LOS ANGELES (MarketWatch) - Despite a divorce agreement that specifically said neither party shall pay or receive alimony, one reader, Divorced in New York, was hit with a $5,000 tax bill from the Internal Revenue Service for some phantom alimony.
Even though the IRS had a copy of the divorce agreement in hand, the agency insisted on assessing the taxes. Why? Because this woman's ex-husband presented canceled checks to prove he made payments to her in the amount reported as alimony. The IRS didn't really care that it wasn't alimony.

What were the payments? They were her portion of his monthly pension, as granted to her in the divorce. Unfortunately, the state was sending the money to Divorced's ex-husband, with the withholding already pulled out, and he was sending to her half of the net. Then, on his tax return, the ex-husband was deducting his full payment as alimony, and pocketing her share of the refund.

This problem could have been avoided if the attorney had set up a QDRO, says Patricia Powell, a certified financial planner and chief executive of The Powell Financial Group Inc., in Martinsville, N.J.

What's a QDRO? A qualified domestic relations order. Properly prepared, it instructs the pension plan to issue a check directly to the ex-wife for her share of the income.

With a QDRO, an ex-spouse can decide whether to get a lump sum rolled over to her IRA, cash it out and pay taxes, or continue to get monthly payments. She can designate how much she chooses to have withheld from her check. And, getting credit for her full share of the withholding, if Divorced had reported the pension income properly on her own tax return, she would have owed no tax.

This is a typical error when couples indulge in do-it-yourself divorces, said Lynne Gold-Bikin, chair of the family law practice group at Wolf, Block, Schorr and Solis-Cohen LLP in Norristown, Penn. Even seemingly simple divorces are more complex than they appear. They involve knowledge of both divorce law and tax law. Gold-Bikin says that if you're not a tax-law expert, you should get one to review the divorce agreement and settlement.

If your divorce doesn't get a tax tune-up, what kinds of errors are apt to occur? Here are some common problems.

Deceptive equality Often, assets appear to be evenly split based on fair market value. Everything looks all nice and equitable, but one person just got stuck with all the taxable assets, while the other walked off tax-free, warns Powell. One of the biggest traps for women, especially mothers, is that they often give up their right to practically everything in order to keep the house and avoid moving their children.

Here are some tax rules to consider:

Pensions, 401(k)s and IRAs are taxed at ordinary income rates. With the high distribution added to your other income, this can throw you into the top tax bracket of 35%.

Stocks and investments often get long-term capital gain treatment - limited to 15%.

The house looks like a good deal with that $500,000 personal residence exclusion. But once your ex signs it over to you, you've instantly lost half that cushion. If the appreciation on your residence is substantially more than the $250,000 personal exclusion, Powell advises you sell the house while you're still married and can use the full $500,000 joint exclusion. Then, split the money and buy your own home in the same neighborhood, which will now have a higher tax basis (basis is the cost, for tax purposes). Note: In most states, property tax keeps up with the increasing market value of the home. In California, due to Proposition 13, property taxes are based on the original purchase price. Before you do this in California, run the numbers to see whether the increased annual property tax payments on the new home might cost you more than the potential capital gains tax.

Cash is valued at face-value for tax purposes - there is no tax on cash!

How can you avoid the problem of "deceptive equality"? Powell suggests you sell off the assets with the high tax values and split the cash. Or if that's impractical, balance the split based on the tax costs. Have your certified financial planner or tax professional review the assets' tax bases to help you reach a truly equitable split.

The vanishing alimony trick Alimony recapture can be a common problem, cautions Gold-Bikin.

IRS Publication 504 explains what the recapture is: "You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year."

Why is this recapture needed if the divorce agreement is properly drafted? Gold-Bikin said this often happens when the alimony payments aren't made on schedule. If several payments are missed in one year, then made up in another year, it's easy to see that $15,000 swing take place. Or if payments are stopped altogether and there haven't been three years of regular alimony payments, that would also trigger the recapture.

Why does this matter? Because the person paying the alimony will lose the deduction. And the person who received the money may go back and file amended returns for all the alimony years - and get refunds. Read that last sentence again if you're dealing with a deadbeat former spouse. You may have a refund coming!

