up “listening” sessions in the various counties so that local practitioners and county bar associations could weigh in on their fears and suggested solutions…

… the court sought out the most prominent experts in the field to begin to come to grips with the economic impact of the lost alimony deduction on its constituent families…

… the court conferred with its judges to see how they might create common approaches to making sure that no one would gain unfair advantage by demanding windfalls for payors or payees, because of an ARA that was now out of sync with federal tax law…

… interest groups communicated to make sure that none of them would advocate for results that would unfairly advantage one side or the other because of the tax law changes…

… the court and various bar groups worked closely to make sure that a legislative fix would be put before the legislature in plenty of time for it to act before January 1st, so that everyone would hit the ground running with the understood goals of the ARA preserved despite federal action...

… the proactivity of the court, the bar and the interest groups led to a unified approach, a smooth glide path to the 2019 reality, so that predictability reigned, and the system didn’t miss a beat…

As I said, I was dreaming…

February 4, 2019’s Massachusetts Lawyers Weekly, Vol. 45, Issue No. 5, article, “Bar: need for alimony fix is urgent” recounts the efforts of the joint alimony task force to move a bill to the legislature with the simplest form of fix, the reticence of at least one interest group, silence from the court -- and as for the legislature – well, who knows. Per Lawyers Weekly, “…the effort is just now gearing up…”, with the horse well outside the barn

As I have asked lawyers in my divorce mediation sessions if they are seeing a common approach in the courts, they look at me like I am still dreaming.

 

Lost in Translation: Reading Tea Leaves on 2019 Alimony Deduction

Wednesday, November 21, 2018

Translation can be a tricky thing.


Just ask this restaurant owner in China, above. (https://lingualinx.com/blog/the-funniest-examples-of-translation-gone-wrong/).

Or, yourself, as you try to assemble your kid’s imported toy next month using instructions that seem reverse engineered from Chinese to Japanese to English; and while reading your next off-shore spam email.

Q4 2018 is a time of searching for clues from the U.S. Treasury about how it will apply 2019’s alimony prohibition for those still struggling to strike alimony deals this year in hope of retaining future deductibility. We’d hope that the challenge would not be compounded by language whose meaning has been lost in translation, but…

While lawyers, judges, mediators and arbitrators struggle to glean government’s intentions through statutes and regulations, the public relies on IRS instructional publications for their primary understanding of tax law.

A colleague recently shared the following draft language for Publication 504 “Divorced or Separated Persons”, the IRS’s public instructions about matters including alimony. Read it as a layperson might:

    Line 11 Alimony Received Enter amounts received as alimony or separate maintenance. You must let the person who made the payments know your social security number. If you don’t, you may have to pay a penalty. For more details, see Pub. 504.

That’s my underlining. It is self-referential and circular, but hey, it’s only a draft.

More substantively, the language continues:

    TAX TIP: Alimony received will no longer be included in your income if you entered into a divorce or separation agreement on or before December 31, 2018, and the agreement is changed after December 31, 2018, to expressly provide that alimony received is not included in your income.

That is their italics, presumably to draw us to its importance. The color-coding is mine, to help illustrate the following. What does this communicate to the reader?

  • The impatient reader, or one who recalls her English teacher defining an independent clause as phasing that has a subject and a verb, and produces a complete thought, may focus on

    “Alimony received will no longer be included in your income if you entered into a divorce or separation agreement on or before December 31, 2018…”

    From which taxpayer might rightfully conclude that her lawyer was crazy in trying to craft an alimony deal in 2018 since taxable alimony has been retroactively repealed. What was the rush about, anyway?

    She might also conclude, let’s wait to talk turkey until after new year, since this clause also implies that 2019 agreements will produce deductible alimony. Huh?
  • The more patient taxpayer will also read “…and the agreement is changed after December 31, 2018, to expressly provide that alimony received is not included in your income.” After suffering through two dependent clauses that rely on the passive tense and a sort of double negative (“no longer” and “not”), one may well wonder “what’s the big deal?” After all, if my 2018 alimony deal does not produce reportable income to me, then who cares if a change to my agreement simply confirms that result?

