3 Cardozo L. Rev. 77 (1981 - 1982)
Year-End Divorce/Remarriage Schemes and the Applicability of the Sham Doctrine

handle is hein.journals/cdozo3 and id is 87 raw text is: YEAR-END DIVORCE/REMARRIAGE SCHEMES
AND THE APPLICABILITY OF THE
SHAM DOCTRINE
I. INTRODUCTION
Happily married couples have recently been suing for divorce.1
Their anomalous decision to divorce is not a consequence of marital
incompatibilities, but rather of the marriage penalty created by the
federal income tax rate structure. Under the Internal Revenue Code,
married couples earning two incomes are taxed at a higher rate than
single persons.2     The applicable tax rate is determined by the tax-
payers' marital status as of the end of the taxable year.3 To avoid the
marriage penalty, some dual income couples have obtained divorce
decrees at the end of the tax year, filed federal income tax returns as
single individuals, and remarried early in the following year.4
Amid growing interest in this apparently legal method of reduc-
ing tax liability,5 the Internal Revenue Service (IRS) has taken the
' STAFF OF JOINT COMM. ON TAXATION, 96TH CONG., 2d SEss., THE INCOME TAX TREAT-
MENT OF MARRIED COUPLES AND SINGLE PERSONS 24 (Comm. Print 1980) [hereinafter cited as
COMMITTEE REPORT]; Note, The Haitian Vacation: The Applicability of Sham Doctrine to
Year-End Divorces, 77 MICH. L. REV. 1332, 1332 (1979).
I.R.C. § 1. Johnson v. United States, 422 F. Supp. 958, 966 (N.D. Ind. 1976), aff'd sub
nom. Barter v. United States, 550 F.2d 1239 (7th Cir. 1977), cert. denied, 434 U.S. 1012 (1978);
Gerzog, The Marriage Penalty: The Working Couple's Dilemma, 47 FORHAM L. REV. 27, 27-28
(1978).
To illustrate, assume that John and Mary are married. For the taxable year 1982, John and
Mary each earned $40,000. Assuming that John and Mary do not itemize, and they file a joint
return, they will have to pay $27,505 in taxes for the taxable year 1982.
If John and Mary filed separate returns as unmarried individuals, they would have to pay
$22,816 in taxes for the taxable year 1982, even though their income is the same as under the
joint return illustration. As John and Mary's income rise, the differential, or marriage pen-
alty, increases because the income tax is a progressive tax.
I.R.C. § 6013(d)(1)(A), dealing with joint income tax returns by husbands and wives,
provides:
(d) SPECIAL RULES-For purposes of this section
(1) the status as husband and wife of two individuals having taxable years beginning
on the same day shall be determined-
(A) if both have the same taxable year-as of the close of such year ....
See also id. § 143, which provides:
(a) GENERAL RULE-For purposes of part V [Deductions for Personal Exemptions]-
(1) The determination of whether an individual is married shall be made as of
the close of his taxable year; except that if his spouse dies during his taxable
year such determination shall be made as of the time of such death; and
(2) An individual legally separated from his spouse under a decree of divorce or
of separate maintenance shall not be considered as married.
See note 1 supra.
I The issue of the year-end divorce/remarriage was explored in the television news show 60
Minutes. CBS NEws, 60 MINUTES, Marriage and Taxes (March 7, 1976, produced by M.
Goldin). See also Tax Treatment of Single Persons and Married Persons Where Both Spouses Are
Working: Hearing Before the House Comm. on Ways and Means, 92d Cong., 2d Sess. 45 (1972)
(statement of Florence B. Donahue) [hereinafter cited as Hearings].

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