Defined benefit pensions, the ones that payout monthly, are strange animals.  They are rare today except where unions and public agencies are found, and they can produce some odd results.

Carl Jagnow married his wife Sharon in 1983.  They both taught school and both participated in the Public-School Employment Retirement System (PSERS).  Husband retired in 2003 because of health issues and he was eligible to put his retirement into pay status at age 55.  When he applied for his retirement he was asked to select between a single life benefit (his) or a benefit that would pay a portion of his pension to Sharon after his death (joint and survivor).  In most settings, couples opt for the spousal benefit option.  The monthly payment is less, but usually not a lot and once the participant spouse dies, the survivor gets a partial benefit for his/her life.

In this case, Carl chose the higher paying single life annuity.  After all, Sharon was also in the PSER system and accruing her own benefit rights.  So, Carl took the higher single life payout of $2,900 a month and supplemented it with his social security and some IRA money.

In 2013 Sharon also had some health issues and, at age 58m following Carl’s lead, she also took the single life annuity of $3,769 a month.  She became social security eligible in 2013 at age 62 and took that benefit.

In 2013 Carl filed for divorce.  The matter went to a hearing with the primary issue being what to do with the pensions.  Wife argued that their decisions, while married, to each take single life annuities was effectively an agreement to leave things as they were.  Husband said the pensions were marital property and needed to be divided equally.  An expert was retained from one of the pension actuarial firms in our state, Conrad Siegel, Inc.  The expert concluded that fairness would dictate that should husband die first, a portion of wife’s annuity should be paid to her husband’s estate.  The master and the trial court approved the expert recommendation.  Wife appealed.  After all, if husband did die, why would money due to her from wages deferred until retirement go to the estate of someone no longer living?

Noting that it was applying an abuse of discretion standard, the Superior Court published decision of Judge Maryjane Bowes found that the trial court scheme was not an error.  “Pension funds accrued during marriage, including state employees’ pension funds, constitute marital property that is subject to equitable distribution.  See Hess v. Hess, 212 A.ed 520, 524-5 (Pa. Super. 2019).  In ordinary cases, the court can adopt either an immediate offset scheme where the pensions are given a present value and then divided, or the court can use a deferred distribution scheme where the division occurs at retirement.  Here, the parties elected to put their pensions into pay status well before separation.  Once the choice is made between single life or joint and survivor annuity, that choice is irrevocable.

While there is merit to wife’s argument that both parties contemplated that they would not be sharing pensions when they took them, the argument kind of misses the mark.  Husband ceased working and started to take his pension in 2003. That income went into the marital household and presumably kept it going.  Wife continued to work another 10 years, with additional compensation being deferred during the marriage to augment her retirement benefit.  Had the court adopted wife’s approach, husband would have never seen any benefit to that additional decade of pension contributions.  It would have been effectively rendered “post separation” even though the marriage was intact while it accrued.

This issue could have been addressed via an immediate offset approach.  At divorce, husband was 72 and had a single life annuity of $2,900.  Wife was 66 and had a single life annuity of $3,739.  If we look to Social Security tables, husband has a life expectancy of just over 13 years.  Wife has an expectation of 19.65 years.  Thus, if each die “as scheduled” by the Social Security administration, husband would collect $452,000 and wife would get $882,000.  The problem with handicapping an immediate offset distribution is that there are more and more factors that go into the handicap as parties get older.  Both these parties retired early because of health issues.  We don’t know precisely what ailed them, but the typical actuarial table is built on a broad statistical population.  Some time ago we handled a case involving a teacher pension where the teacher was afflicted with multiple sclerosis.  There is demographic data to show that people with MS do not live as long as the general population.  But even if you pair a physician with an actuary, neither expert is ready to opine with a reasonable degree of certainly just how many years are pared from life for the annuitant who has MS.  In addition, MS affects people in different ways, just as there are cancer survivors who individually respond well to treatment while others have a form of the disease that could more likely recur or bring about an early death.

The lesson here is that defined benefit pensions are tricky. There was a superficial appeal to wife’sm “You keep yours; I’ll keep mine” approach.  Meanwhile, the difference in approach would have brought her a huge benefit advantage over time.  So, be careful out there and when dealing with these deferred compensation arrangements, get the help you need.