Careful and repeated readings of this one sentence, by one who understands tax law, will ultimately yield an accurate statement of law. But given its intended audience, might not the drafters have simply said:

    “If you and your spouse signed a divorce or separation agreement before December 31, 2018, that required taxable alimony, the alimony that you receive in 2019 or later will be included in your income. However, if you and your spouse or former spouse amend that agreement in 2019 or later, and your amended agreement expresses that future alimony will not be taxable, then the alimony that you receive in 2019 or later will not be included in your income.”

Is draft publication 504 a symptom of poor drafting or something more insidious, like deliberate obfuscation of taxpayer’s rights and obligations?

On a more nuanced level, does the fact that draft publication 504 makes reference to “divorce and separation agreements” only, and not to court orders or judgments, imply that 2018 alimony agreements will be deemed qualified deductible support in 2019 without the need for a judge’s endorsement, as much precedent suggests?

I hope so. The absence of reference to court orders is soothing, and perhaps indicates that my previously expressed worries are misplaced.

But then, what happens if the parties take a merging agreement for alimony, signed in 2018, to a court in 2019, and the judge does not approve the deal for incorporation into an order or judgment?

Of course, this is only a draft, and as a public “instruction” only, it is not law. See, https://www.forbes.com/sites/robertwood/2015/11/11/amazingly-irs-says-you-cant-rely-on-irs-instructions/#21b2923d341a.

So, I think I’ll still wait for the temporary regulations before I let down my guard entirely.

Thanks to David H. Goodman, CPA, of Gosule, Butkus & Jesson, LLP for the draft language. Stay tuned for David’s piece about alimony trusts in the next LDRC newsletter.

 

No Country for Old Men, Part 5: The Appeals Court Tells 79-Year Old Alimony Payor “Si, Mas” Muellner v. Muellner

Thursday, September 06, 2018

Levine Dispute Resolution - Alimony

In an unpublished opinion under Rule 1:28, the Massachusetts Appeals Court recently consigned a septuagenarian couple to resumed legal combat in the Probate and Family Court, 14 years after their divorce. The appellate court vacated two modification judgments of the Probate and Family Court, reducing the now 79-year-old husband’s alimony to his former wife, for the judge’s failure to “demonstrate ‘appropriate consideration’” of:

  • the husband’s ability to pay;
  • the wife’s financial need; and
  • the “intent” of the parties as evidenced by their divorce agreement.

Putting aside completely the M.G.L., ch. 208, §49 (f) presumption that alimony terminates upon the payor’s attainment of full social security retirement age - a distant memory for this payor - since this divorce predated the Massachusetts Alimony Reform Act (eff. 3.1.12) (See, LDRC previous blog entries, “No Country for Old Men”, Parts 1 through 4) this decision is problematic for at least two reasons:

  • it appears that the trial judge is faulted for not considering information that the parties didn’t offer him at trial; and
  • the Appeals Court’s inference of the parties’ intent is pure speculation – the kind for which it might well criticize a trial judge.

Ah, Rule 1:28 decisions. The facts are not “fully addressed”, but one fact that the Appeals Court did disclose is that both modification “trials” were decisions entrusted to the Probate and Family Court judge by agreement of the parties, to be rendered on “stipulation[s] of facts in lieu of testimony”. No one gave direct testimony, and no one was cross-examined, no experts opined.

In other words, no trial at all, with all of its glorious inefficiencies and protections.

Then again, this is what the parties signed up for. Competent adults are, or should be, allowed to make decisions, including ones that disadvantage them. These parties were not juveniles – far from it – and they chose the rules by which they would play. No parens patriae, here. Essentially, they put the judge in the position of an arbitrator, limiting the evidence and circumscribing procedure; and accepting that the decision in generally binding.

The specters of 80-year-olds paying alimony, golden years spent in litigation and my self-indulgent blog title totally aside: shouldn’t the Appeals Court have left well enough alone?

