Strategic Tax Filing During Divorce in Texas

Filing income tax returns while a divorce pends can be an especially contentious issue. When one spouse lacks trust in the other spouse, even filing a joint return can be troublesome. Usually filing jointly results in reduced overall tax burden for the still-married couple. But, sometimes filing jointly may result in a greater benefit to one spouse or the other. This may arise when one spouse has higher earned income than the other spouse, an asset titled in one spouse’s name generated significant income, or a spouse failed to make estimated tax payments throughout the year. The acquiescing spouse may agree to file a joint return in exchange for something of value in return, such as a greater portion of the refund or some other concession in the litigation.

tax timeFor two individuals to file a joint tax return, they must be married as of December 31st of the tax year. If the couple’s divorce was final prior to December 31st of the year, then they are not considered married for the purpose of filing a joint return. Likewise, an individual is not considered married for purposes of filing a joint return if he or she is legally separated. Texas does not have a law regarding legal separation, so this would not apply to a couple seeking a divorce in Texas.  Texas law considers you married until the divorce is final.

When spouses file a joint return, they may not later amend to file a married separate return. If there is a dispute about filing a joint return, instead of failing to file or incurring penalties, the spouses may want to file married separate returns and amend to file jointly later. This is better than incurring a “failure to file” penalty, which can run as much as 25% of the total tax due.

There are circumstances where filing a joint return may not be beneficial based on the extent of the marital estate. It is important to get the advice of a highly qualified tax professional to know what is best for your particular situation.

Head of household status comes into play when the divorcing spouses had dependent children. One or both spouses may qualify to file as head of household. If the spouses have lived apart for more than 6 months and one spouse provides more than half of the cost of maintaining the household for the dependent child for more than half the year, that spouse may file as head of household. Filing head of household provides greater tax advantage than filing as single or as married filing separate, but it is generally not as beneficial as filing jointly.

The requirements for head of household are:
1.  The taxpayer is considered unmarried on the last day of the year.
2.  The taxpayer paid more than half the cost of keeping a home for the year.
3.  A child, dependent parent, or other dependent lived with the taxpayer for more than half the year.

Head of household is based on actual custody and may not be negotiated the way a dependent exemption may be.

Hat tip for the background for this article to Brittany Stephens Pearson and her article “Strategic Use of the Tax Filing Status” from the Fall 2014 issue of the ABA Family Law Section’s Family Advocate Magazine.

Divorce by murder — the Arlington Texas case

domestic violenceWe have all been reading and watching the account of the Arlington, Texas woman who killed her estranged husband this week.  We are just learning that the mother filed for divorce in October and there was a hearing this week over custody of the children.  (See: Domestic dispute led to 2 deaths in Arlington.) The divorce court ruled that the father should have custody of the parties’ children. The mother lost. The mother took matters into her own hands and assured that the children would not be raised by their father.

They won’t be raised by their mother either.  She sits in jail charged with capital murder.

The Tarrant County court records indicate that the divorce was filed by the mother in early October. They were married 8 years and have 4 children ages 18, 8, 6, and 3. The pleadings filed by each party are relatively standard.  Each parent asked for standard shared parenting, although each requested primary custody of the children. Nothing in the pleadings indicates a concern about past domestic violence.

A temporary hearing was held in early December, where the Associate Judge determined that the father should have primary custody of the children, would occupy the marital residence, and have the exclusive right to make decisions about the children’s residence, education, and invasive medical needs. The mother was to see the children according to the Texas Standard Possession schedule. The parties were still sharing the marital residence, but the mother was required to move out by the end of the month.

As a divorce lawyer in Dallas, Texas for 20+ years, I can say with certainty that this scenario is the worst nightmare for any divorce lawyer. Violence is more common in divorce cases than any other type of case.  Emotions are high and some people just can’t take it.  They result to violence against themselves, their spouses, children, or even sometimes the lawyers. Often the violence is hurtful, maybe even scarring, and sometimes it results in death, as it did for the Arlington man.

