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Section 1041 Definition of Divorce | Divorce Tax Attorney & Lawyer

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26 U.S.C. §1041(a)(2) states that transfers of property between former spouses are not taxable as long as they are “incident to divorce”. The question is what is the definition of divorce for Section 1041 purposes?

Section 1041 Definition of Divorce: 26 U.S.C. §71(b)(2)

The Treasury regulations specifically refer to 26 U.S.C. §71(b)(2) for the definition of divorce or separation instrument (see Treas Reg §1.1041-1T(b), Q&A-7). 26 U.S.C. §71(b)(2) lays out three definitions of divorce or separation instrument:

“(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.”

The regulations specifically states that the definition of divorce or separation instrument under 26 U.S.C. §71(b)(2)(A) also includes a modification or amendment to such decree or instrument. Treas Reg §1.1041-1T(b), Q&A-7.

Section 1041 Definition of Divorce: Void Ab Initio Annulments

Additionally, for the purposes of 26 U.S.C. §1041, the definition “divorce” is expanded to include divorce annulments and the cessations of marriage that are deemed void ab initio due to violations of state law. Treas Reg §1.1041-1T(b), Q&A-8.

Void ab initio annulments dissolve a marriage retroactively from its very beginning. In other words, the legal outcome of such an annulment is to treat the annulled marriage as if it never happened. While the state law differs from state to state, there are generally four grounds under which a marriage is voided ab initio: bigamy, related parties (i.e. spouses are related within a certain degree of consanguinity or affinity), incompetence and situations where one of the spouses is less than sixteen years old.

Contact Sherayzen Law Office for Help with Tax Issues Concerning a Section 1041 Transfer of Property

If you need help with tax issues concerning a divorce or a transfer of property pursuant to a divorce, contact Sherayzen Law Office for professional legal help.

Overcoming Late IRC Section 1041 Transfer Presumption | IRS Lawyer & Attorney

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In a previous article, I discussed that a late IRC Section 1041 transfer between former spouses is presumed to be unrelated to the cessation of the marriage. This means that such a transfer may not be considered tax-free for US tax purposes. In this article, I would like to explain what a late IRC Section 1041 transfer is and how to overcome the presumption that it is not related to the cessation of the marriage.

What is a Late IRC Section 1041 Transfer?

A transfer of property between ex-spouses is not taxable as long as it is “incident to divorce”. 26 U.S.C. §1041(a)(2). Temporary regulations state that such a transfer of property will be considered as incident to divorce as long as it occurs within one year of the date of the cessation of marriage or if this transfer is related to the cessation of marriage. Treas Reg §1.1041-1T(b), Q&A-6.

As I indicated in a previous article, a transfer of property is related to the cessation of marriage if it is done pursuant to a divorce or separation instrument and “occurs not more than 6 years after the date on which the marriage ceases”. Treas Reg §1.1041-1T(b), Q&A-7. If the transfer of property between ex-spouses occurs after six years of the cessation of marriage, then it is considered a late IRC Section 1041 transfer. Id.

Late IRC Section 1041 Transfer: Presumption that the Transfer if Not Related to Marriage

A late IRC Section 1041 transfer gives rise to a presumption that the transfer is not related to the cessation of marriage. Id. In other words, if an ex-spouse transfers a property to another ex-spouse more than six years after the cessation of their marriage, then the IRS will assume that the transfer is not related to the marriage.

Late IRC Section 1041 Transfer: Rebuttal of the Presumption

Luckily for US taxpayers, this presumption is not absolute and can be rebutted. “This presumption may be rebutted only by showing that the transfer was made to effect the division of property owned by the former spouses at the time of the cessation of the marriage.” Id.

The temporary Treasury regulations emphasize that the presumption can be rebutted by establishing two facts. First, the transfer was made late “because of factors which hampered an earlier transfer of the property, such as legal or business impediments to transfer or disputes concerning the value of the property owned at the time of the cessation of the marriage”. Id. Second, “the transfer is effected promptly after the impediment to transfer is removed.” Id.

Late IRC Section 1041 Transfer: PLRs Indicate Anticipation of Transfer in a Divorce Decree as the Crucial Factor

The IRS has issued a number of Private Letter Rulings (“PLRs”) on the issue of a late IRC Section 1041 transfer. Overall, the PLRs seem to follow an important trend in determining whether a taxpayer is successful in his rebuttal of the aforementioned presumption.

The key factor that appears in these PLRs seems to be whether a transfer of property (or an option to transfer a property) was part of the divorce decree. In other words, the most important question is whether this transfer of property was anticipated by the terms of the divorce decree. If it was and there is a good justification for the delay of the transfer of property, then the IRS is likely to rule that Section 1041 applies and the transfer would be deemed tax-free for federal income tax purposes.

Of course, it is highly important that a tax attorney review the situation to determine the likelihood that the IRS will agree on both points: anticipation of transfer in the divorce decree and the good reason for the delay of the transfer.

Contact Sherayzen Law Office for Professional Help Concerning Late IRC Section 1041 Transfers

If you are engaged in a divorce or you are an attorney representing a person who is engaged in a divorce, contact Sherayzen Law Office for experienced help with respect to taxation of transfers of property to an ex-spouse as well as other tax consequences of a divorce proceeding.