 

Alimony and the TCJA: Less a Misconception than a Worry, and What to Do About It – A Mediator’s View

Wednesday, August 15, 2018

Levine Dispute Resolution - William M. Levine

By William M. Levine

Call me a skeptic.

I agree with Jonathan E. Field’s excellent essay “Alimony and the TCJA: A Common Misconception” (July 23, 2018), to the extent that he asserts that an alimony agreement that is executed during calendar 2018 should entitle the parties to the continued economic leverage of the alimony deduction, on which many divorcing families have relied since 1942. I wish that I shared Jon’s confidence that what should be will be, but I am less than sure.

Read literally, the 2017 Tax Cuts and Jobs Act permits tax-deductible alimony if contained in “decrees of divorce or separate maintenance or written instruments[s] incident to such decrees…” (my italics). I do not question that tax cases construe “written instruments” liberally, nor do I debate that the “incident to” clause has been applied generously to past taxpayers. But, we live in a time in which political and policy expectations are a wisp in the wind, subject to a profoundly polarized federal legislature and the whimsy of an erratic executive.

Every tax act is a legislative skeleton on which the reigning administration grafts regulations, telling us how the congressional mandate will really work. Witness Jon’s accurately ironic note that the “temporary” treasury regulations of the Tax Reform Act of 1984, that comprise a substantial part of how that set of alimony reforms function to this day, are now 34 years old!

The Internal Revenue Service of Stephen Mnuchin’s Treasury Department is charged with fleshing out TCJA; and it does so in a political/fiscal context. The public face of the alimony deduction repeal was a move to save $6.8 billions of tax revenues over the next decade, to be booked against Congress’ budget reconciliation limit of $1.5 trillion of cuts, to enable passage without Democratic votes. Meanwhile, a deeper problem lurked in the form of the IRS’s indifference or inability to enforce the existing law. In 2010 alone, 47 percent of alimony recipients failed to report any or all of alimony received, resulting in $2.3 billion of losses to federal coffers, according to a 2014 report of the Treasury Inspector General for Tax Administration.

So, we can see that the Trump Administration has incentive, especially in an election year during which the deficit is rising faster than projected, to interpret the alimony repeal in a way that maximizes revenues to offset some of TCJA’s corporate and high-income tax cuts. One contribution that Treasury can make is to promulgate regulations that interpret, or re-interpret, the “incident to” language that Jon cites, by limiting the alimony deduction to those taxpayers whose divorce instruments have actually been made a part of a divorce decree in 2018.

In Massachusetts, that would require the parties to step back from the Probate and Family court bench, with an approved and incorporated agreement, before the close of business on New Year’s Eve if a judgment nisi would suffice. Even worse, if the IRS requires a final divorce judgment (as it does in determining tax return filing status), the parties would need be in court before the end of August or September, given the post-hearing waiting periods of M.G.L., ch. 208, §§ 1, 1A and 1B.

As a divorce mediator, whose job includes providing enough information to assure both parties’ informed consent to divorce settlements, I cannot, despite Jon’s assurances, provide them myself. Rather, I feel obliged to explain the possibilities, even if remote, so that clients do not wake up on January 2d, or April 15th, and learn that some regulation sleight of hand has denied them the benefit of the alimony bargain that they made. It isn’t clear; and it is most surely not easy. But who among us can predict any act the current federal regime – especially with mid-terms looming?

So, what to do in mid-2018? For the dwindling cases that can realistically expect to appear for uncontested divorce hearings in August (§1A) or September (§1B), the question is academic. For the other couples who will be mediating during the balance of this year, I will be raising the issue, and asking them to consider the two-tiered approach of agreeing on an alimony regime that covers both deductibility outcomes; and trust them to make the appropriate decision, for them, in consultation with counsel.

With our alimony statute remaining as written, and 2019 agreements surely precluded from the alimony deduction, we are all going to have to struggle to create equivalencies for taxable and non-taxable spousal support, anyway. There are smart people among us who are studying fast and hard to create mechanical ways of doing that for us, as in, “for income levels of $X, the after-tax equivalent of 32.5% of gross income, fairly balancing the net payor cost versus net payee value gap, is $Y.” Another approach is to prepare case-by-case “old law” and “new law” cash flow analyses, and try, as closely as possible, to translate the net-after-tax shares for the parties with deductibility assumed, to the newer scenario, e.g., if deductibility would result in a 60%-40% sharing of net-after tax income, and then solve to that end result with non-deductible alimony assumed.

