Scenario: Jack and Jill are separated and about to be
divorced within the state of New York. During their marriage, Jack has refused
to pay his federal income taxes. In fact, when Jill asked him whether he is
going to file a tax return, Jack insists that he would rather go to jail. The
IRS has judgments against Jack ordering him to pay his taxes. There are no
judgments or liens against Jill. Can Jill be held responsible for Jack's tax
debt to the IRS?
In answering this question, it is important to note that there are two types of liability at play here: first, liability to the Internal Revenue Service ("IRS"); and second, marital debt liability under the laws of New York state. Jill does not have liability to the IRS; however, Jill may have responsibility for a portion of the tax debt as a form of marital debt.
In a divorce, New York courts will effect equitable distribution of property. In doing so, the courts are authorized to allow distribution of marital debts between the parties. Nielsen v. Nielsen, 682 N.Y.S.2d 502 (N.Y. App. Div. 4th Dep't 1998). The party that proposes the distribution of a debt has the burden of proving the existence and the amount of the debt. Fabricius v. Fabricius, 605 N.Y.S.2d 415 (N.Y. App. Div. 3d Dep't 1993). In determining whether the debt is marital or separate, the court will look at “the nature of the debt itself, the manner in which and for whose benefit the funds were expended and the source of repayment.” Jonas v. Jonas, 660 N.Y.S.2d 487, 487 (N.Y. App. Div. 3d App 1997). In other words, the proponent of sharing the debt also “has the burden of proof as to its obtainment and the ultimate purpose and use of the fund borrowed.” Oliver A. v. Christina A., 806 N.Y.S.2d 446 (N.Y. Sup. Ct. 2005) (unreported decision, available on WestLaw). Where the obligation is incurred “by one party for his or her exclusive benefit or in pursuit of his or her separate interests,” the obligation is not marital debt. Jonas, 660 N.Y.S.2d at 488.
The general understanding in New York is that tax liability incurred during the marriage is marital debt. See, Carlin v. Carlin, 629 N.Y.S.2d 814, 816 (“any future liability arising from the parties' failure to file tax returns for several years is joint and several.”). Since the non-indebted spouse shared equally in the benefits derived from the indebted spouse’s failure to pay his or her income taxes, the non-indebted spouse must share in the financial liability arising out of indebted spouse’s failure to pay his or her taxes. Conway v. Conway, 815 N.Y.S.2d 233 (N.Y. App. Div. 2d Dep’t 2006) (spouse was found to be liable for one-half of the parties' tax obligation arising out of their failure to pay proper income taxes during their marriage).
It has been repeatedly held that marital debt liability for the non-indebted spouse does not include penalties or interests accrued by the indebted spouse as a result of failing to pay his or her taxes. In Capasso v. Capasso, while a wife was held equally responsible for the income tax debt resulting from her husband’s criminal tax evasion, she was not responsible for the $500,000 fine imposed on the husband after his criminal conviction for income tax violations, nor should she, as an innocent spouse, be liable for any “penalties imposed by IRS on account of the acts” of her husband. Capasso v. Capasso, 517 N.Y.S.2d 952, 968. (N.Y. App. Div. 1st Dep’t 1987). A similar result was found in Cooper v. Cooper, where wife was responsible for one-half of federal tax liability incurred when husband filed amended income tax returns, but she was not responsible for any interest and penalties as a result of the filing of the amended tax returns, because the federal tax liability was incurred during the marriage and husband was responsible for delay in reporting income declared on those amended returns. Cooper v. Cooper, 923 N.Y.S.2d 596 (N.Y. App. Div. 2d Dep’t 2011).
However, when there is “economic fault” on behalf of the obligated spouse, at least one court has determined that the income tax debt is that of the indebted spouse. Frey v. Frey, 892 N.Y.S.2d 159 (N.Y. App. Div. 2d Dep’t 2009). Although Frey v. Frey seems to be an outlier case, when the divorcing spouses of Frey, “for the most part, maintained separate finances, and determined from the start of the marriage to file separate tax returns,” the trial court acted within its discretion to direct the defendant, “who failed to file tax returns throughout the duration of the marriage,” to bear the responsibility for paying income taxes, interest, and penalties. Id. at 160-01. The plaintiff has no role whatsoever in the operation of the defendant's business, and plaintiff did not learn that defendant failed to file tax returns until after plaintiff filed for divorce. Id. at 161.
In the scenario before us, even if Jill filed her own taxes throughout the marriage, she still benefited from her spouse’s failure to pay his income taxes during the marriage; therefore, Jill could be responsible to her spouse, upon equitable distribution of property, for a portion of Jack’s tax debt. However, this is only for tax accrued during the years of the marriage and does not include penalties or interest on the debt. Jill may want to argue that Jack is at economic fault and thus she should have to pay his tax debt, however, this would be a difficult argument to make.
