D. Stussy wrote:

- quote -

But per the facts in the case, the wife only owned HALF the
options. Why, then, was the husband allowed (apparently) to
avoid paying tax on ALL of them? As I think I stated earlier
in this thread, the income should be taxed to the person
that OWNS it, not the person the RECEIVES it (except to the
extent of ownership).

MTW

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MTW wrote:

- quote -

I think that the concept there was that the right to receive
that income was itself an asset - and that asset (a
receivable) transferred incident to divorce, thus resulting
in an assignment of income. One cannot exclude what one
isn't entitled to in the first place.

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John H. Fisher wrote:

- quote -

As I understand the facts of the case, here is what SHOULD
have happened: The proceeds of the options should have been
included on the husband's W-2 and therefore reported on his
return. Then, had he been entitled to a deduction for
alimony, he would have claimed an appropriate deduction,
thereby resulting (more or less) in ZERO net tax liability
on these transactions. However, the court ruled that the
husband was not entitled to a deduction for alimony.

In spite of that, the wife was apparently deemed to be the
owner of half the options. So, in that case, I would then
have expected to see a deduction (or perhaps "exclusion" is
a better term) on line 21 of the husband's return labeled,
"Less portion of stock option income included on line 7
received as nominee on behalf of former spouse," or
something like that. The net result would be that the
husband ends up liable for tax on HALF the option income.

But, the court was EMPHATIC on the point that the husband
had NOT reported any of the option income on his return. So,
all the court accomplished by denying the alimony deduction
was to prevent a "double dip" (by preventing a deduction for
income that wasn't included in the return in the first
place). The court came no way near to creating the PROPER
result (unless, of course, there were additional facts not
fully stated in the opinion). Instead, the husband ended up
with exactly the same result as would have occurred had he
properly reported the option income AND been entitled to an
alimony deduction. This was wrong. In my opinion he should
have ended up liable for tax on HALF the option income.

Now, as to the confusing footnote, it has always been my
understanding that the tax liability in a divorce situation
remains with the "owner" of the income, regardless of how
the proceeds are distributed. But, this court apparently
disagrees. So, [tongue in cheek] the next time a client has
to liquidate an IRA because they have no other way to come
up with a cash amount necessary to "settle" a divorce
decree, just ~try~ to cite this case as holding that the
spouse receiving the cash is the one responsible for the tax
and penalty on the IRA distribution!

Bottom line: The husband lost the case, but he actually
ended up better off than if his return had been prepared
correctly!

MTW

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"MTW" <mtwingcpa[at]yahoo.com> wrote:

- quote -

I believe this was deemed to be property that the spouse
already owned. Thus, she was liable for the taxes.

---
Richard B. Gardner, EA

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"MTW" <mtwingcpa[at]yahoo.com> wrote:

- quote -

Well apparently, as per the divorce agreement, she actually
owned the options and the husband exercised the options both
before AND after the divorce and simply remitted the
proceeds to her. The editorial I read quoted the court as
saying he didn't get the alimony deduction but that he DID'T
(past tense) pay tax on the exercise of the options. They
didn't rule on the taxability of the option exercise to him,
they simply noted that he didn't pay tax on it and referred
to his 2000 return.

I think that whomever examined the return dropped the ball.
I agree it was an odd footnote though.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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MTW wrote:

- quote -

Proceeds of the sale would flow to the spouse if the spouse
had an ownership interest in the options. The document
states that she had a 50% interest. One could conclude that
one half of any gain belonged to her and one-half belonged
to him. There is no explanation as to why he gave her 100%
of the proceeds rather than half. The statement in the
footnote regarding proceeds and reference to Sec. 1041 makes
no sense without further explanation.

I suppose that's why you can't treat this opinion as
precedent for another case. (:-D

--
Alan
http://taxtopics.net

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- quote -

I don't see any conflict here, Mike??? What has the
distribution to do with alimony?? Certainly (unless I've
missed something), the husband is not claiming an alimony
deduction and the wife is not reporting the proceeds (if
there were any) as alimony received.

"Jack" - John H. Fisher - TaxService[at]aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=

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In this recent case, Tovar vs. Commissioner, TC Summary 2004-120,
9/2/04, the tax court once again pointed out that it ain't
alimony unless the decree (or applicable state law) provides that
there in no liability for payment after the recipient's death.

But, there was a queer comment in Footnote 5: "Since the proceeds
[of the husband's stock options] were all distributed to the
former wife, the tax, if any, on those proceeds rested with her.
Sec. 1041."

Wow! I guess the Tax Court has re-written Section 1041 !!! Since
when does the tax liability flow to the spouse who receives the
proceeds ??? The result, it appears, was to allow the husband an
EXCLUSION for the income in lieu of an alimony DEDUCTION.
Weird...

MTW

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