The specific approach taken is less important than that we all be aware of the challenge itself, and that we grapple with it in the cause of advancing the parties’ informed consent.

 

Alimony and the TCJA: A Common Misconception

Wednesday, August 15, 2018

Levine Dispute Resolution - Jonathan E. Fields

By Jonathan E. Fields

Under the Tax Cuts and Jobs Act of 2017, alimony will no longer tax deductible to the payor and no longer tax includable to the payee, effective Jan. 1, 2019.

The law was a shock to many, particularly divorce lawyers, most whom had gotten used to the way things had been for the last 7 years. There is a saving grace in the Tax Cuts and Jobs Act, or TCJA, however: Qualifying agreements and modifications can be grandfathered into the old taxability treatment subject to certain requirements.

Specifically, unless the parties opt­in to the new law, the TCJA applies to “decree[s] of divorce or separate maintenance or written instrument[s] incident to such ... decree[s]” executed after Jan. 1, 2019.

To unwind this legislative convolution: The old taxability provisions can apply to your qualifying pre­2019 agreem unless you both agree that you don’t want them to. Still a mouthful, but that’s the way Congress wrote it.

The biggest misconception about alimony and the TCJA, frequently repeated in the lay media, and even by legal commentators, is that the qualifying instrument must be a final divorce judgment. It does not. You do not necessarily have to have a final divorce judgment by the end of the year to be grandfathered.

Lawyers, who like to be “better safe than sorry,” may prefer to have a divorce judgment, but when you are fighting this issue out in December of this year without the luxury of time, it’s worthwhile to take a closer look at what is actually required.

Procrastinators can rejoice. The TCJA continued the requirement from IRC s.71 that a payment made to or on be of a spouse or ex­-spouse pursuant to a “written instrument incident to [a divorce decree]” qualifies for alimony treatment.

The TCJA further sets forth that such instruments are “as defined in s.71 ... as in effect before” the TCJA.

Presumably, the case law from the past several decades interpreting the clause remains relevant and binding.

So, basically, in many instances, all a couple may need to qualify for grandfathered alimony treatment is a contra by Dec. 31, that is a “written instrument incident to [a divorce decree]” pursuant to the statute. The “contract” h is no more prescriptive than a common law “meeting of the minds” contract — except that, unlike in the common law, it must be in writing. A separation agreement signed by the parties and approved by the court should do; no need to wait for a final judgment of divorce 90 to 120 days later. A separation agreement not yet approved by th court should also suffice.

But it doesn’t even have to be that formal. Two Tax Court opinions illustrate the flexibility of the “written instrume incident to a divorce” requirement.

A Tax Court Memorandum Opinion, Leventhal, T.C. Memo. 2000­92, made clear a “meeting of the minds” requirement, particularly that there be a “clear statement in written form memorializing the terms of the support between the parties.” In this case, one spouse’s written assent to a letter proposal of support by the other spouse was a sufficient writing to bring it within IRC s.71.

Moreover, Leventhal tells us, it was not necessary to articulate a specific amount of support so long as “there is a ascertainable standard with which to calculate support amounts.”

A Tax Court Summary Opinion, Micek, T.C. Summ. Op. 2011­45 (2011), is also instructive for our purposes. Here, the couple separated in 1997 and entered into an oral agreement in 1999 that the husband pay the wife alimony $1,250 per week. Later that year, the husband signed a “spousal support affidavit” agreeing, or reaffirming, the payment of alimony in the same amount.

In 2003, the husband stopped paying because he became disabled and, presumably, was unable to earn income.

The wife’s attorney then wrote to the husband, inquiring as to why the alimony stopped. Think about this: There still no divorce pending at this point, the wife hasn’t signed anything yet, and the wife’s lawyer wrote the letter described above four years after the husband started paying alimony.

