Opinion ID: 2935894
Heading Depth: 1
Heading Rank: 2

Heading: Tax Liabilities/Consequences

Text: The petitioner next argues that the trial court erred by reducing the value of some of the parties’ properties, which primarily consist of limited liability corporations, to account for potential taxes that would result from a sale or transfer of the properties. She maintains that, because the trial court neither ordered a sale or transfer of the properties nor had any evidence that the parties intended to sell or transfer the properties, the trial court’s consideration of such tax consequences constituted impermissible “speculation about a party’s future use of an asset” contrary to In the Matter of Telgener & Telgener, 148 N.H. 190 (2002). In a divorce proceeding, the trial court is given discretion in determining the value of any given asset, In the Matter of Chamberlin & Chamberlin, 155 N.H. 13, 16 (2007), and “the equitable distribution of the marital estate,” Telgener, 148 N.H. at 191 (quotation omitted). Absent an unsustainable exercise of discretion, we will not overturn its decision in matters involving alimony and property distribution. Telgener, 148 N.H. at 191. We begin by reviewing our decision in Telgener. In Telgener, the respondent argued that the trial court erred by failing to consider tax consequences when distributing the parties’ marital assets. Id. at 190. He 4 maintained that he would be forced to incur substantial tax penalties as a result of the court’s distribution scheme. Id. at 191. He argued that the trial court committed legal error because it was aware that he desired to purchase a new home and was aware of the difficulty he would face in financing that purchase, yet it failed to consider that to secure financing, he would be forced to liquidate some of his tax-deferred retirement accounts and incur substantial tax penalties. Id. Thus, the respondent contended that, because the trial court failed to consider these supposed reasonably foreseeable tax consequences, the distribution of marital property was unequal, inequitable, and injurious. Id. at 191-92. In accord with the decisions of other courts, we held that, when valuing marital assets for the purpose of distribution, a trial court may consider potential tax consequences to the parties only if a taxable event, such as a sale or other transfer of property, is required by the property distribution, or is certain to occur shortly thereafter. Id. at 192. In contrast, where there is merely a likelihood or a possibility that a taxable event will occur, a court may not reduce the value of an asset by uncertain tax consequences. Id. Because, in that case, the respondent’s testimony was insufficient to show that the tax liability was reasonably ascertainable, we ruled that consideration of a tax consequence would have been improper as it would have required the trial court to speculate regarding the respondent’s future dealings with his retirement funds. Id. at 193. We, therefore, concluded that, because the withdrawal of the retirement funds was neither required by the court’s order nor certain to occur within a short time after the divorce decree, the court did not err when it declined to reduce the value of the respondent’s retirement funds to account for tax consequences to the respondent of early withdrawal. Id. In this case, in assigning a value to each of the parties’ marital assets, the trial court found that “tax debt due to the IRS in respect to the particular pieces of property is relevant to the overall value.” The court explained that “[t]hese debts, according to the evidence[,] will not go away. If and when the properties are transferred to a third party the debt will be due and will remain an attachment to the properties until satisfied.” As a result, the court found that “the debt for taxes has a bearing on the overall value of the properties and will be considered in respect to the property distribution.” The trial court then reduced the value of certain properties by such “tax debt” in its distribution of marital assets. A review of the record indicates that the “tax debt” referred to by the trial court consists of taxes, including capital gains taxes, that would be due upon a sale or transfer of the property. At trial, the parties’ certified public accountant, called as a witness by the respondent, provided evidence as to the estimated potential tax liabilities resulting from a hypothetical sale or 5 foreclosure of the properties. He prepared a spreadsheet depicting the parties’ deferred tax obligation with respect to the properties. He testified that, if the properties are separated “in kind,” there are deferred tax liabilities associated with certain properties that would remain with those properties and that the party who was awarded the property would be responsible for those taxes upon sale or any event that would cause the companies to be liquidated. He explained that he calculated the total potential “recapture tax on sale” of the properties based upon estimated tax rates for capital gains and depreciation recapture. As in Telgener, however, the trial court’s order does not require a sale or liquidation of the parties’ properties or LLCs, nor does it appear from the record that a sale or liquidation was certain to occur within a short time after the divorce decree. Indeed, the respondent acknowledges, “If the Court ordered a liquidation, the foregoing taxes would have to be paid” but the court “did not order a liquidation forcing the payment of these taxes because liquidation [would leave] the parties insolvent.” The trial court itself stated that the debt will be due on the properties “[i]f and when the properties are transferred to a third party.” (Emphasis added.) The parties’ accountant testified that the estimated potential tax liabilities set forth on his spreadsheet constitute “an accounting of the taxes that will be paid if the properties are either sold or foreclosed upon” and agreed with the petitioner’s counsel that “these taxes are [not] currently owed.” Thus, to the extent that, in valuing the marital property for distribution, the trial court considered estimated tax liabilities of the parties due upon a future sale of the properties, it necessarily speculated as to the parties’ future dealings with the properties. This was error. See Telgener, 148 N.H. at 192-93; see also Schuman v. Schuman, 658 N.W.2d 30, 36-37 (Neb. 2003) (concluding that trial court erred by considering tax consequences of sale of business in valuing marital property when “there was no evidence that the business was going to be sold in the near future”); In re Marriage of Hay, 907 P.2d 334, 336 (Wash. Ct. App. 1995) (determining that trial court erred by considering “capital gains tax consequence[s] when valuing the parties’ interest in the real estate partnership” because sale was not imminent and did not directly arise from distribution of property). Nonetheless, relying upon Rattee v. Rattee, 146 N.H. 44 (2001), the respondent contends that the trial court