Apostille and international authentication

17 April 2013

In order for a New York divorce judgment, or any court order from a United States Court for that matter, to be recognized in a foreign country, one of two procedures must be followed.

Both procedures involve obtaining a certification on the official document.

The easier of the two procedures is the apostille, and is available as an option if the foreign nation is a signatory to the 1961 Hague Convention. An apostille is nothing more than a standardized certification of official documents between participating countries.

This procedure is fairly straightforward and can be done without an attorney. However, it can be rather time consuming.

For divorce judgments, or any other state issued document, the first step is to obtain a certified copy of the instrument from the clerk of the court.

This certified copy must then be brought to the New York State Department of State, located in either Manhattan or Albany. There are additional regional offices in other locations, but I’m not sure if the regional offices can issue an apostille.

The Department of State will then issue an apostille to the certified copy, which will then make the instrument fully recognizable in any country that has signed the 1961 treaty.

For Federal documents, the procedure is similar, except the U.S. State Department will issue the apostille.

If the foreign country is not a participant in the 1961 apostille treaty, then an authentication certificate is required. This certificate is issued by the U.S. State Department. The requirements for an authentication will vary from country to country.

Disability Pensions Lose Tax Free Status to Alternate Payee

16 April 2013

Disability Pensions which are distributed as part of a QDRO lose tax free status to the non participating spouse.

A Tax Court ruling may play havoc on pension payments made through a post judgment Quadro.

The facts of the 2012 case of Shannon L. Fernandez v. Commissioner are almost commonplace in divorces; the husband had a disability pension, which is tax free. When the parties divorced, they agreed to divide his pension, and it was assumed that the tax free status would apply to the wife.
But much to everyone’s surprise, the wife’s share of the pension lost its tax free status.

In 2007, the wife received $11,850 in pension income, which was not claimed as income, and a $3,587 deficiency was reported.

The tax court gave the following analysis. Gross income is income from all sources, and is considered taxable unless there is a specific exclusion. The court noted that section 402(e)(1)(A) of the regulations provide that an alternate payee is treated as the distributee of any payments made to the alternate payee made under a qualified domestic relations order (QDRO).
However, as the statute provides that all pension payments are taxable unless specifically excluded, and the exclusion sections failed to expressly provide for a payment made under a QDRO under the exemption section (402(a)), despite a separate section (402(e)(1)(A) specifically stating that the alternate payee shall be treated as the distributee.

The tax court further noted that the Wife herself did not suffer the injury resulting in the disability pension.

The court also found this issue was never raised before, and neither the wife nor the court could find any prior court rulings, and absent any explicit congressional intent to exclude this income coupled with the general rule that all income is considered taxable, the court found the wife pension income taxable.

Under this ruling, it would appear that many alternate payees of disability pensions may be facing serious tax issues in the near future.

Anyone who is currently in a divorce needs to take heed of this as of now little known decision. It is unclear what exact remedies are available to anyone impacted by the Shannon decision as well.

Cioffee-Petrakis adds a new wrinkle to prenuptials

12 April 2013

Prenuptial agreements have been turned upside down by the Appellate Division’s decision in Cioffe-Petrakis. A bit of background is in order to understand the significance of Cioffee.

A prenuptial agreement is simply a contract. But unlike normal contracts, the courts have ruled that marital contracts are held to a much higher standard in determining if they are enforceable.

One discussion I haven’t seen much of involves the 1997 Court of Appeals case of Matisoff v Dobi. This case held that all nuptial agreements must strictly comply with all three requirements of Domestic Relations Law Section 236B(3), which provides that (a) the agreement must be in writing, (b) it must be subscribed by the parties, and (c) it must be acknowledged or proven in the form required for a deed to be recorded. In Matisoff, the parties both admitted there was a signed, written agreement. However, this agreement was not properly acknowledged.

Neither party alleged fraud, duress, or misunderstanding, and the agreement itself was requested by the Wife who had her own attorney.

At trial, the Wife challenged the enforceability of the agreement and prevailed. The Appellate Division reversed and held it enforceable.

The Court of Appeals reversed the Appellate Division, and held that even under these circumstances the agreement was not enforceable, since it was not properly acknowledged.

In other words, all nuptial agreements are must strictly comply with the three requirements of DRL 236B(3).

