Family Law Update 2006 Alimony and Counsel Fees Brian C. Vertz Pollock Begg Komar Glasser Pittsburgh

Four Types of Alimony (with celebrity examples) Periodic Alimony Rehabilitative Alimony Permanent Alimony Equitable Reimbursement Counsel Fees

Periodic Alimony

Rehabilitative Alimony

Permanent Alimony

Equitable Reimbursement

Counsel Fees

Periodic Alimony Although he is retired, 64 year-old rock star Paul earns a lot more than his 37 year old wife Heather, who will not have enough $ to make ends meet after divorce.

Although he is retired, 64 year-old rock star Paul earns a lot more than his 37 year old wife Heather, who will not have enough $ to make ends meet after divorce.

Periodic Alimony Elements of Proof: Budget Income Disparity Imputed Income from Property Illiquidity of Property Lingering Liabilities Health Insurance

Elements of Proof:

Budget

Income Disparity

Imputed Income from Property

Illiquidity of Property

Lingering Liabilities

Health Insurance

Periodic Alimony Stamerro , 889 A.2d 1251 (Pa.Super.2005) Husband and Wife were divorced in 2000 Husband was a highly-compensated sales executive in NYC; wife was unemployed Husband agreed to pay alimony for ten years No modification unless Husband’s income is greater than $600,000 or less than $200,000

Stamerro , 889 A.2d 1251 (Pa.Super.2005)

Husband and Wife were divorced in 2000

Husband was a highly-compensated sales executive in NYC; wife was unemployed

Husband agreed to pay alimony for ten years

No modification unless Husband’s income is greater than $600,000 or less than $200,000

Periodic Alimony Husband left his job in NYC after the company had two bad years but his salary did not decrease Moved to Florida with new wife Took a job at father-in-law’s real estate business earning less than $100,000 Sought modification of alimony

Husband left his job in NYC after the company had two bad years but his salary did not decrease

Moved to Florida with new wife

Took a job at father-in-law’s real estate business earning less than $100,000

Sought modification of alimony

Periodic Alimony Husband argued that the agreement was clear and unambiguous; said nothing about “voluntariness” Superior Court held that there is an implied duty of good faith and fair dealing in every agreement Husband evaded the spirit of the contract

Husband argued that the agreement was clear and unambiguous; said nothing about “voluntariness”

Superior Court held that there is an implied duty of good faith and fair dealing in every agreement

Husband evaded the spirit of the contract

Periodic Alimony Koehler , 2005 WL 4312126 (Northamp.2005) Bar to Alimony – 23 Pa.C.S. § 3706 Perennial Question: What constitutes “cohabitation”?

Koehler , 2005 WL 4312126 (Northamp.2005)

Bar to Alimony – 23 Pa.C.S. § 3706

Perennial Question:

What constitutes “cohabitation”?

Periodic Alimony Kozel , Superior Ct. No. 1807 WDA 2005 Short marriage (4 years) Long separation (7 years of APL) Wife was young, healthy, unemployed No alimony Issue: if there is an appeal, will APL continue?

Kozel , Superior Ct. No. 1807 WDA 2005

Short marriage (4 years)

Long separation (7 years of APL)

Wife was young, healthy, unemployed

No alimony

Issue: if there is an appeal, will APL continue?

Rehabilitative alimony Years ago, Bobby became a stay-at-home dad while Whitney brought home the bacon. To resume his career after divorce, Bobby will need vocal coaching.... and a good publicist.

Years ago, Bobby became a stay-at-home dad while Whitney brought home the bacon. To resume his career after divorce, Bobby will need vocal coaching.... and a good publicist.

Rehabilitative Alimony Elements of Proof: Impairment of Earning Capacity Plan for Rehabilitation Cost of Rehabilitation Prospects for Improving Earning Capacity

Elements of Proof:

Impairment of Earning Capacity

Plan for Rehabilitation

Cost of Rehabilitation

Prospects for Improving Earning Capacity

Rehabilitative alimony Rostron , Superior Ct. No. 1039 WDA 2005 Short marriage (5 years or less) Wife did not work, raising children 3 years of APL 65% plus 5 years of alimony “ window of opportunity”

Rostron , Superior Ct. No. 1039 WDA 2005

Short marriage (5 years or less)

Wife did not work, raising children

3 years of APL

65% plus 5 years of alimony

“ window of opportunity”

Rehabilitative alimony Kokolis , Superior Ct. No. 1131 WDA 2006 Wife was awarded alimony for five years in 2001 Wife suffered a back injury in 2005 Change in circumstances – increased medical expenses + unable to work FT HELD: Extension of alimony was granted for an additional 2-1/2 years ( to age 62)

