Texas Divorce Attorney Blog
Although not always an issue in a Texas divorce, tax matters can become a significant issue, especially in high net worth divorces or divorces involving the division of a business. A Texas appeals court recently decided a second appeal in a case involving a mediated settlement agreement (“MSA”) with potentially conflicting provisions related to the parties’ taxes.
According to the appeals court’s opinion, the parties’ MSA was divided into two parts. Part I was what the parties referred to as the “boilerplate” section and Part II included specific provisions addressing the children and the property division.
Federal tax liabilities were addressed in two provisions, one in each part. The provision in Part I, identified by the appeals court as the “indemnity term,” provided that the parties would equally share any income tax refund or federal tax liabilities from their taxes through 2019, with each holding the other harmless from half of the tax liabilities. The relevant section under Part II, identified by the appeals court as the “IRS regulations term,” stated, “Income Taxes due for 2018 and 2019: According to IRS rules and regulations.”
Previous Appeal
According to the appeals court, the First Corrected Decree entered by the trial court failed to include the indemnity term. The husband argued on the first appeal that the trial court erred. The appeals court pointed out that the indemnity term applied to all years during the marriage through 2019 but the IRS regulations term only applied to 2018 and 2019. The appeals court held that the indemnity term must be included in the decree, but where there was a conflict between the provisions, the IRS regulations term would control for 2018 and 2019 because it was the more specific provision. The appeals court remanded the case to the trial court only to render a decree incorporating the indemnity terms consistent with the appeal opinion.
Each party proposed their own revised decree to the trial court on remand. The wife’s version did not include the indemnity term for tax years 2018 and 2019. The husband proposed a version that applied the indemnity term to all of the years of the marriage through 2019 but provided that the IRS regulations term would control with regard to 2018 and 2019 to the extent of any conflict.
Following a hearing, the trial court accepted the wife’s version and signed a Second Corrected Decree.
Second Appeal
The husband appealed.
The appeals court concluded the Second Corrected Decree was not consistent with its opinion in the first appeal. The appeals court noted that, in the first appeal, it had recognized that both provisions applied to tax years 2018 and 2019, but had not determined whether there was an actual conflict between the two. By not applying the indemnity term to the 2018 and 2019 tax years at all, the trial court’s decree was inconsistent with the appeals court’s opinion.
The wife argued the provisions would not need to be harmonized unless there was a conflict and the appeals court implicitly determined there was a conflict because it agreed the provisions could be harmonized. The appeals court noted that harmonization resolves apparent conflicts, so recognizing the provisions could be harmonized did not imply there was an actual conflict.
The appeals court modified the Second Corrected Decree to apply the indemnity provision to tax years 2018 and 2019 and state that IRS rules and regulations would control in the event there was a conflict with the indemnity provision.
Obtain Legal Advice
In divorces involving complex estates, allocation of tax liabilities can have substantial financial consequences. Although the parties in this case reached an agreement, they are still involved in litigation. The appeals court did not address the issue of whether there existed an actual conflict in the two tax provisions in the MSA, suggesting that was a matter for the trial court, potentially in an enforcement proceeding. If you are considering divorce, the Texas high net worth divorce attorneys at McClure Law Group have the knowledge to advise you regarding potential tax issues and your options. Call us at 214.692.8200 to schedule a consultation.