Jagnow v. Jagnow, 2021 Pa. Super. 133 (June 29, 2021)

This will not be a political piece.  There are enough of those.  But as just about everyone knows, on July 1 the New York attorney general and district attorney indicted both the Trump Organization and its chief financial officer on charges of income tax evasion.  The gravamen of the charges is that the Trump Organization assisted employees in evading income taxes by either paying bills for them or providing perquisites for which no income was reported and thus no taxes paid.

Most readers also know that this comes out of a longstanding fight over the books and records of the Trump Organization; a fight that went to the Supreme Court of the United States.  140 Supreme Court 2412 (7/9/2020).  This case featured the Justice Robert’s quote that the public “has a right to every man’s evidence.”

It turns out in this instance, while the combatants were clashing over disclosure via subpoena, the Manhattan district attorney had discovered what is best termed “every woman’s evidence.”  That evidence was in the hands of Jennifer Weisselberg, the divorced daughter in law of Trump CFO Allen Weisselberg.  According to The Daily Beast in an article published on July 12 in a divorce deposition given in 2018, Barry Weisselberg (son of the CFO of Trump and an employee of the organization) indicated that one of the perquisites working for Trump yielded was $98,000 in annual tuition payments to Columbia Grammar & Preparatory School.  According to the Beast, CFO Allen Weisselberg would prepare the drafts to the school but Donald Trump signed the checks for the tuition.  The indictment alleges that the practice had been ongoing since 2012, thus several hundreds of thousands of dollars in tuition were involved.

Jennifer Weisselberg also had copies of her joint tax returns with her former husband.  They reflected wages in 2010 and 2011 averaging $133,000 per annum.  Meanwhile, Jennifer and her husband lived in a Trump owned building at 100 Central Park South, a block west of the Plaza Hotel.  In deposition, Barry Weisselberg is seen testifying that he was “given” the apartment temporarily, although it appears that the practice went on for years.  He professed to have no idea what the fair rental value of his unit was worth.  Today’s rents for that building range from $5,000 to $20,000 a month according to the Beast.  The indictment alleges other untaxed perquisites included Mercedes lease payments and various other compensatory arrangements.

Depending on what year you look at and whether you believe what is reported, the Trump Organization is a $300 million to $600 million company when measured by revenue.  Their accounting work is done by the 28th largest accounting firm in the United States.  Consequently, one would expect that there was a thorough awareness of Section 162 of the US. Tax Code.  It states that, in general “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business….”

Unfortunately, many divorce clients seem to think that their businesses are entitled to make these side arrangements even though they disguise income or, in other instances have no relationship to the associated business.  The indictment earlier this month had to do with state and city income taxes, but the federal rules are essentially the same.  When you pay for your employees kindergarten or college tuition or you provide them with a stylish crib to sleep in, you are rarely doing it out of charity and, if you are, it is termed a gift, and gifts are going to be looked at very carefully in a setting where the donee is also an employee, independent contractor or has a similar business relationship.

In recent years accountants who see problems like private school payments or company cars that are not properly expense allocated have been pushing back when clients try these schemes.  Section 6694 of the Tax Code puts them on the hook for “unreasonable positions.”  There is material about this on the AICPA website.

But chances are that an accountant is not going to know whether the unit on Central Park South is unoccupied or employee occupied.  Taxpayers all need to realize that if they want to try these off books maneuvers or to play the deduction game aggressively, they may have some protection from a spouse who is on joint returns.  However, once a divorce occurs and the statute of limitations runs on those joint returns, that former spouse is now an eligible receiver under the IRS Whistleblower program.  That’s IRS Publication 5251.

So be careful out there.  The Biden Administration has promised that IRS enforcement is going to be making a comeback now that the Brookings Institution’s concludes that 1 dollar of every 6 eludes federal tax.  Don’t let that comeback include you.

We have written about 529 Plans a few times before.  The major points of those articles are: (a) 529 Plans are marital assets under Pennsylvania law; and, (b) 529 Plans can be UTMA (Uniform Transfer to Minor) Accounts in which case they are gifted property and outside the typical scope of marital assets.

