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Ex-Spouse Property Transfers Incident to Divorce | Tax Lawyer & Attorney

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This article introduces a series of articles on 26 U.S.C. §1041 and specifically the issue of tax treatment of ex-spouse property transfers incident to divorce. As a result of a divorce, it is very common for ex-spouses to transfer properties to each other as part of their settlement agreement. A question arises: are these ex-spouse property transfers taxable?

Note that this article covers a situation only when both spouses are US citizens and only direct transfers between ex-spouses (i.e. the transfers on behalf of an ex-spouse are not covered here).

General Rule for Ex-Spouse Property Transfers under 26 U.S.C. §1041

A property transfer between spouses is generally not subject to federal income tax. 26 U.S.C. §1041(a)(1). Transfers of property between former spouses are also not taxable as long as they are “incident to divorce”. 26 U.S.C. §1041(a)(2). For income tax purposes, the law treats the transferee spouse as having acquired the transferred property by gift. 26 U.S.C. §1041(b)(1). This means that “the basis of the transferee in the property shall be the adjusted basis of the transferor”. 26 U.S.C. §1041(b)(2).

It is important to emphasize that only transfers of property (real, personal, tangible and/or intangible) are governed by 26 U.S.C. §1041; transfers of services are not subject to the rules of this section. Treas Reg §1.1041-1T(a), Q&A-4.

Ex-Spouse Property Transfers Incident to Divorce

The key issue for the ex-spouse property transfers is whether they are “incident to divorce”. The statute and the temporary Treasury regulations describe two situations when a transfer between ex-spouses will be considered “incident to divorce”: “(1) The transfer occurs not more than one year after the date on which the marriage ceases, or (2) the transfer is related to the cessation of the marriage.” Treas Reg §1.1041-1T(b), Q&A-6; 26 U.S.C. §1041(c).

Ex-Spouse Property Transfers Not More Than One Year After the Cessation of a Marriage

Any transfers of property between former spouses that occur not more than one year after the date on which the marriage ceases are subject to the nonrecognition rules of 26 U.S.C. §1041(a). This is case even if a transfer of property is not really related to the cessation of the marriage. Treas Reg § 1.1041-1T(b), Q&A-6.

Ex-Spouse Property Transfers Related to the Cessation of the Marriage

26 U.S.C. §1041 does not actually define the meaning of “transfers related to the cessation of the marriage”. Rather, the temporary Treasury regulations explain this term.

The temporary regulations establish a two-prong test that states that a transfer of property is treated as related to the cessation of the marriage if: (1) “the transfer is pursuant to a divorce or separation instrument, as defined in section 71(b)(2)”, and (2) “the transfer occurs not more than 6 years after the date on which the marriage ceases”. Treas Reg §1.1041-1T(b), Q&A-7. The definition of divorce or separation instrument in the first prong also includes a modification or amendment to such decree or instrument.

If either or both of the prongs of this test are not satisfied (for example, the transfer occurred more than six years after the cessation of the marriage), then a transfer “is presumed to be not related to the cessation of the marriage.” Id. This is a rebuttable presumption and, in a future article, I will discuss how a taxpayer may rebut this presumption.

Contact Sherayzen Law Office for Professional Help Concerning Tax Consequences of a Property Transfer to an Ex-Spouse

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.

Former Credit Suisse Banker Pleads Guilty | FATCA Lawyer Duluth

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On July 19, 2017, Ms. Susanne D. Rüegg Meier, a citizen of Switzerland, pleaded guilty to conspiring to defraud the United States in connection with her work as the head of a team of bankers for Credit Suisse AG. The announcement of this plea by a former Credit Suisse Banker came from the U.S. Department of Justice’s Tax Division.

Facts that Led to Guilty Plea by the Former Credit Suisse Banker

According to the statement of facts and the plea agreement, Ms. Rüegg Meier admitted that, between 2002 and 2011, she worked as the team head of the Zurich Team of Credit Suisse’s North American desk in Switzerland. Ms. Rüegg Meier was responsible for supervising the servicing of accounts involving over 1,000 to 1,500 client relationships, out of which she personally handled about 140 to 150 clients (the great majority of these clients were U.S. persons). These “personally handled” clients had assets of about $400 million.

