COMPLEX TAX CONSEQUENCES SUBJECT TO LATER DO-OVER AFTER IRS RULES?

Missoula divorce involving a single corporation owning a grocery business and a ranch. Long term marriage with three grown children. The most significant issue was taxation. Wife claimed that the ranch could be transferred tax free to a subsidiary corporation, then to her tax free. 

Corporation was a C Corporation until 2010 when S Corporation elected, but with 10 year period of potential tax exposure. Wife's expert testified that an IRS regulated Divisive Reorganization (D Reorg) procedure could be used. Husband owned the corporation 100%. Under IRC 1041 the final transfer to wife of the new subsidiary corporation with the ranch assets only would be tax free. 

Trial Court accepted the Wife's expert opinion, despite contradicting testimony from Husband's corporate accountant that the D Reorg was impossible under tax law, and would result in a $272,000 estimated tax liability that was not taken into account by the trial court. 

The trial court issued an order in response to Husband's motion to amend that said a "... private letter ruling" would now be appropriate and alternative proposals to mitigate tax consequences considered if there is an adverse ruling from the IRS." Husband appeals on various valuation issues, but primarily on the tax issue. Husband argues the trial court failed to specify how or when alternative proposals would be "considered". 

The Supreme Court affirmed. The Supreme Court stated that if there was an adverse letter ruling or the IRS rejected the D Reorg, "Jim could then explore other options, including moving to modify the judgment." Paragraph 26. The Supreme Court did not say how long Husband had to figure this out or what the ultimate result would be. 

They state that the Husband could file a motion to amend the judgment later after a definitive ruling by the IRS to adjust the distribution of the marital estate to incorporate tax consequences. That itself is rife with problems, however. For example, if there is a substantial tax consequence, what valuation date should one use for determining the ultimate distribution to be equitable. If there are intervening valuation changes in the ranch, or the business does poorly – what then? Also, will there be an issue about whether the Husband (who opposes this D Reorg) has done an effective job of presenting this to the IRS when he is on the record stating it cannot be done? Interesting.

Edwards v. Edwards 2015 MT 9