I. Case Law Update: The Latest Decisions Affecting Your Practice
A. Same Sex Marriage and Custody
It is important to first establish the same sex cases that have been brought in Missouri courts concerning child custody during and post Obergefell. In McGaw v. McGaw, appellant, Melissa McGaw filed a motion to determine the parent-child relationship, custody, and visitation rights with respect to the two children to whom she is not biologically related to. The children in this case were born at a time when Melissa was involved in a romantic relationship with the children’s biological mother, respondent Angela McGaw. At the outset, we note that the McGaws’ relationship began, and ended, at a time when the right of same sex couples to marry had not been recognized in Missouri.
Despite their inability to marry, Melissa’s motion alleges that she and Angela took multiple steps to formalize their relationship. They participated in a commitment ceremony, changed Angela’s surname to match Melissa’s, purchased a home together, jointly chose to conceive the children and raise them together, as well as enter into an agreement that governed the termination of their relationship.
Melissa and Angela were never married, and the claims must be addressed under the legal rules applicable to unmarried couples. Following the decision of the Supreme Court of the United States in Obergefell v. Hodges, couples like Melissa and Angela are now able to marry if they choose. Cases like this one, in which important issues involving children must be decided outside the established legal framework applicable to married couples, are going to become rare.
On appeal, Melissa did not challenge the circuit court’s dismissal of her claim to have parentage established under the Missouri Uniform Parent Act. Instead, she argues that she stated a claim for relief based on the theories of breach of contract or under common law equitable doctrines. The court concluded that none of those theories justified reversal.
Now that same sex couples have the right to wed, litigants like Melissa will not have to focus on the alternative claims such as breach of contract or common law equitable doctrines. Instead, any and all laws that were applicable to married heterosexual couples, are now going to be applicable to married homosexual couples. These materials discuss the issues that are arising within the context of divorce, specifically alternative reproductive technologies (hereinafter referred to as “ART”).
B. Essential Information About ART
There are multiple forms of ART, including surrogates, gestational carriers, in vitro fertilization (hereinafter referred to as, “IVF”), intrauterine insemination, sperm donation, and egg donation. The most common of these listed methods is IVF. This procedure is when the eggs are extracted from the donor, and then combined with sperm in a laboratory. Later on, the pre-embryos are either cryopreserved or implanted into the uterus. In the context of lesbian couples, one or both can go through IVF. In some cases, the egg may be extracted from one partner, and the pre-embryos implanted into the other, making the latter the gestational carrier. For gay couples, it is common to use traditional methods such as a surrogate or a gestational carrier. In these agreements, the surrogates will surrender any parental rights after birth. The premises provided thus far sound fairly simple as they are stated in the slide, but we will come to discover that numerous complexities arise in almost all facets of the pre-embryo or child’s life.
C. Rights of Children Born From Embryos
There is an ethical conundrum that arises when dealing with the rights of children born from frozen embryos. On one hand, there is the biological parent(s) interest in retaining their anonymity in regards to the donation that they have made in order to give life to a child. On the other hand, there is also a strong argument that the child should have the right to know who their biological parents are.
In Seaman v. Colvin, the mother, individually and as guardian on behalf of her minor children who were born using ART, sought review of a decision denying her application for the child’s survivor insurance benefits on behalf of their deceased wage earner. The father had previously had his sperm cryopreserved, but later died of Hodgkin’s Lymphoma. The court stated that the children who were born by means of ART after the death of their father were not entitled to inherit by intestate succession from the deceased father’s estate and thus, were not qualified “children” of an insured individual under the Social Security Act.
D. Disposition of Frozen Embryos in Divorce
There are an amazing amount of people that are born through the use of ARTs. Approximately 1.5% of all infants born are conceived using ARTs. When couples or individuals participate in ARTs, and they subsequently create embryos, there are often more pre-embryos created than are necessary to conceive a child. This gives rise to the issue of what to do with the extra pre-embryos. There are existing options for the dispositions of embryos, and these options arise out of divorce cases, when the parties disagree over their use, or lack thereof:
(a) Use by one of the parties for reproductive purposes;
(b) Donation (either to research or to other intended parties for reproductive purposes); or
When analyzing what the courts should do with cryopreserved pre-embryos in divorce cases, several questions arise that the court usually will have to address. First, are the embryos “children of the marriage” such that custody and control of them is determined on the basis of a “best interest” analysis? Second, are the embryos martial property such that they should be disposed of in a property settlement pursuant to the principles of equitable distribution? This is the realm of logic that you will see most courts use analyze this issue.
Additionally, the courts are namely faced with the issue of weighing the interests of the parties. The interests that are usually weighed are the interests and rights to procreate. This interests and right, creates an opposite right to not procreate, or to avoid parentage, so the courts are normally stuck between balancing the two. There is also a big question that arise when using ARTs and the role of pre-conception and IVF forms. We will discuss all of the answers and arguments relevant to these questions within this part of the discussion.
One of the earliest cases concerning disposition of frozen embryos and discussing the issue of whether pre-embryos are considered human beings or property is Davis v. Davis. In Davis, the court was asked which member of the divorcing couple should control the disposition of the pre-embryos. The court discussed the limitation of conditions to which the embryos would be able to be discarded if they were found to be legal persons. They found that, because of repercussions of defining embryos as legal persons, they “are accorded more respect that mere human cells because of their burgeoning potential for life.” They rejected the proposition of defining cells as legal persons because “even after viability, they are not given legal status equivalent to that of a person already born.”
Presently, there is little uniformity across that country in legal precedent as to the allocation of frozen embryos in a divorce. Though, there are three distinct analytical approaches. The first of those approaches is a contractual analysis. This analysis consists of a strict contractual approach, which enforces the terms of the directive or agreement with the clinic as to what happens to the embryos upon specified circumstances, such as death or divorce.
The second main approach is the mutual consent approach. The contemporaneous mutual consent model holds that absent joint consent, the embryos are kept in a cryopreserved state. If either party has a change of heart, advance directives are disregarded and the party’s current objection takes precedence.
The third approach is the balancing approach. In this analysis, there is a balancing of interest based upon the parties’ interests in the preservation or destruction of the embryos, their relative positions, and the burdens being imposed on both depending on the outcome.
There are certain cases that allow the disposition of the embryos to be governed by a time frame prescribed by a cryopreservation agreement. In Litowitz v. Litowitz, a couple had two embryos formed with donor eggs, and the husband’s sperm, after a successful birth using a surrogate. The couple had the left-over eggs frozen with the intention that they would someday be implanted in the uterus of a surrogate mother, however, the couple subsequently divorced. The husband wished to place any children born from the embryos up for adoption in a two-parent family outside the state of Washington but the wife appealed from the court’s ruling because she wanted to raise any potential children. The Washington Supreme Court ruled that the pre-embryos should be thawed out and allowed to expire because the dispute had not been resolved within a five year time-frame prescribed by the Cryopreservation Agreement.
There is an emerging trend to enforce the clinic consent forms that parties sign, or other relative agreements between them, while giving the parties the option of mutually modifying the agreement later. If there is no agreement, the court goes to a balancing analysis. The right not to procreate general prevails, with exceptions of course. If the party who wants to use the embryos for procreation purposes has no other means of having a genetically related child, the courts may consider awarding the embryos to that party over the other party’s objection.
A case demonstrating the contract approach is Kass v. Kass. In Kass, a husband and wife underwent IVF, which resulted in five surplus embryos for storage. The husband and wife signed consent forms at the clinic prior to treatment stating that in the event of a divorce, the embryos would be disposed of by the clinic or used for research. The couple subsequently divorced, and signed an agreement that said that the stored embryos would be handled in a manner consistent with the clinic consent form. Later, the wife sought custody of the embryos on the basis that this was her only chance at genetic parenthood. The court enforced the terms of the consent forms, looking to the original intent of the parties and honoring those intentions.
A case that is distinguished from Kass is A.Z. v. B.Z.. In A.Z. v. B.Z., the court rejecting enforcement of agreements under public policy reasoning. A husband and wife underwent IVF treatments, which resulted in the birth of twin girls. The couple later separated, and the wife implanted left over embryos without the husband’s knowledge and consent. The court looked at the forms (which the husband only signed one of the seven consent forms) that said in the event of a divorce, the embryos should be returned to the wife for implantation. The court said that the conduct of the couple surrounding of the execution of the consent form(s) created doubt on the parties’ true intent.
A case demonstrating the mutual consent model is In re Marriage of Witten. In the context of divorce proceedings, the wife sought control of the frozen embryos so that she could bear a genetically linked child. The husband sought a permanent injunction prohibiting either party from unilaterally utilizing the embryos without written consent from the other. The lower court ruled that agreements entered into at the clinic are enforceable and binding, subject to the right of either party to change their mind regarding the disposition of the embryos. The higher court affirmed the trial court’s ruling stating that neither party could transfer, release, or use the embryos without the other’s written consent.
The third approach, the balancing approach, in best demonstrated in Reber v. Reiss. In Reber, the Pennsylvania Superior Court upheld the trial court’s use of the balancing approach to award frozen embryos to the wife in divorce proceedings. Upon commencing their ART procedures, the spouses had signed consent forms at the clinic, which said that the embryos would be destroyed after three years. The wife at trial testified that the embryos were her only reasonable chance to procreate after surviving cancer treatments that rendered her infertile, and promised to use all reasonable efforts to support the child without any financial assistance from the husband. The husband argued that he did not wish to have a child with his ex-wife or to incur the financial obligation of an unintended child. The court affirmed the lower court’s refusal to enforce the destruction provision in the consent form signed by the spouses, and held instead that the balancing of interests tipped in the wife’s favor.
Another case that demonstrates the balancing approach is J.B. v. M.B.. In this case, the court weighed the wife’s right not to procreate against the husband’s interest in using or donating the remaining pre-embryos. The court found that the wife’s interest in not to procreate the husband’s interests because the father was still able to father other children on his own.
Courts have also applied a hybrid analysis which combines the contractual and balancing approach. In Szafranksi v. Dunston, there was a couple that was dating, with no evidence of any long term prospect. She was diagnosed with non-Hodgkin’s Lymphoma and was told that her chemo treatments would likely render her infertile. Their IVF physician advised her to undergo IVF prior to chemo to create embryos that would be stored until after treatment. Jacob, agreement to provide sperm to use in conjunction with the eggs to create embryos. They signed an agreement that stated the following:
Because of the possibility of you and/or your partner’s separation, divorce, death or mental incapacitation, it is important, if you choose to cryopreserve your embryos, for you to decide what should be done with any of your cryopreserved embryos that remain in the laboratory in such an eventuality […] Embryos are understood to be your property, with rights of survivorship. No use can be made of these embryos without the consent of both partners (if applicable) […] In the event of divorce or dissolution of the marriage or partnership, [the clinic] will abide by the terms of the court decree or settlement agreement regarding the ownership and/or other rights to the embryos.
