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Judicial Enforcement

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C

chitown

Member
What is the name of your state? Florida

It has recently become known that a provision in the divorce agreement (agreed to by both parties but not adjudicated) is in violation of U.S. law (specifically the USTC, both parties are CPA's and it is black and white clear it would violate IRC Sec 401). Can this agreement/contract be legally enforced by a Judge if the enforcement violates U.S. law? Any remedies for OC filing contempt charges because I have not conformed to this agreement? Thanks in advance
 


LdiJ

LdiJ

Senior Member
chitown said:
What is the name of your state? Florida

It has recently become known that a provision in the divorce agreement (agreed to by both parties but not adjudicated) is in violation of U.S. law (specifically the USTC, both parties are CPA's and it is black and white clear it would violate IRC Sec 401). Can this agreement/contract be legally enforced by a Judge if the enforcement violates U.S. law? Any remedies for OC filing contempt charges because I have not conformed to this agreement? Thanks in advance
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Not enough info.....what were the agreements in question and how do they violate federal law?

IRC Sec 401 deals with pensions, profit sharing plans and stock bonus plans...and without details on just what the agreement was and how you think it violates the code...no one can really comment.
 
C

chitown

Member
Violation of USTC incurred as a result of provision in agreement that only one retirement plan of ex spouse be tax effected at a "captial gain rate of 15%". OC and ex spouse labeled this particular asset as an ESOP and always separated in discussions and resulting agreement from all other retirement assets held by both parties which included IRAs, 401(k)'s and 403(b) plans. The use of the term ESOP to identify the asset as well as the inclusion of a capital gains tax to be utilized inferred the ex spouse was a participant in an Employee Stock OPTION plan. It became known the asset was an Employee Stock OWNERSHIP plan. This type of plan although non-contributory, falls under the same rules and regulations of IRC Sec 401 regarding distributions, rollovers, taxation, etc as the other retirement plan assets referred to above. Accordingly, if a taxpayer reported a distribution from this plan on Sched D as a capital asset subject to (currently) a reduced capital gains tax they would be in violation of the IRC. The fact that ex spouse is a CPA and would know this contradicts the IRC would result in the reporting being tax evasion.

Can a Judge cause this agreement which contains the above provision to be legally enforced?
 
LdiJ

LdiJ

Senior Member
chitown said:
Violation of USTC incurred as a result of provision in agreement that only one retirement plan of ex spouse be tax effected at a "captial gain rate of 15%". OC and ex spouse labeled this particular asset as an ESOP and always separated in discussions and resulting agreement from all other retirement assets held by both parties which included IRAs, 401(k)'s and 403(b) plans. The use of the term ESOP to identify the asset as well as the inclusion of a capital gains tax to be utilized inferred the ex spouse was a participant in an Employee Stock OPTION plan. It became known the asset was an Employee Stock OWNERSHIP plan. This type of plan although non-contributory, falls under the same rules and regulations of IRC Sec 401 regarding distributions, rollovers, taxation, etc as the other retirement plan assets referred to above. Accordingly, if a taxpayer reported a distribution from this plan on Sched D as a capital asset subject to (currently) a reduced capital gains tax they would be in violation of the IRC. The fact that ex spouse is a CPA and would know this contradicts the IRC would result in the reporting being tax evasion.

Can a Judge cause this agreement which contains the above provision to be legally enforced?
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Employee stock ownership plans are are NOT retirement accounts more often than not. While some can be, the majority of them are not. I am still entirely unclear about what you are complaining about and what the judge might attempt to enforce. You are being quite vague on the overall details.....and most likely those overall details matter.
 
C

chitown

Member
It is not true that employee stock ownership plans are NOT retirement plans. ESOP's of this type are covered under ERISA and IRC Sec 401 which states for retirement plans including 401(k) 403(b) ESOP's (and others) that distributions prior to age 59.5 are subject to a 10% penalty (hardship rules apply to eliminate if applicable). plans may be rolled over into an IRA or another employer plan, etc. Upon reaching age 59.5 or 70.5 distributions received are reported as ORDINARY income. Employee stock OPTION plans are not retirement plans and are governed by the SEC vs ERISA.

If I was being vague I apologize. The agreement with regards to division of IRA's, 401(k)'s 403(b)'s and employee stock ownership plans of the two parties is as follows: each parties plan is to be valued as of 6-30-04. Spouses ESOP plan is to be valued at same date but reduced by a phantom capital gains rate of 15 percent. The combined value of each parties assets will then be compared with a calculation made to equalize the respective totals to 50-50.

So the end result is that the agreement has a provision that tax effects only one retirement asset (even though it is in the same basket that includes it and other plans) at a capital gains tax rate that would never apply to the asset. Further, if person claimed distribution from this plan as subject to capital gains they would be in violation of the USTC.

Is this enforceable?
 