Another common problem encountered in the divorce process is a collection of unbalanced 529 plans.  Parties marry and have children. They begin to fund 529 Plans as the children come along.  They have one child who is 14 for whom they have set aside $75,000.  They have another child who is 5 for whom they have set aside only $5,000 when they divorce.  The easiest answer is also the one least employed; that is to commit in a property agreement to devote the funds of both accounts for education of the children and continue to fund the accounts after divorce.  Most clients do not agree on the latter point, perhaps because funds become scarce when couples divorce and assume the costs of two residences, alimony, child support and all the rest.

So, what can be done about the $70,000 disparity?  If the older child’s account is regulated by UTMA, the answer is nothing.  The money has been gifted and belongs to the child except where UTMA allows the custodian to employ it during the child’s minority.  But if the accounts are ordinary 529s the transfers can be accomplished because the funds still belong to the account owner.  Rule 1 should be to provide for a rollover in the property settlement agreement and add the words “to the extent such transfers can be accomplished without tax impact on account holding spouse.”  This builds a safe harbor in case laws or regulations change.  Second, a true arithmetic balance may not be fair to the elder child.  A true balance would leave each child with $40,000.  That would seem fair except that the elder child has only four years of growth before they start to draw on the account for college or other qualified expense.  The younger child has 13 years.  If both accounts are yielding 8% annual returns, the older child will have roughly $54,419 at age 18.  The younger child would have roughly $115,500 at the same age.

Now, if you like statistics, realize there is another factor, inflation.  Since 1980 the Bureau of Labor Statistics informs us that overall inflation has been 228%.  Alas, college costs have escalated by 1184% during a corresponding period.  So perhaps the adjustment is superfluous or worse.  In the end, the transfer can probably be done.  But work closely with the custodian of the securities (the brokerage) and don’t leave your accountant out of the mix.

The website MarketWatch publishes a kind of Dear Abby column related to family finances that touches on some very real subjects confronting families today.  On July 2, columnist Quentin Fottrell published a column in which a wife laments her husband’s spending habits and wonders whether she could be liable for his debts should he die.

The wife professes that she loves her spouse, but they have completely different perspectives on how to spend money.  Husband is reported to have $75,000 of credit card debt and is shopping for $8,000 of season tickets for a local sports team.  Wife wants to know if he dies whether she could be liable for these kinds of debt because she is has significant consumer debt of her own.

This problem is scarcely unique.  People can really adore each other while having completely opposing views on many subjects, including finance.  Unfortunately, the legal world doesn’t have many useful remedies to address financial conflict.  The law says there are four kinds of debt.  As between you and your creditors, there is individual debt and joint debt.  American Express can’t sue you for the $75,000 your spouse ran up on his Platinum Amex unless you signed up for the debt with him.  If hubby dies, they can only recover that debt if he has more than $75,000 of assets in his name alone.  But suppose the day comes where the debt climbs to $100,000 and you can’t stand it anymore.  Alas, in a divorce, if that debt accumulated while you and your spouse were married, the court is supposed to divide the debt between the two of you equitably.  You might be able to show that the entire $100,000 was spent on antique car restorations, a collection of handmade bowie knives and tickets for the Penguins.  Some judges and hearing officers will be sympathetic and stick him with most of the debt.  However, many others adopt the laissez-fair view that if you stayed married while he racked up the debt, you get your half of it in sickness and in health.  The case law on this is very spotty and, more often than not, the debt includes things that appear ego driven while other things are clearly family needs (e.g., summer camp, unreimbursed medicals, a stint in rehab).  This may sound very inequitable but courts often take the approach that it is their job to divide the debt as it stands on the date of separation rather than sit through a lengthy rehash of how one spouse tried without success to rein the other’s spending in.  Rare are the cases where the debt amasses quickly.  More typical is the situation where a spouse compensates for his/her unhappiness by purchasing “things”. Another common problem is the spouse who quits or loses a job only to decide that now is the perfect time to open a sporting goods store a mile away from Dick’s or an ice cream parlor next to the Dairy Queen.  That debt is going to be marital debt even if you told your spouse that the idea was crazy, and you were against it.

