Opinion ID: 2361145
Heading Depth: 2
Heading Rank: 1

Heading: Net v. Gross Marital Estate

Text: Ellen's most substantial claim is that the court erred by reducing the value of certain assets to reflect potential tax consequences of a sale of those assets. She relies on Johnson v. Johnson, where we stated that the tax status of assets in the hands of one of the parties should not affect their fair market valuation, unless the decree necessitates their sale. 158 Vt. 160, 165, 605 A.2d 857, 860 (1992). In that case, we held that the trial court erred by relying on the wife's nonexpert testimony on the possible impact of tax law on the sale of her interest in two limited partnerships, and remanded the matter for reconsideration of the fair market value of those assets. Id. at 164-65, 605 A.2d at 860. For several reasons, we are not persuaded that our holding in Johnson compels reversal in this case. First, we noted in Johnson that, although potential income taxes do not affect the value of a marital asset, they `may be another factor to consider in establishing the amount and method of payment of any monetary award.' Id. at 165, 605 A.2d at 860 (quoting Rosenberg v. Rosenberg, 64 Md.App. 487, 497 A.2d 485, 503 (1985)). In this marriage, the primary marital asset was Tom's substantial investment account with Paine Webber, which the court found had a market value of close to $4 million dollars. Throughout the marriage, the parties funded their lifestyle by borrowing against this account; that way, the parties enjoyed the benefit of the growth in the investments without paying taxes on the gain. The parties have been able to live on paper wealth for many years, because their investments have performed well. A downturn in the market, however, could force Tom to sell investments to repay the debt; in so doing, he would incur substantial tax liability because of his low basis. In light of the parties' unusual financial situation, potential tax liability was relevant to the court's overall evaluation of their finances. Moreover, Ellen requested and received a cash award as her share of the marital property. Had she received real estate or stocks of comparable value, and wished to liquidate those assets, she would have faced large tax payments. Instead, she received the full benefit of her award, with no need to worry about future tax problems. As the court noted, however, Tom presumably had to liquidate assets to pay Ellen, and consequently incurred tax liability on the sales. And, as Tom retains the investment account, he also bears the risk that a market downturn will force him to sell some investments and pay taxes on the gain. Under these circumstances, it was not unreasonable for the court to consider potential tax consequences associated with assets in the marital estate. See id. at 165, 605 A.2d at 860 (in interests of fairness and consistency, court may consider specific, relevant, and material evidence about transaction taxation of assets in determining value, division, and method of allocation of parties' assets). Finally, even if the court underestimated the net value of the marital estate by deducting potential tax liability, the error was not relevant to its decision and was therefore harmless. As the spreadsheet attached to the court's decision reveals, the court was well aware of both the gross and net values of the parties' assets. The court did not award Ellen a fractional share of the estate, but instead calculated an award that would generate an appropriate income, given the duration of the marriage and the standard of living during the marriage. We are convinced, based on the court's thorough discussion of the issue, that redefining the net value of the estate would not change the court's decision. As discussed above, the court would still properly consider the potential tax liability in making its decision. The change would be merely cosmetic.