properly took into account accrued tax liabilities in determining the fair market value of the parties’ properties. Rattee dealt with the valuation of stock in a closely held corporation. Rattee, 146 N.H. at 50. We held that the trial court did not err by applying a discount to the “fair value” of the parties’ shares in the company to arrive at their fair market value. Id. at 51 (quotation omitted). The respondent is correct that, in Rattee, we stated that the fact that an actual sale of the defendant’s interest in the company was not contemplated at the time of the final hearing was irrelevant to “the concept of the fair market value” of the stock in the corporation. Id. 6 Because Rattee addressed an issue different from that addressed in Telgener, the holdings in the two cases do not conflict. As we observed in Rattee, “[f]air market value is the price a willing buyer and a willing seller would probably arrive at through fair negotiations, taking into account all considerations that fairly might be brought forward and reasonably be given substantial weight in such bargaining.” Id. at 50 (quotation omitted). Rattee necessarily involved consideration of the stock price a willing buyer and seller would agree upon. Id. By contrast, Telgener involved the potential future tax consequences to the parties resulting from a sale or other disposition of the property. Telgener, 148 N.H. at 192-93. Although such potential tax consequences are relevant to the valuation of the property for distribution purposes if those consequences are the result of the court’s order or are certain to occur within a short time after the divorce decree, they are not relevant to the ascertainment of present fair market value of marital property. See Clark v. Clark, No. M2006-00934-COA-R3-CV, 2007 WL 1462226, at  (Tenn. Ct. App. May 18, 2007) (“[T]he fair market value of a marital asset is separate and distinct from the tax implications of its sale.”); Johnson v. Johnson, 605 A.2d 857, 860 (Vt. 1992) (“[T]he tax status of assets in the hands of one of the parties should not affect their fair market valuation, unless the [divorce] decree necessitates their sale.”); Arbuckle v. Arbuckle, 470 S.E.2d 146, 147, 148 (Va. Ct. App. 1996) (holding that trial court erred by discounting value of dental practice by estimated capital gains taxes “resulting from a hypothetical sale” because those consequences were too speculative to be considered, and, thus, not based upon present fair market value of property). Thus, if the evidence establishes that potential future tax liability reasonably affects the fair market value of a marital asset — that is, the price that a willing buyer would pay a willing seller to purchase a particular asset — the trial court may consider that liability in determining the present fair market value of the asset. However, the value of an asset may not be reduced to reflect the potential tax consequences to the parties resulting from the sale or transfer of the asset after distribution, unless the sale or transfer is required by the court’s order or is certain to occur shortly thereafter. Telgener, 148 N.H. at 192-93; see Johnson, 605 A.2d at 860. The respondent contends that Telgener is “factually and fundamentally distinguishable from this case [because] it involved unknown, speculative personal tax liabilities as opposed to ascertained and accrued commercial LLC tax debt.” The respondent maintains that our concern in adopting the rule in Telgener was with the speculative nature of the tax liabilities and, here, “[t]he amount of the [parties’] commercial LLC’s accrued and deferred tax debt was not speculative and it was verified by uncontested testimony as of the date of trial.” 7 This argument, however, fails to take into account that our holding in Telgener did not merely require that the amount of the potential taxes be reasonably ascertainable. We held that tax consequences to the parties may be considered only if a taxable event is required by the property distribution or is certain to occur shortly thereafter. Telgener, 148 N.H. at 192. Simply because there was evidence in this case of a reasonably ascertainable amount of potential tax liability does not, by itself, allow the trial court to consider such consequences in its distribution of marital property. As we explained in Telgener, “[c]onsideration of a tax consequence is precluded . . . when the trial court must speculate as to a party’s future dealing with the property.” Id. (emphasis added). This reasoning is in accord with the decisions of other courts. See Harmon v. Harmon, 962 A.2d 959, 962-63 (Me. 2009) (concluding that court did not err in not considering tax implications of selling marital property where wife had not expressed intent to sell property and court did not order sale of property); In re Marriage of Haberkern, 85 P.3d 743, 746-47 (Mont. 2004) (concluding court abused its discretion by considering tax consequences when value of retirement account and tax laws at liquidation were unknown and court did not know when sale would occur); Conzemius v. Conzemius, 841 N.W.2d 716, 722-23 (N.D. 2014) (finding court did not err in not considering future tax consequences of property division because wife did not identify plans to retire or to withdraw funds from pension plan “within a short time” (quotation omitted)); Drumheller v. Drumheller, 972 A.2d 176, 191 (Vt. 2009) (finding no error in court’s decision not to adjust value of properties by tax liabilities that would result upon sale because record did not demonstrate that husband would have to sell properties). The respondent further contends that this case is akin to In the Matter of Thayer and Thayer, 146 N.H. 342 (2001), and maintains that “[i]n essence, the unpaid tax liability is an advance on the marital estate that the parties have already received” and, because “[b]oth parties had [the] benefit of the tax deferred income, . . . it would be grossly inequitable if only one party postdivorce was required to pay essentially all of the taxes that went unpaid during the parties’ decades of marriage.” Thayer, however, is distinguishable. Thayer dealt with whether certain debt was properly deemed “family” debt subject to distribution as part of the marital estate. See Thayer, 146 N.H. at 346-47. Thus, unlike this case, Thayer did not involve consideration of potential future tax consequences to the parties resulting from the trial court’s distribution of the marital estate. We conclude, therefore, that, because sale or transfer of the properties at issue was neither required by the trial court’s order, nor certain to occur within a short time after the divorce decree, the trial court erred to the extent that, when valuing the properties for distribution, it reduced the value of those properties to account for estimated taxes that would be due by the parties in the event of a sale or transfer of the properties. Accordingly, we vacate the trial 8 court’s distribution order and remand for distribution of assets consistent with this opinion.