How can you avoid this problem? Gold-Bikin recommends you adhere to the alimony payment schedule.

Vague assignments When the divorce decree awards family support without spelling out which part is for child support and which is for spousal support, it's all taxable to the recipient as alimony, and deductible to the payer, says Gold-Bikin. This the result of a 2005 Tax Court decision in Berry v. Commissioner.

How can you avoid this problem? Spell out how much of the support is designated for each child, and how much is spousal support.

Valid Marriage and Divorce Rules for Green Cards

   The Second Department recently set forth the criteria for setting aside an agreement.   Being unhappy with the terms is not a defense.  Read this case, and do not sign unless you agree.

65.8.34 - - - Rubin

Rubin v. Rubin, --- A.D.3d ---, --- N.Y.S.2d --- (Second Dept. 2006)(2006 WL 3086360)(2006 N.Y. Slip Op. 07863)(Oct. 31, 2006):

Supreme Court, Appellate Division, Second Department, New York.

Guadalupe G. RUBIN, appellant,

v.

James B. RUBIN, respondent.

Oct. 31, 200

ANITA R. FLORIO, J.P., ROBERT W. SCHMIDT, GABRIEL M. KRAUSMAN, and ROBERT A. LIFSON, JJ.

In an action, inter alia, for a divorce and ancillary relief, the plaintiff appeals from so much of an order of the Supreme Court, Westchester County (Tolbert, J.), entered May 3, 2005, as granted that branch of the defendant's cross motion which was converted to one for summary judgment dismissing the cause of action for rescission of the parties' "stipulation and settlement agreement."

ORDERED that the order is affirmed insofar as appealed from, with costs.

" ?A separation agreement or stipulation of settlement which is fair on its face will be enforced according to its terms unless there is proof of fraud, duress, overreaching, or unconscionability? " (Brennan-Duffy v. Duffy, 22 AD3d 699, quoting Linder v. Linder, 297 A.D.2d 710, 711). The defendant demonstrated his prima facie entitlement to summary judgment dismissing the cause of action for rescission of the parties' "stipulation and settlement agreement," by submitting, inter alia, the agreement, which contained an express representation stating that it was not a product of fraud or duress and awarded the plaintiff generous maintenance and equitable distribution, based on the financial information made available to the plaintiff's independent accountant and legal counsel, who negotiated on the plaintiff's behalf over the course of several months (see Kerr v. Kerr, 8 AD3d 626; Kavanagh v. Kavanagh, 2 AD3d 688; Berkman v. Berkman, 287 A.D.2d 426).

By contrast, the plaintiff's evidence submitted in opposition was deficient, being devoid of specificity with respect to the defendant's alleged acts of fraud. The plaintiff instead endeavored to describe the defendant's coercive relationship with her, submitting medical evidence consisting of statements made by mental health professionals who treated her after the agreement was executed and who failed to establish that the plaintiff experienced any incapacitating mental impairment at the time of execution of the agreement. Curiously absent from the plaintiff's proof was an affidavit from her former attorney or financial experts, indicating that the defendant failed to comply with demands for financial disclosure or that the defendant or his agents made any actual misrepresentations to them. Instead, the plaintiff offered the redacted portions of an unsworn hand delivered memo of her former attorney dated the same date as the notarization of the plaintiff's execution of the agreement, but four days prior to the defendant's execution of the agreement, itemizing certain alleged misrepresentations of the defendant and indicating the attorney's belief that the defendant was untrustworthy. This memo clearly negates any potential factual issue since it unequivocally demonstrated that neither the plaintiff nor her former attorney relied on the representations made by the defendant in entering into the agreement. Moreover, the memo also unequivocally shows that the plaintiff could have revoked her acceptance of the agreement prior to its execution by the defendant.