So, what can you do?  Hate to say it, but it is time to talk with a divorce lawyer before the crisis escalates.  To ignore the problem means that what you saved for retirement or the rainy day gets pitched into the pyre of marital debt.  Understand that your protests along the way to financial Armageddon will be considered in divorce but may also be completely ignored when the property distribution is made final.  Even things like the $100,000 loan your spouse took to educate the kid from the former marriage is still marital even though you received essentially “zero” value for the debt.  That’s a bad place to be but only you can stop the debt train before it leaves the tracks.

For better or for worse, divorce lawyers get a front row seat to the home real estate market because their business often involves selling a family’s most prominent asset.  The last 12 months have made for an exciting game as home prices have hit seemingly impossible highs, driven by crazy low interest rates and a surge in demand that is not easily explained.

Clients and realtors are reporting that homes are commanding multiple bids.  In a day when homes can now be toured via the internet, it is not uncommon for a home to have hundreds of views per day.  Buyers and sellers are both reporting market fatigue with the former having to structure bids with price escalators that go far beyond asking price and sellers have to interpret those bids and spend days away from home while hordes descend to see the residence “live.” The market has not been this active since 1987 when buyers often camped out at a residence at dawn on the morning a house went on the market.

But some of the offers that we are seeing come pregnant with problems.  Many buyers are waiving home inspection clauses, but few can avoid the mortgage contingency and the appraisal it requires.  Historically, homes appraised based upon transactions that had closed.  We understand that appraisers are getting the green light to use signed contracts instead because home prices are moving so fast, especially in the $300-500,000 range.

We are also hearing stories of buyers tying the knot to buy a house but then defaulting on the transmission of the down money that is typically due in 3-5 days.  This seems to reflect a buy first think later mentality.  Then we have seen a transaction where the offer exceeded asking price, but the sale price would be adjusted to conform to the lender’s appraisal.

Some of this is clearly frenzied buying based on low interest.  Real estate economists in New Jersey are reporting 12% annual increase in 2020 and 2021 and predicting another 3% in 2022.  Pennsylvania seems to be following suit.  Economists note that for each percentage point increase in mortgage rates the buyer’s buying “power” declines by just under 9%.  A small 3-4% correction in home prices is forecast in 2023.  What seems so curious about this market rally in home prices is the fact that it is heavily concentrated in more modestly priced homes.  The market for a house over $1 million is certainly active, however, in the Philadelphia region buyers at that level seem far pickier about the bids they place.

We have also detected that a lot of the buyers in the lower end are looking to fix and flip older homes in established neighborhoods.  These investors are working a narrow time space because increased interest rates could vastly erode the pool of eligible buyers able to qualify to acquire the flipped house.

On May 26, the Superior Court issued an en banc ruling addressing whether a Court can order a child custody litigant to turn over records of her treatment compiled in the context of a MHPA proceeding.  The unanimous decision of the nine-judge panel was that those records were not subject to disclosure.

The opinion appears fairly definitive.  The Lackawanna County trial court was faced with allegations of a mother’s chronic instability in the context of an emergency petition for special relief.  Faced with the hard stop provisions of Section 7111 of the Mental Health Procedures Act (title 50) the Court appointed a guardian ad litem to insulate the “confidential records” from the Father, while allowing the records to be reviewed by the guardian.  Meanwhile, the Court also ordered psychological evaluation of the parties under Pa.R.C.P. 1915.8.

The conclusion that MHPA records should not be made available had many supporting elements.  Absent an “explicit waiver” by the party whose records are sought, the statute makes clear that the legislative policy was to provide confidentiality as a mean to promote treatment and that production of these records undermines that confidentiality.  Moreover, a current evaluation represents the best evidence of what is the current mental health issue, if any.  The Court was also emphatic that participation is a custody case would not be construed as a waiver of the right to assert confidentiality.

In cases such as this, there is a tendency on the part of trial courts to error on the side ordering disclosure.  This opinion makes clear that such an approach is a reversible error and an order mandating disclosure is one subject to an instant appeal under Pa.R.A.P. 313.  To its credit, the trial court did stay the disclosure order pending appeal.  Candidly, on the strength of this opinion one must ask whether an agency with records compiled under 50 Pa.C.S. 7111 should comply with such an order even if a stay is denied or never sought.

