Newland's Business Notes

Divorce = Financial Trauma

Volume 4 Issue 5 -- September/October 2000

If anything good can be said about death, its that, at least, it puts an end to many nagging problems. The same cannot be said about divorce. As a business and tax attorney, I am frequently addressing problems stemming from divorce.

Many times, when a new client recounts a tax or business situation to me, I ask, "And when did you get divorced?" The response is often, "How did you know?" Aside from being clairvoyant (which few will acknowledge), I have learned that many unfortunate situations have their geneses in divorce.

Tax Problems

Often, during a divorce, the focus is on who will own or control the house, the business, the kids, and the pets. While, admittedly, these matters need to be addressed, it is common to plan inadequately for, or even ignore, other matters that may occur after the divorce.

For example, tax returns for the year of divorce can be filed jointly if the warring parties agree to do so. But what happens with the tax liability or refund? How will additional taxes or refunds be allocated among the former spouses who, after a divorce, often wont discuss such matters?

Problems escalate exponentially if there is an income tax audit of the former couple, which can go back as far as three years, or more if fraud or substantial understatements of tax are involved. If there are unexpected tax liabilities, how will they be shouldered by the now unfriendly ex-spouses? As a reader may imagine, these issues are tough and become tougher when the spouses fail to agree in advance how to address them.

While now there are new IRS innocent spouse rules that may provide relief for some spouses from unexpected joint tax liabilities, such relief is not always available, and the procedural requirements for claiming such relief can be substantial. A better course of action is to designate in the property settlement agreement how the spouses will address government audits and how future tax liabilities will be paid.

Although it is not widely discussed, particularly by the IRS, anecdotal evidence indicates that many divorced individuals fail to file tax returns. The palpable rejection, depression, and denial of recently divorced spouses converts into ignoring such obligations. Unfortunately, Congress has not yet declared a tax holiday (or amnesty) for recently divorced spouses and, if it did, the divorce rate would skyrocket to near 100% very quickly. While certainly no readers of this newsletter would neglect their duty to pay taxes, it seems everyone has a friend getting a divorce. If you do, you may want to share this newsletter with them.

Business Problems

Business distress often occurs when both spouses were active in a business and only one spouse is left to carry on after the divorce. Plans need to be formulated during the divorce to ensure that either vital business information can be obtained from the exiting spouse or arrangements are made to work together later if necessary. For example, one spouse may have negotiated a lease or contract for a client before the divorce which now must be renewed. Planning ahead may involve getting the required background information or securing a promise of cooperation from the spouse who handled the arrangements earlier.

The House and Other Assets

While it is common to deed the family house to one of the spouses in the divorce property settlement agreement, occasionally joint ownership continues after a divorce. In such cases, the decision of when to sell and under what conditions needs to be explored in advance. This holds true for other jointly owned assets as well.

Planning is difficult under the best of circumstances. In divorce situations, in the milieu of emotions and family betrayals, planning is all the more difficult. And, even if proper planning is done, a divorce will still be traumatic. Not addressing matters likely to arise, however, may make the torment of divorce continue on for years.

Copyright 2000

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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