Kokolis , Superior Ct. No. 1131 WDA 2006

Wife was awarded alimony for five years in 2001

Wife suffered a back injury in 2005

Change in circumstances – increased medical expenses + unable to work FT

HELD: Extension of alimony was granted for an additional 2-1/2 years ( to age 62)

Rehabilitative alimony Double-dipping issue: Wife was awarded 60% of the pension-in-pay-status as part of her property division in 2001 Master counted pension as income to Wife in calculating her unmet needs for alimony Trial court reversed, holding that it was a double dip

Double-dipping issue: Wife was awarded 60% of the pension-in-pay-status as part of her property division in 2001

Master counted pension as income to Wife in calculating her unmet needs for alimony

Trial court reversed, holding that it was a double dip

Permanent Alimony Married 25 years ago, Eddie and Valerie intertwined their lives and finances for most of their adult lives. Both now retired, they depend on Eddie’s residuals to pay the bills, since Valerie’s work is no longer in syndication.

Married 25 years ago, Eddie and Valerie intertwined their lives and finances for most of their adult lives. Both now retired, they depend on Eddie’s residuals to pay the bills, since Valerie’s work is no longer in syndication.

Permanent Alimony Elements of Proof: Impossibility of Rehabilitation Intertwining of Financial Destinies Sacrifice of Economic Opportunity

Elements of Proof:

Impossibility of Rehabilitation

Intertwining of Financial Destinies

Sacrifice of Economic Opportunity

Permanent Alimony Smith , 904 A.2d 15 (Pa.Super.2006) Husband and Wife married in 1965; separated in 2000 Wife had limited education, did not work during marriage; disabled after separation Wife awarded alimony until she is eligible to draw her derivative OASDI benefit

Smith , 904 A.2d 15 (Pa.Super.2006)

Husband and Wife married in 1965; separated in 2000

Wife had limited education, did not work during marriage; disabled after separation

Wife awarded alimony until she is eligible to draw her derivative OASDI benefit

Permanent Alimony Issue: Wife’s income tax liability should have been considered. She would owe taxes on her alimony award, which reduces the available dollars, and would have to pay taxes on the interest income from her share of marital property.

Issue: Wife’s income tax liability should have been considered.

She would owe taxes on her alimony award, which reduces the available dollars, and would have to pay taxes on the interest income from her share of marital property.

Permanent alimony Hout , appeal auashed, 898 A.2d 1138 (Pa.Super.2006) Illiquid marital estate – house only Disparity of incomes Alleged medical problems 15 years of alimony pendente lite

Hout , appeal auashed, 898 A.2d 1138 (Pa.Super.2006)

Illiquid marital estate – house only

Disparity of incomes

Alleged medical problems

15 years of alimony pendente lite

Equitable Reimbursement Jessica owes her career to the publicity that her marriage with Nick attracted. As soon as she reached the pinnacle of pop stardom, she dropped him for another.

Jessica owes her career to the publicity that her marriage with Nick attracted. As soon as she reached the pinnacle of pop stardom, she dropped him for another.

Equitable Reimbursement Ask for security – judgment note, pledge of securities, life insurance Acceleration clause – in the event that payor misses 2 payments and does not cure within 10 days of notice, entire balance is due on demand Not tax deductible if obligation survives death of payee

Ask for security – judgment note, pledge of securities, life insurance

Acceleration clause – in the event that payor misses 2 payments and does not cure within 10 days of notice, entire balance is due on demand

Not tax deductible if obligation survives death of payee

Equitable Reimbursement Johnson , 2006 WL 2589787 (9/11/2006) Divorced in 1985 after a 17 year marriage, Husband was ordered to pay installment payments to wife for 10 years with interest as compensation for her interest in husband’s milling business The business went broke in 1993 and husband stopped paying his equitable reimbursement payments.

Johnson , 2006 WL 2589787 (9/11/2006)

Divorced in 1985 after a 17 year marriage, Husband was ordered to pay installment payments to wife for 10 years with interest as compensation for her interest in husband’s milling business

The business went broke in 1993 and husband stopped paying his equitable reimbursement payments.