With this in mind, the holding of Cioffe-Petrakis is curious indeed.

At trial, the Hon. Anthony J. Falanga issued a detailed decision which fills in a lot of missing information in the Appellate Division’s decision. In sum, Justice Falanga found the Wife had been fraudulently induced to signing the prenuptial based upon the Husband’s oral promise to tear up the agreement when they had children, along with other factors.

However, the agreement itself said there were no other promises between the parties, meaning that the court apparently enforced an oral agreement to invalidate the prenuptial agreement if a condition was met. However, an oral agreement fails to meet all three requirements of DRL 236B(3), as by definition, it is not in writing, and an unsigned agreement cannot be signed, nor can it ever be in the form that would allow a deed to be recorded.

So how to reconcile Cioffee with Matisoff?

It seems the key here is not that the oral agreement was enforced as an agreement. Instead, it was viewed as a fraudulent inducement to enter the agreement, and but for that fraud, the Wife would never have signed the prenup.

The Appellate Division’s decision also relies heavily on the credibility of the Wife, and lack of credibility of the Husband.

As it stands, Cioffee seems to cut out an exception to Matisoff, to the extent that a provision within a properly executed agreement stating there are no outside agreements is not an absolute barrier to showing there is an outside agreement, but only to the extent for invalidating the prenup based upon a fraudulent inducement.

As a final note, the final sentence in the Appellate Division’s decision used the phrase that “on the facts of this case …”  which could mean the Appellate Division meant the case to be limited to only Cioffee and not to be considered as having much precedential value.

It is unknown if the Cioffee decision is being appealed to the Court of Appeals, and how future decisions will apply Cioffee.

Pending Amendment to Maintenance

6 July 2010

The Senate and Assembly have passed radical changes to the Domestic Relations Law which change how maintenance is calculated, the enactment of no fault as grounds, and revising pendente lite awards of counsel fees. 

S7740A is the Senate version of the amendment to the maintenance provision of DRL 236 B(6).

 It replaces the existing statutory factors now used to determine maintenance and replaces it with a mathematical formula.

In sum, bill provides that maintenance will be mandatory when one spouse’s income is 2/3 or less than the income of the other spouse. Once that threshold is met, then the amount of maintenance will be calculated using two formulas. Whichever formula gives the smaller award is the one which will be used.

The first formula is to take 30% of the higher spouse’s income, and from that subtract 20% of the lower’s spouse’s income. For the mathematically inclined, that’s M = .3H – .2L.

The second formula is to take 40% of the combined income of both spouses, and from that subtract the lower spouse’s income. Expressed as a formula, that comes to M = .4(H +L) – L.

The duration of the maintenance will be set by a formula too.

I’m playing with these formulas. But what I don’t see in the proposed amendment is any adjustment for a distributive award of future income under O’Brien. Assuming O’Brien remains good law in the near future, this new formula will result in grossly unfair awards to both ends of the spectrum; the spouses with the higher income will pay twice on the same income stream, and lower income spouses who take steps to become self sufficient before starting a divorce will suffer financially.

In addition, with specific cutoffs for maintenance awards, I expect to see quite a bit more pre-divorce planning designed reduce financial awards to the other spouse.

Stay tuned.

Relaunch of Blog

4 July 2010

The relaunch of my blog is in progress. A lot of old posts were saved, some were lost.

Kidney not subject to Equitable Distribution

16 March 2009

In my prior post on the now infamous kidney case, the husband was claiming a distributive award for the value of the kidney he donated to his wife.In a non shocking decision, Referee A. Jeffrey Grob denied the husband’s request for an expert to give testimony to value the donated kidney. The court ruled:

At its core, the defendant’s claim in appropriately equates human organs with commodities

Referee Grob noted that public health law Section 4307 prohibits the transferring of anything of value, any human organ for use in human translation, and that a violation is considered a class E felony. The court stated that the husband’s request would not only run afoul of this statute, but may subject him to criminal prosecution as well.

So there you have it. Donated organs are not subject to equitable distribution. It probably took the husband tens of thousands of dollars in legal fees to have a court rule on this too.