The couple created three embryos, but they subsequently broke up and Jacob later filed a law suit seeking to enjoin Karla from using the embryos. Karla counterclaimed seeking sole custody and control. The court affirmed the lower court’s ruling that Karla was entitled to sole custody of the embryos under both a contract and balancing analysis. The evidence of assent from Jacob from a phone conversation created an oral contract between the two. The court further stated that the parties did not modify their oral contract when they signed the informed consent at the clinic because the document contemplated the parties reaching a separate agreement. The court ultimately honored the parties’ original intent as set forth in the prior agreement.
The Szanfranksi case is distinguishable from most other decisions with similar facts because all of the couples who signed the forms were married, and subsequently got divorced. In this case, there was just a couple. The court also found in that case that the lower court did not err in finding that her interests should prevail based on the fact that it is her only possible chance at genetic parenthood.
What does the case law from these three approached mean in the context of same-sex marriages? Theoretically, it shouldn’t mean much following the Obergefell decision. The right to marry was deemed fundamental, and under Due Process and Equal Protection, same-sex couples cannot be deprived the right to marry. Prior to Obergefell, the Supreme court ruled in United States v. Windsor that §3 of the Defense of Marriage Act violated the 5th Amendment. This ruling recognized same-sex couples, and it changes the language of thousands of federal regulations in order for them to apply to same-sex couples. With the Obergefell decision as controlling authority, all cases in the past that have dealt with same-sex couples and ARTs no longer pose the complexities that they once did. Cases like the ones discussed earlier in the context of the three approaches to disposition of frozen embryos will now apply to same-sex couples.
In Missouri, there is a 2015 case that has gained nationwide publicity for the divorce proceedings. Jalesia “Jasha” McQueen-Gadberry and Justin Gadberry have been going through divorce proceedings for the past five, going on six, years – mostly concerning the disposition of the cryopreserved embryos that they created together. McQueen and Gadberry created the embryos in 2007, where they had two of the four successfully fertilized embryos implanted. The remaining two pre-embryos remain cryopreserved. Prior to going through IVF treatments, the then couple signed an agreement with the fertility clinic that McQueen would receive the embryos in the event of a divorce. McQueen and Gadberry differed in opinions with regards to what should be done with the embryos – he wanted them to be donated to an infertile couple, donated to research, or to be destroyed.
In the amicus curiae brief supporting McQueen in her appeal of the trial court’s decision, the Thomas More Law Center argued that the trial court failed to recognize the embryos as human beings. It is contended that under RSMo § 452.705, embryos should be protected because they are minor children. Furthermore, RSMo § 452.705 should be construed in the light and context of RSMo § 1.205, which states that, “1. The general assembly of this state finds that: (1) The life of each human being begins at conception; (2) Unborn children have protectable interests in life, health, and well-being; (3) The natural parents of unborn children have protectable interests in life, health, and well being of their unborn child. [2. Omitted] 3. As used in this section, the term ‘unborn children’ or ‘unborn child’ shall include all unborn child or children or the offspring of human beings from the moment of conception until birth at every state of biological development.” In defining conception, the brief supporting McQueen states that all Missouri statutes should be construed with the understanding that life begins at conception. Moreover, conception is defined as fertilization of the ovum of a female by the sperm of a man.
Arguing that the embryos are considered protected human beings at the time of conception, and a child under the age of eighteen, according to RSMo §1.205 and RSMo §452.705 respectively, embryos in divorce should be subject to a ‘best interests’ analysis, and not simply a division of property.
The brief also argues that the State has a compelling interest in protecting an unborn child which overrides the right of the mother to abort [or discard] her child. But once Roe is brought up, the question arises – at what point is the fetus [or embryo] viable? Planned Parenthood contemplated the technological advance and other medical advances that may occur in the future stating that society will, “continue to explore the matter.” Under Missouri law, the amicus curiae brief argues, an embryo is viable even though it requires artificial aid to sustain viability outside the womb.
The last contention of the brief is that there is no forced procreation if the mother uses the embryos to procreate, which many of the cases we previously discussed relied upon in the decisions. The rationale relies on the fact that the embryos are already considered children past the point of conception.
In McQueen’s brief, there were similar, but additional arguments made to support her position. In a prior Missouri court proceeding, McQueen had a guardian ad litem appointed to the two cryopreserved embryos. The court appointed a guardian ad litem, which can only be appointed in cases where the best interests of a child are being investigated and the trial court recognized this, but later reversed its rationale and ruled that the embryonic cells are inanimate objects. McQueen further contended that in other areas of the law, unborn children have protections and recognition of being human beings for legal purposes – they are recognized in wrongful death statutes, manslaughter statutes, as well as murder statutes.
Another argument that McQueen presents in her brief is that the trial court gave the father the unprecedented right to direct the death of embryonic children. Historically, the courts have given the pregnant woman the right to choose to bring a baby to term ever over the father’s objections. Can McQueen have her cake and eat it too? This argument and past arguments conflict with regards to abortion jurisdiction. This argument falls apart because on one hand, abortion jurisdiction does apply, and on the other, it does not. In the amicus curiae brief by the Thomas More Law Center, it is argued that abortion jurisdiction does not apply because the embryos are outside the womb. They further argue that applying RSMo § 1.205 to RSMo §452.705 does not require any child to term, but rather it allows for the opportunity to do so. If abortion jurisdiction does not apply, then should father’s rights still be trumped by mother’s rights to direct the disposition of the embryonic cells?
The latter argument seems to be perplexing, but the former seems to have a valid point of contention from the standpoint of expansive interpretation of statutory language. The point of contention could potentially dissipate if McQueen and other Missouri state legislators pass a bill modifying the language of child custody statutes. The effort seeks to define embryos as human life as opposed to property that is divided like personal effects and other tangible, household items. According to Carla Hoste, a family law practitioner, the bill could have catastrophic consequences – do IVF clinics or anyone who discards embryos subject to manslaughter or murder charges? Sarah Ross of the ACLU states that this would violate people’s 14th Amendment right to not procreate, because the new definition in the bill would force someone to become a parent in all circumstances. The goal with the changing the language of the bill is to apply a best interests approach to custody cases involving embryos.
This issue of defining the embryo as property or persons has arisen in the past. The embryos are sort of a special type of property, somewhere in the gray area between property and personhood. Embryos are unlike any other property because if one parent wants to use them, the other would never truly be separated from that property due to child support payments and other obligations that arise out of parenthood.
A similar case arose out of California recently. Mimi Lee, the intended mother, wanted to use the embryos with her husband after she lost her fertility due to cancer treatments. The IVF consent form that the couple signed stated that in the event of divorce, the embryos should be destroyed. Lee argues that the IVF consent form is not legally binding and that this is her last chance at biological parenthood, in an effort to try and compel the court to rule in her favor. The court said that Lee does have the right to procreate, just not with her ex-husband. This is a little deviation from other court cases that are discussed previously where the court grants the embryos to the mother who has no other chance of biological parenthood. The twist of not being able to procreate with the other party in question seems to strike a balance in theory (respecting the right not to procreate of the husband and recognizing the right to procreation of the mother), but not practically.
There have been around eleven cases since 1992 concerning the disposition of frozen embryos in divorce. Eight out of the eleven of those cases, the judge rules in favor of the partner who asserts their right not to procreate. States like Pennsylvania, Illinois, and Maryland are the only three states that have sided with the woman where it is their last chance of biological parenthood.
The most publicized case of a sperm donor having to pay child support arises out of Kansas. William Marotta, who responded to a lesbian couple’s Craigslist ad for supplying sperm to help the lesbian couple give birth to and raise a child, was forced to pay child support. The donor and the couple signed agreements prior to their ‘at home’ artificial insemination stating that the donor would not be held responsible for child support, or any other obligations that may arise.
Under Kansas law, Marotta would not have been held liable for child support if a physician had carried out the procedure. The state licensed physician participation would have rendered him officially a sperm donor, and therefore not liable for child support payments. The concern in having a physician participate in these procedures is one of public policy – it is important to make sure that the donor is screened for any genetic defects such as diseases that can be passed down through inherited genetic material.
Conversely, there are cases that demonstrate that agreements prior to artificial insemination can be enforced. In Ferguson v. McKiernan, the court enforced the agreement between the sperm donor and donee, that the donor would not be held responsible for child support payments. The sperm donor in this case argued that there is public policy precluding parents from bargaining away a child’s rights to child support should not preclude an otherwise binding contract between the parties. He contests that but for the promise to seek child support, the donor would have never participated. The sperm donor also cited §702 of the UPA which states that, “a donor is not a parent of a child conceived by means of assisted reproduction,” and “the donor can neither sue to establish parental rights, nor be sued and required to support the resulting child. The mother in this case argues that the “best interests” approach should be applied. Furthermore, she urges that the interests of the child preclude the enforcement of the contract upon the parties. The court ultimately ruled in favor of the sperm donor.
The court has also looked at other factors to determine the obligations and rights of known donors. In Mintz v. Zoernig, the biological mother of a child was artificially inseminated, and moved against the sperm donor for child support. The artificial insemination that took place in this case was not done so through a licensed physician, which consequently, does not allow the sperm donor to fall under the exception under the UPA. The sperm donor’s contention was that he was merely a sperm donor, but the court found otherwise. The court held that the sperm donor was the father, and therefore obligated to pay child support because the father had done numerous things to lead to such conclusion, including:
(1) The sperm donor held himself out to be the children’s father;
(2) He has had a relationship with the children since their birth;
(3) He has enjoyed visitation with each child;
(4) The sperm donor has acknowledged that he is the natural father of each child; and
Three months after the Mintz decision, the court looked at a similar case of a known sperm donor. In Jacob v. Shultz-Jacob, a sperm donor provided genetic material to a lesbian woman. In short, the court found that the man was automatically recognized as the possessor of parental rights [and obligations] based on his biological parenthood.
The stories of sperm donors being held liable for child support tend to grab the attention of the local media outlets. Another story, from the New York Post, discusses a sperm donor who had been sending gifts to his biological son signed “Dad.” Eighteen years prior, the man had helped his friend get pregnant by donating his sperm. When his son approached the age of 18, the biological mother came after the father for child support, and won. The court said that the father had put himself out there as the child’s dad, and had developed a relationship with the child, at least enough to force a child support payment for the 18 years he had been financially absent from the child’s life.
Courts have ruled on known sperm donors’ obligations to pay child support using numerous rationales, providing freedom from or obligations to pay child support depending upon the specific facts. But the specific take away is that there is a trend that shows that donors who develop a relationship with the child(ren) drastically increase the likelihood that the court will find that the man is responsible for child support.
II. Authenticating and Admitting Social Media and ESI
A. High-level Strategies to Subpoena Top Social Media Sites
Once you have decided that social media content will be or could be important to your case, you have several initial options. First, you can obtain the consent of the other party to produce the requested data. Second, you can attempt to subpoena the provider. Finally, you can attempt to compel the opposing party to produce the data.