A few more years go by. At some point — the opinion does not make clear when — the husband filed for divorce Presumably satisfied that neither party had the means to support the other, the parties’ agreement incorporated the divorce judgment mutual waivers of present and future alimony.

In 2009, the IRS filed a notice of deficiency disallowing the husband’s alimony deductions for the years 2000 to 2003, the period prior to the divorce during which the husband was paying alimony to the wife. All of the paymen at issue were made prior to the filing of the divorce.

The husband took the matter to Tax Court. The issue before the court was whether the alimony was paid pursua to a “written instrument incident to [a divorce decree].”

The Tax Court agreed with the taxpayer, finding that alimony was paid pursuant to such an instrument and, therefore, deductible to him and includible to his ex­wife. The Tax Court reasoned that (1) the so­called “spousal support affidavit” signed by the husband in combination with (2) the letter from the wife’s attorney inquiring as to why he had stopped paying alimony (which evidenced her client’s understanding that alimony was to be paid) wa sufficient to qualify under IRC s.71. That is, a written instrument (the affidavit) signed by one party and the lette from the wife’s attorney was together a sufficient “written instrument” that evidenced the meeting of the minds between the parties.

    ❝ The biggest misconception about alimony and the Tax Cuts and Jobs Act is that the qualifying instrument must be a final divorce judgment. It does no do not necessarily have to have a final divorce judgment by the end of the year to be grandfathered.

Considering the significant time gap between the instrument and the divorce filing, it is striking that Micek did no focus on the requirement that the “written instrument” be “incident to [a divorce decree].” We might deduce from Micek that timing is not dispositive to the “incident to” requirement but that it is, rather, a sort of “totality of the circumstances” analysis.

Indeed, the parties had been living separately and the husband had been paying alimony for several years, and, eventually, they got around to making de jure what had been de facto. From this, it would appear a logical construction that the alimony payments at issue, though made several years before a complaint for divorce, were “incident to” a divorce.

In any event, to play it safe, the practitioner should endeavor to have the contract executed while a divorce is pending or imminent in order to meet the “incident to divorce” requirement — so, unlike Mr. Micek, nobody is rely on the Tax Court to save the day.

Bottom line: a divorce judgment is not the only way, under the TCJA, to get the preferential tax treatment that alimony judgments today can enjoy.

In the context of Micek and the “incident to” discussion above, consider prenuptial or postnuptial agreements. Although there is no case law on the issue, these do not appear to be qualifying agreements pursuant to IRC s.7 They are not, in the same sense as the Micek agreement, “incident to” a divorce decree, even if one of the partie filed for divorce shortly after signing.

Two additional issues merit consideration: (1) Must a 2018 agreement contain a present award of alimony, and (2 How should the practitioner handle 2018 temporary orders of alimony followed by a 2019 (or later) divorce judgment?

As for (1), it is unclear whether a 2018 agreement that contains no present award of alimony but preserves the rights of the parties to future alimony would qualify for preferential retroactive treatment.

On the one hand, the TCJA’s new alimony rules exempt from its application “any divorce or separation instrument executed before 2019. That would suggest that any agreement would suffice, whether or not it includes a presen award of alimony.

On the other hand, elsewhere in the TCJA alimony is defined, subject to other conditions, as payments made to o on behalf of a spouse pursuant to a “divorce or separation instrument.” Arguably, read together, there needs to b present award of alimony — actual payments must be made (or required).

In light of the uncertainty, the cautious practitioner would do well to include a requirement of a present payment alimony, if only a nominal amount, and a statement in the agreement to the effect that the parties intend the agreement to qualify for tax preferential treatment per the TCJA.

As for (2), temporary orders pose challenges when dealing with the TCJA and retroactivity. If there is a 2018 temporary order of alimony followed by a 2019 divorce judgment, the temporary order is extinguished. With that the link to retroactivity may be severed. That is not clear, of course, but it is a possibility.

