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Why Is a Tax Lawyer Necessary in High Asset Divorces?

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Why Is a Tax Lawyer Necessary in High Asset Divorces?

A tax attorney is often essential to handle certain threshold issues in a divorce. These issues can include:

  • Determining the Assets and Liabilities that Comprise the Marital Estate
  • Determining the Characterization of Marital, Commingled and Separate Assets & Liabilities
  • Determining the Income Items to be Disclosed to the Court
  • Helping to Reach an Acceptable Property Settlement

While a tax lawyer can assist with all of the above, one of the legal questions he or she must often resolve as a prerequisite to addressing these additional issues is investigating and determining the date of separation.

Why Is the Date of Separation Important in a Divorce?

Making a legal determination of when a marriage terminates for tax purposes is the primary initial step in reaching the correct tax positions in a divorce situation. For tax purposes, per § 6013 and § 7703, H and W are married until they are deemed legally separated via either a final divorce decree or separate maintenance agreement. Per IRS Pub. 504, marital status is determined under State law and thus State law controls when the divorce decree or separate maintenance agreements become final.  A married filing joint or married filing separate return cannot generally be filed in the year that a divorce becomes final.

Unless a divorce decree or decree of separate maintenance is obtained by a taxpayer before the end of the tax year, they cannot qualify as an abandoned spouse and are considered married for tax purposes. A married filing joint or a married filing separate (MFS) return or head of household (in certain narrow conditions) is thus required. Furthermore, Spouses that are separated under a temporary “interlocutory” decree of divorce are considered still married for tax purposes up and until a final decree of divorce is adjudicated.  Where a spouse has appealed a divorce, state law determines if the appeal delays the effective final decree of divorce or not.

How Does a California Court Determine a Separation Date?

A court in California will ordinary seek an objective basis for making a determination of H and W’s subjective intent to end their marriage. Of critical importance, as demonstrated in California Divorce Case Law, is when and if a physical separation occurred where one of the spouses left the marital residence. Except for a narrow exception carved out in Marriage of Davis (2015) 61 C4th 846, 865, physical separation is an “indispensable threshold requirement” in a court determination of the official date of separation. According to the California Supreme Court to hold that a couple has separated requires that the spouses “live in separate residences and at least one of them has the subjective intent to end the marital relationship. A California court will look to evidence of the “subjective intent to end the relationship” that can be objectively measured “by words or conduct reflecting that there is a complete and final break in the marriage relationship”.

However, it is also important to note that under Davis, the court did not rule out that there could be circumstances where a couple could be living ‘separate and apart,’ as if they had established separate residences with the requisite objectively evidenced intent by at least one of them to end the marriage, “even though they continued to literally share one roof.”  Under Marriage of Manfer (2006) 144 CA4th 925, 930, H or W’s subjective intent to separate is objectively scrutinized by a California court via examining the actions of H and W, and not by the perception of the public as to the status of the marriage, under the “preponderance of the evidence” standard.  Actions and evidence used to determine the date of separation includes:

  • Joint credit card records evidencing duplicated living expenses especially the establishment of a separate residence
  • Written evidence of a party’s subjective intent to separate; Letters, Diaries, E-mails.
  • Credit card records of any new accounts opened after the purported date of separation
  • Change-of-address forms.
  • Real property lease outside the marital residence;
  • Bank records that show the opening of a separate bank account postdate of separation