Case Title: Grace v. Grace

Citation: 

Docket Number: 95-831

State: arkansas

Court: Arkansas Supreme Court

Date: 1996-10-21T00:00:00Z

Document:
Pamela GRACE v. Theodore GRACE

95-831                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
               Opinion delivered October 21, 1996


1.   Divorce -- valuation and distribution of marital property
     after divorce -- when potential taxes should be considered in
     valuing marital assets. -- In order to insure a "fair and just
     determination and settlement of property rights,"
     predictability is favored over mere surmise in the valuation
     and distribution of marital property after divorce; potential
     tax liability may be considered in valuing marital assets only
     where a taxable event has occurred as a result of the divorce
     or equitable distribution of property or is certain to occur
     within a time frame such that the tax liability can be
     reasonably predicted; a trial court in a divorce action should
     consider potential taxes in valuing marital assets only if (1)
     the recognition of a tax liability is required by the
     dissolution or will occur within a short time; (2) the court
     need not speculate about a party's future dealing with the
     asset; (3) the court need not speculate about possible future
     tax consequences; and (4) the tax liability can be reasonably
     predicted.

2.   Divorce -- when federal tax consequences should be taken into
     account -- no federal income tax consequences would result
     from the court's division of property. -- A chancellor may
     consider "the federal income tax consequences of the court's
     division of property" when she finds that it would be
     inequitable to divide the property half and half; Ark. Code
     Ann.  9-12-315(a)(1)(A)(ix) (Repl. 1993); here, the court was
     unaware of any federal income tax consequence that would
     result from "the court's division of property"; there may be
     in the plan of division of marital property certain tax
     consequences that should be taken into account; however, the
     clear implication is that only tax consequences necessarily
     arising from the plan of distribution are to be taken into
     account, not speculative possibilities.

3.   Divorce -- sale of book of business prospective and not
     required by the decree -- consideration of tax consequences of
     sale error. -- It was error for the trial court to have
     considered the tax consequences of a prospective sale of the
     "book of business" because the decree did not require such a
     sale, and there was no evidence that a sale was imminent.

4.   Divorce -- chancellor had no authority to determine validity
     of an obligation to a third party who was not a party to the
     divorce -- decisions about consideration of marital debts in
     assigning marital property will not be disturbed unless
     clearly erroneous. -- A chancellor has no authority to
     determine the validity of an obligation to a third party who
     is not a party to the divorce; however, a chancellor is to
     take into consideration the estate, liabilities, and needs of
     each party; the supreme court, upon entertaining questions
     about marital debts and whether they should be "considered" in
     assigning marital property as questions of fact, declines to
     reverse decisions about them unless they are clearly
     erroneous.  

5.   Divorce -- chancellor's conclusions as to debt's
     enforceability disregarded -- factual conclusions not found to
     be in error. -- While disregarding the Chancellor's
     conclusions about whether the debt was "enforceable" or
     "owed," the court had no reason to say her factual conclusions
     about the transfer of the money were in error, or that she
     erred in considering the $5,000 as a "liability" of the
     parties.


     Appeal from Pulaski Chancery Court; Ellen Brantley,
Chancellor; affirmed in part; reversed in part.
     Kaplan, Brewer, & Maxey, P.A., by:  Philip E. Kaplan and
Regina Haralson, for appellant.
     Dover & Dixon, P.A., by:  Philip E. Dixon and W. Michael Reif,
for appellee.
     David Newbern, Justice. 
     This is a divorce case.  The only issues on appeal concern
division of the marital property.  The property included major
assets, such as the marital home, which was awarded to Pamela
Grace, and an insurance "book of business," which was awarded to
Theodore Grace.  As we understand it, the "book of business" of an
insurance agent consists of his right to residual payments from
insurance policies sold and from prospective renewals.  The
Chancellor also adjusted the division of property between the
parties by assigning to Mr. Grace a debt the Chancellor termed
"unenforceable" and yet "owed" by the parties to his parents in the
amount of $5000.  We hold the Chancellor erred in subtracting from
the value of the "book of business" the amount of federal tax that
would have to be paid in the event the asset were sold.  We hold it
was not error for the Chancellor to consider the $5000 debt, assign
it to Mr. Grace, and accordingly reduce the award to Mrs. Grace by
half the amount of the debt.

                        1. The tax credit
     A chancellor may consider "the federal income tax consequences
of the court's division of property" when she finds it would be
inequitable to divide the property half and half.  Ark. Code Ann.
 9-12-315(a)(1)(A)(ix) (Repl. 1993).  In this case, there is no
demonstrable federal income tax consequence resulting from the
division of the property.  The Chancellor did not order the "book
of business" to be sold.  Mr. Grace mentioned, at one point in the
proceedings, that he might have to sell that asset in order to
satisfy his obligation to Mrs. Grace, but the Chancellor said in
her summation, "I don't think there's any evidence that he's going
to sell."
     Mr. Grace argues the witnesses who testified about the value
of the "book of business" said a buyer would "expense" the
purchase.  We presume that means a purchaser would be someone in a
position to deduct from business profits the expense of purchasing
the "book of business" for tax purposes.  That ostensibly would
give the asset a higher value to the buyer, thus creating a higher
market value or selling price and, therefore, a greater tax
consequence to the seller.  The argument obviously assumes certain
facts about the hypothetical buyer being in a position to "expense"
the purchase.  The contention is that the evidence of the value of
the asset was thus based on an assumption that Mr. Grace would have
to pay tax on the sale.  Again, no sale has been ordered, and none
seems to be in prospect.
     In support of the Chancellor's decision on this point, Mr.
Grace cites Hogan v. Hogan,