Equitable Reimbursement Husband eventually filed bankruptcy, and Wife attempted to obtain an “alimony” order in state court to avoid discharge of the installment obligation to her State court refused to characterize the payments as “alimony” which might survive the discharge

Husband eventually filed bankruptcy, and Wife attempted to obtain an “alimony” order in state court to avoid discharge of the installment obligation to her

State court refused to characterize the payments as “alimony” which might survive the discharge

Equitable Reimbursement Bankruptcy court dismissed husband’s petition, so the obligation survived Husband sought modification of alimony Trial court granted modification Superior Court reversed; equitable reimbursement is really equitable distribution Modification would constitute forfeiture

Bankruptcy court dismissed husband’s petition, so the obligation survived

Husband sought modification of alimony

Trial court granted modification

Superior Court reversed; equitable reimbursement is really equitable distribution

Modification would constitute forfeiture

Equitable Reimbursement Husband and new wife sold their home in Vermont Vermont court refused to attach proceeds Husband and new wife sold stocks Pennsylvania court refused to attach proceeds of Vermont house because it was entireties property Remanded regarding stock proceeds

Husband and new wife sold their home in Vermont

Vermont court refused to attach proceeds

Husband and new wife sold stocks

Pennsylvania court refused to attach proceeds of Vermont house because it was entireties property

Remanded regarding stock proceeds

Tax Consequences Do’s and Don’ts of Deductibility Allocation Proposed Tax Reform Tax Traps

Do’s and Don’ts of Deductibility

Allocation

Proposed Tax Reform

Tax Traps

Do’s and Don’ts of Deductibility DO pay in cash (not property) DO enter an order or agreement DO NOT designate as non-deductible DO NOT live together DO terminate upon payee’s death DO NOT designate as child support* DO NOT file joint tax return DO NOT front load

DO pay in cash (not property)

DO enter an order or agreement

DO NOT designate as non-deductible

DO NOT live together

DO terminate upon payee’s death

DO NOT designate as child support*

DO NOT file joint tax return

DO NOT front load

Johanson v. Com. T.C. Memo 2006-115 Marital settlement agreement required husband to pay “spousal support” Did not terminate “spousal support” upon death of the payee Incorporated into California divorce decree California law states that “spousal support” terminates upon payee’s death

T.C. Memo 2006-115

Marital settlement agreement required husband to pay “spousal support”

Did not terminate “spousal support” upon death of the payee

Incorporated into California divorce decree

California law states that “spousal support” terminates upon payee’s death

Kean v. Com. 407 F.3d 186 (3d Cir. 2005) Support order did not terminate support upon payee’s death NJ law: no statute to terminate spousal support upon payee’s death NJ law: divorce abates upon death of a spouse

407 F.3d 186 (3d Cir. 2005)

Support order did not terminate support upon payee’s death

NJ law: no statute to terminate spousal support upon payee’s death

NJ law: divorce abates upon death of a spouse

Pennsylvania Law 23 Pa.C.S. § 3707: “Upon the death of the payee party, the right to receive alimony pursuant to this chapter shall cease.” Rule 1910.19(d): “All charging orders for spousal support and alimony pendente lite shall terminate upon the death of the payee spouse.”

23 Pa.C.S. § 3707: “Upon the death of the payee party, the right to receive alimony pursuant to this chapter shall cease.”

Rule 1910.19(d): “All charging orders for spousal support and alimony pendente lite shall terminate upon the death of the payee spouse.”

Tax Consequences Kean v. Com . 407 F.3d 186 (3d Cir. 2005) NJ divorce court ordered Father to pay unallocated child and spousal support into a joint bank account Support order stated that wife would have exclusive use of the deposited funds Husband claimed alimony deduction Wife did not claim alimony income

Kean v. Com . 407 F.3d 186 (3d Cir. 2005)

NJ divorce court ordered Father to pay unallocated child and spousal support into a joint bank account

Support order stated that wife would have exclusive use of the deposited funds

Husband claimed alimony deduction

Wife did not claim alimony income

Kean v. Com. “ Where support payments are unallocated, as in this case, the entire amount is attributable to the payee spouse’s income. Otherwise, we would be left with a situation in which the portion of the unallocated payment intended for the support of the payee spouse would be taxable to the payor spouse. This treatment of support payments is not accidental, and can benefit families going through a divorce. “ By ordering the payor spouse to make an unallocated support payment taxable in full to the payee spouse, the couple may be able to shift a greater portion of their collective income into a lower tax bracket. Consequently, an unallocated payment order not only frees the parents from restrictive court instructions that dictate who pays for what, but may allow the parties to enjoy a tax benefit at a time when they face increased expenses as they establish independent homes. This advantage would be lost by taxing all unallocated payments to the payor spouse.”

“ Where support payments are unallocated, as in this case, the entire amount is attributable to the payee spouse’s income. Otherwise, we would be left with a situation in which the portion of the unallocated payment intended for the support of the payee spouse would be taxable to the payor spouse. This treatment of support payments is not accidental, and can benefit families going through a divorce.

“ By ordering the payor spouse to make an unallocated support payment taxable in full to the payee spouse, the couple may be able to shift a greater portion of their collective income into a lower tax bracket. Consequently, an unallocated payment order not only frees the parents from restrictive court instructions that dictate who pays for what, but may allow the parties to enjoy a tax benefit at a time when they face increased expenses as they establish independent homes. This advantage would be lost by taxing all unallocated payments to the payor spouse.”

