California Divorce and Family Law

Deductibility Of Attorneys' Fees In Connection With Divorce

It’s that time of year again. Of course, the general rule is that lawyers’ fees and costs in connection with obtaining a divorce are not tax deductible. As with many general rules, there are exceptions:

1. Attorneys’ fees related to tax advice. I.R.C. §212(3). Areas having tax implications upon which an attorney may offer advice include the tax effect of the distribution of property, including retirement plans, tax deductibility of interest payments or installments to effectuate an equitable distribution of property, the allocation of the dependency exemption and child tax credit, whether a joint tax return should be filed, the tax effect of unallocated maintenance and child support, the tax implications of the form of alimony, and advice regarding the recapture of front end loaded maintenance in the first three years following separation.

Practice tip: it is not helpful for the client wishing to tax deduct some attorney fees to have a provision in the marital settlement agreement that no tax advice was given.

2. Attorneys’ fees related to the production or collection of taxable income may be deductible. I.R.C. §212(1). For example, the payee of taxable alimony may be entitled to a deduction for attorney fees in generating the production or collection of this taxable income and fees in connection with securing an increase in taxable alimony may also be deductible. Attorney fees for obtaining income producing property are not deductible, but could arguably be added to the tax basis of the property.

A taxpayer may deduct only fees paid to his or her own attorney, unless the fees of the other party are paid as alimony.

Any attorneys’ fees that are legitimate income tax deductions are deductible only to the extent that all of the miscellaneous deductions in the aggregate exceed 2% of the taxpayer’s adjusted gross income. There is also an “applicable amount” which may reduce the otherwise allowable deduction.

Lawyers must be very careful not to overstate the amount or portion of attorneys’ fees that relate to tax deductible advice or legal efforts. I.R.C. §6701, Penalties for Aiding and Abetting Understatement of Tax Liability.

From Diana Skaggs and the Divorce Law Journal.

Case Law Development: Filing Separate Civil Action to Enforce Temporary Orders During Pendency of Dissolution is Sanctionable Conduct

The California Court of Appeals affirmed a judgment of dismissal and sanctions against a wife who, while her marital dissolution proceeding was pending, brought a separate civil action against her husband and two accounting firms. The wife claimed her husband failed to make two interim monthly payments required under the terms of a stipulation and order in the dissolution proceeding, and further claimed his conduct constituted intentional infliction of emotional distress. The wife also sought a declaration that the husband and the accounting firms were required to provide her with tax returns and related documents she had previously sought in the dissolution proceeding.  The trial court dismissed the complaint against both husband and the accounting firm.

The court of appeals concluded that wife's suit is

a textbook example of an improper attempt to wage "family law ... by other means ... ."  When a dissolution proceeding is pending, neither party to that proceeding has the right to file a separate civil action to enforce an interim support order issued in the dissolution proceeding. The same rule applies to filing a purported tort action arising from conduct that relates to the interim support order and, but for the dissolution proceeding, would not have occurred.

The court was careful to note that while it is true that spouses may bring tort actions against one another, that principle "has no application when a dissolution proceeding is pending, and it certainly has no application when a spouse is attempting to enforce an interim order in a pending dissolution proceeding."  The court commented that it need not "draw a line between spousal cases that might properly be brought in a separate civil action and those that may not' because wife's action here "clearly falls on the far side of any line that might conceivably be drawn."

After the trial court in the civil action sustained the husband's demurrer, the husband sought sanctions in the family law court. The family law court granted the husband's motion, ordering the wife to pay $ 32,950 to the husband as sanctions, and ordering the wife and her attorneys to pay that sum to the husband . The court of appeals also affirmed this order, holding that wife's attempts to bring the separate civil suit were so clearly without support given existing precedent that the suit was "specious and plainly not warranted by existing law."  The court also rejected wife's argument that the family court could not sanction her for filing a frivolous action in another court, concluding  that    

the "conduct" precipitating the sanctions is the act of filing an action in a court where it clearly does not belong, in order to avoid litigating the matter before the family court judge who made the support order in the first place and who was thoroughly familiar with the parties and the issues. In this situation, it is difficult to see how the judge in the civil action would be in a better position than the family law judge to determine the propriety of sanctions for Ms. Burkle's forum-shopping conduct. Indeed, it seems to us the reverse is true.

Burkle v. Burkle, 2006 Cal. App. LEXIS 1694 (October 30, 2006)
Thanks to the Family Law Prof Blog  for a great summary. Read the case here.

How much is my divorce going to cost?

As many people know, a divorce can be very expensive, both financially and emotionally. You can try, however, to keep the financial costs down by getting an estimate from your attorney of the total fees or you can work with a lawyer who charges a flat fee.

Michael Sherman at the Alabama Family Law Blog has an excellent post about the virtues of flat fees. I couldn't agree more with his opinion:

What will my divorce cost?

This is a question you should ask your lawyer at the initial consultation. If you are working for a lawyer that charges fixed fees like our firm does (also known as flat fees), then they can tell you exactly what the fee will be. But, even if you are working with a lawyer that charges by the hour they should be able to give you the amount of their hourly rate, the amount of the retainer and a reasonable estimate of the total fees that will be incurred. If they can't or won't then go somewhere else.

In fact, I would not hire a lawyer that is not willing to represent you in a divorce on a fixed fee. I have a strong opinion about fixed fees vs. hourly billing. I am currently putting an article together that will go into this in much more detail, but I will speak very briefly to the issue here.

Why would you hire someone to handle your divorce case that can't quote you a specific, total fee? Many lawyers will say they can't quote a flat fee on a divorce because there are too many variables to accurately estimate a fair fee. That is nonsense. There are many variables involved in building a house, but when you contract to build one, there is a set price established on the front end and agreed to by both parties. If there is unforeseen work needed, a change order is prepared. Simple, effective, fair.

The bottom line is that hourly billing (coupled with the high pressure put on lawyers to bill more hours) places an incentive on a lawyer to engage in protracted litigation. That is not in the client's best interests (particularly in the emotional turmoil of a divorce). Additionally, the client must feel like they are writing a blank check to the lawyer (because they are). Not to mention the fact that with hourly billing you are charged (usually in 6-15 minute increments depending on the lawyer) for every phone call, every e-mail, every meeting, etc. Is that any way to encourage open communication (which is absolutely necessary for effective representation)? Of course not.

I guess you get the point. My advice is not to hire a lawyer that is not willing to work on a fixed fee basis. I realize that is a controversial statement. It is one with which many of my fellow lawyers would vigorously disagree. But, I have been working on a fixed fee basis for over 10 years. I have been doing it exclusively for about 3 years. My clients love it because it takes away an unknown factor, it allows open, regular communication, and they never receive a $150 bill for a 30 minute phone call. I love it because I can focus less on tracking my time and more on resolving my clients problems (not to mention there are no such things as accounts receivable in my office).