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Divorce and Taxes: Is Spousal Support a Debt or an Obligation?

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Divorce and taxes seem to be two inescapable life scenarios for too many people.

Take Texas billionaire Sam Wyly for example. He filed for bankruptcy protection in October but only after a federal jury told him to pay an estimated $400 million in penalties.

His offense was that he'd used offshore trusts to hide his stock trades.

SEC Finds Wealthy Philanthropist Was Hiding Money

Who is this guy? He was a contributor to Republican causes and a charitable donor who made his fortune investing in - and later selling - his interests in two chains: Michaels, the arts-and-crafts stores, and Sterling Software.

Those businesses made him a considerable sum of money. He made even more money when he sold Sterling for $4 billion in 2000 and sold Michaels for $6 billion in 2006.

However, his business dealings weren't, shall we say, always above board. Last May, a Manhattan federal jury found Wyly and the estate of his deceased brother, Charles, guilty of making illegal trades.

The SEC accused Wyly and his brother of recouping an estimated $550 million from at least 700 undisclosed transactions in 40 companies. They then shuffled the money between their Cayman Islands and Dallas accounts.

The Securities and Exchange Commission (SEC) didn't take that too well.

IRS Becomes a Creditor in Bankruptcy Case

Now the Internal Revenue Services is his largest creditor; taxes owed are still an unspecified amount as the government discovers more about this case.

His second largest creditor is the SEC. Wyly and his brother's estate owe the commission $198 million.

To make matters worse, he's going through a divorce.

Wife Argues Spousal Support Isn't a Debt; It's an Obligation

Wyly's ex-wife, Torie Steele, wants half of his stock holdings. So she sued Wyly in federal bankruptcy court recently.

She claims that even the SEC portrays her as a victim and asserts that her ex-husband transferred to an offshore account a substantial amount of the stock he received during the divorce.

However, she notes, the SEC indicates that Wyly owned even more stock than he received in the divorce.

Her assertions are that Wyly either didn't disclose all of his stock or asked companies to delay issuing the stock to him until after his divorce with Steele was settled.

For this reason, she wants half of any previously undisclosed community property.

There's another issue that Steele is arguing. Per the divorce settlement, Wyly must send $41,666 monthly to his ex-spouse in spousal support payments. However, when Wyly declared bankruptcy, he declared his spousal support as debt and stopped making his payments.

If you have additional questions, check my website for further resources or contact a licensed, family law attorney.

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