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Divorce Mediation Blog

The Appeals Court Speaks on RSU’s in Child Support: This is Going to Be a Challenge Hoegen v. Hoegen

Wednesday, February 03, 2016

In this child support modification case, a Probate and Family Court judge declined to “count” the husband’s income derived from restricted stock units (RSU’s), granted in a corporate compensation package. He did so on the theory that, in the parties’ divorce agreement, the wife had waived all rights in the husband’s “stock plans”. The Massachusetts Appeals Court reversed this month in Hoegen v. Hoegen, ordering the trial court to re-calculate the increased child support with the husband’s RSU derived income included, because:

  1. The Child Support Guidelines (CSG) definition of income is all-encompassing;
  2. Prior case law (Wooters v. Wooters II), established that stock option generated income is countable towards child support
    (an egregious misstatement of the Appeals Court’s own case, since Wooters was not a child support case at all, and it reviewed the construction of broad underlying alimony judgment that gave rise to a contempt controversy, not addressing the discretion of a court to order alimony from stock option derived income, per se);
  3. The husband “regularly” earned income from RSU’s;
  4. The wife’s waiver was not, under any circumstances, binding on the children (who are the beneficial targets of child support);
  5. The court did not make written findings to justify exclusion of this income, other than the wife’s improperly enforced waiver; and that
  6. The order did not comply with the policy of the CSG, and earlier case law, of enhancing child support to reflect the higher standard of living enjoyed by the financially stronger parent.

The appellate decision has a rational basis, but will be difficult to implement; and, as often is the case, it has implications well beyond the results for these parties. Here are a few that come to mind:

  1. Where the legislature determined that income for alimony purposes is defined by the CSG (as the trial court may change it from time-to-time) does every child support case necessarily require examination for alimony implications?
    We think so.
  2. Where the Appeals Court mandated that RSU’s be counted towards CSG income, does this open the door to more self-adjusting litigated judgments (as distinct from incorporated agreements) in both child support and alimony matters?
    It may have to, given the challenges of doing otherwise.
  3. If not, does this decision encourage speculative alimony and child support awards by requiring judges to project market action between grant date and vesting? Is past performance a reliable indicator of future value? Must a judge allow evidence that it may not be?
    Yes, no and, we believe, very probably.
  4. If the market betrays the judge’s projection, high or low, is that a material change of circumstances?
    Why would it not be?
  5. If the judge bets high, as measured against ultimate market value, and resulting income at vesting, would that make the judgment unenforceable by contempt?
    Given In re: Birchall especially, one would expect so.
  6. If self-adjusting judgments are used, when would RSU income realized for support purposes?
    The only reasonable inference would be at the time of vesting, as that is when income is realized. What right does this imply if employee terminates employment and RSU’s are lost?
  7. If self-adjusting judgments ensue, how does this square with Hassey v. Hassey’s prohibition in the alimony context?
    It doesn’t, because the Appeals Court reversed Hassey’s 30% bonus order as related to §34 contributions, and not to traditional needs and ability to pay alimony criteria. The rules may just evolve differently for the two forms of support, despite the legislature’s deference to the trial court’s discretion to define income via CSG. Not ideal, certainly.

 

Income Tax Tips For Divorcing Couples

Wednesday, June 19, 2013

How to Avoid Unnecessary Tax Troubles During Divorce

By Rich Streitfeld, CPA, CFE

Impoverishing One Impoverishes All

If at all possible try to think and act as an economic unit, at least until the divorce is final. You are right – and you do need to have your financial needs met in a fair and equitable fashion. However when one party tries to grab all the income tax benefits at the expense of the other, all may lose out – less money for the kids, more money for the lawyers. For instance if Sharon refuses to sign a joint return while the divorce is in process and Greg makes more money, she may save $500 but he may lose $5,000. This may make Sharon happy, but may also make a settlement more elusive, drag out the proceedings and make it more difficult for Greg to provide for his share of any agreement. A better way? Sharon agrees to file jointly, but in exchange Greg pays her the $500 she would have received had she filed separately.