Your best two options are typically to acquire consent or to subpoena the opposing party. If you subpoena the opposing party, you may be forced to explain to the judge why such materials are relevant, and you may have difficulty with access and the formatting of information. Users are only able to provide the information in screenshots and may not even have access to all of their historical data. Even still, user consent or a subpoena to the user may be your best option, because often social media providers are not particularly cooperative, and even if they are helpful, they are still expensive. For example, Facebook, at one time, charged a non-refundable $500 processing fee in addition to a $100 notarized declaration of the records authenticity. Additionally, in the case of Facebook, you need either a valid California or federal subpoena.
Even if you are successful in subpoenaing Facebook, you may receive limited information. The company has over 30,000 servers located in several data centers across the United States. If the company responds, it may provide a “Neoprint,” which it describes as an expanded view of a given user profile. This may include the user’s physical address, e-mail address, phone number, and IP address. Facebook also may provide a “Photoprint,” which is a “compilation of all photos uploaded by the user that have not been deleted, along with all photos uploaded by any user which have the requested user tagged in them. “Some speculate that in the wake of Crispin and the SCA that it appears unlikely that MySpace and Facebook would divulge private content, subject to a civil subpoena, without the user’s consent. In fact, Facebook’s own policy seems to answer this question: “Federal law prohibits Facebook from disclosing user content (such as messages, Wall (timeline) posts, photos, etc.) in response to a civil subpoena.” “Specifically, the Stored Communications Act, 18 U.S.C. §2701 et seq., prohibits Facebook from disclosing the contents of an account to any non-governmental entity pursuant to a subpoena or court order.” Now, an individual’s entire Facebook profile is downloadable by the user, thus mitigating the need to subpoena the provider.
Other social media websites, such as MySpace, pose even greater difficulties as they require additional information, such as user id, password, and birth date. Even once you have gathered such information, you are likely to run into issues with what information contained in the profiles is discoverable.
A common objection to social media evidence is found under Fed. R. Evid. 901 stating the materials are not authentic. In that case you can look to Fed. R. Evid. 901(b)(1), using authentication through the testimony of a witness with knowledge that the evidence is what it is claimed to be. Electronic communications-including email, text message, or social media message can be authenticated through the testimony of the author (including participant in online chat) or 901(b)(4) permits authentication using circumstantial evidence, in conjunction with the appearance, contents, substance, internal patterns, or other distinctive characteristics.
Essentially, a witness testifies that an email, text message or social media message, originated from the known email address or social media page of the purported sender. Most courts will find this to be sufficient. For instance, in United States v. Lanzon, the court upheld the admission of transcripts of an instant messaging conversation an undercover agent had with a man attempting to solicit sex acts from a minor. The defendant argued that copying the instant messaging conversations into a word document altered the conversation such that they could not be authenticated. The court rejected this under Fed. R. Evid. 901(b)(1) stating the “proponent need only present enough evidence ‘to make out a prima facie case that the proffered evidence is what it purports to be”.
However, some courts have been more stringent. For example, in Griffin v. Maryland, a MySpace printout was admitted into evidence as it contained the birth date, photo, number of children, and nickname of the defendant. The trial court stated that “the characteristics of the offered item itself, considered in the light of circumstances, afford authentication techniques in great variety, including authenticating an exhibit by showing that it came from a particular person by virtue of its disclosing knowledge of facts known peculiarly to him.” The Maryland Court of Appeals would eventually reverse the decision of the trial court because the “facts known peculiarly to him” could have easily been duplicated by another user in this instance.
Consistent with this is People v. Lenihan, where the mother of the defendant in a murder case downloaded photos from the government witness’s MySpace page four days after the shooting. The court found the defendant’s foundation improper in light of the ability to photo shop, edit photographs, and the fact that the defendant did not know who took the photographs or who uploaded them.
Likewise, in Commonwealth v. Williams, evidence was admitted from the defendant’s MySpace account. The prosecution was able to provide testimony from witnesses that inculpatory messages had been sent from the defendant’s account. However, the Massachusetts Supreme Court found the trial court’s admission of the evidence improper, because there had been no showing that only the defendant had access to the account. The court noted that just because a person received a phone call from a person claiming to be person “A” that did not actually mean that the person they spoke with was person “A”.
When it comes to admission of social media evidence, it appears that the key issue for the court is a fear of fabrication. While courts have struggled with this, some have begun to consider this a factual issue for the jury. In People v. Clevenstine, another internet sexual assault case, the state presented testimony from a computer forensic analyst and a legal compliance officer from MySpace. The legal compliance officer was able to provide testimony that satisfied the Griffin court’s concern that the messages originated from the MySpace account, and he satisfied the Williams court’s concern about access and use of the profile. The court stated that under Fed. R. Evid. 104(b) the “trier of fact could weigh the reliability of the MySpace evidence against the possibility that an imposter generated the material in question.”
With regard to email, some courts will require authentication from the sender, some from the recipient, and some will accept authentication from either. For instance, in Network Alliance Group L.L.C. v. Cable & Wireless USA, Inc., inconsistencies within the alleged e-mail correspondence suggested that the correspondence was not authentic. The date stamp for one of the email messages listed a date well into the future and an incorrect day of the week for that date.
Situations like Network Alliance, where all facts surrounding a correspondence are disputed, have led to alternative methods of authenticating ESI. One of these approaches has been to take judicial notice of other commonly known characteristics of computers. Check local authority as some courts interpret authentication requirements tougher than others and some will simply not accept it if another more traditional form is readily available.
Most recently, in Campbell v. State, the court upheld the admission of Facebook messages as being authenticated, in a domestic assault case. The court asserted that Facebook present authentication concerns that are twofold. “First, because anyone can establish a fictitious profile under any name, the person viewing the profile has no way of knowing whether the profile is legitimate, See, Tienda v. State, 358 S.W.3d 633, 638 (Tex. Crim. App. 2012). Second, because a person may gain access to another person’s account by obtaining the user’s name and password, the person viewing communication on or from an account profile cannot be certain that the author is in fact the profile owner. The court in Tienda v. State held that the appropriate method for authenticating electronic evidence will often depend on the nature of the evidence. In Campbell, the court held that the Facebook messages provide circumstantial evidence supporting that the boyfriend assaulted his girlfriend, therefore supporting the lower court’s ruling.
To summarize, there are several methods of authentication for social media evidence. The most obvious is to ask the owner/creator of the social media profile if they added the questioned content under Fed. R. Evid. 901(b)(1). Second, you can always formulate requests for admission with a printout of the desired posts attached. Third, you can bring in computer or social media experts to testify, as was done in Clevenstine under 901(b)(3) or maybe even 901(b)(9). Some have also used Fed. R. Evid. 901(b)(4) Distinctive Circumstances or Characteristics, which parallels the initial reasoning applied by the lower court in Griffin. Finally, you can use conditional relevancy under Fed. R. Evid. 104(a) and (b). Until there is a commonly accepted method of authenticating social media evidence, the practitioner should be prepared to meet the most exacting standards.
This will depend upon how you received the data. For instance, Twitter’s website (in reference to Twitter accounts or Vine) states that its data production comes in electronic format capable of viewing by common word processors such as Microsoft Word. Additionally, the website mentions that its records are self-authenticating and come with an electronic signature to ensure the integrity at the time of production. A declaration will be provided upon request.
Even if subpoenaing one of these providers or a social media outlet in general, it can be wise to seek consent first. The SCA allows the provider to provide the user’s records with “the lawful consent of the originator or an addressee or intended recipient of such communication, or the subscriber in the case of remote computing service …” A well drafted consent form should include the account holder or user’s name, any user id or known screen name, along with the person’s date of birth and address, including email address, as many providers require this information anyway. The consent should also include a detailed description of what information is targeted and a notarized signature of the consenting party.
If you are not receiving the data as part of a response to a subpoena, you have other options. You could take printouts of the video similar to photos taken from social media websites. However, beware that most of these video sharing outlets allow for pseudonyms and nickname, which makes the biggest challenge the issue of who uploaded the video. Additionally, these could be played in court from the sender’s or recipient’s video sharing account with corroborative testimony. This may be the better option depending on whether a still image can capture the behavior you are attempting to prove. Be prepared with your Fed.R.Evid. 101 and 904(b) methods of authentication and applicable exceptions to hearsay.
Often the best place to begin your challenge of ESI and social media evidence, in particular, is on authenticity. Every piece of evidence that is admitted must meet a threshold standard of authenticity under F.R.E. 901. It does not need to be proven that the object is what it is purported to be, only that a reasonable juror could find it to be what it is purported to be. Federal Rule of Evidence 104(b) makes this a preliminary determination for the judge. In other words, the judge is the gatekeeper.
Authentication of social media often devolves into two categories. The first is the identity of the alleged declarant and the second is whether the offered evidence is an accurate representation of the material to be found online. As discussed previously, courts are increasingly finding a printout of a social media website to be a fair and accurate depiction of a website, but it may still be worth a try if you can point out discrepancies between the current site and the print out.
Calling into question the identity of the social media user has been successful. The first step, however, is to consider how your opponent will seek to authenticate the information. If the opponent is likely to utilize F.R.E. 901(b),by having a witness testify as to the origins of the communication, you can attempt to attack their credibility. If the opposing party is likely to attempt authentication of ESI through distinctive characteristics of the material, attempt to show that the characteristics are not so distinctive. This is essentially what happened as Griffin v. Maryland, moved up the Maryland court system. Commonly, a successful argument is that others had access to the computer, phone, or media outlet. Many courts are cognizant that photos and documents may be altered and online accounts hacked. Consequently, this can be successful even if the other side is attempting to use an expert to show the trustworthiness of the process in which the alleged records are made. Finally, and if finances allow, you might be able to show another user posted the alleged content through metadata.
There are several possible objections a party may make with regard to the manner in which ESI discovery is conducted. The first rationale, and perhaps the rationale the courts were initially most willing to accept, was that a discovery request was overly burdensome or costly under Fed. R. Civ. P. 26(b)(2)(B). Generally speaking, the cost of allowable E-Discovery will vary directly with the amount in controversy. According to the Comments associated with Fed. R. Civ. P. 26(b)(2)(B) in accessing discoverability the court should consider: (1) the specificity of the discovery request; (2) the quantity of information available from other and more easily accessed sources; (3) the failure to produce relevant information that seems likely to have existed but is no longer available on more easily accessed sources; (4) the likelihood of finding relevant, responsive information that cannot be obtained from other, more easily accessed sources; (5) predictions as to the importance and usefulness of the further information; (6) the importance of the issues at stake in the litigation; and (7) the parties’ resources. Many of these factors are explicitly considered under Fed. R. Civ. P. 26(b)(2)(C), which authorizes a protective order to limit discovery.
Rule 26(b)(2)(C) provides:
When Required. On motion or on its own, the court must limit the frequency or extent of discovery otherwise allowed by these rules or by local rule if it determines that:
(i) The discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive;
(ii) The party seeking discovery has had ample opportunity to obtain the information by discovery in the action; or
(iii) The burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.
