How Income Taxes Affect Property Settlements

• Jurisdiction: Colorado,United States
• Citation: Vol. 29 No. 1 Pg. 55
• Pages: 55
• Publication year: 2000

29 Colo.Law. 55 Colorado Lawyer 2000.

2000, January, Pg. 55. How Income Taxes Affect Property Settlements

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55

Vol. 29, No. 1, Pg. 55

The Colorado Lawyer
January 2000
Vol. 29, No. 1 [Page 55]

Specialty Law Columns
Family Law Newsletter
How Income Taxes Affect Property Settlements
by David Melton

Almost all divorce property settlements are affected by income tax liabilities. This article discusses how courts deal with income tax liabilities and what types of information practitioners should present to the court about these tax liabilities

Courts can consider tax liability issues in two ways: (1) tax liabilities that directly reduce marital property; and (2) tax liabilities that should be considered as a factor in the equitable division of marital property. The former is a part of evaluating the marital estate to determine the proper amount of marital property to be divided, and the latter is one factor among many that the court considers in the equitable division of marital property

Direct Reductions of Marital Property

As stated by one commentator, to be a direct reduction of marital property

[c]ourts 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.1

In Colorado, whether a court takes tax consequences into account in valuing assets rests in the court’s sound discretion.2 However, where the tax consequences are "speculative and based on hypothetical situations" (that is, where there is no evidence as to when or whether a party will sell an asset, or where the amount of the liability on sale is uncertain), it is within the court’s discretion to not consider tax consequences.3

Current tax liabilities arising from transactions that have already occurred clearly fall into the category of directly reducing marital property. Additionally, any near-term tax liability from anticipated dispositions of marital property should fall into this category. This would include tax liabilities 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.

Tax Factors Affecting Equitable Division

Under the Colorado property division 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 cases is the deferred taxes on marital property:

The purpose of considering tax consequences is to strive for a fair and equitable distribution of marital assets to...