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Tax Consequences of Liquidation of Retirement Accounts
© 2004 National Legal Research Group, Inc.
MARYLAND: Solomon v. Solomon, ___ Md. ___, 857 A.2d 1199 (2004).
Tax liabilities can be considered as a division factor only where they are not speculative. The trial court did not err by holding that the husband could pay the monetary award without liquidating his retirement accounts, so that he would not actually incur tax liability arising from that liquidation. The husband did not dissipate marital property by forfeiting his interest in a corporation in exchange for being released from a debt. The trade turned out to be unwise, but an unwise business decision is not equivalent to dissipation.
With regard to the judgment granting a divorce to the parties, the husband, a partner in a law firm, appealed several matters relating to the property division made by the trial court and originally affirmed by the intermediate court of appeals. The wife also appealed a portion of the property distribution order.
The husband, who had an income of over $1 million was ordered to make a $550,000 monetary payment to the wife. The parties, who enjoyed a luxurious lifestyle, had lived beyond their means and incurred more than $2 million in secured and unsecured debt. Their marital assets were valued at a minimum of $1.34 million, $445,731 of which was in the form of the husband's retirement accounts. The husband had also held "put" rights as a minority shareholder in a corporate entity, which had an estimated value at between $55 million and $100 million, giving the husband an interest worth between $735,000 to $1.3 million. In other litigation involving the same corporation, it was valued at over $82 million, which gave the husband's interest therein a value of $1.08 million. Ultimately, however, the trial court did not resolve the valuation issue because the husband had conveyed his minority interest as payment of a defaulted debt obligation.
The husband first argued that the lower court had erred in calculating the value of the marital property because it failed to consider the certain tax consequences he would face. He contended that, as he would have to cash out or prematurely liquidate his retirement accounts in order to pay the marital award, the court had erred in not considering the tax liability to which he would be exposed. He asserted that the court below was obliged to consider the tax liabilities as an "other factor" under Md. Code Ann., 8-205(b)(11) because the tax consequences were immediate and specific. The Maryland Supreme Court, in resolving this issue, first noted that it had never before addressed the consideration of tax liabilities as an "other factor." Reviewing prior decisions of Maryland's intermediate appellate court, the court adopted the view expressed therein, see especially Rosenberg v. Rosenberg, 64 Md. App. 487, 497 A.2d 485 (1987), that tax liabilities may be considered as an "other factor" for purposes of distributing a marital property award only when they are immediate and specific or not speculative. Looking generally to the circumstances of the case before it, the court declared that claimed tax liabilities associated with an uncompelled, premature liquidation of a retirement account to satisfy an undifferentiated lump-sum marital award are more apt to be regarded as speculative and not immediate or specific unless additional evidence in the record indicates otherwise. The court then proceeded to consider and reject the assertions of the husband as to why his tax liabilities were immediate and specific. It found that his tax liabilities could only have been immediate and specific if he had no option other than to withdraw funds from his retirement accounts in order to pay the marital award. Nothing was shown on the record that would have required him to do so. The trial court had not ordered the husband to pay the marital award from any specific source, let alone his retirement accounts. Moreover, the court noted that both the trial and intermediate appellate courts were persuaded from the evidence that the husband's financial profile indicated that he had several other funding sources available from which he could pay the marital award. First, he had a yearly seven-figure income which substantially exceeded the monetary award of $550,000. Second, he had access to several lending sources from which he had borrowed significant sums of money in the past.
The court also rejected the husband's contention that his tax liabilities should have been addressed in the original valuation of the marital property. Under the reasoning of Rosenberg, value for purposes of divorce means "fair market value" or the amount at which property would change hands between a willing buyer and a willing seller. Thus, tax liabilities should not be taken into account in valuing property for a marital award, although such liabilities may be considered as an "other factor" under Md. Code Ann., 8-205(b)(11) in determining the marital property award.
The wife appealed on several bases as well. First, she contended that the trial court and intermediate court had erred in not ruling that the husband had committed dissipation of the marital assets when he conveyed his interest in the corporation in which he held "put" rights in satisfaction of a secured debt. The corporation, and thus the husband's interest therein, was worth more than the amount of his debt. Nevertheless, the Maryland Supreme Court found no dissipation. It recognized that property disposed of before trial cannot be considered marital property unless it has been intentionally dissipated by the owning spouse. Here, the wife presented evidence as to the husband's dealings with regard to his interest in the corporation. While that evidence may have well raised suspicions, it was not such irrefutable evidence of dissipation that the trial court was bound to accept it as proof of fraudulent or collusive conduct. Given the husband's financial position at the time of the pertinent transaction and the uncertainty of the value of the corporation, it was not entirely unreasonable for him to forfeit his entire interest in the corporation in order to free himself from a substantial debt. The fact that his interest turned out to be worth substantially more than the amount of the debt was unfortunate, but it is not necessarily fraudulent to make a bad business decision.
The wife's second argument related to the issue of the classification of the husband's country club membership as marital property subject to distribution. For a discussion of that issue, wherein the Maryland Supreme Court, as a matter of first impression, found that a nonequity membership which could not be sold or exchanged was not marital property, see Brett R. Turner, Country Club Memberships as Divisible Property, 21 Equitable Distribution Journal 109 (Oct. 2004).
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