Child Support & the Self Employed – The Depreciation Deduction

31 January 2009

Buried in DRL 240(1-b) and FCA 413(b)(5) is this often missed clause:

iv) at the discretion of the court, the court may attribute or impute income from, such other resources as may be available to the parent, including, but not limited to: … (A) any depreciation deduction greater than depreciation calculated on a straight-line basis for the purpose of determining business income or investment credits, …

I’ve seen this clause confuse judges and litigants, giving child support orders that are either too high or too low. So what exactly does this mean? In short, it means that some legitimate business deductions permitted by the IRS will not be allowed for determining income for child support.

Let’s take it one step at a time.

Straight Line Depreciation

First, what exactly is depreciation and what is meant by a straight line basis? I’m going to make up some numbers to make it easier to follow. For this example, all expenses are legitimate; there is no hidden income or artificially inflated expenses.

Let’s assume someone is self employed, and has gross revenue of $500,000 per year. Obviously, there are certain expenses associated with running a business, and those expenses should be deducted off the gross income. For example, rent, the cost of goods sold, salaries paid and utilities are all deducted off the gross income to determine profit. For this example, let’s say there are $275,000 in legitimate business expenses and all are valid deductions by the IRS. Other than depreciation, there are no other expenses. That leaves $225,000 in profit so far.

Now let’s assume the business owner purchases a new piece of equipment for $100,000. Since $100,000 was spent as a legitimate business expense, you’d think that it would be acceptable to deduct this expense from the gross income, giving a profit of $125,000.

Nope says the IRS. Even though you paid for this piece of equipment in full, you have to spread out its cost over its useful lifetime. And, the IRS being what it is, has charts saying what the useful lifetime is for every conceivable item. For this example, let’s say the IRS says the lifetime is 10 years.

So, to determine the business deduction, you divide the cost of the equipment ($100,000) by its useful lifetime (10 years) giving you a permitted deduction of $10,000 per year for 10 years. This type of depreciation gives an equal amount for each year, and if you draw a line on a chart for the annual depreciation, you get a straight line. Somebody decided to call this “straight line depreciation” So far so good. So for out example, the $225,000 in profit would be reduced by $10,000, reflecting one year’s worth of straight line depreciation.

Accelerated Depreciation

Now here’s where it starts to get complicated. In 1981, Congress said it would be a good thing to allow business owners a tax break if they bought new equipment. To accomplish this goal, accelerated depreciation was invented, otherwise known as the Accelerated Cost Recovery System, known as ACRS for short. Using hypothetical numbers, ACRS would allow our business owner to obtain more depreciation early on at the expense of less depreciation down the road. For example, ACRS might allow 60% of the cost to be deducted the first four years, 20% of the cost spread out over the next two years, and the remaining 20% spread out equally over the remaining four years. Thus, under ACRS, the depreciation might be 15%-15%-15%-15%-10%-10%-5%-5%-5%-5%.

In 1986, Congress said that ACRS needed to be changed, and modified the depreciation schedule, giving us the Modified Accelerated Cost Recovery System, otherwise known as MACRS. Using hypothetical numbers, the depreciation schedule for our machine was changed to 20% the first year, 20% the second year, 15% for the third, 15% for the fourth year, and 5% for each of the remaining years. Thus under MACRS, the depreciation would be 20%-20%-15%-15%-5%-5%-5%-5%-5%-5%.

Separate from ACRS and MACRS, there is also the Section 179 expenses, which in simple terms, allows a business to deduct 100% of the expenses associated with certain qualified property in the year in which it was purchased. And for those who have made it this far, a Section 179 expense deduction is an exception to the depreciation rule. Remember, our tax code consists of rules, exceptions to the rules, and exceptions to the exceptions.

So turning back to the example, let’s say we are using MACRS, and the equipment is in the second year of service, giving a 20% depreciation deduction. Thus, for tax purposes, the net income is $125,000 less 20% of the cost (20% of $100,000 being $20,000), for a bottom line of $105,000.

But for child support, DRL 240 (1-b)(b) (vi)(A), and its twin companion, FCA 413 (b)(5) (vi)(A) require that any depreciation over the straight line be added back in. The straight line depreciation gives 10% of the total cost, or $10,000. The business properly deducted $20,000 under MACRS. Thus, any amount of depreciation over $10,000 is added back in. As $20,000 – $10,000 = $10,000, the income for child support is properly determined to be $105,000 plus $10,000, or $115,000.