Ms. Rüegg Meier assisted many U.S. clients in utilizing their Credit Suisse accounts to evade their U.S. income taxes and to facilitate concealment of their undeclared financial accounts from the U.S. Department of the Treasury and the IRS. In particular, she engaged in the following activities to help her clients conceal their accounts: retaining in Switzerland all mail related to the account; structuring withdrawals in the forms of multiple checks each payable in amounts less than $10,000 that were sent by courier to clients in the United States and arranging for U.S. customers to withdraw cash from their Credit Suisse accounts at Credit Suisse locations outside Switzerland, such as the Bahamas. Moreover, Ms. Rüegg Meier admitted that approximately 20 to 30 of her U.S. clients concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities or other structures that were frequently created in the form of foreign partnerships, trusts, corporations or foundations.

Additionally, between 2002 and 2008, the former Credit Suisse banker traveled approximately twice per year to the United States to meet with her clients. Among other places, Ms. Rüegg Meier met clients in the Credit Suisse New York representative office. To prepare for the trips, the former Credit Suisse banker would obtain “travel” account statements that contained no Credit Suisse logos or customer information, as well as business cards that bore no Credit Suisse logos and had an alternative street address for her office, in order to assist her in concealing the nature and purpose of her business.

After the UBS case, Credit Suisse began closing U.S. customers’ accounts in 2008. During that time, Ms. Rüegg Meier assisted the clients in keeping their assets concealed. In one instance, when one U.S. customer was informed that the bank planned to close his account, the former Credit Suisse banker assisted the customer in closing the account by withdrawing approximately $1 million in cash. Furthermore, she advised the client to find another bank simply by walking along the street in Zurich and locating a bank that would be willing to open an account for the client. The customer placed the cash into a paper bag and exited the bank.

Admitted Tax Loss from the Activities of the Former Credit Suisse Banker and Potential Sentence

The former Credit Suisse Banker admitted that the tax loss associated with her criminal conduct was between $3.5 and $9.5 million. The sentencing of Ms. Rüegg Meier is scheduled for September 8, 2017. She faces a statutory maximum sentence of five years in prison, a period of supervised release, restitution and monetary penalties.

2014 Individual Income Tax Rates

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The IRS recently announced the 2014 individual income tax rates with inflation adjustments wit respect to each tax bracket. Remember, since the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, a new tax bracket of 39.4% appeared. Also, note that the 2014 individual income tax rates listed below do not include other taxes such as those imposed on investment income by the new health care laws. Finally, it is important to remember that the default PFIC regime calculations do not depend on your personal tax rate.

As adjusted for inflation, the following marginal income tax rates will apply to individuals in the tax year 2014:

Filing Single

10% $0 – $9,075
15% $9,076 – $36,900
25% $36,901 – $89,350
28% $89,351 – $186,350
33% $186,351 – $405,100
35% $405,101 – $406,750
39.6% $406,751 and greater

Notice the small range of the 35% tax bracket.

Filing Married Filing Jointly and Surviving Spouses

10% $0 – $18,150
15% $18,151 – $73,800
25% $73,801 – $148,850
28% $148,851 – $226,850
33% $226,851 – $405,100
35% $405,101 – $457,600
39.6% $457,601 and greater

Filing Married Filing Separately

10% $0 – $9,075
15% $9,076 – $36,900
25% $36,901 – $74,425
28% $74,426 – $113,425
33% $113,426– $202,550
35% $202,551 – $228,800
39.6% $228,801 and greater

Filing Head of Household

10% $0 – $12,950
15% $12,951 – $49,400
25% $49,401 – $127,550
28% $127,551 – $206,600
33% $206,601 – $405,100
35% $405,101 – $432,200
39.6% $432,201 and greater

IRS Auto Depreciation Limits Released for 2013

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The IRS recently released Rev. Proc. 2013-21 detailing the updated price inflation adjustment limitations on depreciation deductions and lease inclusion amounts for passenger automobiles first placed in service during calendar year 2013. These adjustments are required under Internal Revenue Code Section 280F. If you need advice relating to these matters, or any other tax or legal issues, please contact Sherayzen Law Office, PLLC.

