Virginia Family Law Appeals

Court can let divorcee pay money judgment to ex by transfer of pre-tax funds from IRA, 401k

The Court of Appeals upheld a post-decree order letting a man transfer parts of an IRA and a 401(k) to satisfy a monetary award under Code § 20-107.3(D) in Johnson v. Johnson, 56 Va. App. 511, 694 S.E.2d 797 (2010). He had been ordered to pay $1.2 million in ten equal, annual installments, and said he had no other way to pay the $120,000 that had come due. Wife had a tax expert testify that if she cashed out the $120,000 in retirement funds after receiving them, she would only have $60,736 after taxes and early withdrawal penalties.

The trial court had the discretion to approve this particular property transfer, and to justify it by interpreting what it had intended in the original award, the Court said.

Neither the opinion, nor the trial judge's statements that it quotes, say why the difference between the pre-tax $120,000 value, and the post-tax, post-penalties $56,000, does not matter. The trial judge is quoted on that only as saying,

And when I ordered that in this case the award could be satisfied by the transfer of property, I think that intended to mean the value of the property. It was $120,000. What she decides to do with it is up to her. And I don't think the Court should take any consideration of the fact that she's going to say she wants to cash out.

Essentially, it seems that this is considered an exercise of the broad discretion that Code § 20-107.3(D) gave the trial judge. I think the trial judge and Court of Appeals understood very well the difference that it made, but the trial judge had the discretion to decide what was equitable in the circumstances. The trial judge may have been saying that at the time of the original award, he was basing the award on pre-tax assets and intended all along to divide that, not post-tax dollars. But not necessarily.

Gilliam v. McGrady: PROPERTY DIVISION – DEBT – BUSINESSMAN’S UNPAID PAYROLL TAXES – BLAME FOR ORIGINAL DELINQUENCY v. BLAME FOR CONTINUING DELAY OF PAYMENT.

The subject of apportioning or allocating debt between spouses in an equitable distribution case under §20-107.3, which has remained somewhat mysterious heretofore, is elucidated somewhat by the Court of Appeals’s decision in Gilliam v. McGrady, No. 0288-08-2 (Va. App. 03/04/2009).  A painting contractor whose wife had a salaried job as a paralegal left his employment taxes unpaid and the debt was still there to divide as negative property at their divorce.  So how is it fair to do this – by calling it separate and leaving it with the businessman husband, or calling it marital and dividing it, and if dividing, then how?  The unchallenged evidence showed that the husband let this important matter go originally, but the wife, knowing fully about it, went on helping him live beyond their means and willingly participated in leaving the delinquency uncured.  So if it’s a matter of reward and blame, should it be allocated to the one who originally let it go, or to both of them who willingly let it continue, accumulating even more interest and penalties?  The trial court thought both, but the Court of Appeals had other ideas.  (More precisely, the trial court split the original debt 50-50 and the interest and penalties husband 65% and wife 35%).  Since the trial judge began with a ruling that the debt should be considered marital because it benefited both the parties, the Court of Appeals said you must consider more factors than that.  Who originally incurred the debt is surely a factor, along with the original purpose of the expenditure (i.e., to benefit the business by leaving unpaid that portion of the employees’ salaries which should go to the federal or state government or both).  The Court of Appeals says that since it’s illogical to divide positive property and negative property with different burdens of proof, the presumption of all property being marital must apply to debt as well.  It had already been held as a factual determination at trial that both parties benefited because they both spent this money that hadn’t been timely paid in taxes.  But the trial court reasoned erroneously, the appellate judges say, and should instead have looked at both the benefit the parties got from spending the money and the use that the business got out of this unpaid money (or unpaid labor).  No, the Court of Appeals says, the judge should look at the purpose of the original debt and not to who bears responsibility for the later non-payment.  The latter treatment ignores the statutory requirement to consider the “purpose” of the debt.  The Court of Appeals considers it unfair to allocate any to the spouse who participated willingly in letting it continue unpaid.  The appellate court sees the blames as different: the duty violated by the husband was to obey the criminal law and the civil law – avoiding non-payment of federal taxes as well as fulfilling the general duties of an honest person and good citizen to pay all one’s creditors in full.  Since husband had both duties but wife had just the general duty, it would be unfair to saddle her with an equal portion of the blame.  What the Court of Appeals does affirm is the trial court’s holding that the wife had the burden of proving that the taxes were not marital debt.  That lower-court ruling was valid, because if the presumption of marital debt applies to both positive and negative property, that’s the result you get.

McKee v. McKee: ALIMONY — CLAIMED MONTHLY EXPENSES – ALIMONY AWARD EXCEEDING PAYOR INCOME BUT LEVELED BY TAX SAVING – ALIMONY-CHILD-SUPPORT RELATIONSHIP.

The high-earning doctor in McKee v. McKee, 22 VLW 1061 (unpublished, 1/29/08), then had the nerve to argue that the wife’s other claimed expenses were way too high.  He was challenging particularly a $627 car payment, $750 for savings, repairs that were supposed to be taken care of by the refinancing, $950 groceries with $300 meals out, $345 gasoline, $186 cable and $60 for financial advice.  The court majority said that wife has the burden of supporting the figures she claims and she presented insufficient evidence to support any of these expenses, so it was error to grant alimony based on them.

INCOME TAX — INCOME INCLUDES FEE AWARD IN DIVORCE.

A fee award is "expenses paid by another," so it is gross income for federal taxation purposes, the U.S. Tax Court says in Young v. Commissioner, T.C. Nos. 20435-97 & 21489-97, 25 Fam. L. Rep. (BNA) 1506 (8/20/99).

TAX LIABILITY — JOINT PROPERTY — ENTIRETIES PROPERTY — TAX LIEN.

The U.S. Supreme Court recently held that a federal tax lien under 26 U.S.C. §6321 can be lodged against tenancy by the entireties property. Specifically, the Court held that "property or rights to property" under the statute, to which the federal tax lien may attach, includes rights which the husband has in property held in tenancy by the entirety, and it does not matter if the wife has done nothing to incur liability. U.S. v. Craft, No. 00-1831, ___ U.S. ___ (4/17/02).

PENSIONS — EARLY RETIREMENT DEALS — MILITARY.

A tax case from the Fourth Circuit may have some far reaching effects in the area of pension division by Virginia courts in divorce cases. Waterman v. Commissioner, ___ F.3d ___, 14 VLW 18 (CA 4, 6/3/99).

INCOME TAX — ALIMONY — UNITARY AWARD

Everyone knows alimony ends on death, but beware the situation, common to many states, in which that is only common law. And beware as well the arising of this question in the pendente lite context. "Unallocated family support payments" do not qualify as alimony if there is no explicit specification, in the order or in statutes, that they end on death, the U.S. Tax Court says in Miller v. Commissioner, T.C. Nos. 8094-97 & 8158-97, 25 Fam. L. Rep. (BNA) 1492 (8/12/99), http://fl.bna.com/#0824. Applying the alimony definition of 26 USC (Internal Revenue Code) § 71(b), the Court could find nothing in the order, nor in Colorado's Uniform Marriage and Divorce Act, that said that either temporary orders or other kinds of unallocated family support payments are to end at death. The order was for payments until "further Order of the Court," and the UMDA says only that temporary support orders terminate when a final decree is entered or the divorce case is voluntarily dismissed. The temporary order had had the husband pay a fixed percentage of his income as alimony and child support.