Family Law Newsletter

• Parents' Responsibility for Minors' Actions
  In most states, the age of majority (when a person is recognized by law as an adult), is 18 years of age or older. A “minor” is a person who is under the age of 18. When a minor breaks the law or causes damage or injury to... Read more.
• The Recall of Hazardous Toys
  The U.S. Consumer Product Safety Commission (CPSC) regulates the distribution of 15,000 types of consumer products that pose an unreasonable risk of injury or death to the public. As young children are particularly susceptible to... Read more.
• U.S. Supreme Court Strikes Down Alimony Statute as Unconstitutional
  A landmark U.S. Supreme Court case, decided in 1967, declared certain Alabama alimony statutes unconstitutional because they required men, and not women, to pay alimony. Background In February 1974, a... Read more.
• Mischaracterization of Divorce Payments as Alimony
  Most divorces involve a division of property between the spouses. If there are children from the marriage, the parent not granted custody usually must pay monthly child support. In addition, one of the spouses may be granted monthly... Read more.

• Erika Girardi lost $750,000 earrings in latest legal battle with estranged husband
• How to Keep Your Marriage Alive and Avoid a Divorce
• US Mother Wins at High Court in International Custody Dispute
• Here’s if Britney Signed a Prenup With Sam Before Their Wedding & How Much They’re Both Worth
• Norton Introduces Bill Requiring Health Insurers to Directly Reimburse Divorced Parents for Children’s Medical Expenses

Relief from Allocation of Community Income

Under the laws of some states (i.e., “community property” states), property acquired and income earned during marriage may be “community” property. This generally means that such income may be considered income earned equally. When couples in such states prepare and file income tax returns separately (as opposed to jointly), each must reflect one-half of community income (generally defined as wages earned and income earned from community property assets during the tax year) on their tax returns.

Commonly, one spouse earns more income than the other spouse. For federal tax purposes, a couple must agree to file a joint return. If one spouse refuses to file a joint return, the spouse earning less income may have to file a separate tax return listing income received by the other spouse. The end result may be tax liability for the spouse earning less income, who may lack sufficient resources to pay such tax. In recognition of this inequitable result, the Internal Revenue Code (IRC) provides relief under certain circumstances.

Relief Based on Separation of the Spouses

Intended originally to protect abandoned spouses, IRC §66(a) provides an exception to the general rule that community income is taxed one-half to each spouse. IRC §66(a) applies when the following conditions are met:

• The spouses are married to each other at any time during the year.
• The spouses lived apart at all times during the year and do not file a joint return for any taxable year beginning or ending that year.
• One or both the spouses have earned (community) income.
• No portion of that earned income is transferred between the spouses, directly or indirectly, before the close of the year, subject to some exceptions.

Provided these conditions are met, the following may apply:

• Earned income, other than trade or business income or a partner’s distributive share of partnership income, is treated as the income of the spouse rendering services.
• Trade or business income is taxed to the spouse exercising substantially all of the management and control of the business.
• A partner’s distributive share of partnership income is allocated to the partner as self-employment income.
• Separate property income is treated as the income of the owner/spouse.
• All other community property income (such as dividends, interest, rents and royalties) is treated as provided in applicable community property law.

Relief When Spouse Not Notified of Community Income

Under IRC §66(b), the benefits of community property laws and allocation of income for tax purposes may not apply to items of community income, and only one spouse may be responsible for reporting all of it (and may be assessed additional tax), if one of the spouses:

• Treated such income as though solely entitled to it; and
• Failed to notify the other spouse of the nature and amount of the income by the due date for filing the return (including extensions).

Equitable Relief from Separate Return Liability for Community Income

Under IRC §66(c), a spouse may avoid responsibility for items of community income if:

• That spouse filed a separate return for the tax year;
• The spouse does not include in gross income an item of community income that was properly includable, but could have been treated as income of the other spouse under certain circumstances;
• The spouse did not know, and had no reason to, of the community income; and
• Under all the facts and circumstances, it would not be fair to include the item of community income in the gross income of that spouse.

This is sometimes referred to as “innocent spouse” relief and is an exception to the general rule that one-half of the community income is taxed to each spouse. If the foregoing circumstances are established, the item of community income is allocated to the gross income of the other spouse.

Additional Equitable Relief

IRC §66(c) also gives authority, under prescribed procedures, to relieve a spouse from liability when it is “inequitable” to hold that spouse liable for any unpaid tax or deficiency (or any portion thereof), even if the foregoing circumstances are not established. Through a “Revenue Procedure,” the IRS has provided guidelines on factors relevant to granting this relief. These include where the requesting spouse (RS):

• Is separated or divorced from the other spouse.
• Will suffer economic hardship if relief is not granted (e.g., will not be unable to pay bills).
• Was abused by the other spouse.
• Is not legally obligated to pay the liability (under a divorce decree, etc.), but the other spouse is obligated to pay the liability.

Factors militating against granting the relief include:

• The unpaid liability or item is attributable to the RS.
• There are strong reasons why the RS should have known about the liability.
• The RS significantly benefited from the liability or the items causing the liability.
• The RS has a legal obligation to pay under a divorce decree or settlement.

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