Divorce decree|My homework aider

Instructions:

You are the tax manager of Maximus & Smith CPA and have asked the two tax interns to prepare a research memo regarding the same client.  You provided each the same information about the client and are using this assignment as one of the indicators to help you decide which one to recommend for a full-time position. Review the following two research memos addressing the same question.

Prepare the feedback you would offer each intern including what changes you would make if any to each memo in order to improve it. Be sure to include, which intern do you think did a better job on this assignment.

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See attached the research memos from the two different students.

Memo to File from Stuart Student

TO: File

FROM: Stuart Student

RE: Ben (tax year 2016)

Facts

Ben, a single taxpayer, divorced his wife, Jennifer. Through a court settlement between Ben and his former spouse, Ben paid Jennifer for alimony and child support. The separation decree included monthly payments made to Jennifer, where Ben pays $500 in alimony and $600 in child support.

Moreover, Ben was unemployed for 3 months of the year and received a total of $3,000 in unemployment benefits. During the 9 months of Ben’s employment, he paid his former spouse $9,900 and stated that $4,500 was for alimony payments and $5,400 was for child support. As a result of his unemployment and lack of sufficient payment, Ben gave Jennifer his home theatre equipment to compromise for the missed payments during 3 months of his unemployment. The theatre equipment has a basis of $6,000 and a market value of $3,300. Furthermore, Ben made $72,000 in earned income during the 9 months of his employment.

Issue and Conclusion 1

Can Ben deduct the alimony payments of $500 a month from his income? Can Ben deduct the $600 of child support payments from his income?

Yes, Ben is allowed to deduct the $500 of monthly alimony payments that he makes to his former spouse.

No, Ben cannot deduct the $600 of monthly child support payments.

Analysis 1

Alimony payments are fully deductible towards the total income of the individual making the payments and are included in the income of the individual receiving the payments. According to Sec.215(a), alimony payments are deductible towards Ben’s income. Ben can deduce the $500 of monthly alimony payments made to his former spouse in the same year in which he makes the payments. Alimony is strictly defined in Sec.71 of the Internal Revenue Code. In order for the payments to be considered alimony, such payments have to be arranged under a formal divorce agreement. Ben’s cash payments to Jennifer were ordered by the court. Second, Ben and his former spouse cannot reside under the same house, meaning that they cannot file a joint tax return. Also, Ben is not liable for any payments after the spouse’s point of death. After analysis, Ben’s cash payments of $500 are considered alimony and completely deductible. Alimony is considered a For AGI deduction, therefore it is subtracted from gross income. The former spouse would have to give Ben her identification number (S.S number) in order for Ben to insert her S.S number in his tax return for the year the payments were made Sec.215(c)(1) and Sec.215(c)(2). This will allow the IRS to confirm the alimony payments by concluding that the former spouse did indeed receive alimony payments, which is included in her gross income. This means that Ben would have a lower Adjusted Gross Income (AGI), if everything else is held equal. The fact that his AGI is lower provides a tax benefit for Ben because most itemized deductions are off of AGI floor limits.

The child support that Ben pays his former spouse during the tax year is not deductible. Payments made towards the care and support of a child are not part of alimony Sec.71(c)(1) and as a result, not allowed to be deduced during any year.

Issue and Conclusion 2

Is the $3,000 of unemployment compensation that Ben received for the quarter, taxable?

The $3,000 of unemployment compensation is fully taxable.

Analysis 2

Ben is required to include unemployment benefits into his gross income Sec.85(a). Any amount of compensation that Ben received during his three months of unemployment, relating to his unemployment, is considered unemployment compensation under law Sec.85(b). Therefore, the $3,000 of compensation Ben received for his unemployment during the quarter is subject to taxation. However, Reg. Sec 1.85-1 stipulates that Ben could be entitled to limitations that could benefit him. Under this regulation, effective after Dec. 31, 1978, Ben’s modified adjusted gross income would have to exceed the base amount of $20,000. Ben earns $72,000 plus the additional $3,000 in unemployment giving him a total of $75,000 in modified adjusted gross income. The difference between the modified AGI and the base is then divided by two, which will equal to $27,500. The rule states that Ben has to include in gross income the lesser of the $27,500 and the unemployment compensation. In the case of Ben, he would have to include the entire $3,000 of unemployment benefit. In summary, the unemployment compensation of $3,000 is fully taxable for Ben.

Issue and Conclusion 3

Does the theater equipment that Ben gave his former spouse as a means of settling the three months of not paying alimony qualify as valid alimony? If it doesn’t qualify, should Ben recognize a gain or loss from the transfer?

No, the transfer of theater equipment does not qualify as an alimony payment, therefore it cannot be treated as an alimony payment for deductibility purposes.

Ben would have to treat the transfer of property as a gift.

Analysis 3

One of the characteristics of alimony is that it is a cash payment made to the spouse under a separation decree Sec.71(b)(1). The key word here for Ben is cash. The transfer of the equipment is not a cash payment, instead, it is a disbursement of property. Only cash or cash equivalents, such as checks or money orders, are considered a valid form of alimony. A transfer of property is not a valid form of alimony Temp. Reg. Sec 1.71-1T(b).

Furthermore, Ben has made a transfer of property to his former spouse. Under Sec.1041(a)(2), no gain or loss is reported if the transfer was made to a former spouse. The transfer, however, must have occurred because of the divorce. A transfer of property is determined as being caused by the divorce if the transfer occurred within one year of the separation or if the transfer is related to the termination of the marriage Sec.1041(a)(2). Since Ben has been divorced for over two years he doesn’t meet the one-year limit. Therefore, the transfer must be related to the termination of the marriage in order for Ben not to recognize a gain or loss. In order to be related to the “cessation of the marriage”, the transfer must satisfy the two following requirements: (1) the transfer is made in accordance with a separation decree (2) and the transfer occurred within six years of the divorce Temp. Reg. 1.1041-1T, A-7.

The transfer was executed within six years of the divorce and Ben’s reason for the transfer of the music theater property was because of the alimony and child support payments stated in the separation decree. Based on these facts, the

SOLUTION

1. Analysis of Child Support: Stuart correctly concluded that child support is not deductible, but did not provide a clear explanation of why. Stuart could improve the memo by providing more detailed analysis on why child support is not deductible. Analysis of Unemployment Compensation: While Stuart correctly concluded that unemployment compensation is fully taxable, he did not provide an analysis of the taxation of the theater equipment given to Ben’s former spouse. Stuart should have analyzed whether Ben recognized a gain or loss from the transfer of theater equipment. Writing style: Stuart’s memo would benefit from more concise and clear writing. There are several long sentences that could be broken up into smaller, more easily digestible sentences.