Statistics show that domestic violence is the reason stated for 1 out of every 5 divorces in the US. Most domestic violence incident reported involve the woman as the victim; men rarely report domestic violence. In a violent relationship, the most dangerous time is the first two weeks after the breakup or filing of the divorce.

If you are in a violent relationship and want out, here are some tips:

  • Create an exit strategy. Make sure you have a safe place to stay for a few weeks after the break up. Stay with a relative or friend that lives in a place the other spouse doesn’t know about.
  • Deliver news about the break up in a public place.  Having witnesses around when the bad news is delivered decreases the likelihood that there will be a violent incident.
  • Be careful going to and from work. Ask security to escort you to your car. Take a different route home or a different form of transportation than usual.
  • Hire a lawyer and get a protective order (the Texas version of an order protecting a person from domestic violence) in place. Protective orders in Texas are enforceable by law enforcement officers.
  • Call 911 if there is an immediate threat to your safety or the safety of the children.

My heart goes out to the children in the Arlington case — may their family be strong for them in this time of heart-wrenching grief.  And, my heart goes out to the lawyers for both parties.  I can’t imagine the struggle they are each going through too.

Who gets to claim the child as a dependent in a Texas divorce

depend exempThe question often arises after a divorce in Texas — which parent gets to claim the child as a dependent for tax purposes? Often this issue is settled by the obvious split of parenting time greatly in favor of one parent, but as we have seen a rise in equal time splits for parents and children we have also seen a rise in arguments over who should be entitled to the dependence exemption.

The IRS provides a special rule for children of divorced or separated parents in IRC 152(e). The custodial parent will have the right to claim the exemption provided that the parents lived apart for at least six months out of the year, the parents together provided for more than half the child’s support, and the child lived with one or both parents for more than half the year. The custodial parent is determined either by the face of the court documents or by physical custody. Physical custody is which parent has the child for the greater number of nights per year. If there is a literal tie, the winner is the parent with the higher adjusted gross income. The custodial parent may release the right to claim the dependency exemption to the noncustodial parent by completing Form 8332 “Release Revocation of Release of Claim to Exemption of Child by Custodial Parent”. This form must be attached to the noncustodial parent’s tax return to claim the dependency exemption.

It is not enough to have the assignment of the dependency exemption contained in the divorce decree. Likewise, the IRS will not accept a dependency release form if the court documents condition the exchange of the dependency exemption upon current payment of child support.

The general requirements for claiming a dependency exemption include

  • The taxpayer cannot be the dependent of another.
  • The dependent must be a US citizen or resident alien or resident of Canada or Mexico  for some part of the year.
  • The dependent cannot claim himself or herself on his or her own return.
  • The dependent must be a qualifying child or qualifying relative.

A qualifying child is one who:

  • is the taxpayer’s child, stepchild, foster child, sibling, or step sibling.
  • either under the age of 19 and younger than the taxpayer and spouse, or under age 24, a full-time student, and younger than the taxpayer and spouse.
  • must have lived with the taxpayer for more than half of the year.
  • must not have provided not more than half of his own support.
  • No joint return is being file during the year.
  • Only one person can claim the dependency exemption for the child.

For 2014, the dependency exemption is $3,950.

A child who is over the age of 18 (and not a full-time student) or has been emancipated cannot be claimed as a dependent.

Hat tip to the ABA Section of Family Law’s Fall 2014 edition of Family Advocate and the article “The Dependency Exemption” for the inspiration for this article.

10 qualities to look for when hiring experts in a Texas divorce case

hired gunIn divorce cases in Dallas or, really anywhere in Texas, it is sometimes necessary to hire a professional to offer expert witness testimony on a subject. An expert is someone who is qualified through education or experience on a subject unknown to lay persons and whose opinion would be helpful to the factfinder (judge or jury). Examples of expert witnesses often used in divorce or family law cases include psychologists, psychiatrists, doctors, CPAs, business valuation professionals, realtors, appraisers, or sometimes lawyers.