This case is consistent with M.M. v. L.M., 55 A.3d 1167 (Pa. Super. 2012) and Gates v. Gates, 967 A.2d 1024 (Pa. Super. 2009).  It makes clear that appointment of a guardian ad litem is not a path around the problem and that a current “best interests” analysis in a custody proceeding does not overrule a statutory provision mandating confidentiality.

C.L. v. M.P. 2021 Pa. Super. 107 (May 26, 2021)

Recall March of 2020.  The country more or less stumbled into its first pandemic in a century and by the third week of March, Pennsylvania and its judicial system were essentially closed.  For the next 10 weeks we were told to quarantine.  Schools, office buildings, almost every form of activity was restricted or closed.  Friends and clients opined that this had to be good for business.  The business would be suppressed for a while, but a house filled with kids schooling and adults working under one roof would seem to be an incubator for marital discord.

Well, according to the Wall Street Journal’s June 26 edition, it has not panned out that way.  According to data collected by Monmouth University Professor Gary Lewandowski, the preliminary data indicates that couples may have actually developed an appreciation for each other given what they endured together.

Monmouth is a polling powerhouse.  Its data from January of this year reflects that 7 of 10 couples in a relationship reported satisfaction from it: up 10 points from pre-pandemic levels.  10% of respondents said they argued more while 16% reported arguing less during 2020.  One-third of respondents thought the last year had brought an improvement in their relationship. Twelve percent thought things did deteriorate.  Perhaps most unusual was the self-reported “troubled marriage” index.  In 2019 it ran as high as 40%.  The 2020 survey saw that decline to 29%.

People in the single community also reported changes to their approach to relationships.  Surveys done by and reported a shift in what their clients wanted.  The respondents looking on these sites to “hook up” or seek other kinds of short-term gratification shifted towards more caution in deciding who to interact with and greater interest in sustained relationships.

Dr. Lewandowski concludes that these shifts may be temporary.  However, he also leaves the impression that many of us may have learned something about ourselves and about the people we live with from the 13 months we have endured.  Early in the process almost all of us knew of someone who worked in an industry decimated by school and business closures.  Until February, I knew of no one who died from the coronavirus.  Today, I can count five friends and acquaintances who are no more.  604,000 deaths, enough coffins to stretch from Philadelphia to Chicago does remind us that perhaps we should pepper life’s frustrations with a measure of gratitude and enjoy what we have while pursuing what could be.

This weekend brought a report from an outlet called BGR Media about the child tax credits that are due to start hitting bank accounts in the next few weeks.  This child tax credit, unlike all its predecessors, is being paid to eligible recipients in advance; typically, at the rate of $250-$300 a month depending upon the age of the child.  Rivers of electronic ink have been spilled over this and as we wrote on May 18, 2021, it is creating business for lawyers because it’s a new thing for divorced couples to fight over.  We warned then and now that it may be the lawyers and the accountants who profit most from this subsidy “intended” to help lesser income earners.

Well, as with all “free lunches” the meal is starting to smell like it was left out too long.  According to BGR’s experts, your monthly tax credit only works if you have income tax due at the end of the year to take the credit against.  Many people who earn modest incomes often use their federal tax withholding to build up a small surplus; triggering a tax refund when they file the next year. Those people may find that unless they have federal tax due on April 15, 2022, their credit will need to be repaid to the government.  How about rolling it forward to the following tax year?  That’s not how its structured now.

In practical terms, here’s the rub.  Beginning in July, the IRS is sending you $250-$300 a month. So, your bank account will receive $1500-$1800 by years’ end on December 31.  It is designed to help people pay their bills and most people will employ it that way.  But wait.  Let’s assume that historically you estimate your taxes due and calibrate your withholding to land right at -0- each tax year.  You owe the IRS nothing.  You have no refund due.  Based on current interpretations of the tax law, you owe the government $1500-$1800 when you file. To put another way, the IRS is effectively loaning you money until next April.  If you owe the government $1500-$1800 on April 15, your tax credit will wipe out your “owe”.  But otherwise, your loan is due, and you will need to pay back the stimulus.

What’s the solution?  Perhaps stay away from the program all together or if you already signed up, keep your monthly stipend in the bank so that it can be repaid. Like so many other tax policies enacted in the last few years, Congress seems to pay little attention to what they are doing while Washington trumpets that it is answering the call of people adversely affected by the 2020 pandemic.  This appears to be a pretty pathetic answer and one which may cause more economic stress than benefit.