Pres. Bush’s Advisory Panel on Federal Tax Reform Report issued 11/1/2005 Intended to eliminate AMT and “simplify” the tax code Would eliminate the alimony deduction Uncertainty whether existing alimony orders would be “grandfathered” Would also eliminate home mortgage interest deduction

Report issued 11/1/2005

Intended to eliminate AMT and “simplify” the tax code

Would eliminate the alimony deduction

Uncertainty whether existing alimony orders would be “grandfathered”

Would also eliminate home mortgage interest deduction

Tax Traps! Payments to a Third Party as Alimony Arrears and Voluntary Interim Payments

Payments to a Third Party as Alimony

Arrears and Voluntary Interim Payments

Counsel Fees Grounds Tax Consequences Sources of Law: 23 Pa.C.S. § 3702 – divorce actions 23 Pa.C.S. § 4351(a) – support actions 23 Pa.C.S. § 6108(a)(8) – PFA actions 42 Pa.C.S. § 2503 – vexatious conduct

Grounds

Tax Consequences

Sources of Law:

23 Pa.C.S. § 3702 – divorce actions

23 Pa.C.S. § 4351(a) – support actions

23 Pa.C.S. § 6108(a)(8) – PFA actions

42 Pa.C.S. § 2503 – vexatious conduct

Counsel Fees Stackhouse , 900 A.2d 383 (Pa.Super.2006) Wife won twice at the Master’s level Defeated on appeal Granted $80,000 on remand but denied alimony

Stackhouse , 900 A.2d 383 (Pa.Super.2006)

Wife won twice at the Master’s level

Defeated on appeal

Granted $80,000 on remand but denied alimony

Counsel Fees McCoy , 888 A.2d 906 (Pa.Super.2006) Marital Estate = $400,000 Husband earned $64k, Wife earned $15K 50/50 division of assets, 15 mo. alimony $5,000 CF to wife Husband argued that Wife failed to meet her burden to produce evidence of the nature and reasonableness of her CF

McCoy , 888 A.2d 906 (Pa.Super.2006)

Marital Estate = $400,000

Husband earned $64k, Wife earned $15K

50/50 division of assets, 15 mo. alimony

$5,000 CF to wife

Husband argued that Wife failed to meet her burden to produce evidence of the nature and reasonableness of her CF

Counsel Fees Husband also argued that Wife did not need CF because she received a $50,000 advance during divorce litigation Superior Court called it a “close case” but deferred to trial court’s discretion

Husband also argued that Wife did not need CF because she received a $50,000 advance during divorce litigation

Superior Court called it a “close case” but deferred to trial court’s discretion

Counsel Fees Jacobs , 884 A.2d 301 (Pa.Super.2005) Husband refused to produce documents in discovery, which would have revealed that he owned a separate estate of $7 million Wife spent over $120,000 in CF to obtain sanctions against Husband Trial court awarded $50,000 CF to Wife Affirmed by Superior Court

Jacobs , 884 A.2d 301 (Pa.Super.2005)

Husband refused to produce documents in discovery, which would have revealed that he owned a separate estate of $7 million

Wife spent over $120,000 in CF to obtain sanctions against Husband

Trial court awarded $50,000 CF to Wife

Affirmed by Superior Court

Tax Consequences - CF Salesky - T.C. Memo 2006-162 Court ordered Husband to pay CF directly to Wife’s law firm Husband claimed alimony deduction NJ law: Obligation to pay CF terminates upon death of payee Not tax-deductible

Salesky - T.C. Memo 2006-162

Court ordered Husband to pay CF directly to Wife’s law firm

Husband claimed alimony deduction

NJ law: Obligation to pay CF terminates upon death of payee

Not tax-deductible

True Story A Dutch actress training to be a witch is eligible for a tax deduction for her course fees, the tax authorities in the Netherlands have decided. They allowed the 39-year-old woman to claim 2,210 euros (£1,505) for the course that lasts a year and a day. A tax official told Reuters news agency the woman used the course "to extend her professional knowledge." Students learn to cast spells, prepare herbs and potions and use crystal balls as well as other aspects of witchcraft. The course organiser, Margarita Roland, said she taught apprentices all they needed to know, using magic as a force for good.

A Dutch actress training to be a witch is eligible for a tax deduction for her course fees, the tax authorities in the Netherlands have decided. They allowed the 39-year-old woman to claim 2,210 euros (£1,505) for the course that lasts a year and a day.

A tax official told Reuters news agency the woman used the course "to extend her professional knowledge." Students learn to cast spells, prepare herbs and potions and use crystal balls as well as other aspects of witchcraft. The course organiser, Margarita Roland, said she taught apprentices all they needed to know, using magic as a force for good.