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Deferred Compensation: Dramatic Changes

BY Thomas R. White III
October 07, 2003

The recent issuance of Revenue Ruling 2002-22, 2002-19 I.R.B. 849 dramatically changes how income tax principles will be applied to the marital division of deferred or incentive compensation arrangements, and, potentially, to other types of assets, the gain from which is taxable as ordinary income. Stock options and contractual deferred compensation arrangements have become a standard form of compensation for corporate employees. In the marital dissolution law of practically every state where marital rights to these compensation arrangements have been examined, the value represented by these rights has been determined to be marital property, subject to division at divorce to the extent earned before divorce. Indeed, deferred compensation rights may be the most valuable marital asset, so negotiation and litigation over division of this value has become a fertile area for marital settlements.


The income tax consequences of dividing compensation assets pose significant problems and require careful attention to ensure that each spouse will receive the economic value of his or her share. Now, with Revenue Ruling 2002-22, issued by the IRS last May, matrimonial practitioners must familiarize themselves with another wrinkle in the equation.


A Little Background

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