Capital Gains

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If you were fortunate enough to buy stock in Apple Inc. in early 2009, you might have paid $13 per share. It’s now worth $150.

If you’re getting a divorce holding Apple shares with a substantially lower-than-market cost basis, you must plan your trial evidence or settlement to deal with the embedded capital gains tax exposure. In the example above, the gain would be $137 per share. When sold, under current tax laws, a capital gains tax of perhaps tens of thousands of dollars or more could be incurred.

If you settle this issue, you may negotiate the impact of capital gains on the spouse retaining the shares. It will always be easier, fairer, to simply divide the shares, but care must be taken to divide it “traunch” by traunch; to divide each group of shares purchased at any one time. In that way, the spouses will be assured that not only will today’s fair market value be the same, but so will the embedded capital gains issue.

If you don’t settle, the issue will be far more difficult. The court may not recognize nor account for the potential tax liability incurred if and when the stock as sold. The transfer from one spouse to the other incident to the divorce itself is not viewed as a taxable event. Even if the court computes the transfer using the current fair market value, the transferring spouse reports no capital gains; the recipient spouse keeps the original cost basis. If and when the recipient sells the shares, the recipient will bear the entirety of the capital gains tax, computed on the gain over the original cost basis.Continue Reading Considering Potential Capital Gains Tax Liabilities in Divorce

Sometimes developing divorce case law seems like a bad game of telephone.

Take the February 7, 2014 decision of the Fourth Department in Foti v. Foti. Here, the Court reversed the order of Supreme Court, Monroe County Justice Kenneth R. Fisher which had granted a wife partial summary judgment determining that various real estate entities and management companies were her separate property. She had proven that her interests were received from her father by gift.

Generally, under New York’s Domestic Relations Law §236B, property that is owned by a spouse before the marriage constitutes “separate property,” and is not divided on divorce, except, under some circumstances, to the extent of some portion of appreciation in value of the separate property over the course of the marriage. Inheritances and gifts (from someone other than the other spouse) are also “separate property.” On divorce, the court will divide  the parties’ “marital property,” property acquired during the marriage which is not “separate property.”

In Foti, the Fourth Department held that there was an issue of fact whether the wife commingled her interests in the entities, transforming the nature of those interests to marital property. The possible “commingling” arose from deductions taken on the parties’ joint tax return: “Here, the parties filed a joint federal tax return in which defendant reported her interest in the entities as tax losses, and ‘[a] party to litigation may not take a position contrary to a position taken in an income tax return,’” quoting from the 2009 decision of the Court of Appeals in Mahoney-Buntzman v. Buntzman, 12 N.Y.3d 415, 881 N.Y.S.2d 369.

In Mahoney-Bunztman, the Court of Appeals held that a husband’s decision to declare on his joint income tax return that money he received on the disposition of his interest in a real estate development company was ordinary earned income prevented him from later claiming that that money was merely a transformation of his separate property.Continue Reading Deducting Separate Property Business Losses on Joint Tax Return May Transform Property to Marital