Harold Hamm, CEO of Continental Resources, has recently gotten a divorce that comes with a price tag of about $1 billion. That sounds like a big divorce payment, but it could have been as large as $5 billion. As always, there will be tax ramifications depending on how the money transfers are handled. Tax attorney Rob Wood discusses the situation in this report, based on his Forbes article “Harold Hamm's Billion Dollar Divorce And The IRS.”
Wood notes that stories like these are interesting because the numbers are so big. However, the tax rules are the same, no matter how big the divorce. The rules are clear, Wood says but things get fouled up in a surprisingly large number of divorces.
It appears that most of what Ms. Hamm receives will be in the form of a property settlement, and transfers like that are not taxable under Section 1041 of the tax code. Alimony, however, is taxable income. It’s important for everyone involved to clearly define the terms of the divorce settlement.
In the settlement, Ms. Hamm gets $320 million up front, with monthly payments of $7 million or more to follow. Monthly payments, as Wood explains, “sounds like alimony, or . . . spousal maintenance.” Child support payments (when there are children involved) are not taxable.
Wood suggests that, if the Hamms decided to split their assets, whether by agreement or because of a court order, there would be no tax on the property. Under the estate and gift tax law, spouses can make such transfers without tax, and the same rule applies in a divorce. However, property transferred in this way “keeps its historic basis.” Meaning, Wood explains, that shares of stock (for example) would be transferred with a low basis, so that the ex-wife would pay taxes on the higher value should she sell the stock. The same thing applies to real estate.
If the monthly payments are spousal maintenance, they are deductible by him and taxable to her. A problem can occur when the parties to a divorce do not characterize the payments in the same way and the IRS compares the returns.
For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.