I. Equitable Distribution of Marital Debts
A. Can a Court Distribute Debts as Well?
Simply put, yes. In effecting equitable distribution of property, a court can also allow marital debts to be split between the parties. Nielsen v. Nielsen, 256 A.D.2d 1173 (4th Dept. 1998). However, the court has discretion to refuse to take into consideration marital debts that are unproven. Fabricius v. Fabricius, 199 A.D.2d 695 (3d Dept. 1993).
In determining whether the debt is marital or separate, the court will look at the nature of the debt itself, the manner in which and for whose benefit the funds were expended and the source of repayment. Jonas v. Jonas, 660 N.Y.S.2d 487, 487 (3d Dept. 1997). In other words, the proponent of sharing the debt has the burden of proof as to its obtainment and the ultimate purpose and use of the fund borrowed. Oliver A. v. Christina A., 806 N.Y.S.2d 446 (Suffolk Cty, Supreme Ct. 2005). Outstanding financial obligations incurred during the marriage which are not solely the responsibility of the spouse are to be considered marital debts. Jonas, 660 N.Y.S.2d at 487. Where, however, the indebtedness is incurred by one party for his or her exclusive benefit or in pursuit of his or her separate interests, the obligation should remain that party’s separate liability. Id. at 488.
So, if there are marital debts, be prepared to prove, with documentation,
- the amount of the debt,
- who the debt is owed to, and
- for what purpose was the debt incurred.
Marital debts are typically distributed in the same proportion as marital assets; however, marital debt can be allocated differently based on other factors, such as one spouse’s ability to pay compared to the other, or one spouse’s responsibility for incurring the particular obligation. Solomon v. Solomon, 10 A.D.3d 584 (1st Dept. 2004); Madori v. Madori, 201 A.D.2d 859 (3d Dept. 1994); Kuhn v. Kuhn, 134 A.D.2d 900 (4th Dept. 1987).
EXAMPLE: Marital debts tend to include student loans taken out during the marriage and credit card balances used to purchase groceries, clothing, and other necessities for the spouses and/or children. On the other hand, marital debt will likely not include gifts made by one spouse to a paramour.
B. Can a Court Distribute an Income Tax Liability?
Absent economic fault, courts will usually distribute tax liabilities incurred during the marriage between the parties.
The general understanding seems to be that income tax liability incurred during the marriage is marital debt. Carlin v. Carlin, 217 A.D.2d 679 (2d Dept. 1995) (any future liability arising from the parties’ failure to file tax returns for several years is joint and several). In Cooper v. Cooper, the wife was responsible for one-half of federal tax liability incurred when husband filed amended income tax returns, but she was not responsible for any interest and penalties as a result of the filing of the amended tax returns, because the federal tax liability was incurred during the marriage and husband was responsible for delay in reporting income declared on those amended returns. 84 A.D.3d 854 (2d Dept. 2011).
A similar result was found in Conway v. Conway, in which a spouse was found to be responsible for one-half of the parties’ tax obligation arising out of their failure to pay proper income taxes during their marriage. The rationale was that, since the wife shared equally in the benefits derived from failing to pay income taxes (i.e., there was ultimately more property in the marital estate subject to equitable distribution), she must share in the financial liability arising out of the tax liability. 29 AD3d 725,726 (2d Dept.2006)
It is important to note that in Capasso v. Capasso, while a wife was held equally responsible for the income tax debt resulting from her husband’s criminal tax evasion, she was not responsible for the $500,000 fine imposed on the husband after his criminal conviction for income tax violations, nor should she, as an innocent spouse, be liable for any civil fraud or other penalties imposed by IRS on account of the acts of her husband. 517 N.Y.S.2d 952 (1st Dept. 1987).
However, at least one court has found that it was appropriate to order a spouse, who bore a tax liability accumulated during marriage, to pay the liability when the spouse engaged in economic fault. Frey v. Frey, 68 A.D.3d 1052 (2d Dept. 2009). When the divorcing spouses of Frey v. Frey, for the most part, maintained separate finances, and determined from the start of the marriage to file separate tax returns, the trial court acted within its discretion to direct the defendant, who failed to file tax returns throughout the duration of the marriage, to bear the responsibility for paying income taxes, interest, and penalties. Id.
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