So how can a lawyer or litigant know if the expert is a good one? Here’s 10 tips for hiring a good expert:

1.  Does the expert’s experience and training match the topic about which they are to opine?
2.  Has the expert witness given conflicting opinions about the topic in prior cases?
3.  Does the expert have a history of success on the topic?
4.  Does the expert have a history and reputation for integrity?
5.  Does the expert require sufficient time to develop his opinions? Asked another way, did the expert take the case on short notice and hurry through his analysis?
6.  Has the expert followed common procedures, assessments, or protocols in conducting the evaluation to form the opinions?
7.  Do the conclusions reached have strong foundational basis?
8.  Does the expert get hired by many different firms or tend to work for only a few firms exclusively?
9.  Does the expert’s professional affiliations go beyond just membership in relevant organizations?
10. Does the expert’s writings and research show more than just length of time in the profession?

Having an unprofessional expert can cause the factfinder (judge or jury) to view not only the expert’s opinions but also the client’s entire case in a negative light. The purpose of an expert witness is to strengthen the client’s case, so it is worth it to hire a high quality expert witness.

Hat tip to ABA Section of Family Law’s Fall 2014 issue of Family Advocate for their article “Spotting the Hired Gun” by Stanley Clawar as the inspiration for this article.

No same-sex divorce in Texas (yet)

Several years ago, Texas adopted the federal Defense of Marriage Act, which give Texas the right to refuse to acknowledge legal same-sex marriages performed in other states. By not recognizing the marriages as valid, Texas law does not provide for divorce of same-sex married couples. This situation is sure to change at some point soon. But for now it creates a real problem for many couples who live here.  Dallas divorce lawyer Michelle O’Neil explains here:

 

WAIVER DANGER: Challenge when receiver is appointed in a Texas divorce

The Texas Family Code provides that a receiver may be appointed to take control of certain assets in the middle of a Texas divorce proceeding. The standard for appointing a receiver is a relatively low bar – a receiver may be appointed “for the preservation and protection of the property of the parties”. [Texas Family Code section 6.502(a)(5)].  In fact, a receiver may be appointed to take charge of community or separate property of the parties.  [In re C.F.M., 360 S.W.3d 654 (Tex. App. – Dallas 2012).] receiver 2

BEWARE, challenging the appointment of a receiver is reviewable by interlocutory appeal. This is one of the few times that interlocutory appeal applies in a Texas family law case!

An interlocutory appeal operates under accelerated deadlines, so the notice of appeal is due 20 days after the order appointing the receiver is signed by the judge. [Texas Rules of Appellate Procedure 26.1(b).] An extension of this deadline may be requested. With the notice of appeal, the appellant must designate and request the clerk’s record and the reporter’s record, which must be filed within 10 days after the notice of appeal.   Then, the appellant’s brief is due 20 days after the records are filed.

Only orders appointing a receiver are appealable via interlocutory appeal. Other orders regarding receivership are not subject to interlocutory appeal such as: order denying appointment of receiver, order dissolving receivership, or order appointing successor receiver.

Seeking interlocutory appeal under the family code does not automatically stay the appointment of the receiver or trial of the case. The trial court maintains jurisdiction over the case and may proceed with the case in any matter necessary.

NOW HERE’S THE IMPORTANT PART, failure to challenge the appointment of a receiver in a family law case by interlocutory appeal WAIVES the right to challenge.  [Sclafani v. Sclafani, 870 S.W.2d 608, 611 (Tex. App. – Houston [1st. Dist.] 1993, writ denied).]  Let me say this another way, an interlocutory appeal is the exclusive method of challenging the appointment of a receiver in a family law case.  General consensus is that the appointment of a receiver is moot after the trial is over.  [See Richards v. Mena, 820 S.W.2d 372 (Tex. 1991).]

This means that a lawyer and his or her client must decide super quickly whether to challenge the appointment of a receiver in a family law case – within 20 days or so! Otherwise, the right to complain is gone… forever. So, don’t let WAIVER DANGER happen to you!

Torn up Pre-nup — Valid or Not?