Be mindful, though, that this is a Federal Rule of Evidence, while adopted in most jurisdictions the particularities of E-Discovery may differ in your jurisdiction.
Also, even if the judge does not find that the material is too burdensome or costly, the judge does have the authority to shift the burden of discovery related costs. Ordinarily, the producing party bears the burden of the associated costs, but instances where a party requests that documents be provided in a format different from which they are usually kept, may be sufficient to justify expense shifting. Other factors such as whether the information is available from other sources, such as depositions, interrogatories, requests for admission, or other discovery devices; each party’s respective resources; the nature of the issue being litigated; and, each party’s ability to control costs.
Further, one can object that the discovery request is likely to produce privileged material. Fed. R. Civ. P. 26(b)(5)(B) is essentially a claw back provision. It provides that if information produced in discovery is subject to a claim of privilege or of protection as trial-preparation material, the party making the claim may notify any party that received the information of the claim and the basis for it. After being notified, a party must promptly return, sequester, or destroy the specified information and any copies it has; must not use or disclose the information until the claim is resolved; must take reasonable steps to retrieve the information if the party disclosed it before being notified; and may promptly present the information to the court under seal for a determination of the claim. The producing party must preserve the information until the claim is resolved.
Finally, and often related to burden and cost, one can object that discovery of, in this case, social media evidence is not relevant to the matter at hand. In order for any evidence to be admitted, it must, as a threshold matter, be relevant under F.R.E. 401. Depending upon what issue is being contested, your client’s social media use may provide no insight as to finances or child care habits. Further, even if there is evidence to be found, perhaps the purpose for which the materials are being sought is not relevant. Take infidelity for example, in most no-fault jurisdictions, evidence of marital indiscretion so long as it is not wasting marital resources is irrelevant.
B. Exploring Effective Authentication Techniques
Issues and laws regarding family law are generally state-specific. Still, Federal Rules of Evidence are often mirrored or closely mirrored when states enact such statutes. In that vein, we will look to the Federal Rules of Evidence in determining which objections to the entry of ESI into evidence that you should expect.
Your first hurdle will be to pass any objections to relevance. Under Fed. R. Evid. 401, evidence is relevant if it has any tendency to make a fact more or less probable than it would be without the evidence: and the fact is of consequence in determining the action.
In Farris v. Farris, the trial court judge did not see the relevance of Husband’s attempts to enter Facebook pictures as evidence. He was attempting to enter pictures of marital property Wife sold at a garage sale after they had separated to prove a list of marital assets he wanted were missing. The judge did not see the relevance and dismissed the postings. The Appellate Court reversed and remanded the decisions of the Trial Court Judge.
A common objection to social media evidence is found under Fed. R. Evid. 901 that the material is not authentic.
In that case you can look to Fed. R. Evid. 901 (b)(1), authentication through the testimony of a witness with knowledge that the evidence is what it is claimed to be. Electronic communications-including email, text message, or social media message can be authenticated through the testimony of the author (including participant in online chat) or 904(b)(4) permits authentication using circumstantial evidence, in conjunction with the appearance, contents, substance, internal patterns, or other distinctive characteristics.
Essentially, a witness testifies that an email, text message or social media message, originated from the known email address or social media page of the purported sender. Most courts will find this to be sufficient.
When it comes to admission of social media evidence, it appears that the key issue for the court is a fear of fabrication.
Situations like where all facts surrounding a correspondence are disputed, have led to alternative methods of authenticating ESI. One of these approaches has been to take judicial notice of other commonly known characteristics of computers. Check local authority as some courts interpret authentication requirements tougher than others and some will simply not accept it if another more traditional form is readily available.
Most recently, in Campbell v. State, the court upheld the admission of Facebook messages as being authenticated, in a domestic assault case. The court asserted that Facebook present authentication concerns that are twofold. “First, because anyone can establish a fictitious profile under any name, the person viewing the profile has no way of knowing whether the profile is legitimate, See, Tienda v. State, 358 S.W.3d 633, 638 (Tex. Crim. App. 2012). Second, because a person may gain access to another person’s account by obtaining the user’s name and password, the person viewing communication on or from an account profile cannot be certain that the author is in fact the profile owner.
The court in Tienda v. State held that the appropriate method for authenticating electronic evidence will often depend on the nature of the evidence. In Campbell, the court held that the Facebook messages provide circumstantial evidence supporting that the boyfriend assaulted his girlfriend, therefore supporting the lower court’s ruling.
To summarize, there are several methods of authentication for social media evidence. The most obvious is to ask the owner/creator of the social media profile if they added the questioned content under Fed. R. Evid. 901(b)(1). Second, you can always formulate requests for admission with a printout of the desired posts attached. Third, you can bring in computer or social media experts to testify, as was done in Clevenstine under 901(b)(3) or maybe even 901(b)(9). Some have also used Fed. R. Evid. 901(b)(4) Distinctive Circumstances or Characteristics. Finally, you can use conditional relevancy under Fed. R. Evid. 104(a) and (b). Until there is a commonly accepted method of authenticating social media evidence, the practitioner should be prepared to meet the most exacting standards.
C. Admissions of Evidence and the Fear of Falsification
If your ESI comes from an entity such as Google, Facebook, or some variation thereof, you will either need a business records affidavit or a representative to testify as the authenticity of the document. Be prepared to combat the best evidence rule if there is no business records affidavit available for non-photographic information.
Authentication of ESI typically involves two concerns. The first, and often the biggest concern for the court, is the identity of the alleged declarant. Also though, one must show that the proffered evidence of the alleged communication is an accurate representation of what was posted. In the 1960’s courts were somewhat skeptical of computer printouts. Indeed, 1981 ALR suggested that when introducing computerized business records the foundation should include: (1) the reliability of the computer equipment used to keep the records and produce the printout;(2) the manner in which the basic data was initially entered into the computerized record-keeping system;(3) the entrance of the data in the regular course of business;(4) the entrance of the data within a reasonable time after the events recorded by persons having personal knowledge of the events;(5) the measures taken to insure the accuracy of the data as entered;(6) the method of storing the data and the precautions taken to prevent its loss while in storage;(7) the reliability of the computer programs used to process the data;(8) the measures taken to verify the accuracy of the programs; and (9) the time and mode of preparation of the printout.
Recently, however, courts have not had great difficulty in accepting that a print out or screen shot is an accurate representation of various online communications. For example, in United States v. Catrabran, the defendant contended that the computer printouts used against him were inaccurate, and he was able to show inaccuracies in the data. Despite this, the court concluded the discrepancies merely went to the weight of the evidence. Indeed, one court has even stated that computer printouts “have a prima facie aura of reliability.” Increasingly, the only bar to the admission of ESI is finding the applicable hearsay exception.
In J.T. v. Anbari, a Missouri case, a party introduced into evidence a print out of posts a juror had made during a jury trial. Although the juror did nothing in violation of the trial court’s order, this case shows the use of printouts of social media posts in Missouri.
Printouts typically contain the same identifiable information that is on the page itself. The names may incorporate the target’s name, the profile picture may be unique to the sender, and the conversation may detail characteristics unique to the defendant. Typically, having a witness testify as to whether the printout is a fair and accurate depiction of the email, highlighting various identifiable characteristics is enough for admission.
Printouts of social media have been a little bit tougher for courts to handle. Similar to online chat rooms, individuals create a user id under a pseudonym or nickname. This, particularly in the realm of social media, has created authentication issues. However, most of these again revolve around the identity of the sender, not the accuracy of a computer printout or screen shot. Do not forget that the opposing party may even be willing to stipulate to the authenticity of the social media and the printouts.
In LaLonde v. LaLonde, the Court of Appeals of Kentucky considered pictures posted on Facebook when deciding a child custody case. The husband sought to introduce photos from Facebook, to show his wife’s alcoholism. The wife argued that the photographs could not be authenticated “because Facebook allows anyone to post pictures and then ‘tag’ or identify the people in the pictures.” However, the court reasoned that “there is nothing within the law that requires her permission when someone takes a picture and posts it on a Facebook page. There is nothing that requires her permission when she was ‘tagged’ or identified as a person in those pictures.” Accordingly, the wife’s testimony that she was the person depicted in the photographs and that the photographs accurately reflected that she was drinking alcohol, was sufficient to meet the standard of authentication.
Ultimately, social media evidence, electronic evidence, and all forms of evidence are subject to the possibility of alteration. The use of computer printouts for ESI has largely become widely accepted and your greatest concern should be proving authorship of any alleged communication.
D. Recovery of Deleted Data
What to do if the account has been closed? Facebook’s policy states: “If a user cannot access content because he or she disabled or deleted his or her account, Facebook will, to the extent possible, restore access to allow the user to collect and produce the account’s content. Facebook preserves user content only in response to a valid law enforcement request. Facebook’s website states that it takes approximately one month for an account to be deleted, but also states that some information may be contained in back-up copies for up to 90 days. Further, even if an account has been deleted, some pieces of information like messages or group postings will remain because they are not stored on your account. If an account has merely been de-activated, as opposed to deleted, Facebook will retain all of the information in the profile indefinitely in case you choose to re-activate. You may be able to distinguish between the two, because if the account is merely de-activated, the user will still appear on others’ friends’ lists.”
III. Valuing and Dividing Complex Assets: Stock, Retirement Plans and More
Stock option is a contractual right to purchase stock during a specified period at a predetermined price. Increasingly, corporations are granting stock options to employees as compensation for services that have been, or will, be performed. The increasing use of employee stock options has translated into expanding litigation concerning whether stock options are marital property, and if so, how they should be valued and divided.
In evaluating whether an employee stock option constitutes a “property” interest, the standard is whether it is “vested”. A non-vested stock option is treated as a mere expectancy because the holder has no enforceable rights. Therefore, non-vested stock options are not “property” and are not subject to division, even though the ability to exercise the option is contingent on passage of time or continued employment. So long as the employer cannot unilaterally repudiate the option, it should be deemed “vested” and therefore “property” in divorce law. When the option-holder has the absolute right to exercise the option at any time by payment of the option price, the option is said to be both “vested” and matured. Once an option is determined to be “vested,” and therefore a “property” interest, the next step is to classify that interest as either marital or separate property. On the other hand, an employee stock option granted in consideration of future services does not constitute marital property until the employee has performed those future services. Whether an employee stock option is characterized as being granted in consideration of past or future services depends upon the circumstances surrounding the grant and the effect of the option agreement. The determination may depend upon such factors as the flexibility and variety of option plans as well as the size of the company and its need to offer incentives to employees to remain as employees of the company. Options may be awarded as an inducement to lure an executive to a company.
Options are also an effective tool to provide incentives to an employee to stay with a company, especially in the competitive high technology industry. Options granted during a term of employment may be a reward or bonus for work well-done (i.e., for past services) or as “golden handcuffs” to keep an employee from accepting a lucrative offer elsewhere (i.e., for future services).
Once vested stock options have been classified as “marital” property, the court has discretion to determine the appropriate method for valuation and distribution. There are basically three approaches to valuation and division: (1) net present value, (2) deferred distribution, and (3) reserve jurisdiction.
