Barney Bird <barney_bird[at]msn.com> wrote:

- quote -

Wow! That's an interesting case, coming to the opposite
result of what most of us espoused.

After skimming the case, I note that they frequently used
the term "valid" in reference to the prenuptial agreement,
but they did not otherwise discuss the elements of
"validity" that might apply. I bring this up because here in
WA state it has always been my understanding that such
agreements have no effect on THIRD PARTIES unless they are
"recorded" with the county auditor. And, presumably, that
recording would have to take place BEFORE the time at which
the third party involvement occurred.

In other words, you've got to GO PUBLIC with your agreement
if you want it to impact third parties. At least this is my
understanding. I have several clients with prenuptial
agreements, but I'm not aware of any who have recorded them
(I've asked). So, while these agreements are presumably
"valid" as between the spouses, are they "valid" with
respect to third parties (creditors, etc.) that haven't
otherwise been put on notice?

No one is a bigger fan of the 9th Circuit than I <g> . But, I
would tread carefully before betting my life in reliance on
the Elam case.

MTW

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"kw" <kw2807[at]pacbell.net> wrote:

- quote -

Unless I overlooked it, you did not indicate in which state
you and your husband are domiciled. However, since IRS
allocated the refund 50/50, I assume you live in a community
property state. In accordance with a number of counsel
opinions addressing this subject, IRS generally determines
injured spouse refund claims arising from community property
states by allocating the joint overpayment half to each
spouse. The half allocated to the liable spouse is offset
to his debt and the remaining half is refunded to the
injured spouse.

Because a presumably valid prenuptial agreement exists,
there is legal precedent supporting your position that the
joint overpayment should be allocated without regard to
community property considerations. In U.S. v. Nancy A.
Elam, 97-1 USTC ¶50,399, the 9th U.S. Circuit of Appeals
held as follows:

Note: The Elams were domiciled in California

[ begin quoted text ]

....we conclude that a valid prenuptial agreement is relevant
to determine the proper apportionment to each spouse of the
overpayment claimed on the couple's 1988 joint return. To
the extent the Government can show the overpayment resulted
from Dr. Elam's separate property because of the prenuptial
agreement, Nancy Elam is not entitled to a refund on her
1989 separate return based on the overpayment credit.
Accordingly, the Government should have the opportunity to
show the proper apportionment of the 1988 overpayment credit
by relying on the prenuptial agreement. Taxpayer should have
the opportunity to show the prenuptial agreement is invalid.

[ end quoted text ]

In 1988, the Elam's filed a joint return showing an
overpayment of approximately $176,000, all of which they
elected to apply to the following year's return as an
estimated tax payment, also known as a credit elect. The
Elams had a valid prenuptial agreement which declared their
intent to keep each spouse's property separate and not to
hold property as a marital community. In 1989 they were
divorced. On his separate 1989 return, Dr. Elam claimed the
entire $176,000 credit elect from 1988 in accordance with
the terms of their prenuptial agreement. In 1991, Nancy
Elam filed a late return claiming half of the carried
forward overpayment from 1988. IRS processed her return and
issued her a refund. IRS later determed they had erroneously
allowed Nancy Elam's refund claim and filed suit against her
to recover it. The federal district court for the central
district of California held for Nancy Elam. The gov't
appealed to the 9th circuit where the district court was
reversed. The 9th circuit's holding sustained government's
position that they could rely on a valid prenuptial
agreement as a basis for allocating the entire credit elect
to Dr. Elam and could proceed to recover the erroneous
refund paid to Nancy Elam.

The information above is posted for general discussion
purposes only and should not be construed as professional
legal or tax advice.

Barney Byrd
barney_bird[at]msn.com

To contact me directly, use the correct spelling of my last
name in the e-mail address above.

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