Discussion:Spousal equalization payment

Client was divorced in 2005 and in the divorce decree it lists all the assets and how they are to be divided. In addition wife gets the following equalization payment.

Wife's Property Equalization Payment - "The wife shall be receiving a property equalization payment in the amount of $53,500 paid through the following vehicles: Intel Stock and Intel 401K Stock Purchase Plan." The stock was cashed and she received the proceeds of 21,000. The 401K was rolled over into an account in her name in the amount of 32,500. All good so far.

Spousal Maintenance - "The wife has received a lump sum property equalization payment which is intended by both parties to be a lump sum spousal maintenance payment".

Child Support - "husband is entitled, commencing on Jan 1, 2005, to add to wife's income and subtract from his income the amount of 1,000 a month for a period of 24 months." This 1,000 a month is used in the calculation of income to determine if husband has to pay child support.

I don't have a lot of experience with divorce settlements and have never seen one worded like this. Does all this mean she has to claim the 53,500 as alimony? That doesn't seem right to me as it is really a property equalization but I'm worried about the fact that it also says it is to be viewed as spousal maintenance. Client is under the impression she has to claim the 24,000 and husband gets to deduct the 24,000 as alimony.

I'd love some feedback from anyone with more experience than I have.

Thanks, Sandy

Basis for Intel stock is a problem if alimony. Does anyone know if there is a step up due to income recognition and if so is it considered husband's disposition?

1. 230k – Represents 60% Equity of their Primary Residence located in AK (Was written in Divorce Decree T/P would get 60% of the equity)

2. 170k – Represents cash gift.

Item 1. Would be taxable even though it pertains to the divorce since per Sec1041 it would NOT IF:

         a.  transfer of property was made within 1 year of 1/99.

         b.  Or if the equity provision was written into the divorce agreement which it appears to have been and transfer was

             was made within 6 years of 1/99 which clearly here has expired.

Item 2. Not taxable since it is merely a gift.

RE: item 1 – would not this be ordinary income reported on Line 21 of 1040 or Captial G/L, depending on what her adjusted 60% tax basis is on the home? To determine her actual tax liability I would need to get a copy of her 2007 return and use this an estimate for 2008 and add the 230k assuming this is correct process.

Would these be correct replies or am I missing something? Do you need further information to determine this?

Thank you for your time.

Item 1 - These facts are not a transfer of property merely a cash settlement stated in the divorce decree therefore

        none of the $230k is taxable.

Item 2 - Cash Gift which is not taxable to T/P but subject to Gift Tax to the payor less the 1st 12k exclusion.

As for reporting these transactions on T/P's tax return there is none.

Since I have not seen the divorce decree what if there is no mention of T/P due from Ex of the 60% equity payment?

Would the 230k then also be treated as a gift?

Either way to me since no title or interests has been transferred all the the $400k is tax free since it respresents a cash settlement between the 2 parties.

Comments/Suggestions?

curious because this is 9 years later

The parties are declared tenants in common with no right of survivorship in this real property. The home shall be immediately listed for sale, and both parties shall utilize their best efforts and forthwith execute any and all docuements necessary to list and sell the home. Premises may be rented on month-to-month basis until sold. Any rent paid by tenant shall be applied to existing mortgage, taxes, insurance, utitlies, and maintenance for home. In the event the rent rec'd is insufficient to pay the items described above, the husband shall make any payments and the wife shall reimburse him for 1/2 of all such amounts actually paid from her share of the proceeds upon sale. The husband shall provide complete accounting of all rents rec'd and all amounts he seeks reimbursement.

And now I recieve from wife's attorney proposed settlement revision stating:

1. Wife will waive right to complete accounting in exchange for $400k. 2. Note no mention of any of the $400k being treated as cash gift! 3. And now Ex wants to word this to say it is alimony or some sort of spousal maintenance payments so he can deduct it on

   his return.

4. Also in accepting the $400k, she will quit claim the AK property all over to him.

To me its sounds like she is getting the bad end of this deal! My points:

1. Initally entitled to $600k and told it is reduce to $230k due to Ex paying mortage and utility payments. Difference of $370k!

2. Is this really a cash gift or merely a way to pay her $400k for her interests in the property which would then be

   considered a taxable gain on gross proceeds of $400k, since property is not consider her formal residence but now 
   investment property.  

3. Now wants to show as Alimony when this was not stated in the original decree...is not this just paying her 60% interest

   by wiring her 3 payments, $230k by end of October 2008, then $85k by 6/09 and $85k by 6/10. 

Assuming this is a tranfer of property, would not this Gain be shown as Installment sale since reciving payments over 3 years?

Comments/suggestions?

Thanks for any assistance.