The net present value approach results in immediate distribution to the nonemployee spouse. A lump sum that represents the net present value of the future benefit is determined and may be offset by the value of other property in the marital estate. If using this method, the trial court, guided by actuarial data, values the future benefit, considers a number of different factors, including certain risks, and accords a present value to the future benefit. The benefits associated with immediate distribution are compelling in those instances where the value of the stock options is minimal relative to the overall marital estate. The non-employee spouse exchanges future contingent post-dissolution enhancements for the benefits of immediate distribution, while the employee spouse reaps the benefit of potential enhancements that may occur post-dissolution. If the employee spouse foresees that the options may dramatically increase after the divorce, that spouse will want to “cash out” the non-employee spouse. The “Net Present Value” method serves the goal of finality and allows the parties to disentangle financially, providing some measure of closure. By immediately offsetting the value of the options with other marital property, the policy of judicial efficiency is served because the parties do not have to return to court at a later date. In circumstances where the marital estate is large enough to permit an offset with other marital property, the net present value method should be preferred.
One approach to assigning a value on stock options is to determine its intrinsic value, which is simply the market value of the stock, less the exercise cost of the option and any applicable financing costs. Courts and experts have also used more complicated mathematical formulae to determine a stock option’s present value. Two main types of models exist: econometric and theoretical. Econometric models, or empirical models, use “regression analysis of historical relationships among economic variables to estimate statistically the expected value of an economic variable,” in this case, the expected value of stock options.
The two most widely used econometric models to value stock options are the Shelton Model and the Kassouf Model. The Shelton model is especially useful for valuing stock options of closely held companies. Most models use a variable known as the volatility factor, which quantifies the historical fluctuations of the stock’s price. The Shelton model does not use this variable. The information needed to determine the volatility factor is often not available when dealing with options issued by closely-held companies. Use of the Shelton model in this situation eliminates the need for the costly analysis, or outright speculation, which would be necessary to compute a volatility factor for the stock of closely-held companies. Theoretical models, or statistical models, rather than being based on historical observation, “are forward looking and attempt to determine what the option should sell for in the market given the option terms and the underlying stock’s salient characteristics.”
These models are based on a number of assumptions, one essential assumption being “that the price of the underlying stock behaves in such a way that possible future prices can be accurately modeled by some probability distribution.” The other assumptions vary from model to model. The best known and most widely used, of the theoretical models is the Black-Scholes Model. Computer programs using the Black-Scholes Model are readily available. The Black Scholes Model accounts for the option price, the term of the option, the market value of the underlying security, a risk-free rate of return, and the underlying volatility of the stock option, in order to come up with a present value for the option. When using any of these approaches to value employee stock options, it is important to note that these models were generally designed to value marketable options. Usually, employee stock options are non-marketable, and a discount for lack of marketability should be utilized. Furthermore, valuation should not rely on use of only one model. Using at least two models will help to ensure that the valuation is relatively accurate. The practitioner should bear in mind that, if the circumstances do not warrant an immediate distribution because there are either insufficient assets to permit an offset or the present value is too difficult to ascertain, the trial court may use either the deferred distribution or reserve jurisdiction method.
Unlike the net present value method, the deferred distribution and reserve jurisdiction methods do not result in an immediate offset with other marital property. Under these approaches, the non-employee spouse will not receive any benefits until the benefits are actually paid to the employee spouse or the employee spouse becomes eligible to receive benefits. Under the deferred distribution method, the court pre-determines the percentage the non-employee spouse will be eligible to receive once the benefits are paid or the employee spouse is eligible to receive them. The percentage used is commonly based upon the “time rule” formula. The “time rule” formula was explicitly made applicable to the division of stock options in In re Marriage of Balanson.
One commentator has suggested that the time rule fraction should be as follows: Period of Employment During Marriage (numerator) Period of Employment From Hiring Until Vesting (denominator). No Colorado case has expressly determined whether the employee-spouse is required to exercise the options as soon as possible. Most stock options preclude the employee-spouse from transferring or assigning the option so that the trial court would not be able to simply order a division in kind. One solution under the deferred distribution method is to have the court require the employee spouse to make a payment in cash to the non-employee spouse, based upon the predetermined “time rule” formula, as soon as the options are exercisable, whether or not the employee chooses to retain the options. Another alternative is to order the employee spouse to exercise the options and then transfer the underlying stock or sale proceeds to the non-employee spouse. Each of these possible solutions involves potential future court involvement and issues of employer cooperation.
In Colorado, a court may also apply the “reserve jurisdiction” method of dividing stock options. Unlike the deferred distribution method, whereby the court predetermines the non-employee spouse’s share, the reserve jurisdiction approach is effectively a “wait and see” method. If the court reserves jurisdiction, the marital portion of the options may be divided and distributed at a later date when they are exercised.
In the case In re the Marriage of Chen, the Wisconsin Court of Appeals upheld the use of the “if and when” method. The case concerned stock options that had been granted during the marriage but were not exercisable until dates after the divorce. The options were not transferable or assignable and expired if employment terminated. The trial court found that no reasonably accurate value could be assigned to these stock options, and therefore an award of a fixed sum would not be practical. The court then held that the employee’s spouse could exercise the options “if and when” he desired, subject only to employer and SEC regulations. Upon sale of the underlying stock acquired via exercising the options, the employee-spouse was to pay the non-employee spouse one half of the net profit. If the stock thus acquired had not been sold within 18 months of the date of exercise, the non-employee spouse could elect to be paid using the stock price 18 months from the date of exercise, or she could choose to wait until the stock was finally sold. If no net profit was made, no additional monies were due either party.
The Maryland Court of Special Appeals, in Green v. Green, approved a similar method of division. Just as in Chen, the employee spouse’s stock options were not assignable and could not be sold. The court found that “although it is true that an unassignable, unsalable option has no fair market value, it is nonetheless an economic resource, comparable to pension benefits, to which a value can be attributed.” The court approved an “if, as, and when” approach to the valuation and equitable allocation of the unexercised options, which applied to both matured and immature options. The trial court was to calculate a value of the options as of the date of the divorce decree. The court could then determine a percentage by which the profits should be divided if, as, and when the options are exercised. The court felt this was equitable as the employee spouse is under no compulsion to exercise his options. At the same time, however, the non-employee spouse’s equitable interest in the options, if exercised, is protected.
In contrast to the Colorado appellate courts, the Illinois Court of Appeals in In Re Marriage of Moody, found that stock options do not constitute property until exercised. It directed the trial court to retain jurisdiction until such time as the options were exercised or expired. If and when the options were exercised, the trial court was permitted to use its discretion in allocating an appropriate share of any profit realized by the employee spouse. This “if and when” approach subsequently withstood an argument that the court should have retained jurisdiction to permit the non-employee spouse to compel the exercise of her share of the options.
In Smith v. Smith, the Missouri Court of appeals upheld a trial court decree finding that the employee spouse had the right to decide whether or not to exercise his stock options. However, if the employee-spouse elected to exercise any of the options, he was to give the non-employee spouse 30 days notice before acting. During those 30 days, the non-employee spouse could provide the employee spouse with the cash necessary to buy a one-half interest in that option on her behalf. If she did not provide him with the cash, she forfeited her right to the one-half of that option. Each party was to pay a share of the income taxes on the options.
The “property” right at issue with regard to stock options is the right to choose whether or not to purchase stock shares which are offered at certain dates at specified prices. To divide this marital asset properly requires giving each spouse the right to choose whether or not to exercise the right to purchase the underlying stock. Because employee stock options are typically not assignable, and because division in kind is therefore not permissible, courts have developed alternative mechanisms to accomplish division. The “net present value” method of dividing stock options is the preferable method where the stock and the options are readily capable of valuation. In situations where the options are not capable of valuation, the deferred distribution or reserve jurisdiction methods more equitably serve to divide the options. Reserving jurisdiction to divide the options should be the last resort, since the goal of finality is contravened when parties will inevitably need to return to court to value and divide the options. Under most circumstances, the time-rule formula can pre-determine the non-employee spouse’s share when options become exercisable and therefore is preferable to reserving jurisdiction.
B. How to Value and Divide Retirement Plans
Deferred compensation refers to pension plans, 401K plans, IRAs and other retirement assets. Such plans are divisible as part of a property settlement in divorce regardless of which party is named on the plan. How they are divided depends on the value and nature of the asset. Perhaps one of the worst scenarios in a divorce is when these types of assets are transferred to a former spouse but the original owner is liable for liable for the taxes, including penalties for early withdrawal.
There are three main kinds of deferred compensation plans: Savings plans, such as IRAs, 401(k) Plans, ESOPs, Thrift Savings Plans; “Defined Contribution” plans; and “Defined Benefit” plans. With a defined benefit plan, an employee is provided a monthly payment starting at retirement age and ending at the end of his/her lifetime. A defined contribution plan is one in which the value of the plan is determined in part by the amount of contributions made into the plan. The money contributed may be invested and grow.
Savings plans such as an IRA are considered “cash” plans since they may be liquidated before a person retires. They are divisible as part of a divorce. However, before any division may occur, a custodian of the account must receive and review a certified copy of the court order dividing the plan. Additionally, the spouse receiving a portion of the plan must fill out documents relating to the manner of payout. IRA proceeds may be cashed out and paid directly to the receiving spouse or they may be “rolled” over into a new IRA in the name of the receiving spouse. However, the tax consequences related to cashing out the plan may reduce the plan proceeds by more than thirty percent (30%) for taxes and early withdrawal penalties.
The valuation of a defined contribution plan can be determined by multiplying the account balance by the percentage of vesting. This is a relatively simple way to value the plan and determine marital value. Generally, such plans may be divided currently with each party receiving one half of the current vested value.
With a Defined Benefit Plan, generally the participant’s benefits cannot be liquidated prior to retirement age and the non-participant spouse may receive a retirement plan in her name representing her marital interest in the participant’s plan. This plan is generally subject to the same terms and conditions of the original plan. Often, the Participant may choose a payment method from several options. The chosen method will affect the amount or timing of the payments to both the participant and any receiving spouse. This may mean that benefits are received when the original participant decides to retire, not when the recipient spouse retires.
A defined Benefit plan may be divided in one of two ways, Cashing Out/Present Value Calculation or Division of Future Benefit. For Cashing Out/Present Value Calculation, first, a recipient spouse may elect to receive money effectively cashing out his/her interest in the plan. To cash out, a present value of the plan proceeds must be determine. “Present Value” is the current value of a future benefit. In simple terms, a dollar that you receive today is more valuable than a dollar you receive next week since you may invest the dollar or deposit the dollar and accrue interest. Therefore, benefits that are received at retirement age would have a lower value if paid in a lump sum currently. Often, a calculation or of present value requires an actuary or accountant. For Division of Future Benefit, rather than using a present-day cash value, a defined benefit plan may be divided by dividing the future stream of income. This is accomplished by drafting a Qualified Domestic Relations Order (QDRO). This is a court order which instructs a pension plan to pay an Alternate Payee (or former spouse) a portion of benefits accrued by a Participant due to an equitable distribution agreement in a divorce. With this method, the court retains jurisdiction until the benefits are paid.