We note that the Common Pleas Court of Berks County has ruled that stimulus payments under the CARES Act (that’s the first stimulus passed in March 2020) is not income for purposes of calculating support.  The case is Amos v. Riversa, 113 Berks 107 (12/16/2020).

Click here for the IRS link to assess your eligibility, but realize that Step 1 may involve engaging your accountant to advise you whether this program is going to be a problem for you.

As we have all witnessed, ours is an age when grandparent duties transcend “Saturday” night. Historically, Saturday was grandparent night when parents would have their night out.  Sadly, the explosion in substance abuse among young and middle age adults has forced many older couples to choose between taking their grandchildren in or seeing them placed in a foster care system.

The tensions of resuming the duties of full-time parents during what were supposed to be the “golden years” has taxed many marriages.  A couple recent appellate cases speak to what happens when grandma and grandpa decide that they either don’t like each other or the relationship otherwise snaps because a second generation of child rearing was not part of the marital bargain.

The most recent case is unpublished.  It was “unpublished” on June 15 and may be cited as J.B.S v. J.L.S., Jr..  In this case the mother of the child disappeared into the mist and the father brought the kids home to live with his parents (these litigants) in 2009.  In 2010 the father murdered another child leaving his parents to assume the role as sole parents of two children, then ages 1 and 4.  In the wake of this tragedy the Court awarded the children to the grandparents with the consent of the now missing mother.  Mother was ordered to pay child support but did not.

In 2018 Grandpa filed for divorce and sought primary custody of the children.  That issue was litigated, and the Court awarded Grandma primary physical custody.  Grandpa was then earning roughly $90,000 a year to Grandma’s $33,000 so Grandma filed an action for child support.  In Spring 2019 the Court awarded spousal support of $300 and $141 in monthly child support.  A de novo hearing was sought and after two days of hearings a York County trial judge vacated the child support order based upon a published decision from December 2019 called S.R.G. v. D.D.G., 2019 (Pa. Super. 355).

The 2019 case has similar facts except this time it is mother’s parents who have their grandchild.  Mother has a history of mental illness.  Father is in jail.  Grandfather filed for divorce prompting grandmother to move to Florida with the child.  The child summers with grandpa while living primarily with grandma in Florida.  The opinion suggests that grandma may have been prompted to seek support in response to extensive custody litigation brought by grandpa.  The panel decision expresses sympathy for her plight but concludes there is “no explicit statutory requirement that a grandparent has any duty to support a grandchild.”

But, wait…. what about the Latin name for the insect that looks like a grasshopper?  You know, en loco parentis[1].  Grandmother notes that both she and her husband had assumed custody and taken (undefined) “proactive steps” to be the grandchild’s parents.  They were undeniably acting in the place (loco) of the parents (parentis).

Here the published decision relies on a 1985 Superior Court case; Commonwealth ex rel McNutt v. McNutt, 496 A.2d 816, 817 (1985).  There the Court ruled that as a matter of public policy it was not equitable for a grandparent who acted out of generosity to take in a child to be held liable for support of that child.  It acknowledges grandmother’s reference to a 2015 Pennsylvania Supreme Court case; A.S. v. I.S., 130 A.3d 763.  We reported on this case when it was published. It held that where a step-parent decided to prosecute a custody action seeking both legal and physical custody of a child, his actions bespoke an intention to assume all the rights of parental authority and, as such, exposed him to a legal support obligation in doing so.  The Superior Court contrasted the grandparents in this case who had accepted the child into their household as an act of kindness knowing that father was not available and their daughter (mother) was incapable of performing the duties of a full-time parent.

The published decision in S.R.G. v. D.D.G. was acknowledged to be a close one by President Judge Jack Panella.  After all, grandfather had been regularly pursuing legal custodial rights to his grandchild, albeit against grandmother rather than the natural parents.  However, the Panella court affirmed trial court holding that no child support obligation could be imposed, notwithstanding the Supreme Court’s 2015 ruling in the stepparent case.