Therefore, the practitioner may want the judgment to incorporate the temporary order so as to preserve best as possible the benefits of a qualifying retroactive instrument.

This position is generally consistent with the IRS regulations for alimony pursuant to the Tax Reform Act of 1984, which also dealt with the issue of the retroactive application of that law to instruments entered prior to that act’s effective date of Jan. 1, 1985.

Those regulations (which, by the way, have been “temporary” for 34 years) made clear, for example, that if a 198 divorce judgment incorporated without change the terms of a 1984 instrument, that 1985 judgment would be grandfathered under the then pre­existing tax law. 26 CFR s1.71­1T (Q­A #26).

The 1984 regulations do have one caveat that the practitioner may wish to consider: The subsequent judgment must incorporate the terms of the prior instrument “without change.”

Clearly, we don’t know if the IRS will interpret the TCJA’s alimony provisions in the same way, but it may be worthwhile to at least consider these regulations as we venture into uncharted territory. If the IRS were to adopt this position with respect to the TCJA, it would certainly be problematic in the event a 2018 judgment provides fo nominal alimony payment and a post­2018 judgment calls for a larger payment.

In the months ahead, while many labor to complete agreements by year’s end, we can hope for clarifying guidan from the IRS. In the meantime, especially in the gray areas, practitioners would do well to let clients know, in writing, where there are uncertainties as to whether their agreements will be grandfathered.

Jonathan E. Fields is a family law attorney and partner at Fields & Dennis in Wellesley Hills. He can be contacted jfields@fieldsdennis.com.

 

Pre-marital Cohabitation in Defining Marital Length Clarified; But, In Rejecting Normalized Income for Alimony & Accepting Early Valuation Date: Why won’t the Appeals Court tell us what they really think?

Wednesday, May 30, 2018

BORTOLOTTI V. BORTOLOTTI - Part 2

Levine Dispute Resolution - AlimonyAfter announcing one useful alimony holding, which we discussed in Part 1, the appellate panel in Bortolotti v. Bortolotti speed-wrote six issues that are common to many divorce cases, and where the bench and bar could use some real direction. In this blog entry, we will focus on two of them:

  1. the trial judge’s decision to use “normalized” salary for business valuation purposes but half that amount for alimony calculation; and
  2. the judge’s acceptance of a 2014 real estate valuation at a 2016 trial.

The Appeals Court upheld both decisions, simply noting that each was within the Probate and Family Court’s discretion, but with the thinnest possible explanation, giving little critical value to the reader.

Bearing in mind that “unpublished” opinions are not formal precedent, but that the Appeals Court invites their use for “persuasive value”, why wouldn’t the appellate bench want to write its opinion persuasively? Why not share their actual analysis?

In our first example, trial court accepted the uncontested adjustments that a valuation expert made to the husband’s salary, in furtherance of an income-based valuation, for which salary “normalization” is an essential component. Normalization is an effort to approximate the owner’s actual economic yield, or more traditionally, that which a hypothetical buyer might fairly expect achieve in the future.

Common adjustments are one-off expenses, personal expenses written off against revenues and S Corporation tax effect. A potential business buyer uses this to measure likely return, so as to rationalize its investment, including acquisition debt. The divorce court does it to determine the value to the business owner who is cashing out the opposing spouse’s marital interest.

The Appeals Court owed no explanation for upholding the acceptance of the normalized salary in the valuation context because no one disputed the substance of the finding at trial. But, then, the panel addressed the trial court’s determination to use only half of the normalized sum for alimony purposes because “there was evidence that [the husband] did not derive any actual income from” his company.

What does this mean? Were the actual earnings zero? Were they normalized to a positive value, more than zero based solely on adjustments? Alternatively, did the expert find positive earnings, but zero salary and/or profit distributions made? If so, did the judge determine that half of the realized but undistributed income was retained for legitimate business purposes?

In short, it matters what the essential facts were, and why the Appeals court found the trial decision to be sound. Discretion is not unbridled; and appellate analysis is, or should be, an explanation of why the judge did not abuse it so that the bench and bar may learn from an elucidated point of view, from which they may analogize with intellectual consistency. Instead, we are left with bare bones, and a conclusory statement, which may create mischief in place of clarity.