Thinking as one unit often means continuing to file “married joint” until the divorce is final. Why? “Married filing separate” brings higher tax rates and the loss of valuable tax benefits, especially related to kids and education. Itemized deductions, certain credits and the dependency exemptions have to be allocated– no, the tax service will not let both of you claim Junior or the interest on your mortgage. Own rental property? Your maximum loss may be 50% – or zero..

That said, there are situations where a joint return is not advisable, or simply impossible. You may be suspicious of your spouse’s business tax reporting or wary of being responsible for his pre-marital tax debts. You may have such a disparity in personal income that the benefits of joint filing are reduced or even eliminated. Or maybe relations are so bad between you that you cannot manage the details of splitting a joint tax refund – or payment, so you forego it altogether..

Document Who Gets the Child Income Tax Deduction

[Note: You can do this when you divorce (multiple years into the future) or each year when you both file your taxes (a single year); the form is the same.].

Who claims the child or children? Often couples will decide to alternate, even if one has actual physical custody. Sharon claims Junior this year, Greg takes him next year – and this is memorialized in their divorce agreement. In the eyes of the IRS, however, your divorce agreement is not sacrosanct and any dispute will be trumped by “facts on the ground”. So what does this mean?.

Next year arrives, they are divorced, and Sharon is upset that Greg is behind on paying child support. She decides to claim Junior on her taxes. Greg goes by their divorce agreement and claims Junior as well. The IRS disallows both deductions until it can determine who the “custodial parent” is. Greg submits the divorce decree; Sharon submits documentation that Junior stayed with her “the majority of the nights”. A few years ago the IRS explained that it would side with the actual custodial parent, regardless of the divorce terms. Sharon wins..

How could Greg have prevented this travesty – after all, he negotiated and planned for claiming Junior at least half the time. At the time of their divorce settlement, he needed to have Sharon (the custodial parent) certify her release of the child dependency exemption for those specific future years he would claim it by filing IRS Form 8332, and then attach a copy of the signed form to his tax return. Then she cannot override his exemption even if Junior was there 366 days. She has released her right to the exemption for that year..

Other Income Tax Considerations for Divorcing Couples

Divorce and the IRS Tax Code – not to mention human relationships – are all exceedingly complex. Here are a few other issues to be aware of while you navigate this difficult process..

  1. Child support is not taxable to the recipient or a deduction for the payer. Alimony is taxable to the recipient and a deduction for the payer. But child support is generally statutory – controlled by legal guidelines in each state.
  2. Are you married but living apart from your spouse for the last six months of the year? If you are supporting a dependent you may be eligible for “head of household” status, which is far more beneficial than married “filing separately”. However, very specific conditions must be met, and both parents may not claim the status for the same child.
  3. Negotiating for property ownership but thinking you may need to do a “short sale” down the road? There can be adverse tax consequences if that happens – you could be taxed on the amount of the forgiven mortgage. There are protections in place to prevent this, but some of them are scheduled to expire at the end of 2013 and/or do not apply to a second home.
  4. Is your tax status changing? You may need to change your salary withholdings or estimated payments. You do not want to get caught by surprise on April 15 – and even if it’s a good surprise you very well might prefer that larger refund in your weekly paycheck.
  5. Think carefully about how your dependency deductions may impact applications for college financial aid. Colleges that rely solely on the government financial form (FASFA) do not directly take in to account the second parent’s income once you are divorced. Private schools and some public universities are more likely to utilize other financial forms as well, that do require disclosure of both parents’ income and assets.

Copyright © 2012 Rich Streitfeld
All rights reserved.

Rich Streitfeld is a Certified Public Accountant and Certified Fraud Examiner with Aaronson Lavoie Streitfeld Diaz & Co (www.alscpa.com) in Cranston, Rhode Island. He can be reached at (401)-223-0205 or rich@alscpa.com.

 



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