Circling back to the decision of earlier this week, the Court in J.B.S. ruled that the entry of a temporary support order which was contested and properly excepted to, does not make the determination of support res judicata.  None of the orders for child support had been made final before the trial court decided that child support was not due and vacated the prior temporary order.  On a different subject, grandmother in the 2020 decision sought to assert that her husband had made more direct assertions of parental control than in the 2019 case.  The Superior Court held that, while custody had been assumed by the grandparents in both cases, none had taken action to terminate the rights of the birth parents.

This is a topic which is likely to be the subject of more litigation.  The constellation of people raising minor children grows by the day.  In some cases, the task is thrust upon the person acting in loco parentis.  In A.S. v. I.S. we observed a stepparent positively asserting legal rights against a natural parent.  So, we can see a line of support responsibility emerging, but it is a fragmented one.  By way of example:

Natural parents voluntarily place their children with grandparents but later revoke that consent and demand the children back.  Grandparents counterclaim for custody and natural parents prevail.  Do grandparents have a support obligation by reason of their counterclaim?

In A.S. v. I.S., if the stepparent loses interest in seeing the child or a court decides that continued contact is not in the child’s best interest, does the support obligation cease as well?

The most recent case seems to turn on the fact that no effort was made to extinguish the rights of the natural parents.  But in the case, it is fairly clear that there is custody litigation between the two grandparents that is quite serious and demonstrates that each aspires to act as parents.  Isn’t the termination question a distinction without a substantive difference?  Suppose both natural parents were long term incarcerated.  It would then be clear that the grandparents are the only “parents” left standing.  They assumed that obligation together.  Isn’t grandma doubly prejudiced because she must employ resources to support the children and defend grandpa’s lawsuits.  To this writer the analogy is closer to L.S.K. v. H.A.N., 813 A.2d 872 (Pa.Super. 2002) where a same sex couple agreed to start a family together using a surrogate.  The Court more or less implied a contract to provide support as condition of that agreement.

In his S.R.G. v. D.D.G. opinion, P.J. Panella suggests this may benefit from a legislative solution.  It is a tough one to define from a bill drafting standpoint, but both lawyers and other third parties who live with children not their own, would benefit from some clarity as a matter not just of support, but standing to pursue custodial rights.

J.B.S. v. J.L.S. Jr., 1188 MDA 2020 (6/15/20) Opinion by Judge Pellegrini.


[1] The correct answer is praying mantis or mantis regliosa.

There is hope that the plague is behind us.  Pestilence is on its way either in the form of a lantern fly or the return of the cicada after 17 years of peace.  For the divorce lawyer and his friend in crime, the accountant, there is another crisis emerging.  It’s the war over who gets the tax credits for the children.  Chances are the true winners will be the lawyers and the accountants, because in many instances the fight will consume the dollars in controversy.

Once upon a time, in fact for most of time, if you had primary physical custody of a child under 19 or under 24 if a student, you could deduct what was essentially $2,000 for yourself, your spouse and those dependent kids who qualified.  The statute was and remains Section 152 of the Internal Revenue Code.  In 1984 Congress allowed parties to agree upon an allocation of the deduction so long as that agreement was embodied in IRS Form 8332.  Life was simple but for the fact that the Congress decided to inflation adjust the dependence exemption amount.

In 1997 Congress decided to fiddle some more.  They passed a small ($400) child tax credit.  A credit is a different animal than a deduction.  If you are in a 22% tax bracket a $2,000 tax deduction is subtracted from income.  It thus saves you $440.  A tax credit is a dollar for dollar reduction of your tax liability.

Fast forward to 2017.  We had a late year tax reform bill that changed everything.  Dependency exemption; gone; at least until 2025.  Tax rates completely revised for all tax classifications from single to married joint.  And the tax credit got juiced.  Before 2018 for households with more than $110,000 the tax credit was beyond the pale.  The 2018 bill did not phase out the tax credit until $200,000 for single households and $400,000 for married/joint returns.  And the credit itself was increased to $2,000 per child.  The other big news was that in some circumstances you could get a payment for the tax credit even if you owed no income tax.  So effectively it was a negative income tax, subsidizing families with tax dollars.

