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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.

IRS 2017 Standard Mileage Rates for Business, Medical and Moving

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The IRS recently issued the optional IRS 2017 standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

According to the IRS Rev. Proc. 2010-51, a taxpayer may use the business standard mileage rate to substantiate a deduction equal to either the business standard mileage rate times the number of business miles traveled. If he does use the IRS 2017 standard mileage rates, then he cannot deduct the actual costs items. Even if the IRS 2017 standard mileage rates are used, however, the taxpayer can still deduct as separate items the parking fees and tolls attributable to the use of a vehicle for business purposes.

It is important to note that a taxpayer does not have to use the IRS 2017 standard mileage rates. He always has the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. In such a case, all of the actual expenses associated with the business use of the vehicle can be used: lease payments, maintenance and repairs, tires, gasoline (including all taxes), oil, insurance, et cetera.

The IRS 2017 standard mileage rates shall be as follows:

  • 53.5 cents per mile for business miles driven (down from 54 cents for 2016);
  • 17 cents per mile driven for medical or moving purposes (down from 19 cents for 2016)
  • 14 cents per mile driven in service of charitable organizations

The IRS 2017 standard mileage rates are generally lower than last year’s mostly due to the lower price for gasoline. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

On the other hand, in some circumstances, a taxpayer cannot use the IRS 2017 standard mileage rates. For example, a taxpayer cannot use the IRS business standard mileage rate for a vehicle after using any MACRS depreciation method or after claiming a Section 179 deduction for that vehicle. Additionally, the business standard mileage rate cannot be used for more than four vehicles used during the same period of time. More information about the limitations on the usage of the IRS 2017 standard mileage rates can be found in the IRS Rev. Proc. 2010-51.

Second Quarter of 2012 Underpayment and Overpayment Interest Rates

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On February 23, 2012, the IRS announced that the underpayment and overpayment interest rates will remain the same for the calendar quarter beginning April 1, 2012. The rates will be:

  • three (3) percent for overpayments (two (2) percent in the case of a corporation)
  • three (3) percent for underpayments
  • five (5) percent for large corporate underpayments
  • one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.

Minnesota Department of Revenue Launches New e-Services System

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On October 3, 2011, the Minnesota Department of Revenue announced the launch of its new e-Services online system. This new system is replacing e-File Minnesota and will offer a wider variety of services to 400,000 business taxpayers. The new system was the product of at least four years of diligent work by the Department.

The new E-Services not only provides the ability for business taxpayers to file and pay their taxes, it also allows taxpayers to update their contact information, register new accounts, and send the department secured messages. In addition, business taxpayers will have the ability to view all account information in one location. They can now view their payment history, returns they have filed and all correspondence sent to them by the Department of Revenue.

The functionality being added provides more security flexibility to the business taxpayer. Businesses can create unique user ID’s and passwords which grant online access to tax practitioners and accounts they partner with.

Finally, e-Services will also allow self-service activities 24 hours a day, seven days a week. Business taxpayers now have the ability to handle their tax needs online when it is convenient for them.

The transition to the new system will begin on October 17, 2011 and is currently projected to finish by mid-January of 2012. During the transition, groups of taxpayers will be added each Monday, until all 400,000 business taxpayers have access to e-Services.

Form 2290: Highway Use Tax Return is Now Due on November 30, 2011

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On July 15, 2011, the IRS advised truckers and other owners of heavy highway vehicles that their next federal highway use tax return (which is usually due on August 31) will instead be due on November 30, 2011.  IRS Notice 2011-77 explains that the main reason for the extension of the deadline is to alleviate any confusion and possible multiple filings of Form 2290 that could result if Congress reinstates or modifies the  highway use tax after September 30, 2011.

Generally, the highway use tax of up to $550 per vehicle applies to trucks, truck tractors and buses with a gross taxable weight of 55,000 pounds or more. A variety of special rules apply to vehicles with minimal road use, logging or agricultural vehicles, vehicles transferred during the year and those first used on the road after July. Ordinarily, vans, pick-ups and panel trucks are not taxable because they fall below the 55,000-pound threshold. The tax is currently set to expire on September 30, 2011.  For trucks and other taxable vehicles in use during July, the Form 2290 and payment are, under normal circumstances, due on August 31.

The new November 30 filing deadline for Form 2290 (Heavy Highway Vehicle Use Tax Return) applies to the tax period that begins on July 1, 2011. It covers the vehicles used during July, as well as those first used during August or September. Returns should not be filed and payments should not be made prior to November 1, 2011.

To aid truckers applying for state vehicle registration on or before November 30, 2011, the new regulations require states to accept as proof of payment the stamped Schedule 1 of the Form 2290 issued by the IRS for the prior tax year (the one that ended on June 30, 2011). Under federal law, state governments are required to receive proof of payment of the federal highway use tax as a condition of vehicle registration. Normally, after a taxpayer files the return and pays the tax, the Schedule 1 is stamped by the IRS and returned to filers for this purpose. Prior to the new regulations, a state normally would accept a prior year’s stamped Schedule 1 as a substitute proof of payment only through September 30.

For those acquiring and registering a new or used vehicle during the July – November period, the new regulations require a state to register the vehicle, without proof that the highway use tax was paid, if the person registering the vehicle presents a copy of the bill of sale or similar document showing that the owner purchased the vehicle within the previous 150 days.