TESTING TAX CLAIMS ACROSS THE TABLE

In a divorce negotiation, tax consequences are asserted constantly. An asset is said to carry a large embedded liability. A transfer is said to trigger a taxable event. A retirement account is said to be worth substantially less than its balance.

Some of those assertions are correct. Some are approximately correct. And some are simply wrong — sometimes through genuine misunderstanding, sometimes not.

An asserted tax consequence is a legal position, not a fact. It can be verified. The difficulty is that in the ordinary divorce, nobody in the room is engaged to verify it.

HOW AN UNTESTED CLAIM MOVES A SETTLEMENT

The mechanism is straightforward. A tax burden is attributed to an asset. The party asserting it offers to take that asset and absorb the burden. The other side, having no way to test the claim and no appetite to litigate a tax question, accepts a discount against a liability that may be smaller than represented — or may not exist.

The discount is real. The liability may not be. And because the question was never examined, no one learns which.

WHAT VERIFICATION ACTUALLY INVOLVES

• Reading the underlying documents — the partnership agreement, the plan document, the trust instrument, the depreciation schedule — rather than the summary.
• Identifying the Code provision the claim depends on and whether it applies on these facts.
• Computing the consequence rather than accepting a characterization of it.
• Distinguishing a tax that is due now from one that is deferred, contingent, or avoidable entirely depending on how the asset is divided.
• Determining whether the asserted treatment survives if the Service ever examines it.

THE POINT IS NOT SUSPICION

Most tax assertions in a negotiation are made in good faith by professionals who are not tax practitioners and are relying on a general impression. The problem is not bad faith. It is that a material term of the settlement rests on an unexamined assumption.

Verification cuts both ways. It corrects an overstated liability asserted by the other side, and it identifies a genuine one your own team missed. Either way the settlement is negotiated on facts.