In 2020 we saw the economy stagger when the pandemic of influenza began to lay grip to the economy.  Congress decided it needed to pump money into the economy via loans to business and money to households.  The latter was done, in part, through the American Rescue Plan Act of 2021.  The tax credit is now $3,000 per child under 17 and $3,600 per child under age 6.  Half of the benefit is payable in the second half of 2021 by deposit from the Treasury Department.  Read any news collection source out there and articles are appearing daily about who qualifies and how to get the money.

So, the sharks are in the water and they can smell stimulus.  Meanwhile, the problem with all new law is that the devil in the details and the Treasury Department is stuck administering those details.

In this vein, we report on two cases.  The first is Donnelly v. Donnelly, a May 17,2021 non precedential decision by the Superior Court.  In quieter times, the Donnelly’s separated and reached a sensible agreement not uncommon to all of us.  They would alternate taking the dependency exemption for their children from year to year.  This actually worked until Congress decided to meddle by eliminating the exemption effective in 2018.  Tax Year 2019 was dad’s year, so he wandered into his local H&R Block and had them cook up his return.  When they fed it into the computer, it choked first because there was no exemption to claim.  Not to worry, he would be content with the newly re-written tax credit.  But the computer at the IRS choked a second time because mother had already filed a return claiming the child tax credit for the children.

Dad was not a happy taxpayer.  So, he went to see his local judge in Bucks County and demanded that his ex be held in contempt for appropriating his dependency exemption.  Alas, the court noted that there was no exemption because Congress took it away.  But, not to worry, the Court “interpreted” the tax law change as one justifying modification of the support so that dad got a $1,200 reduction in support that mirrored the tax credit that mom had purloined.  No contempt was found because what mom did was not willful, and a tax credit is a different thing than a dependency exemption.

Mom appealed.  She didn’t change the tax scheme, Congress did, and it gave the tax credit to a person who qualified by having primary physical custody.  The revised childcare credit was a matter between her and the government.  And this was not money being taken from dad’s pocket to line hers.  After all, the whole tax scheme had changed, and rates were generally lowered.  The agreement in 2014 related to dependency exemptions under Section 152.  What she claimed and got was a tax credit under Section 24 of the Code.

The Superior Court came down on dad’s side and said this needed to be treated as a petition for modification and that the law had changed circumstances.  The order was not modified itself.  Instead, mom was ordered to repay dad the tax credit he couldn’t process because she had already filed a return and claimed it.  The Superior Court saw no harm in this result even though no modification appears to have been requested and it appears the only issue addressed was dad’s “lost” tax credit money.

The opinion cites Pa.R.C.P. 1910.16(f) a rule stating that it is within the power of a trial court to award the child tax credit.  The same provision then goes on to talk about the dependency exemption even though they are two statutorily different animals.  Meanwhile IRS Form 8332, which is the definitive document involving “exemptions” for dependents says the release when signed includes all forms of child tax credits when it is properly signed and submitted.

In Donnelly, the trial court fixed the problem by amending the order so that dad got the tax credit for 2019.  But a recent tax court case reminds us that the IRS is rather finicky about how dependent children are to be claimed for purposes of head of household or child tax credits where the non-primary custodian is doing the claiming. In DeMar v. Commissioner, the Tax Court upheld a longstanding policy that Form 8332 is the exclusive means by which the non-custodial parent can claim head of household or tax credits.  In other words, the IRS doesn’t want to see agreements, court orders or any other form of indicia of an agreement.  You either produce a signed Form 8332 or lose the battle. T.C. Memo 2019-91.  You can get a court to force the custodial parent to sign.  You can get the court to modify the order to get your money back.  But it appears that even a court order allocating the dependency or tax credit does not move the IRS computer in West Virginia to accept the claim.  It’s pretty much a signed Form 8332 or bust.  In DeMar, the father even got the form signed.  But because the custodial parent did not amend her return to allow dad to claim the kid, the IRS said no to the amended return.

The IRS regulations governing this aspect of the law are found at 26 C.F.R. Sec. 1.152-4(e)(1)(ii).  It is a labyrinth of rules which reflect a real effort to get things right.  But as many taxpayers know all too well, he or she who files first may get the last laugh unless you join Mr. Donnelly and take the matter to court.  Indeed, Mr. Donnelly did get his $1,297 back but one must wonder at what price?  With the tax credit now greater and more accessible we may be destined for more of these fights.  It is not clear once the dust settles who will be the winner.