In reality, the IRS has numerous classification of property, ranging from three to twenty years for personal property, and 27.5 & 30 years for buildings.

Examples

Now for two real examples. In one case, I represented the custodial parent, and got the credit for the increased depreciation added back in when the non custodial parent’s income was determined. In another case, I represented the non custodial parent. The judge was about to disallow all depreciation expenses, since they were only “paper losses.” I showed the judge this section of the statute, and preserved the deduction, thereby lowering the child support obligation.

For both cases, I anticipated that the court may not properly apply this section of the statute, and had several hard copies of the section ready to show the court. As a practice tip to any attorney dealing with the self employed, I’d recommend doing the same, highlighting the section helps greatly too.

One final point that’s worth repeating – this section of the child support statute simply disallows a legitimate deduction. There is no artificial manipulation of income or expenses going on.

Stay away from New York Divorce Specialists

30 January 2009

This is one of my pet peeves. Spend five minutes on google, and you’ll find any number of New York lawyers who claim to “specialize” in any given area of law, including divorces and family law.

The problem is, doing so is an ethical violation of Part 1200 – Rules of Professional Conduct, Rule 7.4 provides that:

[a] lawyer or law firm shall not state that the lawyer or law firm is a specialist or specializes in a particular field of law …

Lawyers can use the term “concentrate” to describe which area of law they dedicate the bulk of their practice to. Lawyer can state which areas their practice is limited to.

But an attorney cannot use the word “specialize.”

A New York lawyer who does hold themselves out to be a family law or divorce specialist either doesn’t care or doesn’t know about the ethical rule’s prohibition on this term. And if they don’t know that basic bit of information, odds are they won’t know other critical aspects of divorce law. Once I even met a self proclaimed divorce specialist who kept talking about how New York divides community property. (Hint #1 – We don’t. New York is an equitable distribution state. Hint #2 – See Hint #1).

Choosing a divorce lawyer is hard enough to begin with, it’s one of the most important decisions anybody will ever make. Avoiding lawyers who don’t know they are violating ethical rules is an easy way to weed out some of the less than desirable choices when finding a divorce lawyer.

Hello, I’m here for your liver.. no wait.. kidney … no wait …

8 January 2009

We want your liver

 This divorce could be straight out of a Monty Python skit.

  Both Newsday and The New York Post have reported about what can only be one of the most bizarre divorces cases, ever.

Doctor and nurse meet and fall in love, and vow to spend a lifetime together in marital bliss. Unfortunately, the wife had severe health problems, which resulted in both kidneys failing. Following two failed kidney transplants, the doctor donated one of his kidneys in 2001, thereby saving his wife’s life.

Two years later, the wife is claimed to have began an extramarital affair with physical therapist.

The wife filed for a divorce in 2005, with the doctor alleging to have been served with the divorce summons in the operating room.

Four years into the divorce action, the doctor is now demanding the kidney back, or to otherwise treat it as part of the marital estate with it being worth $1.5 million.

Assuming that the wife did cheat after receiving a kidney from her husband, nobody can dispute that was a pretty crummy thing to do. And if she really did have the doctor served with the divorce papers in the operating room, that too was even more crummy. Granted, she must have had one heck of a process server, or perhaps the process server was posing as the patient. Who knows.

So assuming all this is true, the doctor certainly has real reason to feel betrayed.

But to ask for a distributive share of the donated kidney as part of equitable distribution takes this divorce to the land of the surreal poka dot bunny rabbits, otherwise known as the place of going from right to wrong.

Like most stories, I’m sure there is a lot more going on than what is being reported by the press. But whatever those facts might be, there is something seriously wrong with a divorce relying on In Re Monty Python’s The Meaning of Life’s “Live Organ Transplants” as controlling law.

“We’re here for your liver” 

“But I’m not done using it!”

Two New Articles

29 December 2008

Two new articles are posted on my website, http://www.jdbar.com/.In New York Estate, Probate and Administration Basics, estate versus non estate assets are explained, followed by a brief discussion as to how an estate is handled when someone dies with and without a will.

The New York Default Last Will and Testament is exactly that; the will which everybody has if they don’t make their own.

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