Most married couples do not live their lives under the assumption that they will someday divorce. Even couples who are having difficulty in their marriages tend to believe that their problems will work out and they will remain married. As a result, spouses, when filing joint tax returns, usually take positions that would provide the family the largest amount tax relief. However, when you are divorcing your spouse your primary interests may be to maximize your share of the assets accumulated during the marriage, and minimize any payments you may have to give your soon to be ex-spouse. One way of maximizing your share of the assets is to argue that that the assets acquired during the marriage are separate property and therefore should not be shared with your spouse. However, if during the marriage you took a contrary position in a filed tax return, you may be precluded from making a separate property argument. This is what happened in the New York State case of Foti v. Foti 2014 NY Slip Op 00835.
In Forti, the wife argued that various real estate entities and management companies given to her by her father were her separate property and therefore her husband should not get any interest in the properties. However, the parties filed joint tax returns and in at least one of the tax returns the wife appeared to have “commingled” her interest in the entities with marital property. If you commingle your separate property with marital property, a court may deem part or all of your separate property to be marital property, and give your spouse a share of the property. The trial court agreed with the wife that the properties were her separate property and granted her motion for summary judgment. Summary judgment means that there were no factual disputes as to whether the properties belonged solely to the wife. However, the New York Appellate Division reversed the trial court and ruled that because the wife filed a joint federal tax return in which she reported her interest in the property as tax losses, she may have commingled the entities with marital property. Since it was not clear that the properties remained the wife’s separate property, the Appellate Division ruled that the trial court must hold a hearing to determine whether the entities were in fact commingled and reversed the grant of summary judgment.
The lesson to be learned here is that “a party to ligation may not take a position contrary to a position taken in an income tax return.” Before filing for divorce, it is best practice to give your attorney several years of your tax returns and other financial documents so your attorney can best devise a strategy that will help you to put your case in the best light in the divorce proceeding.