Some lawyer soon will assert that Bortolotti supports the proposition that “actual income” and “realized income” are opposites (they are not) and that a rigorous application of JS v. CC is not really required for alimony matters, when a controlling owner does not distribute realized income. Neither is a healthy result.

It is possible the trial court did apply JS v. CC factors comprehensively and well, and this was not reported in keeping with the Rule 1:28 admonition that the opinion does not “fully” address the facts. Yet, the facts that are key to the decision should be discussed or at least identified. Otherwise, what is the point of making the decision publicly available?

Similarly, where the judge applied a two-year-old real estate appraisal value to the marital home, the Appeals Court simply opined that the date was halfway between the date of separation and the date of trial and that the judge was within his or her discretion. This conclusion leaves us wondering: Were all assets valued as of the interim date? Was there intrinsic significance to the halfway point? Was the Court choosing between bad alternatives (2-years-old v. older)? Did only one party offer a value? Was a more recent value offered, but on an infirm basis?

The answers to these questions, and others, matter; and we; and we suspect other curious minds would like to know the why as much as the what.

 

Pre-marital Cohabitation in Defining Marital Length Clarified

Tuesday, May 15, 2018

But, In Rejecting Normalized Income for Alimony & Accepting Early Valuation Date:
Why won’t the Appeals Court tell us what they really think?
BORTOLOTTI V. BORTOLLOTTI - Part. 1


Levine Dispute Resolution - Alimony

We have previously lamented the shortcomings of Massachusetts Appeals Court’s Rule 1:28 opinion practice, and the recent Bortollotti v. Bortollotti has us at it again, but that will have to wait until Part 2.


Today, instead, we focus on the court’s helpful clarification of the legislature’s provision that tasks trial judges with determining if and when a marriage may be construed to begin before its legal registration, for purposes of calculating the length of marriage, and the resulting presumed durational limit calculated under M.G.L., ch, 208, § 48. When we say it is helpful, it is not to say that we agree or disagree with the concept, but rather, that, like a puzzle part, it fills a gap that makes the statute more understandable and, therefore, more predictable in outcome.

The concept of a de facto relationship giving rise to an obligation normally associated with a legal one preceded the Alimony Reform Act (“ARA”), beginning with California cases involving child support by estoppel (obligations arising from unrelated-party voluntary undertakings and resulting reliance), to pre-marital contribution in equitable division cases (see, Liebson v. Liebson and Moriarty v. Stone) and, more recently and directly on point, judges’ grappling with the inequities of same sex couples who were divorcing after long relationships and fact-based economic unions, but to whom marriage was foreclosed until implementation of 2005’s Goodridge decision.

In ARA, the legislature expanded the notion to all marriages in the alimony context.

Section 48 allows the trial court to back-date the start of marriage for a “significant marital cohabitation that includes ‘economic marital partnership’”, per Bortollotti. In this case, the trial judge found that the parties had, in fact, cohabited before legal marriage, but that the wife had not contributed income to the partnership, therefore, an economic marital partnership did not exist.

With logic more parallel to actual marriage, and historic alimony law, the Appeals Court reversed, stating that the wife’s very economic dependence signified that the marital partnership had begun. They reconciled three ARA features: the enumerated criteria for awarding alimony; the “common household” needed to trigger a payor’s post-divorce right to demand redress; and the pre-marital issue, here.

Since economic dependence is one of the enumerated alimony factors, the appellate court reasoned, it will suffice to extend the length of marriage retrospectively, for alimony’s presumed durational limit purposes.

The holding is fairly simple. It will apply to many cases, sometimes with minor, and other time substantial effect. The most extreme, obviously, will be when this metric leads to a finding that a 19 ½-year marriage was preceded by a more than 6-month cohabitation with economic dependency, stripping the payor of any presumed durational limit whatsoever, especially where the payor is more than 16 years shy of full social security retirement age. We can expect that this aspect of those cases to be most hotly contested.