The plaintiff also submitted the affidavit of a realtor to establish that the former marital residence was grossly undervalued, opining that when the property was appraised it was worth between $26,100,000 and $35,000,000 instead of $15,000,000, as set forth in the agreement. That affidavit, however, consists of a one-page estimate of the market value of the property and contains no information as to the methodology utilized in arriving at the appraised value. The realtor's affidavit stated that there would be no change in valuation due to the six-months passage of time between the execution of the agreement and the date of the appraisal, without making any reference to the existence of fluctuations, if any, in real estate values over the time period in question. Even if the valuation presented by the plaintiff was accurate, the plaintiff failed to allege that the true value was known by the defendant. In fact, the agreement clearly stated that both parties had a right to appraise the property but both parties waived such right. In this regard, the plaintiff failed to demonstrate how she was impeded from doing her own appraisal of the marital residence prior to entering into the agreement in question, and ignored the defendant's assertion, making it unrebutted, that the valuation figure agreed to by the parties was selected by the plaintiff and thereafter accepted by the defendant.

As noted above, a party seeking to rescind a separation agreement or a stipulation of settlement has the burden of showing that the agreement was the result of fraud, duress, or overreaching or that its terms were unconscionable (see Chambers v. McIntyre, 5 AD3d 344; Brennan-Duffy v. Duffy, supra). In an action commenced by one spouse to rescind an agreement, the party moving for summary judgment dismissing the claim for recession must make a prima facie showing that the agreement should not be set aside and, in opposition, the spouse seeking to rescind the agreement must demonstrate the existence of a triable issue of fact sufficient to raise an inference of fraud, duress, overreaching, or unconscionability (see Brennan v. Brennan, 305 A.D.2d 524). Unsubstantiated and conclusory allegations are not sufficient to raise a triable issue of fact (see Korngold v. Korngold, 26 AD3d 358; see also Rosenzweig v. Singer, 18 AD3d 853; Deppe v. Deppe, 287 A.D.2d 480; Kammerer v. Kammerer, 278 A.D.2d 282). The plaintiff's evidence consisted solely of such conclusory and unsubstantiated allegations, and therefore was insufficient to raise a triable issue of fact. Accordingly, the Supreme Court properly granted the defendant summary judgment dismissing the cause of action for rescission.

99.2.68 Hougie

Hougie v. Hougie, 261 A.D.2d 161, 689 N.Y.S.2d 490 (First Dept. 1999)

Supreme Court, Appellate Division, First Department, New York.

Anne L. HOUGIE, Plaintiff-Respondent,

v.

Robert E. HOUGIE, Defendant-Appellant.

May 6, 1999.

**490 Allan D. Mantel, for Plaintiff-Respondent.

Michael F. Teitler, for Defendant-Appellant.

ROSENBERGER, J.P., RUBIN, MAZZARELLI, SAXE and BUCKLEY, JJ.

**491 MEMORANDUM DECISION.

*161 Order, Supreme Court, New York County (Sherry Klein Heitler, J.), entered April 17, 1998, which denied defendant's motion for partial summary judgment dismissing so much of the complaint as seeks equitable distribution of defendant's enhanced earning capacity as an investment banker, unanimously affirmed, with costs.

Preliminarily we note that whether a particular marital asset, such as the enhanced earning capacity attributable to a particular career, is subject to equitable distribution is an issue that can be decided prior to trial (see, e.g., Elkus v. Elkus, *162 169 A.D.2d 134, 572 N.Y.S.2d 901, lv. dismissed 79 N.Y.2d 851, 580 N.Y.S.2d 201, 588 N.E.2d 99; West v. West, 213 A.D.2d 1025, 625 N.Y.S.2d 116, lv. dismissed 86 N.Y.2d 885, 635 N.Y.S.2d 950, 659 N.E.2d 773). On the merits, defendant's enhanced earning capacity as an investment banker is subject to equitable distribution regardless of whether or not such a career requires a license (see, Elkus v. Elkus, supra; but see, West v. West, supra), and the amount of such enhancement was therefore properly determined without regard to the existence of any such license. However, on appeal, in his reply brief, defendant for the first time acknowledges that during the marriage he obtained a Series 7 securities license, which is necessary to trade securities in the United States, and such license should also be taken into account in determining his enhanced earning capacity (see, McSparron v. McSparron, 87 N.Y.2d 275, 285- 286, 639 N.Y.S.2d 265, 662 N.E.2d 745).