Page 74 - Family Law Services

Alternative minimum tax (AMT) credit carryforward. No published guidance exists on how to allocate
AMT credit carryforwards. Any reasonable, nonabusive method would likely be accepted by the IRS.
Typically, such amounts are allocated as if the divorcing parties had filed separate returns in the year(s)
generating the AMT.

Capital loss carryforward. Under IRS Regulation 1.1212-1(c)(1)(iv), capital loss carryforwards are allo-
cated based on the percentage of separate capital gains and losses of each spouse. Gains and losses on
jointly-owned property are generally divided equally.

Charitable contribution carryforward. Under IRS Regulation 1.170A-10(d)(4), charitable contribution
carryforwards will be split in proportion to what the charitable contribution and resulting carryforwards
would have been had the parties filed separate returns.

General business credit carryforward. The general business credit consists of a number of allowable
business credits, including the investment credit, welfare-to-work credit, alcohol fuels credit, and low
income housing credit. Generally, any business credit carryforward would follow the business property
that created the credit and is allocated to the spouse receiving that business property.

Investment interest expense carryforward. No published guidance exists on how to allocate investment
interest expense carryforwards. Any reasonable, nonabusive method would likely be accepted by the
IRS. Typically, such amounts are allocated by taking into consideration which spouse will generate in-
vestment income in the future to make use of the carryforward expense amount.

Net operating losses. Under IRS Regulation 1.172-7(d), net operating loss carryforwards will be split in
proportion to what the net operating losses would have been had the parties filed separate returns.

Passive activity loss carryforward. Tax-free transfers incident to divorce under IRC Section 1041 are
treated as if the property was transferred by gift. Under the passive loss rules (IRC Section 469[j][6]),
when a passive activity is disposed of by gift, any suspended losses are added to the basis of the activity
immediately prior to the gift. Planning opportunities are available to avoid the capitalization of suspend-
ed losses when passive activities are transferred incident to divorce. Possible remedies include the fol-
lowing:

• Transferring spouse retains the property until the earlier of the following:

— The suspended losses are used up.

— Within six years of the date of the divorce.

• Transferring spouse transfers the net income from the property (after offsetting against suspend-
ed losses) to the other spouse by way of nontaxable or taxable IRC Section 71 payments.

• Allocation of other assets or debt reductions with equal, after-tax value to the other spouse.

Note, however, that various considerations must be addressed with such remedies, such as the death of
either spouse, insolvency, or other unforeseen circumstances. Careful planning and consideration must
be made.

S corporation losses. Under IRC Section 1366(d)(2), as amended by the American Jobs Creation Act of
2004, Section 235(a), for tax-free IRC Section1041 transfers of S corporation stock to a spouse (or to a

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