C. Examining Forensic Experts/Business Valuation Specialists
Whenever a privately held business is among the assets in a dissolution proceeding, certain fundamental issues must be addressed in the context of determining the value of the business. If the business is relatively small in terms of the gross revenue it generates, the first issue is often whether the business is worth valuing. The cost of having a qualified professional value the business and produce a complete written evaluation report typically exceeds $10,000 at minimum. If after a cursory review of reliable financial information concerning the business there are questions about whether the business has significant value, a less comprehensive approach is likely warranted. For example, a business valuation expert can be engaged to provide an opinion about the range of value of a business without providing a full written valuation report. While engaging an expert for this limited purpose is generally not sufficient if the value of the business is going to be fully litigated, it can often be a prudent first step determining whether the business has a value significant enough to justify having a valuation report completed.
Choosing the engaged valuation expert is a critical decision. Professionals who represent themselves to be qualified to provide business valuation opinions often do not have the same credentials. The credentials and certifications of all candidates need to be examined. Information must be obtained concerning each potential expert’s experience, not simply in terms of their years of professional practice, but also with regard to the profession or industry in which the business to be valued operates.
An experienced valuation professional typically has a reputation in the community. There are many subjective decisions that a business valuation expert must make in the context of rendering an opinion as to the value of a business. Over time, certain experts tend to establish that they are more or less conservative in their approach to these decisions which has an impact on their conclusions of value. Where there is the possibility that the business valuation expert will be asked to testify, gathering information about the individual’s reputation for presenting his or her opinion in a clear, cogent and persuasive manner in a courtroom is important information to have when deciding who to choose.
The projected cost of the professional’s work and the time they need to complete the work are important considerations. Business valuation experts typically charge for their work based on set hourly rates. Particularly when a valuation firm is engaged where there are a number of professionals who might be involved in a project, identifying the individuals who will be doing the work and the billing rates of those individuals must be discerned.
The amount of time the professional needs to complete the project is a critical component of determining who to select. Typically, deadlines have been established either by the circumstances relating to a particular situation or by orders of the court making it fundamentally important to establish that the professional valuation expert can complete the work in a timely fashion within the established deadlines.
An individual involved in a divorce will seldom have the ability to decide who would be an appropriate choice to value the marital interest in a business. It is therefore prudent to seek guidance from a lawyer having knowledge in the substantive area of the law involved and experience in the community in order to make a wise decision. Clearly some of the information needing to be considered in choosing a valuation expert is only known to lawyers who have worked with, or against, the valuation experts who are among the field of candidates being considered.
D. Insights on Selecting and Working with Forensic Accountants
Federal Rule of Evidence 702 allows for expert testimony: “If scientific, technical, or other specialized knowledge will assist the trier of fact to understand or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.” Check state statutes for your local rules regarding the qualifications of an expert and the admissibility of their testimony. A Business Valuation Specialist will frequently be allowed to testify in terms of valuing a closely held business and consequently you should consider the use of Business Valuation Specialist in any case involving closely held business. This is particularly true if the business would appear to have some value and you are unfamiliar with business accounting. Remember, that in order to divide marital property and debt in a just or equitable manner, it is critical that all assets be valued, including businesses owned in whole or part by the parties.
It is also important to know at what point in time the evaluation is to take place. For instance, in Goodwin v. Goodwin, the husband’s expert valued a business at the time the wife left the company’s employ arriving at a figure of $385,000. The wife’s evaluator valued the business at a point as close to trial as possible to a figure of $1.65 million. The trial court adopted the latter evaluation, and the appellate court concluded it was within the discretion of the trial court to do so.
Additionally, consider a cost benefit analysis regarding size of business or if spouse suspects hidden business incomes. All too frequently a spouse whose business has performed and provided beautifully for years will suddenly be cash strapped. (Recently Acquired Income Deficiency). To help identify such spouses consider the use of several types of financial experts. Accountants can help examine cash flow, value business perks, and discover hidden or unreported income. Business and Practice Appraisers can be used to determine the fair market value of a business or practice. Financial Planners can help identify the true value of investments going forward and Real Estate Appraisers as well as Vocational Experts may prove useful too. The key to the use of these experts is that you know both the expert and their report.
It is also vital to tell the expert at the onset what you might be looking for and the purpose in hiring them. Knowing what you’re looking for will help you determine whether the expert is capable of identifying that information for you. In other words, you need to know the strengths and weaknesses of the expert. For this, you will want to see their curriculum vitae, discuss their potential biases, and ask about their general experience with testifying in court.
You will also need to be able to identify the strengths and weaknesses of the report. If you do not already understand, ask the expert for an explanation of the methodology used and alternatives which could have been employed. Prepare the expert for direct and cross examination of their findings and be prepared to impeach the opposing parties’ expert in terms of the substance, their own biases, and on their experience. For instance, did they comply with methodologies in Rev. Rul. 59-60? Did they substitute book value for fair market value?
The following are a few basic concepts and terms in forensic accounting:
Market Approach: Valuator tries to locate guideline businesses that have been sold in order to make a comparison of value. Similar to appraising of residential real estate, but can be difficult to use for small closely held businesses.
Asset Based Approach: Each component of the business is valued separately. Valuator estimates value by estimating cost of duplicating or replacing individual elements of the business. This approach cannot be used alone if there are intangible assets with value.
Income (Income-Based Approach): General way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more methods that convert anticipated economic benefits into present single account.
Capitalization of Earnings: A method within the income approach whereby economic benefits for a representative single period are converted to value through division by a capitalization rate.
Capitalization Rate: Any divisor (usually expressed as a percentage) used to convert anticipated economic benefits of a single period of value.
Minority Discount: A discount for lack of control applicable to a minority interest.
Key Man Discount: Discount for loss of efficiency until someone is sufficiently trained to replace a key man.
Marketability Discount: Discounts for lack of marketability deal with the lack of liquidity of an ownership interest and how quickly and easily it can be converted into cash.
A. Sample Questions to Ask Business Valuation Experts on Examination
· Have you personally sold a business or assisted a client in buying or selling a business in the same industry? How many have you sold?
Asking the expert if he or she has sold businesses in the past is directly aimed at the expert’s experience and knowledge on real-world issues. An expert who has sold businesses has firsthand knowledge of the selling process and is likely to have a better understanding of the marketplace. An attorney should be on the lookout for a business valuation expert who is purely theoretical and has little knowledge about buyers and sellers in the real world.
· Do you know for certain if the amount you concluded to be the value of the business can be financed?
A good business valuation expert will consider more than one method as a check for reasonableness. And a great business valuation expert will take one step further by determining if the purchase price can be financed. If the opposing side’s expert determines a value for a business that cannot be paid off in five or seven years while also returning a reasonable amount to the owner, it is probably not a realistic price to pay for that business.
· Does your valuation comply with generally accepted accounting principles?
Some valuation experts are stumped by this question. Generally accepted accounting principles do not govern the valuation field. However, there are well-accepted valuation principles such as Uniform Standards of Professional Appraisal Practice and Statement on Standards for Valuation Services.
· Did you conduct a site visit? If so, when?
Generally, site visits are important to a business valuation but this question is often overlooked by attorneys. If the expert did not conduct a site valuation, how do they know what they were valuing didn’t just vanish into thin air? A site visit must be performed to physically observe the valuation subject and corroborate those observations with the information obtained from the management interview and financial records. Trust but verify.
· From your previous valuations, has any value you determined ever been substantially changed in a court decision? Has the value stood up in court?
· Have you ever been excluded as an expert? Has your testimony ever been excluded?
· Who hired you and how many times have you worked for them?
It’s all about perception. If the expert admits he or she has been hired by a client over and over again, the perception is that the expert will conclude a value to the client’s satisfaction whether or not it represents fair market value.
· You advertise yourself as an expert for hire, is that correct?
The intent of this question is to show the judge or jury that the expert is a “hired gun” and is likely an advocate on behalf of his or her client. The value may be skewed to favor their side and may not represent fair market value.
· How much of your professional time is devoted to expert testimony?
Score one for your side if you cross-examine a business valuation expert who spends more time on the “expert” part than the “business valuation” part. This kind of “expert” likely will be seen as an expert opinion for hire.
E. Checklist of Essential Documents to Obtain in Divorces (With Samples)
The three primary sources with regards to the discovery process will be tax documents; financial documents including bank and credit card records, insurance policy information, retirement plan documentation, and any investment records; and email & text records. Of course, the relevant discovery requests will vary from case to case but this is a broad overview of the common sources for discovery of hidden assets and is similar to discovery in a standard divorce case. Each of these sources and specific discovery tactics will be analyzed more in-depth throughout the rest of the presentation.
The conventional ways to obtain information in divorce proceedings are well known: (1) Interrogatories; (2) Requests for Production; and (3) Depositions. The use of subpoenas can also be helpful. Typically, interrogatories are aimed at gathering initial information and facts that the opposing party could not recall without reference to particular documents. Interrogatories in conjunction with Requests for Production then serve to produce the traditional sources of information for a divorce attorney. Some staples may include:
· Bank Statements;
· Corporate Documents, including Articles of Incorporation, Minutes and By-Laws;
· Corporate or Partnership Tax Returns;
· Profit and Loss Statements;
· Documents relating to assets and debts;
· Rental or Lease Agreements;
· Appraisals of business assets; and
· Other relevant business records
In some cases, assets may be overlooked-that being said, the OP is unlikely to voluntarily disclose such assets. Therefore, it is important to keep an “open-mind” throughout the discovery process; whether through document request, depositions, or interrogatories, consider assets that may be overlooked:
· Stock Options & Restricted Stock
· Capital Loss Carryover
· Cemetery Plots
· Collections or Memorabilia
· Intellectual Property
· Retained Earnings
· Credit Card Reward Points
· Country Club, Golf Course and Other Memberships
All of these examples may easily get overlooked but potentially carry significant value.
Sample Statement of Income and Expenses
IN THE FAMILY COURT OF ___________COUNTY
STATE OF _______________
SSN: XXX-XX- )
Petitioner, ) Cause No.:
and ) Div.
