Family Law / Divorce Tax Issues

A major concern for business owners going through a divorce, other than valuing the business and the practicalities of running the daily operations (for small, closely held entities), includes the tax issues that come along with a divorce. Our family law and divorce attorneys are experienced in handling these types of issues incident to a divorce. Having an attorney who is knowledgeable about business tax issues with you during this time can make a complicated process smoother.

Section 1041 of the Internal Revenue Code describes how you can use a redemption of stock in divorces. This occurs when the corporation purchases stock from a stockholder. The goal of the redemption is usually to have the corporation transfer a promissory note or cash to the stockholder and have the stockholder transfer all of his or her stock to the corporation. The redemption should not be finalized until after the divorce, although negotiations finalizing the terms of the redemption can occur before the final divorce. Typically, the stockholder usually seeks capital gain treatment for the distribution from the corporation, rather than divided treatment. This allows cash to be taken out of the company in exchange for stock at capital gains rates.

Cash is usually the big problem in divorce. Cash may be obtained from a 401k without penalty via a QDRO (Qualified Domestic Relations Order) in the divorce setting.

As you can probably see from the information provided above, business tax issues concerning divorce can be complex with numerous hurdles through to properly obtain the outcome that is most beneficial to you. The advice of an attorney with expertise in the area can be invaluable to your case.