When a couple divorces, they often agree to sell the family home and split the money that they earn from the sale. As the Fourth District Court of Appeals recently explained, those proceeds may include any tax refunds or other benefits that one spouse obtains as a result of the sale.
Husband and Wife separated in 2006, after a roughly nine-year marriage in which the couple had two kids. They signed a “post nuptial agreement” two years later, under which the couple agreed to treat their family home as community property – after accounting for Husband’s separate $2.5 million interest in the property – and to list it for sale within a week. The agreements further provided that Husband and Wife would split the net proceeds of the sale.
The home was sold for $10 million in March 2009. The couple used $1.3 million in proceeds to pay state and federal taxes and allotted another $2.5 million to Husband to cover his separate interest in the property. They evenly divided the $3.52 million that remained after accounting for interest, fees, commissions, and other costs. Husband and Wife filed separate tax returns that year, with each listing $5 million in proceeds from the sale of the home. Wife also listed a separate $2.5 million property sale for the separate interest awarded to Husband. She received a $475,000 tax refund because she claimed the sale as part of her nontaxable basis for the property.
A trial court rejected Husband’s request to award him half of the tax proceeds, finding that the money didn’t count as part of the proceeds from the sale of the home. “The court acknowledged [Wife] filed an aggressive tax return that resulted in her refund, but only the Internal Revenue Service and the California Franchise Tax Board had jurisdiction to decide whether she paid the proper tax amount,” the Fourth District later explained. As a result, the trial court said Wife was entitled to any benefit from the tax filing and would be responsible for any liability.
Reversing the decision on appeal, the Fourth District said the tax refund was covered under the post nuptial agreement and should have been split evenly between Husband and Wife. “Although the post nuptial agreement does not refer to an equalization payment based on a later capital gains determination by the tax authorities, the couple’s clear intent to equally divide the net sale proceeds after paying the taxes requires an equalization payment if the taxes differed from the amount the couple contemplated at the time escrow closed.” The Court nevertheless said that Wife’s payment of half the proceeds to Husband should be delayed until the tax authorities “finally determine” the amount of her refund.
If you’re considering a divorce in California, it’s important to seek the counsel of an experienced family law attorney. Contact San Jose divorce lawyer John S. Yohanan for advice on a community property issue. With more than 30 years of experience, Mr. Yohanan is an accomplished family law attorney who has helped a number of clients resolve a property disposition and a wide variety of other issues on optimal terms. Call our office at (408) 297-0700 or contact us online to schedule a consultation.
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