SSN: XXX-XX- )
STATEMENT OF INCOME AND EXPENSES OF
Social Security Number:
Name and address of employer:
Gross Wages Salary and commission each Pay Period
PAID: __ WEEKLY ___ BI-WEEKLY SEMI-MONTHLY MONTHLY
Number of Dependents Claimed:
FICA (social security tax) $
Federal Withholding Tax $
State Withholding Tax $
Health Insurance $
Dental Insurance $
City Tax $
ADL Fed Tax $
Total Deductions each Pay Period $
Net take home pay each pay period $
B. Additional income from rentals, Dividends and Business enterprises, social security, A.F.D.C., V.A. benefits, Pensions, Annuities, Bonuses, Commissions and all other sources (give monthly average and list sources of income:
Average Monthly Total $
C. TOTAL AVERAGE NET MONTHLY INCOME $
2. EXPENSES REQUIRED TO MAINTAIN PREVIOUS STANDARD OF LIVING STATED ON A MONTHLY AVERAGE.
A. Rent or mortgage payments $
1. Gas $
2. Water $
3. Electricity $
4. Telephone $
5. Trash Service $
6. Sewer $ $
1. Gas and Oil $
2. Maintenance (routine) $
3. Taxes and license $
4. Payment on the auto loan $ $
1. Life $
2. Health & accident $
3. Disability $
4. Homeowners $
5. Automobile $ $
E. Total payment installments contracts (Credit Cards) $
F. Child support paid to other for children not in your
custody (excluding children of this marriage) $
G. Maintenance or Alimony (excluding Petitioner or Respondent) $
H. Church and Charitable Contributions $
I. Other living expenses (total of items 1-7 listed below) $
CHILDREN IN YOUR CUSTODY
1. Food $ $
2. Clothing $ $
3. Medical Care, Dental Care and Drugs$ $
4. Recreation $ $
5. Laundry and cleaning $ $
6. Barber Shop and Beauty Shop $ $
7. School and Books $ $
Total $ $
J. Day Care Center or Babysitter $
K. All other expenses not presently identified:
L. TOTAL AVERAGE MONTHLY EXPENSES $
STATE OF _____________ )
COUNTY OF ____________ )
COMES NOW , being of lawful age and after being duly sworn, states that he has read the foregoing Statement of Income and Expenses and that the facts stated therein are true and correct according to the best of his knowledge, information and belief.
Subscribed and sworn to before me, a Notary Public, this ____ day of ____________, 200__.
My Commission Expires:
Sample Statement of Property
IN THE FAMILY COURT OF ______________ COUNTY
STATE OF ________________
SSN: XXX-XX- )
Petitioner, ) Cause No.:
and ) Div.
SSN: XXX-XX- )
STATEMENT OF PROPERTY OF
Social Security Number:
I. PROPERTY (include all marital property and separate
property of both parties and designate owner of
Present Amount Marital/Separate
Value Owed Property
A. Real Estate – list any and all interest held in
real estate (include legal description and name
B. Motor Vehicles – (including all automobiles,
boats, trailers, aircraft, recreational vehicles
and campers, and give year, make, model, and
serial number and name of mortgagor).
Present Amount Marital/Separate
Value Owed Property
C. Bank Accounts – list all checking and savings
accounts held either in your name alone or in your
name and that of another person. Give the name
of the institution, the names on the account and
the account number. Be sure to include here all
time deposit, etc.
D. Household Goods – Include all appliances,
furniture, silver, antiques, televisions, stereos,
etc. Attach list of each item with value of at
least $100 showing present value, amount owed
and whether marital or separate property.
E. Personal Goods – Include jewelry, furs, guns,
cameras, coin and stamp collections, fishing
and camping equipment, etc. Attach a list of
each item with a value of at least $100
showing present value, amount owed and whether
marital or separate property.
F. Cash on Hand –
G. Securities – list all stocks, bond, promissory
notes mortgages and all other such property in
which you have an interest and give the names
in which the securities are held and
identification numbers if any.
H. Life Insurance – List the kind of policy,
name of issuing company, policy number,
owner of policy, insured, beneficiaries,
face value and cash surrender value, if any
(include any policies furnished by your employer).
Present Amount Marital/Separate
Value Owed Property
I. Retirement, Pension and/or Profit Plans –
List number of plans in which you are enrolled
Or have interest, give names and address of
plan administrators, present value of plan if
know, and gross benefit payable at earliest
retirement or maturity date. Is plan vested? If
not, on what date will it vest? Please attach
employee information concerning the plan if
J. Any interest in any trust – Give name of
the trust, name and address of the trustee,
name of settler, name of beneficiaries,
nature of the interest you have in the trust and
attach to this list a copy of the trust instrument.
K. Any interest in a contract made but not yet
performed – list the parties to the contract,
their address and the expected date of
performance, if any.
L. Any interest in pending litigation or suits
yet to be filed.
M. Any interest in farm equipment, animals,
or crops – give nature of the property
and its location.
N. Any Debt Owed to You by Others – List
the names and address of the debtor, any
security, date of loan and due date, if any, etc.
O. Future Interests – List the interest you hold,
the property involved and the present owner.
P. Partnership Interests – (List the name of
partners and percentage interest). Attach a
copy of the partnership agreement or set forth
its terms with assets and liabilities.
Q. List any Other Asset Not Already Listed
A. List all loans from any bank or lending institution
to you. Show who signed the loan, the date of the
loan, and give the name and address of the lender
and the outstanding balance.
B. List all credit card balances and store charges –
C. Other indebtedness.
STATE OF ____________ )
COUNTY OF __________ )
COMES NOW , being of lawful age and after being duly sworn, states that he has read the foregoing Statement of Property and that the facts therein are true and correct according to the best of his knowledge, information and belief. ________________________________
Subscribed and sworn to before me, a Notary Public, this ________ day of _______________, 200___.
My Commission Expires:
Sample Case Checklist
DOMESTIC CASE CHECKLIST
I. INTRODUCTORY PHASE
_____ Pleadings Filed. (if Petitioner)
_____ Petition/Motion to Modify
_____ Statement of Income & Expenses
_____ Statement of Property
_____ Case Information Sheet (County Specific)
_____ Certificate of Dissolution (if needed)
_____ Request for Appointment of Special Process Server
_____ Filing Fee (if needed)
_____ Form 14 (St. Louis County)
_____ Answer Filed (if Respondent)
_____ Counter Petition (incorporated in Answer)
_____ Statement of Income & Expenses
_____ Statement of Property
_____ Answer to Counter-Petition Filed (if Petitioner)
_____ Parenting Class Completed by Client
_____ Form 15 Filed (if Jefferson County)
_____ Mediation Completed (if Required by Court)
_____ All Necessary Documents from Client (make sure client gets us tax returns, paystubs, documents relating to property, debt and custody)
______ Mandatory document exchange (St. Louis County).
______ Review local rules for obscure forms needed to be filed
II. INTERMEDIATE PHASE
_____ Docket Discovery Deadlines, Settlement Conferences and Trial Dates (and inform client of them)
_____ Pre-Trial Order received and docketed
_____ Reminders of due dates docketed on the calendar
_____ Checked local rules regarding due dates for pre-trial matters
_____ Interrogatories and Requests for Production Issued (check local rules for each county on whether our client must answer first and limit on interrogatories and requests we can issue)
_____ Checked local rules regarding content
_____ Docket due dates for outbound and inbound discovery
_____ Golden Rule Letter (if discovery responses or orders of the Court are overdue)
_____ Motion to Compel (if discovery responses are overdue after golden rule letter)
_____ Subpoenas, Custodian of Records Depositions and Notice of Intent
(for all necessary evidence not obtained through requests for production. Notices of Intent must be filed and documents provided to all parties with custodian of records affidavit 7-days before trial)
_____ Checked Missouri Secretary of State for registered agent
_____ Notice of Deposition
_____ County specific Subpoena Form
_____ Subpoena Letter
_____ Process Server contacted
_____ Docket due date and reminder
_____ Motion for Guardian (if abuse or neglect is alleged. Further, have client meet and pay guardian. Provide all pleading and necessary documents to guardian.)
_____ Notice of Hearing
_____ Depositions (of opposing party and necessary witnesses)
_____ Court reporter scheduled
_____ Deposition outline completed
_____ If no deposition by client request, letter sent to client outlining repercussions of no depositions
_____ Comply with Discovery Deadlines (if court has set them, i.e.
disclosure of experts, if any).
_____ Check Pleadings Prior to Getting Close to Trial (make sure facts have not risen that might make amendments to pleadings necessary. If so, amend pleadings and request leave in advance of trial)
_____ Request for Leave filed
_____ Amended Pleadings filed
_____ Trial Retainer (make sure client has trial retainer within 60 days of trial)
_____ Docket 60 days out from trial for Trial Retainer
III. TRIAL PHASE
_____ Exhibit Books Prepared with Table of Contents (Prepare book for witnesses, yourself, opposing attorneys and judge. Include in book proposed parenting plan and Form 14 <if kids are involved>, statements of income and expenses and property, tax returns for last three to five years, financial documents that show value of marital estate and debts, home appraisals, expert reports, documents and other evidencing supporting the financial and custody parts of case, etc.)
_____ Request for Findings of Fact and Conclusions of Law
_____ Subpoenas of all Necessary Trial Witnesses
_____ Letter to witness with date, time and place of trial with instructions to contact you prior to trial
_____ Witness Fee checks issued with Trial Subpoena
_____ Process Server contacted
_____ Outline of Trial Questions
_____ Direct Examination
_____ Cross Examination
_____ Meet and/or Speak with all Necessary Trial Witnesses (always meet with client unless impossible)
_____ Print Off Attorney Fee Statements for Trial (Does not go in Exhibit Book)
IV. POST TRIAL
______ Post Dissolution Proceedings (QDRO, Deeds, Etc.)
______ Motion to Amend/Reconsider/New Trial filed within 30 days of publication of Judgment
______ Appeal considered/filed
_____ Letter to client outlining options for appeal and due date of appeal
IV. Tax Treatment and Consequences of Divorce: A Practical Refresher
A. Filing Status of Divorcing Parties
Your filing status is used in determining whether you must file a return, your standard deduction, and the correct tax. It may also be used in determining whether you can claim certain other deductions and credits. The filing status you can choose depends partly on your marital status on the last day of your tax year.
If you are unmarried, your filing status is single or, if you meet certain requirements, head of household or qualifying widow(er). You are unmarried for the whole year if either of the following applies :
o Exception. If you and your spouse obtain a divorce in one year for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intend to remarry each other and do so in the next tax year, you and your spouse must file as married individuals.
If you are married, your filing status is either married filing a joint return or married filing a separate return. You are married for the whole year if you are separated but you have not obtained a final decree of divorce or separate maintenance by the last day of your tax year. Note an interlocutory decree is not a final decree.
If you are divorced, you are jointly and individually responsible for any tax, interest, and penalties due on a joint return for a tax year ending before your divorce. This responsibility applies even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns.
In summary, parties in the middle of a divorce may file a joint return only if they are married at the end of the tax year (December 31) and both agree to the filing. Parties qualify as married even if they are separated as long as there is no final court judgment ending their marital status. A temporary order relating to child support, alimony, or child custody does not affect marital status. However, if the divorce is final as of December 31, parties may not file jointly-their filing status is either “Single” or “Head of household.”
B. Tax Consequences When Property is Sold/Transferred
26 USCA § 1041: Transfers of property between spouses or incident to divorce
(a) General rule. No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of) –
(1) a spouse, or
(2) a former spouse, but only if the transfer is incident to the divorce.
