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13 Aug. 2012

Separated? What’s your Tax Liability?

Posted By The Buncher Law Corporation

Basically, there are three ways to end a marriage or registered domestic partnership within the State of California: by divorce, by legal separation, or by annulment. Legal separation is similar to a dissolution of marriage or dissolution of a domestic partnership in terms of the range of issues that are resolved, however the parties remain married or registered to each other.

If you are legally separated, then this oft asked question may resonate with you:

My spouse runs a business that began during the marriage. I was never directly involved. I do not know how much the business makes and, at present, I do not receive income from the business. So, what is my tax liability?

To give this situation even greater definition, consider spouses who have lived apart for an extended period of time through legal separation and have not filed for divorce. The answer to the question is found in a case known among attorneys as Bass v. Commissioner.

Respondent determined deficiencies in petitioner’s income tax for the calendar years 1977 and 1978 in the amounts of $735.99 and $566, respectively. The issues for decision are (1) whether petitioner, an ordained minister, is liable for self-employment taxes under the provisions of sections 1401 and 1402 (of the U.S. Revenue Code) for each of the years here in issue; and (2) whether tuition payments made by petitioner in 1978 for specified individuals to attend a religious school are properly deductible as a charitable contribution.

The decision specifies that both spouses are accountable for any portion of the income taxes of a business that is owned as a community asset by both spouses, even if the spouses are living separate and apart from each other throughout the taxable year regardless of which spouse actually controls the day-to-day operations of the business. The spouses interest in the community property under California law is sufficient to establish his or her liability for Federal income tax on his or her half of the community income.

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