Matt Levitsky, an associate in our Montgomery County, Pennsylvania office wrote a guest blog for our fir’s Pennsylvania Family Law Blog entitled "Who Gets to Claim the child if there is 50/50 Custody?"

Matt’s post talks about the four prong test and the fact that at the end of the day, all other things being equal, the exemption would normally go to the parent with the higher adjusted gross income (AGI).  The piece also has an interesting discussion on whether a step-parent’s income is included in the AGI test.  I note that Sandra Fava has previously addressed the issue of the allocation of the dependency exemptions, in general, on this blog.

While this is an interesting technical discussion, often it does not come into play in post-divorce scenarios in New Jersey because, either the parties agree upon the allocation of exemptions (most often, blindly alternating it if there is an odd number of children or splitting them if there is an even number of children – whether this makes sense or not will be the subject of another blog post in the future) or a judge will simply allocate the exemptions in a similar fashion, regardless of what the IRS code would provide. 

In any event, Matt’s post was interesting reading and provides some guidance about what the proper result is when there is no agreement of the parties or decision by a court.

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Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric practices in Fox Rothschild’s Roseland, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com.

I recently blogged on the issue of how to treat unreported income, perks and other personal expenses paid through the business and the treatment of same for support purposes.  As noted in that post, the issue comes up both for support and business valuation purposes. 

In order to value a business, the experts come up with an income stream that gets capitalized.  That income stream is tax affected.  That is where the issue gets interesting.  More often than not, the experts tax affect the entire income, after adding back the perks, personal expenses, non-operating expenses, unreported income, etc. 

I have asked several of the forensic accountants why this is being done if this is note the economic reality for the business owner in that case.  More often than not, I have been told that you cannot assume that a buyer of the business would not declare all of the income and/or would improperly pay expenses through the business.  From a pure business valuation perspective, this seems correct and reasonable.

For purposes of equitable distribution, that remains questionable.  In the seminal case on business valuation in divorce in NJ, Brown v. Brown, discounts for lack of marketability and lack of control were not considered because the business was not really being sold.  Some have argued that Brown means a value to the holder standard is to be applied.  While I am not sure that that is the case, if discounts are not applied because there is no sale, then why are these excess perks and personal expenses tax affected when doing so artificially reduces the value of the business?  Put another way, if the business owner is not paying taxes on these things, why should there be this fictional tax be applied, which only serves to reduce value? At some point, I am sure this issue will be litigated further.  Until then, we will continue making the arguments on both sides.

More often than not, a matrimonial law attorney is not a C.P.A.  More often than not during the process of a case, a client will ask the advice of their attorney, “How should I/we file tax returns this year?”

The answer is and should be first and foremost a reference to a C.P.A.  A qualified C.P.A will be able to look at a divorcing couple’s entire financial picture, including their past and advise as to how to best file the final tax return in a way to minimize the taxes due.

What happens when one party does not want to file a joint return because of concerns regarding tax liabilities or even worse, penalties? The recent unpublished Appellate Division decision of Hreha-Coloccia v. Coloccia, A-3892-07T1, decided September 2, 2009, gives some guidance in this regard.

Continue Reading The Filing of Tax Returns During a Divorce

As April 15h quickly approaches and the pressure to get those tax returns completed and filed grows, the issue of which parent can claim a child or children as a dependency deduction for tax purposes becomes more and more relevant.

All Property Settlement Agreements (“PSA”) or Final Judgments of Divorce should address this issue to avoid future complications.  What about when the issue is appropriately addressed but one parent seeks to modify the terms so as to receive a benefit  perhaps previously given up in lieu of some other benefit?

Recently, the Appellate Division heard the matter of Mitchell v. Mitchell, A-4856-07T1, decided March 11, 2009 (unpublished decision).  In this case, the parties have been divorced since 2002 resolving their issues by entering into a negotiated Property Settlement Agreement.  At the time of the divorce, husband was earning over $100,000 and wife was imputed income of $17,000.  The two children were given as tax exemptions to the husband but resided primarily with the wife.

Both parties remarried.  In 2008, wife filed a motion seeking, among other things, to amend the terms of the parties’ PSA to allow each party to claim one child as a dependency deduction on their tax returns.  Her argument was based on the fact that husband now had twins with his current spouse and would receive that tax benefit.  The trial court granted this request stating that there had been “numerous changes in circumstances” since the parties entered into the agreement and that such a request was “fair”.

The Appellate Division vacated and remanded this aspect of the trial court’s Order.  In doing so, it noted that husband didn’t argue that the trial court was powerless to change or modify the terms of the PSA but rather that the judge’s conclusory determination of what was “fair” was insufficient to support the Order.  The Appellate Division agreed stating that the “record does not disclose the tax effect if one of the child tax exemptions was taken from” the husband.  Id. at pg. 6.  The court must ascertain whether its fair and equitable to take from husband a right for which he had previously bargained and which  may need to be determined with an evidentiary hearing.

In 2008, the IRS amended Section 152(e), which deals with dependency exemptions.  The changes to the tax code can be summarized as follows:

The custodial parent, for 2009 and forward, is the one with whom the child resides the greater number of nights during the year, regardless of the terms of the divorce decree.

The custodial parent can unilaterally revoke the release of a child exemption for calendar years 2009 and forward, even if the release was made prior to 2009.  As a result, it is important to make sure that there is a procedure in place to have the custodial parent file IRS form 8332 in a timely manner so that the non-custodial parent can claim the exemption that they are entitled to claim by reason of the parties’ agreement or a Court Order. Put another way, the change in the IRS section does not preclude a non-custodial parent from claiming the exemption, it just requires more care to make sure that this is accomplished.

As a further note, the individual claiming a dependency exemption is entitled to benefit from a Child Tax Credit and any allowable Hope and/or Lifetime Learning Educational Tax Credits.

For more information on the tax benefits/ramifications of these issues, you should consult a tax professional.