ShredWhat would happen under Texas divorce law if two spouses decide after years of marriage to tear up their prenup? Is that enough to invalidate the agreement?

I read with interest last week’s post from lawyer Daniel Clement of the New York Divorce Report about a New York case holding a premarital agreement valid even after the couple tore it up on their honeymoon. (See Braha v. Braha.) The couple was engaged less than three weeks when they married in 2002. The husband told his then-fiancé that his father “threatened to cut him off” if he did not have her sign a pre-nuptial agreement.  According to the wife, the parties never intended for the agreement to be enforceable.  Neither attempted to negotiate the agreement. While on their honeymoon, the couple ceremoniously ripped up their agreements and threw them in the ocean.  The wife destroyed her original of the agreement, but, as it turns out, the husband only destroyed a copy of the agreement. He kept his original hidden away as a secret for the 12 years of their marriage. Then, when the parties divorced in 2013, he brought out his original pre-nup and sought to enforce it.

Wife claimed that the husband fraudulently induced her to sign the agreement because he led her to believe that it was being executed as a “show” for his father.  She says Husband devised a plan where his attorney would draft the agreement and another attorney would represent her in the agreement.  Husband’s father would review the agreement. Then, all copies would be ripped up and thrown in the ocean on the honeymoon cruise. Therefore, Wife did not pay any attention to the terms of the agreement since she believed it would be void.

Husband denied Wife’s allegations. He says he never intended to deceive his father and nullify the document. He admits they tossed away copies of the agreement on the honeymoon because they would “most certainly remain married forever”.

Like Texas, New York has a strong public policy favoring premarital agreements, and in analyzing an agreement, the law requires looking only to the four-corners of the document to determine the parties’ intent.  And, like Texas, the burden is on the party trying to invalidate the agreement to prove fraud.

The court found the language in the agreement to be clear and unambiguous.  The agreement contained the boilerplate provision regarding the understandings of the parties:

“This Agreement contains the entire understanding of the parties with respect to the matters set forth herein, including, without limitation, the rights of the party with respect to the property of the other party.  There are no representations, warranties, promises, covenants or understandings, oral or otherwise, other than those expressly set forth herein.”

Further, the agreement contained provisions about how to modify or nullify the agreement:

“Neither this Agreement [nor] any provisions hereof, including without limitation, this article, may be altered, modified, terminated, or revoked, except by an instrument executed and acknowledged by both parties with the same formalities as this Agreement.”

Thus, under the terms of the agreement, the parties could only invalidate the agreement by a written, signed agreement.  Tearing up the agreement was insufficient to invalidate the agreement.

Texas law would require a similar analysis as New York under the facts of this case. In Texas, a premarital agreement is presumed valid and only limited defenses are available to invalidate a pre-nup.  One defense is that the party did not sign the agreement voluntarily. (Tex. Fam. Code §4.006(a)(1).) Typical contract defenses such as fraud are appropriately considered in the ultimate determination of voluntariness. Generally, whether a party executed an agreement voluntarily or as the result of a state of duress or coercion is a question of fact dependent upon all the circumstances and the mental effect on the party claiming involuntary execution.

Common factors considered in assessing voluntariness include:

  • The level of business sophistication of the parties;
  • The overall maturity level of the parties;
  • The education level of the parties;
  • Familiarity with premarital agreements and their impact upon martial property rights;
  • The parties’ course of dealing and length of negotiation in executing the premarital agreement; and
  • Each party’s use of independent counsel.

So, a Texas court would look first to the terms of the agreement for clear and unambiguous language.  Then, the Texas court would evaluate the defenses to the agreement – in this case the involuntariness of the execution of the agreement – based on the facts of the case.  The deck is definitely stacked against invalidation of a premarital agreement.

For more information on challenging a premarital agreement in Texas, see my blog post Dallas Court of Appeals Affirms Trial Court’s Judgment Voiding Premarital Agreement and the analysis of the Dallas Court of Appeals opinion in Moore v. Moore.

For more information about premarital agreements in Texas, see my related blog posts on Texas premarital agreements here.

