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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