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4 Sec. Tax'n Newsl. 1 (1984-1985)

handle is hein.journals/newsqtrly4 and id is 1 raw text is: SECTION OF TAXATION I SettlemeC r Divorce Settlements: Taxes and Pensions Divorce Settlements after DEFRA The Deficit Reduction Act of 1984 (DEFRA) made a number of significant changes concerning alimony, prop- erty transfers, and allocation of dependency exemptions in divorce. While the changes relating to property transfers and dependency exemptions bring a needed simplification to divorce settlements, the complexities of the new ali- mony rules are creating a great deal of uncertainty. Couples now negotiating property and support agreements may find it advantageous to enter into a separation agreement before the end of 1984 to receive the maximum benefit of the old alimony rules and the new tax-free treatment on di- vision of property. Alimony Although alimony and separate maintenance payments remain deductible by the payor (under section 215) and includible in the income of the payee (under section 71), DEFRA has significantly changed the definition of ali- mony. DEFRA retains the prior law requirement that to qualify as alimony, payments must be made under a decree of divorce or separate maintenance (or a written instrument incident to such a decree), a written separation agreement or a decree requiring support or separate maintenance. (See Divorce Settlements on page 13) Inside This Issue: Midyear Meeting Schedule Hotel Reservation Forms Section Testimony Developments: Surrender of Preferred Stock Service Appeals Decision in Haffner Late Filing of Estate Tax Return Partial Guarantee of Debt In a Limited Partnership QTIP Elections Coming Up in the Next Issue: Committee Preference Questionnaire May Meeting Information © 1984 American Bar Association Dividing Retirement Benefits Under the Employee Retirement Security Act of 1974 (ERISA), which generally preempts state law relating to retirement plans, benefits under a pension, profit-sharing, or stock bonus plan are subject to spendthrift provisions that are designed to prevent the assignment or alienation of plan benefits. Since the passage of ERISA, both the courts and the responsible federal agencies (the Depart- ment of Labor and the Service) have wrestled with the question of whether ERISA prohibits the assignment or division of retirement benefits under state divorce or com- munity property laws. The Retirement Equity Act of 1984 clarifies ERISA's preemption and spendthrift provisions by permitting plans to honor qualified domestic relations orders. The Act makes it clear that orders other than qualified orders are preempted by ERISA. Thus, it will be critical that judg- ments, orders, and property settlements satisfy these rules. (See Dividing Pension Benefits on page 17) Regulated Futures Contracts The Deficit Reduction Act of 1984 (DEFRA) extends the mark-to-market rules of section 1256 to nonequity op- tions and dealer equity options as well as regulated futures contracts and foreign currency contracts. The expansion of these rules to listed options makes it necessary for non- commodity practitioners to understand the mark-to-market and hedging concepts of section 1256. The expansion of section 1256 to options affects only listed options-those traded on or subject to a qualified board or exchange. All nonequity options (commodity op- tions and stock index options tradeable on a commodities exchange) are now covered by section 1256. Equity op- tions are subject to the mark-to-market rules only if they are dealer equity options. A dealer equity option is a listed equity option (i.e., a stock option or an option based on a stock index other than an index eligible for trade on a commodities futures exchange) purchased or granted by an options dealer in the normal course of his activity in dealing with options and listed on the board or exchange on which such dealer is registered. Mark-to-Market The mark-to-market rules of section 1256 were added by the Economic Recovery Tax Act of 1981 to preclude the use of futures trading for tax shelter purposes. (See Regulated Futures Contracts on page 11)

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