LdiJ

LdiJ

Senior Member
chitown said:
It is not true that employee stock ownership plans are NOT retirement plans. ESOP's of this type are covered under ERISA and IRC Sec 401 which states for retirement plans including 401(k) 403(b) ESOP's (and others) that distributions prior to age 59.5 are subject to a 10% penalty (hardship rules apply to eliminate if applicable). plans may be rolled over into an IRA or another employer plan, etc. Upon reaching age 59.5 or 70.5 distributions received are reported as ORDINARY income. Employee stock OPTION plans are not retirement plans and are governed by the SEC vs ERISA.

If I was being vague I apologize. The agreement with regards to division of IRA's, 401(k)'s 403(b)'s and employee stock ownership plans of the two parties is as follows: each parties plan is to be valued as of 6-30-04. Spouses ESOP plan is to be valued at same date but reduced by a phantom capital gains rate of 15 percent. The combined value of each parties assets will then be compared with a calculation made to equalize the respective totals to 50-50.

So the end result is that the agreement has a provision that tax effects only one retirement asset (even though it is in the same basket that includes it and other plans) at a capital gains tax rate that would never apply to the asset. Further, if person claimed distribution from this plan as subject to capital gains they would be in violation of the USTC.

Is this enforceable?
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Ok....lets try this again

An IRA, 401k, 403b etc. can be divided by a QDRO. A division via QDRO is not a taxable event. Both parties are free to leave the funds alone or roll over the funds into another plan.

An ESOP or an employee stock purchase plan cannot be divided without exercising the options or selling the stock. Therefore, you have a taxable event.

The reason why I sincerely doubt that the employee stock purchase plan is a retirement account is due to the 15%. Any CPA is unlikely to have 15% as their marginal tax rate, and since cashing in a retirement account would result in 1099 R earnings, it would be taxable at the TP's marginal tax rate. However, if it is not a retirement account, it would result in 1099 B earnings, which are properly reported on Schedule D as capital transactions.

In any event, I can see no way that this transaction violates any provision of the tax code....whether its a retirement account or not. You are merely being asked to absorb the tax expense on your portion of the plan.
 
C

chitown

Member
You are correct in your statements but need to realize the acronym ESOP has two different translations. An employee stock option plan OR employee stock ownership plan. Two completely different types of deferred compensation plans with different tax implications.

Most people when they hear ESOP think of the Option translation where you are given a right to buy shares of stock at a given price regardless of the stock's current trading price for a certain period (typically 10 years). The ability to exercise the option and purchase the shares at the option price may vest over a period of time. Once the option is exercised, the shares of stock are obtained. Whether these shares are immediately sold or are held for the required holding period determines the particular tax percentage computations i.e. ordinary or capital gain.

An employee stock ownership plan is a retirement plan where the employer contributes shares of stock of the Company into an account maintained for the individual participant. The individual never personally contributes to the account. It is similar to a Company match in a 401(k) plan (without the person making any contributions). It is covered by the same rules as other retirement plans such as 401(k)'s. profit sharing, 403(b)'s etc by ERISA and the USTC.

The agreement calls for only ONE of eight similarly categorized retirement plans to be tax effected at a cap gains tax rate that would never apply to that ONE asset.
 
LdiJ

LdiJ

Senior Member
chitown said:
You are correct in your statements but need to realize the acronym ESOP has two different translations. An employee stock option plan OR employee stock ownership plan. Two completely different types of deferred compensation plans with different tax implications.

Most people when they hear ESOP think of the Option translation where you are given a right to buy shares of stock at a given price regardless of the stock's current trading price for a certain period (typically 10 years). The ability to exercise the option and purchase the shares at the option price may vest over a period of time. Once the option is exercised, the shares of stock are obtained. Whether these shares are immediately sold or are held for the required holding period determines the particular tax percentage computations i.e. ordinary or capital gain.

An employee stock ownership plan is a retirement plan where the employer contributes shares of stock of the Company into an account maintained for the individual participant. The individual never personally contributes to the account. It is similar to a Company match in a 401(k) plan (without the person making any contributions). It is covered by the same rules as other retirement plans such as 401(k)'s. profit sharing, 403(b)'s etc by ERISA and the USTC.

The agreement calls for only ONE of eight similarly categorized retirement plans to be tax effected at a cap gains tax rate that would never apply to that ONE asset.
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I will repeat....sigh....and employee stock ownership plan is NOT automatically a retirement plan....and even if it is, if it must be divided there are tax implications.

Again...explain how you feel this violates the tax code.
 
C

chitown

Member
Sorry but is clear an employee stock ownership plan IS a retirement plan. Regardless, assume I am correct in its classification. Is a retirement plan distribution reportable as a capital gain item? Clearly it is not, yet the asset is being tax effected with a "capital gains rate of 15%". Is this not a violation of the USTC?

Second, assuming I am correct in classification, it is the only retirement plan asset owned by either party to be tax effected? The rationale would be that it is a capital asset of some sort, but it clearly is NOT as stated by the Co's plan documents.
 
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