In answering this question, it is important to note that there are two types of liability at play here: first, liability to the Internal Revenue Service ("IRS"); and second, marital debt liability under the laws of New York state. Jill does not have liability to the IRS; however, Jill may have responsibility for a portion of the tax debt as a form of marital debt.
In a divorce, New York courts will effect equitable distribution of property. In doing so, the courts are authorized to allow distribution of marital debts between the parties. Nielsen v. Nielsen, 682 N.Y.S.2d 502 (N.Y. App. Div. 4th Dep't 1998). The party that proposes the distribution of a debt has the burden of proving the existence and the amount of the debt. Fabricius v. Fabricius, 605 N.Y.S.2d 415 (N.Y. App. Div. 3d Dep't 1993). In determining whether the debt is marital or separate, the court will look at “the nature of the debt itself, the manner in which and for whose benefit the funds were expended and the source of repayment.” Jonas v. Jonas, 660 N.Y.S.2d 487, 487 (N.Y. App. Div. 3d App 1997). In other words, the proponent of sharing the debt also “has the burden of proof as to its obtainment and the ultimate purpose and use of the fund borrowed.” Oliver A. v. Christina A., 806 N.Y.S.2d 446 (N.Y. Sup. Ct. 2005) (unreported decision, available on WestLaw). Where the obligation is incurred “by one party for his or her exclusive benefit or in pursuit of his or her separate interests,” the obligation is not marital debt. Jonas, 660 N.Y.S.2d at 488.
The general understanding in New York is that tax liability incurred during the marriage is marital debt. See, Carlin v. Carlin, 629 N.Y.S.2d 814, 816 (“any future liability arising from the parties' failure to file tax returns for several years is joint and several.”). Since the non-indebted spouse shared equally in the benefits derived from the indebted spouse’s failure to pay his or her income taxes, the non-indebted spouse must share in the financial liability arising out of indebted spouse’s failure to pay his or her taxes. Conway v. Conway, 815 N.Y.S.2d 233 (N.Y. App. Div. 2d Dep’t 2006) (spouse was found to be liable for one-half of the parties' tax obligation arising out of their failure to pay proper income taxes during their marriage).
It has been repeatedly held that marital debt liability for the non-indebted spouse does not include penalties or interests accrued by the indebted spouse as a result of failing to pay his or her taxes. In Capasso v. Capasso, while a wife was held equally responsible for the income tax debt resulting from her husband’s criminal tax evasion, she was not responsible for the $500,000 fine imposed on the husband after his criminal conviction for income tax violations, nor should she, as an innocent spouse, be liable for any “penalties imposed by IRS on account of the acts” of her husband. Capasso v. Capasso, 517 N.Y.S.2d 952, 968. (N.Y. App. Div. 1st Dep’t 1987). A similar result was found in Cooper v. Cooper, where wife was responsible for one-half of federal tax liability incurred when husband filed amended income tax returns, but she was not responsible for any interest and penalties as a result of the filing of the amended tax returns, because the federal tax liability was incurred during the marriage and husband was responsible for delay in reporting income declared on those amended returns. Cooper v. Cooper, 923 N.Y.S.2d 596 (N.Y. App. Div. 2d Dep’t 2011).
However, when there is “economic fault” on behalf of the obligated spouse, at least one court has determined that the income tax debt is that of the indebted spouse. Frey v. Frey, 892 N.Y.S.2d 159 (N.Y. App. Div. 2d Dep’t 2009). Although Frey v. Frey seems to be an outlier case, when the divorcing spouses of Frey, “for the most part, maintained separate finances, and determined from the start of the marriage to file separate tax returns,” the trial court acted within its discretion to direct the defendant, “who failed to file tax returns throughout the duration of the marriage,” to bear the responsibility for paying income taxes, interest, and penalties. Id. at 160-01. The plaintiff has no role whatsoever in the operation of the defendant's business, and plaintiff did not learn that defendant failed to file tax returns until after plaintiff filed for divorce. Id. at 161.
In the scenario before us, even if Jill filed her own taxes throughout the marriage, she still benefited from her spouse’s failure to pay his income taxes during the marriage; therefore, Jill could be responsible to her spouse, upon equitable distribution of property, for a portion of Jack’s tax debt. However, this is only for tax accrued during the years of the marriage and does not include penalties or interest on the debt. Jill may want to argue that Jack is at economic fault and thus she should have to pay his tax debt, however, this would be a difficult argument to make.
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