ARE BUSINESS TAXES OWED TO IRS SEPARATE PROPERTY OR MARITAL PROPERTY WHEN YOU DIVORCE?Louise Gilliam v. Arthur McGrady, Richmond Virginia
This blogger had an interesting article up today. It had to do with this somewhat well-to-do Virginia couple who got into some trouble for living above their means. The wife’s parents were basically subsidizing their lifestyle and the husband had his own business which he ran by himself, seemingly without any input from the wife. He paid for household expenses and other things from the company’s accounts. But the wife claims she knew nothing whatsoever about the business, including the fact that he failed to pay his business taxes to the IRS and owed a hefty sum in back taxes. Well, actually, a closer reading of the case clearly shows that the wife admitted knowing about the tax debt and even tried to help her husband pay it off by hiring an accountant which the husband later fired. Her mother apparently gave them some money to go towards paying down the debt as well. So the wife was totally knowledgeable about the these business taxes owed to the IRS.
In any event, fast forward to the divorce. Now, the wife is basically saying that because the business was wholly and completely her husband’s baby, that she should not be held accountable for the debt. She wants the debt classified as separate property as opposed to marital property which will mean that only the husband is on the hook to pay it back. Cunning, eh? If you twist this around, if that company was worth 2 billion dollars, even if the husband never told her squat about it, she would want that baby classified as a marital asset as opposed to a separate asset. Not for nothing, but am I right or wrong? But because it is a debt she is pushing it off as a separate property of her husband even though the company was clearly formed during the marriage.
The lower court determined that the assets were marital property and she appealed. The appellate division of Richmond Virginia citing a bunch of cases including See Stumbo v. Stumbo S.E.2d 591, 595 (1995) (referring to “marital property” as defined in Code 20-107.3 as including both assets and debts) , 20 Va. App. 685, 692-93, 460 – 6 – determined that the wife had the burden of proof to show that the debt was separate property. The appeals court also determined that whether the debts are marital or separate will turn on what was the purpose of the debts at the inception, and who benefited from the use of the money that should have paid the debt. That will determine whether the debt is marital or separate.
I don’t like that result. I think the purpose of the debt is obvious. He was to pay the IRS by putting the money in trust for payroll taxes for his business which was formed during marriage. This business was a marital asset and any debts incurred during its tenancy is a marital debt. Period. And how do I come to this stunning conclusion? Because if there was no debt but only revenues and income attributable to this business, the wife would not be questioning whether it was separate or marital. It would be clearly marital and she would want her equitable share of it, and I, for one, would be arguing for her to get her fair share. I mean, let’s just be real. Let’s be fair. As far as who benefited from the fact that the husband did not pay the debt? Come on. The facts and testimony of both parties show that he used the money to pay household expenses. Now, because she tried to help him pay it off an all, I think the debt should be apportioned in a “fair” way and that she should not be made to pay more than say 30% of it. But she ought to pay something because it was a marital debt and she clearly benefited from the fact that he didn’t use the money to pay the business taxes owed to the IRS but instead used the money for household expenses.
The court, with all due respect, got into this sketchy discussion about gambling debts, criminal fines, restitution and home equity lines of credit used to buy gifts for paramour as an example of the type of debts that would be separate and basically lumped all of that with the case at bar, suggesting that the debt from unpaid taxes of a business were somehow equivalent to credit cards used on paramours, gambling debts, etc. I’m sorry but I don’t buy that. I don’t buy it at all. That is mixing apples and oranges in the worse possible way. How in the name of reason can criminal fines and gambling debts and credit cards used on paramours be the same as business debts from a legitimate business? The fact that the husband could have incurred criminal charges for not paying the taxes is hardly the controlling issue here. The controlling issue is that he had a business that was formed during the marriage. That is a marital assets. Period. Then he had some obligations such as taxes there went unpaid. That is also a marital obligation. The money was instead used to pay for marital expenses and the entire family benefited from this failure to pay the IRS. Both husband and wife have to eat this debt. They are both responsible for it.
Conversely, there is no such thing as a “marital crime” in the sense that if one spouse commits a crime and incurs a criminal fine, you can’t jail the other spouse just by virtue of a marriage or hold the other spouse responsible unless it can be shown that the other spouse participated in the crime. On the other hand, if the husband had used a credit card to pay his paramour, he effectively would have DISSIPATED the marital assets to the detriment of his wife and would owe her restitution because clearly only he and his paramour benefited from the expenditure. The same is true for gambling debts. This is a dissipation issue. A dissipation of marital assets issue. You can’t just compare this to the accrual of debts from a legitimate business formed during marriage. That is, frankly, illogical to my way of thinking. I’m sorry. But it is. I can’t believe the court came out with the reasoning it came out with in this case.