Is a Divorce a Divorce for Tax Purposes?

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Is A Divorce A Divorce For Tax Purposes?, Houston Tax Attorney

Each state has its own laws. This includes laws that say how one gets married and how one gets divorced. State laws provide a method for accomplishing both acts.

The laws of foreign countries usually have similar laws and processes. Religious bodies and affiliations have similar rules and processes.

This raises some interesting questions as to whether someone is married or divorced for tax purposes. Can someone be married for non-tax purposes and considered divorced for tax purposes? And how does this play out for provisions like our innocent spouse relief rules where someone has not complied with state law to be married or if they were divorced under the strictures of their religious affiliation but not state law?

The court recently addressed this type of issue in Estate of Grossman, T.C. Memo. 2021-65 in the context of the estate tax marital deduction. The holding is not limited to just estate taxes. It can also apply to other types of taxes, such as income taxes.

Facts & Procedural History

This case involves a dispute over estate taxes. The estate was worth $87 million. Of this amount, $78 million went to the surviving spouse.

The estate tax return reported a marital deduction for the amount paid to the surviving spouse. The IRS audited the estate tax return and challenged the marital deduction. The IRS concluded that the surviving spouse was not actually married to the decedent and, therefore, absent a marital deduction, the estate owed $35 million in estate taxes.

The decedent’s marital history started in 1955. The decedent married his first spouse in New York in 1955. In the 1960s the decedent attempted to divorce his wife by obtaining a court order from a Mexican court. The decedent’s wife challenged this court order in New York and it was found to be invalid.

In the late 1980s, the decedent followed the steps to obtain a divorce under Jewish law. This included getting his rabbi’s approval and then obtaining a letter from the rabbi. The decedent then followed the steps to get married to the spouse in question here. This included obtaining a marriage certificate from the Israeli Ministry of Religious Services and having a marriage ceremony in Israel.

These were the facts the U.S. Tax Court had to consider. The IRS and the estate filed for summary judgment on this issue. The court had to decide whether the marriage and/or prior divorce was valid for Federal estate tax purposes.

The Estate Tax Marital Deduction

The marital deduction is a central feature of our estate tax laws. It provides a 100% deduction for the value of property which passes from the decedent to his surviving spouse on death.

The marital deduction is premised on the idea that a surviving spouse should not have his or her estate diminished by the estate tax just because the other spouse dies. For example, a couple that owns a homesteaded farm might have to sell the farm to pay the estate tax. This may mean that the surviving spouse has to lose his or her home.

The marital deduction prevents this type of situation. It allows the surviving spouse to keep the estate intact, with the expectation that the IRS will collect its estate tax when the second spouse dies. The marital deduction is really just a timing rule.

Does State Law Dictate Who is Married for Tax Purposes?

The marital deduction is not just a timing rule if the decedent was not married, as the IRS argues in this case. The first question the court considered in addressing this situation is what law it should apply?

The IRS argued that New York law applies. This is based on the decedent and spouses living in New York, the estate being administered in New York, etc.

The estate argued that the “place of celebration” rule applies. This rule looks to where the marriage ceremony was performed which, in this case, was Israel. The estate cites the following IRS guidance in support of its position: Rev. Rul. 2013-17, 2013-38 I.R.B. 201; Rev. Rul. 58-66, 1958-1 C.B. 60; Rev. Rul. 53-29, 1953-1 C.B. 67.

The court sidestepped this issue by concluding that the decedent was married to the surviving spouse even under New York law:

the proper starting question is whether Semone and Ziona were validly married. To answer that question, given the parties’ positions on this score, we assume (without deciding) that we should look to New York law. And New York law in turn requires us to consider the rules of the place of the celebration of the marriage, here Israel.

The court rejected the IRS’s argument that the decedent was never divorced from his first wife. It concluded that the divorce was accepted by the law of Israel as evidenced by the marriage granted by Israel and that New York law adopts the law of Israel.

The Takeaway

The estate tax is significant. IRS audits involving estate taxes can trigger significant tax liabilities. These liabilities can often be mitigated or reduced with advanced estate tax planning. The same can be said for income and other taxes.

This planning has to factor in the validity or invalidity of the marital relationships. This is particularly true for those who have divorced or had prior marriages.

If there is a subsequent marriage following divorce, the parties should consider state law to determine whether the divorce was valid for the first marriage. This is especially true for religious divorces that are not handled by the state court. These types of issues may in effect be cured by a foreign marriage as long as the authorities in the foreign country are apprised of the divorce and the foreign laws specify that one cannot remarry absent a valid divorce first.

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