The next time, Rule 1:28 and why the rest of Bortollotti is frustratingly sparse.

 

Why was the GOP out to get Alimony?

Monday, January 22, 2018

Levine Dispute Resolution - Alimony

Well, they did it. In December, Congress repealed the alimony deduction, and as a result, support for divorce families will become more expensive and less generous, beginning in 2019.

Unbeknownst to us, the federal alimony deduction was on Republican chopping block wish list for a long time, with previous failed repeal attempts in 1984 and 2014. Few of us thought it important enough to the president or the GOP caucus to actually make it happen this time, especially when the senate bill did not mention it in its bill. Boy, were we wrong.

The question is: why?

To save majority lawmakers from having to reach actual consensus with Democrats, God forbid, by keeping the red ink caused by the 2017 Tax Cuts and Jobs Act below $1.5 trillion over the next ten years, permitting a budget reconciliation maneuver and permitting passage on Republican votes only?

Whatever happened to simplification and revenue neutrality: watchwords of tax reform and Republican faith, for as long as memory serves? Not this Congress, and not this time.

But, really, how much did it help that cause? According to the House Ways and means Joint Committee on Taxation, repeal of the alimony deduction, upon which divorcing families have relied for three-quarters of a century, will “save” $8.3 billion from the aggregate deficit over 2018-2027. See here.

A drop in the bucket…

… especially in context. When a Fox Business reporter asked Treasury Secretary Mnuchin about the president’s abandonment of his campaign-guaranteed crackdown on carried interest preferences for private equity and hedge fund principals, which would have saved an estimated $100 billion over the same ten years, he blathered that, “…it’s not that much money…”. Really. Listen for yourself here.

So, we come back to “why”, if not budget reconciliation? Was it the moralism of Paul Ryan’s wing of the GOP, punishing divorcing families for their failings? If so, we are dangerously more like the theocratic regimes that our president loves to praise or castigate, depending on his momentary whim, than we like to believe.

In the meantime, families are the collateral damage. So much for family values.

 

GOP Plan to End Alimony Deductibility: Time to reform the Alimony Reform Act?

Monday, November 20, 2017

Levine Dispute Resolution - Alimony

The House GOP seems to think that repealing §215 of the Internal Revenue Code is a good idea. We have long believed that there are probably too many alimony-paying lawyers in Congress to let this day ever come. It probably won’t, but if it does, it will plunge the Alimony Reform Act (ARA) (eff. 3.1.12) into crisis. Either way, the legislature needs to respond.

M.G.L., ch. 208, §48 defines “alimony” as: “the payment of support from a spouse, who has the ability to pay, to a spouse in need of support for a reasonable length of time, under a court order”. Nothing about tax impact. The drafters, like us, clearly took deductibility under federal and state law for granted.

Moreover, M.G.L., ch. 208, §53(b) defines a “reasonable and lawful” presumptive formulation for general term alimony, stating the general term alimony should generally not exceed the recipient needs, or 30-35% of the difference between the parties’ applicable gross incomes.

This statutory range makes the same once-safe assumption: that IRC §215 allows parties to leverage dollars to the family’s benefit, by shifting income tax from a higher progressive tax rate of the payor, to the payee’s lower rate.

If the alimony deduction dies, it will take the viability of §53(b) along with it. Yet, the zombie statute will persist, entitling litigants to rely on it, despite its infirmity; unless and until the state legislature takes corrective action. This will not happen overnight – these things never do – and in the meantime… Sophisticated divorce agreements have “savings” clauses, which help people adjust alimony sums in the unlikely event of a deductibility repeal, and the GOP plan grandparents existing judgments, at least until modification. But modification cases and new divorces won’t get off so easy.

Maybe, the legislature should take the GOP proposal as a warning shot, at least. The legislature could act pre-emptively. Sections 48 and 53(b) at least need reformulation, regardless of Congress’ ultimate action. We should convert the assumption of the tax-shifting leverage of continued deductibility for alimony into a clear predicate for the ARA, with provisions to address the alternative.

And, if the unthinkable happens, it’s better get started now.

 



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