Example: Giuliani filed for divorce in October 2000 (after 20 years of marriage and two children), charging Hanover with cruelty. In response, Hanover blamed the ex-mayor’s “open and notorious adultery” for the split. He often appeared in public with his girlfriend Judy Nathan (they are married now). When they initiated their divorce proceedings, Giuliani was a modestly paid government official. In fact, Hanover earned more money as an actress. That changed after the terrorist attack in New York on September 11, 2001. As a result of Giuliani’s role in dealing with this tragic event, his future earning power increased substantially. Accordingly, Hanover was entitled to share in this windfall by receiving an equitable distribution valued at more than $6.8 million.

The UMDA’s provisions on the distribution of property upon divorce have been influential, although not followed by all states. Under the UMDA, a professional degree is not property and therefore not subject to equitable distribution upon divorce. Although an asset, its future monetary value is too uncertain, and is not transferable. However, the contributing spouse is entitled to some compensation for helping the spouse obtain the degree. Thus, reimbursement alimony will be awarded for this purpose; to reimburse for monetary contributions made for the education of the degreed spouse. See, e.g., Mahoney v. Mahoney, 91 N.J. 488, 453 A.2d 527 (1982).

Although most jurisdictions do not recognize a professional license as a marital asset, professional goodwill is considered marital property that may be equitably distributed. “Professional goodwill” is described as the enhanced earning capacity that comes from a professional’s reputation, and client or customer list. See, e.g., Dugan v. Dugan, 457 A.2d 1 (N.J. 1983) (law practice); In re Marriage of Fleege, 568 P.2d 1136 (Wash. 1979) (dentist’s practice).

Pension rights are also marital property that can be divided. These can either be vested (where the employee would be entitled to the benefits immediately if he or she quit or was fired) or non-vested. Although the receipt of non-vested benefits may be uncertain, both types of pension rights are now readily recognized as property subject to distribution. See, e.g., Bender v. Bender, 258 Conn. 733, 785 A.2d 197 (2001). To determine the amount distributable if the pension rights are non-vested, courts calculate the “present value” of future pension benefits.

Sometimes, the amount of pension benefits that must be distributed exceeds the amount of available assets. Accordingly, courts have used an alternative method of distributing pension benefits—reserved jurisdiction instead of present division. Reserved jurisdiction involves deferring distribution until the beneficiary-spouse actually begins receiving benefits. This method necessitates involvement by the pension plan administrator. A “Qualified Domestic Relations Order” (QDRO) is the required document to effectuate payment to the beneficiary’s former spouse. A QDRO must follow stringent requirements to be valid. (Those requirements are beyond the scope of this course.)

Alimony/Spousal Support

Alimony arose in the English ecclesiastical courts at a time when divorce was not permitted and a married couple could obtain only a legal separation. Because it was incident to a separation, alimony originally “was a continuation of the husband’s (and only the husband’s) legal duty of support, and a duty that was not discharged because the marriage had not terminated.” Where the wife was at fault (for the judicial separation), she was not entitled to alimony.

The original alimony concepts carried over to modern American divorce laws. Divorce, as it was recognized by courts in this country, was initially wholly fault-based, and so a woman could collect alimony from her ex-husband only if he was found to be at fault for the divorce. Furthermore, alimony could be temporary (awarded while divorce is pending—alimony pendent lite) or permanent (awarded at the conclusion of the litigation).

Today, alimony awards are generally based upon the needs and abilities of each party, using the following factors:

• Age of the parties;
• Health and physical condition of the parties;
• The earning capacity of the parties;
• Present income of the parties; and
• The jurisdiction of the marriage (in some jurisdictions).

When divorce statutes were fault-based, there were two additional factors courts considered:

(1) degree of fault and

(2) maintenance of status.

Taking into account the above factors, courts sometimes award rehabilitative alimony, which was used to support the spouse during a period of retraining or re-education for entry into the workforce, thereby enabling the spouse to become self-supporting.

Example: Dolores lives in a state that limits alimony awards to three years where there are no minor children, but permits an extension of the period if warranted. Dolores petitioned for an extension; however, she did not articulate any justifiable reason for the request. The court denied her demand, reiterating that alimony was only a short-term support mechanism until the spouse could become self-supporting. Dolores had the burden of proving that justice required an extension. See, e.g., Calderwood v. Calderwood, 327 A.2d 704 (N.H. 1974).

As mentioned, historically, only the wife was entitled to alimony. Since 1970, most states no longer base alimony awards on the spouse’s gender. See, e.g., Pfohl v. Pfohl, 345 So.2d 371 (Fla.App. 1977).

Once a court grants alimony, it may later be modified by the court or even terminated completely, under certain circumstances (e.g., a substantial change in the circumstances). For example, UMDA § 316 allows the amount to be changed “only upon a showing of changed circumstances so substantial and continuing as to make the terms unconscionable.” Other grounds for termination are remarriage, cohabitation and death (of either the payor or payee).

Tax Considerations

The classification of the distribution determines its taxability. Specifically, property settlements are not taxable transactions to either spouse. See IRC § 1041. Alimony is taxable to the recipient and deductible by the payor, see IRC § 71 and §215, respectively, provided it meets certain requirements.

A payment to or for a spouse under a divorce or separation instrument is considered alimony if the spouses do not file a joint return with each other and all the following requirements are met:

(1) The payment is in cash.
(2) The instrument does not designate the payment as not alimony.
(3) The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance.
(4) There is no liability to make any payment (in cash or property) after the death of the recipient spouse.
(5) The payment is not treated as child support.

To get the benefit of a deduction, the amounts attributable to alimony must be designated as such in a written divorce decree. One reason the Internal Revenue Service requires specific designation is so that the payor does not overstate the deductible amounts paid to the ex-spouse. Not all payments under a divorce or separation instrument are alimony. Alimony does not include:

• Child support,
• Noncash property settlements;
• Payments that are the spouse’s part of community income;
• Payments to keep up the payer’s property, or
• Use of property.

Any amounts that do not meet the alimony definition are neither deductible nor includable in income. The biggest area for possible abuse clearly is child support.

This is just an overview of the tax considerations involved in divorce. More detailed discussion of this subject is beyond the scope of this course.