(b) Transfer treated as gift; transferee has transferor’s basis. In the case of any transfer of property described in subsection (a) –
(1) for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and
(2) the basis of the transferee in the property shall be the adjusted basis of the transferor
(c) Incident to divorce. For purposes of subsection (a)(2), transfer of property is incident to the divorce if such transfer –
(1) occurs within one year after the date on which the marriage ceases, or
(2) is related to the cessation of the marriage.
(d) Special rule where spouse is nonresident alien. Subsection (a) shall not apply if the spouse (or former spouse) of the individual making the transfer is a nonresident alien.
(e) Transfers in trust where liability exceeds basis. Subsection (a) shall not apply to the transfer of property in trust to the extent that –
(1) the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds
(2) the total of the adjusted basis of the property transferred. Proper adjustment shall be made under subsection (b) in the basis of the transferee in such property to take into account gain recognized by reason of the preceding sentence.
According to Sec 1041(c), a transfer is incident to the divorce if it occurs within one year after the divorce or “is related to the cessation of the marriage.”
Keller v. Keller, 877 S.W.2d 192 (Mo. App. 1994): Trial court was required under the IRC to use as ex-wife’s basis upon sale of the former marital residence the original tax basis husband and wife had in the home, rather than ex-wife’s basis at the time of dissolution. Note: the court referenced § 1041 in saying that property exchanges incident to dissolution are nontaxable events to the parties, and parties must carryover the original basis in property exchanged and use such basis in computing capital gain or loss in the event of a sale.
C. Tax Basis of Assets: Review of Capital Gains
Basis is the amount of capital investment in property for tax purposes. Basis is used to calculate depreciation/appreciation and any gain or loss on the sale, exchange, or other disposition of the property.
To calculate basis, take the cost to you of the asset. This is the price, sales tax, and other expenses to acquire the asset. Cost also includes amounts you pay for the following items: Freight, installation and testing, excise taxes, legal and accounting fees, revenue stamps, recording fees, and Real Estate Taxes (if assumed for the seller).
Adjusted basis in the property occurs when certain events occur during the period of your ownership. These events may increase or decrease your basis.
Increase basis by all items properly added to capital account. This is improvements having useful life of more than one year. The following increases the basis of property: The cost of extending utility service lines to the property, impact fees, legal fees (the cost of defending and perfecting title), obtaining a decrease in an assessment levied against property to pay for local improvements, zoning costs, and the capitalized value of a redeemable ground rent.
The following reduces the basis of a property: Section 179 deduction, deductions previously allowed for amortization/depreciation/depletion, casualty and theft losses and insurance reimbursement, easements, adoption tax benefits, and credit for employer-provided child care.
Capital gain is profit from the sale of property for a higher selling cost then was the purchasing price. If the selling cost is lower than the purchasing price then it is a capital loss. The difference between selling and purchase price is the difference of adjusted basis and the amount you realize from the sale.
So, in a divorce, the assets that you have in your marriage are divided up. It is important to keep basis in mind when dividing the assets. If there will be a large capital gain from realization of the property an individual may have to pay more taxes.
D. Itemized Deductions: Real Estate Taxes and Mortgage Interest
Real estate/Real Property is land and anything built attached to it. Real Estate Taxes the seller owed on real property that you bought, treat those taxes as your basis if the seller did not reimburse you. You cannot deduct the amount as taxes. If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Do not include that amount in the basis of the property . If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.
Again, this is important for divorce because when you divide the assets you will receive the basis of that asset in the divorce. This can lead to paying more taxes.
E. Tax Impact of Dividing Retirement Accounts Pension Plans
Individual Retirement Accounts (IRAs) are typically one of the items allocated in a divorce decree. An IRA is a type of custodial account or trust held for the benefit of an individual or their beneficiaries. It is created by a contract between the bank that manages the account and the owner (i.e. the depositor). Part of this contract includes the beneficiary/beneficiaries who will receive the balance of the IRA upon the owner’s death. The beneficiaries are usually the owner’s spouse or children. Upon dissolution of the marriage, the divorce decree will award the IRA to one of the parties, and whichever party receives it is able to change the beneficiaries. For example, if the husband is awarded the IRA in the divorce, he can substitute his children as the primary beneficiary for his ex-wife beneficiary.
It is important to change the beneficiary on an IRA as soon as possible. Beneficiary designations often trump provisions laid out in a will and if a beneficiary isn’t changed, an ex-spouse can still have access to the IRA. A recent Missouri Court of Appeals case, In re Estate of Merit, details this possibility. In 1996, the husband designated his wife as a beneficiary of a Fidelity IRA account. The couple divorced in 2000 and husband received the IRA in the property settlement. Several times over the years, the ex-husband contacted Fidelity for information on how to access the Beneficiary Change Form yet he never actually changed the beneficiary. When he died, a fight between his estate and ex-wife ensued over the IRA. The estate cited a Missouri statue that revokes an ex-spouse as the beneficiary on the date the marriage ended. Several states have such statutes, but they have not held up to judicial scrutiny. In the Missouri case, the appellate court referenced a U.S. Supreme Court case that held ERISA governed and overrides or pre-empts state statute to reduce administrative burdens in identifying the correct beneficiary. The circuit court had not addressed the Supreme Court case and instead awarded the funds to the estate based on the intent of the ex-husband. The Court of Appeals reversed and remanded the case to the circuit court with the specific instruction to enter a judgment in favor of the ex-wife including costs and attorney’s fees.
This case is just one of many where failure to change a beneficiary designation results in an unintended transfer of assets. The circuit court seemed to do what it thought was just by awarding the IRA to the estate, but the law did not support the decision. In the Supreme Court case, the couple had only been divorced for two months and it was likely that the ex-husband did not have an opportunity to change designations before dying in an auto accident. That did not matter. Thus it is important to change beneficiaries as soon as possible after a Divorce becomes final.
Normally, withdrawing money from a 401(k) or an IRA is considered a taxable event that requires a party to pay income tax on the funds contributed as well as penalties. When accrued during marriage, retirement accounts are also considered marital property and are subject to equitable division in family court. The Internal Revenue Code recognizes that a Qualified Domestic Relations Order (“QDRO”) can divide funds in a 401(k) or similar retirement account. This allows the providers to roll funds into a retirement account for their spouse. While QDROs do not apply to Individual Retirement Accounts, a spouse can avoid a taxable event by rolling the divided funds into another qualified retirement account. Know that a spouse who converts any retirement funds to cash will be responsible for taxes and penalties for the account.
6 USCA § 408. Individual Retirement Accounts
§ 408(d)(6). Transfer of Account Incident to Divorce
The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument … is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.
F. Transfers in Divorce Taxation Questions
· Question 1: Does section 1041 apply on to transfers of property incident to divorce?
o No. Section 1041 is not limited to transfers of property incident to divorce. Section 1041 applies to any transfer of property between spouses regardless of whether the transfer is a gift or is a sale or exchange between spouses acting at arm’s length (including a transfer in exchange for the relinquishment of property or marital rights or an exchange otherwise governed by another nonrecognition provision of the Code). A divorce or legal separation need not be contemplated between the spouses at the time of transfer nor must a divorce or legal separation ever occur. 26 CFR 1.1041-1T(a)
· What kinds of transfers are governed by section 1041?
o Only transfers of property (whether real or personal, tangible or intangible) are governed by section 1041. Transfers of services are not subject to the rules of section 1041. 26 CFR 1.1041.1T(a)
· Must the property transferred to a former spouse have been owned by the transferor spouse during the marriage?
o No. A transfer of property acquired by section 1041. 26 CFR 1.1041-1T(a)
· When is a transfer of property incident to the divorce?
o A transfer of property is incident to the divorce where the transfer occurs not more than one year after the date on which the marriage ceases, or the transfer is related to the cessation of the marriage.
o Thus, a transfer of property occurring not more than one year after the date on which the marriage ceases need not be related to the cessation of the marriage to qualify for section 1041 treatment. 26 CFR 1.1041-1T(a)
· When is a transfer of property related to the cessation of the marriage?
o Transfer of property is treated as related to the cessation of the marriage if the transfer is pursuant to a divorce or separation instrument, as defined in section 71(b)(2), and the transfer occurs no more than 6 years after the date on which the marriage ceases.
o A divorce or separation instrument includes a modification or amendment to such decree or instrument.
o Any transfer not pursuant to a divorce or separation instrument and any transfer occurring more than 6 years after cessation of the marriage is presumed to be not related to the cessation of the marriage.
o The presumption may be rebutted only by showing that the transfer was made to effect the division of the property owned by the former spouses at the time of the cessation of the marriage. For example, the presumption may be rebutted by showing that (a) the transfer was not made within the one and six years period described above because of factors which hampered an earlier transfer of the property, such as legal or business impediments to transfer or disputes concerning the value of the property owned at the time of the cessation of the marriage, and (b) the transfer is effected promptly after the impediment is removed. 26 CFR 1.104-1T(a)
· May transfers of property to third parties on behalf of a spouse (or former spouse) qualify under section 1041?
o Yes. There are three situations in which a transfer of property to a third party on behalf of a spouse (or former spouse) will qualify under section 1041, provided all other requirements of the section are satisfied.
o The first situation is where the transfer to the third party is required by a divorce or separation instrument. The second is where the transfer to the third party is pursuant to the written request of the other spouse (or former spouse).
o The third situation is where the transferor receives from the other spouse (or former spouse) a written consent or ratification of the transfer to the third party. Such consent or ratification must state that the parties intend the transfer to be treated as a transfer to the non transferring spouse (or former spouse) subject to the rules of section 1041 and must be received by the transferor prior to the date of filing of the transferor’s first return of tax for the taxable year in which the transfer was made.
o In the three situations described above, the transfer of property will be treated as immediately transferring the property to the third party. The deemed transfer from the non-transferring spouse (or former spouse) to the third party is not a transaction that qualifies for nonrecognition of gain under section 1041. 26 CFR 1.1041-1T(c).
· How is the transferor of property under section 1041 treated for income tax purposes?
o The transferor of property under section 1041 recognizes no gain or loss on the transfer even if the transfer was in exchange for the release of marital rights or other consideration. This rule applies regardless of whether the transfer is of property owned by the transferor or is a division (equal or unequal) of marital property. 26 CFR 1.1041-1T(d).
Property Transfer Examples:
Example 1. A and B are married and file a joint return. A is the sole owner of a condominium unit. A sale or gift of the condominium from A to B is a transfer which is subject to the rules of section 1041.
Example 2. A and B are married and file separate returns. A is the owner of an independent sole proprietorship, X Company. In the ordinary course of business, X Company makes a sale of property to B. This sale is a transfer of property between spouses and is subject to the rules of section 1041.
Example 3. Assume the same facts as in example 2, except that X Company is a corporation wholly owned by A. This sale is not a sale between spouses subject to the rules of section 1041. However, in appropriate circumstances, general tax principles, including the step-transaction doctrine, may be applicable in re-characterizing the transaction. See, 26 CFR 1.1041-1T(a).
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