Relevant Definitions

According to the IRS, “Passenger automobiles are defined in section 280F(d)(5)(A) as any 4-wheeled vehicle which is manufactured primarily for use on public streets, roads, and highways, and which is rated at 6,000 pounds unloaded gross vehicle weight (or, in the case of a truck or van, 6,000 pounds gross vehicle weight) or less. Section 280F(d)(5)(B) provides exceptions from this definition, and allows the Secretary to promulgate regulations to exclude trucks and vans from the definition of passenger automobiles” (Internal Revenue Bulletin: 2003-37).

Limits for Passenger Automobiles (Excluding Trucks and Vans)

The depreciation limitations for passenger automobiles (not including trucks or vans) first placed in service during calendar year 2013, and for which the additional bonus depreciation applies (allowing for 50% “expensing” of the cost of the automobile in the year of purchase), is $11,160 for the first tax year. The amounts for following years are: $5,100 the second tax year, $3,050 for the third year, and $1,875 for each succeeding year. Note that, for this category and for each category that follows below, any personal use of a passenger automobile, truck or van will reduce the maximum depreciation deduction that may be taken by a business.

As will be seen from the deduction amounts listed below, only the first year of depreciation is affected by the adjustments.

For passenger automobiles (excluding trucks and vans) placed in service during calendar year 2013 to which 50% bonus depreciation does not apply, the depreciation is $3,160 for the first tax year. For the following years, the amounts are: $5,100 the second tax year, $3,050 for the third year, and $1,875 for each succeeding year.

Limits for Trucks and Vans

The depreciation limitations for trucks and vans first placed in service during calendar year 2013, and to which the additional 50% bonus depreciation applies, is slightly higher than passenger automobiles, at $11,360 for the first tax year. For later years, the amounts are: $5,400 the second tax year, $3,250 for the third year, and $1,975 for each succeeding year.

The depreciation limitations for trucks and vans first placed in service during calendar year 2013, and to which the additional 50% bonus depreciation does not apply, is $3,360 for the first tax year. For later years, the amounts are: $5,400 the second tax year, $3,250 for the third year, and $1,975 for each succeeding year.

Bonus Depreciation

Rev. Proc. 2013-21 includes various factors as to why bonus depreciation may not apply, including the fact that a taxpayer, “(1) purchased the passenger automobile used; (2) did not use the passenger automobile during 2013 more than 50 percent for business purposes; (3) elected out of the § 168(k) additional first year depreciation deduction pursuant to § 168(k)(2)(D)(iii); or (4) elected to increase the § 53 AMT credit limitation in lieu of claiming § 168(k) additional first year depreciation.” If a passenger automobile, truck or van is not used at least 50% of the time for business purposes, the vehicle must be depreciated under standard straight-line ADS rules.
The Rev. Proc. also includes updated tables for the dollar amount of income inclusion for passenger automobiles (excluding trucks and vans), and separate tables for trucks and vans with a lease terms beginning calendar year 2013.

IRS Provides Penalty Relief to Farmers and Fishermen

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On January 18, 2013, the IRS announced that it will issue guidance in the near future to provide relief from the estimated tax penalty for farmers and fishermen unable to file and pay their 2012 taxes by the March 1 deadline due to the delayed start for filing tax returns.

The delay stems from this month’s enactment of the American Taxpayer Relief Act (ATRA). The ATRA affected several tax forms that are often filed by farmers and fishermen, including the Form 4562, Depreciation and Amortization (Including Information on Listed Property). These forms will require extensive programming and testing of IRS systems, which will delay the IRS’s ability to accept and process these forms. The IRS is providing this relief because delays in the agency’s ability to accept and process these forms may affect the ability of many farmers and fishermen to file and pay their taxes by the March 1 deadline. The relief applies to all farmers and fishermen, not only those who must file late released forms.

Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1. Under the guidance to be issued, farmers or fishermen who miss the March 1 deadline will not be subject to the penalty if they file and pay by April 15, 2013. A taxpayer qualifies as a farmer or fisherman for tax-year 2012 if at least two-thirds of the taxpayer’s total gross income was from farming or fishing in either 2011 or 2012.

Farmers and fishermen requesting this penalty waiver must attach Form 2210-F to their tax return. The form can be submitted electronically or on paper. The taxpayer’s name and identifying number should be entered at the top of the form, the waiver box (Part I, Box A) should be checked, and the rest of the form should be left blank.