Almost all divorce property settlements are affected by current or deferred income tax liabilities. The court can consider tax liability issues in two ways:

"Courts have generally found that consideration of tax consequences is either required or at least appropriate where the consequences are immediate and specific and/or arise directly from the court's decree, but find they are not an appropriate consideration where speculation as to a party's future dealings with property awarded to him or her would be required." ( A.L.R. 5^th 568, page 16) The question then becomes, what tax liabilities would qualify under this "immediate and specific and/or arise directly from the court's decree" standard?

Current tax liabilities arising from transactions that have already happened clearly fall into this category. Additionally, any near term tax liability from any anticipated disposition of marital property should fall into this category. This would include any tax liability generated by a court ordered property settlement. Any other type of deferred tax liability would not likely qualify as a direct reduction of marital property.

Under the Colorado property statute CRS 14-10-113, the court divides marital property in such proportions as the court deems just after considering all relevant factors. One such relevant factor in many high net worth cases is the deferred taxes on marital property.

Clearly, not considering deferred taxes in a distribution of marital property could result in an inequitable distribution of martial property. How then, can parties to a divorce assist the court in reaching an equitable distribution that takes deferred taxes on marital property into account?

In theory, if the court chooses to award any tax-burdened asset directly to either spouse, it should consider the overall tax burden that is being allocated to each party and adjust the equitable distribution accordingly. To determine the overall burden allocated to each spouse, the court would need a schedule of the tax consequences of each marital property asset to be distributed. Once the total tax consequences of a particular property division are calculated, the court can then award additional marital property to the party suffering the larger deferred tax burden. Since the actual process of equalizing the tax burdens and benefits to each party on an asset by asset distribution can be a complicated and cumbersome process, practitioners are well advised to make clear and well reasoned presentations to the court.