Dallas divorce lawyer has unique perspective

Dallas divorce attorney Michelle May O’Neil has a unique perspective because she practices both litigation and appeals in the Texas family law area. This helps her see a case not only as an advocate for the client’s position to either a judge or jury, which most family law attorney share, but also from the lens of the appellate court who might review the case after it is over. She is in a position to “dot the i’s and cross the t’s” by knowing how the case will be analyzed when it is over. Appellate courts look at whether error was properly preserved and whether the errors made, if any, rise to the level of actually being harmfully reversible. Here’s how Michelle O’Neil describes this unique perspective:

 

 

What can a family law appellate lawyer do for my case?

appeal arrowYes, family law appellate lawyers handle appeals to the Texas court of appeals or the Texas Supreme Court. We read records, write briefs, and make oral arguments.  We research rules and analyze case opinions. But, adding an appellate lawyer to your trial team can be beneficial long before filing a notice of appeal.

Pleadings

Early in the case, the appellate lawyer can assist with complex pleading issues.  If jurisdiction is contested, the appellate lawyer can prepare and present the plea to the jurisdiction or special appearance and get the legal issues ready for mandamus (family law cases) or interlocutory appeal (civil cases). The appellate lawyer can draft special exceptions and craft special pleadings for complex claims or defenses.

Complex Legal Issues

An appellate lawyer can be a member of the family law trial team, much the same as an expert witness or jury consultant. As a second chair lawyer in the case, the appellate lawyer can take charge of complex legal issues so the trial lawyer can focus on presenting the factual issues.  For example, in a challenge to a premarital agreement, the appellate lawyer can handle the legal research and briefing on the basis for the challenge, coordinate the evidence needed to meet the elements of the claim, and draft the pleadings on the issue.

Dispositive Pre-trial Motions

Summary judgments, even if unsuccessful, can help prepare the trial lawyer to make a motion for directed verdict at trial or raise a legal sufficiency point on appeal. A no-evidence motion for summary judgment can be used strategically to either eliminate unmeritorious claims prior to trial, or at a minimum get an idea before trial of the evidence and legal theories the other side may rely upon to prove the claim. So, an appellate lawyer can be especially beneficial in preparing summary judgments prior to trial to eliminate (or defend against elimination of) some tenuous claims. In a jury trial case, the appellate lawyer can file Rule 248 motions seeking determination of the trial court’s rulings on matters of law.

Pretrial Appeals

When a party suffers a negative ruling on a pretrial matter, such as discovery, mandamus may be a viable alternative. Or, if the trial court appoints a receiver over the marital estate, interlocutory appeal will be required to avoid waiver of error. Interlocutory appeals have accelerated deadlines to watch out for. An appellate lawyer can be useful for seeking redress in the appellate courts of pretrial rulings either by mandamus or interlocutory appeal, as appropriate.

Trial

Having an appellate lawyer sit second chair at trial can ease the pressure on the trial lawyer from focusing on preservation of error issues to concentrating on presentation of the factual issues.  A motion can be made at the beginning of the trial to allow the appellate lawyer to handle all objections. (The worst scenario for a trial lawyer is to hear from an appellate judge that he or she waived error by failing to make the right or timely objections!) The appellate lawyer can draft and present motions for directed verdict, preserving error on the sufficiency of the evidence arguments for appeal. In a jury trial, the appellate lawyer can present and monitor issues pertaining to limine and jury charge. Recently, the Texas Supreme Court has moved away from broad form submission and toward granulated charge questions. Having an appellate lawyer handle the charge objections and requests for submission can ease the trial lawyer’s burden.

Post-trial

After trial is over, an appellate lawyer can be beneficial to ensure that requests for findings are timely filed, especially with the special deadlines for such findings in many family law cases. The appellate lawyer can handle sufficiency objections to the trial court’s ruling and proposed judgment, or objections to the jury’s verdict. Motions for new trial and other post-judgment motions are also an area of an appellate lawyer’s expertise. Preparing the issues for direct appeal after the entry of judgment, and preserving the deadlines, can be essential to presenting the case for appeal, and directly related to the appellate lawyer’s purpose.

 

Would living in Texas have been better for Mr. Hamm in his Oklahoma divorce?

Hamm divorce

The Harold Hamm divorce in Oklahoma is getting a lot of media attention right now. The divorce trial has started and the wife is making allegations that the husband’s company is rewriting history to downplay his role in the company’s success in order to increase the value of the marital estate subject to division. The trial has been closed to the media and interested onlookers and the lawyers have been placed under a gag order to prevent them from leaking interesting tidbits to the media, so we won’t know exactly what’s going on for a while.

Hamm divorce

Mr. Hamm founded Continental Resources in 1967, about 21 years before the marriage. He now owns 68% of the company’s shares and amassed a $19 billion fortune during the marriage. When Mr. Hamm divorced his previous wife, a year before marrying the current Mrs. Hamm, court filings estimated his net worth to be around $16 million.  Under Oklahoma law, the growth in the parties’ net worth deriving from their work efforts during the marriage is considered marital wealth, subject to equitable division under Oklahoma law. So, how much each spouse gets in the division of property depends on the value the judge places on Mr. Hamm’s work during the marriage.

The allegation is that the company has been secretly altering its website and other public information to make it appear that market factors had more to do with the company’s success during the Hamm marriage than Mr. Hamm’s direct efforts. Oklahoma law apparently will make a distinction between Mr. Hamm’s efforts that increased the value of the company, which would be attributable to marital property. On the other hand, if the increase in value of the company was based on market factors outside of Mr. Hamm’s efforts (“luck”), then the increased value would not be marital property. So, Mr. Hamm has incentive to downplay his role, while the wife benefits from extolling his virtues.

Reporters were able to obtain the company’s corporate website from internet cache and discover revisions to the website such as a change that backdated a very profitable decision to move the focus from natural gas to oil to before the date of the Hamm marriage. Another change added a date before the Hamm marriage of the company moving into a basin in North Dakota. The company apparently changed the company’s 2013 annual proxy which originally stated that Mr. Hamm grew the company through his leadership skills and business judgment. The document produced struck the language extolling Mr. Hamm’s contributions.

Texas Divorce Law

Texas divorce laws would approach the Hamm divorce very differently than Oklahoma divorce law. As a community property state, Texas would look at the moment when the asset was obtained by the spouse to determine if the asset is community property and divisible upon divorce, or separate property of the husband and not divisible. So, in the Hamm situation, if all of the shares of stock were purchased and owned prior to the marriage, Texas law would consider the stock husband’s separate property, not subject to division upon divorce. 

The next step in the analysis of the Hamm situation under Texas law would be to evaluate the characterization of the increased value of the stock.  Unlike Oklahoma law, Texas would treat the increase in value of the stock, regardless of the efforts of Mr. Hamm in causing the increase, as separate property, the same as the stock itself.

Under Texas law, Mrs. Hamm might have a claim for reimbursement to the community estate under the case of Jensen v. Jensen. This Jensen claim would seek reimbursement to the community estate for the time, toil, and talent expended by one spouse to benefit his separate estate without the community estate receiving a proper benefit. So in the Hamm situation, under Texas law, the question would be whether Mr. Hamm received an appropriate salary (which would be community property) for his efforts in working for the company that caused the increase in the stock value.  If he did receive an appropriate compensation, then the wife would not have a Jensen claim.  However, if he was under- compensated or received no compensation for his efforts on behalf of his separate property company, then the community could make a claim to the increase in value of the separate property stock.  The value of such claim would be limited by the reasonable compensation he should have received.

Needless to say, under Texas law, the Hamm divorce would look very differently than it does under Oklahoma law.

 

Hat tip:

Joshua Schneyer and Brian Grow, U.S. oil baron rewrites his company’s history; move could stave off record divorce payout

Joshua Schneyer, Billion-dollar debate in Oklahoma divorce: Was oilman just lucky?

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