Grace v. Grace

Pamela GRACE v. Theodore GRACE

95-831                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
               Opinion delivered October 21, 1996


1.   Divorce -- valuation and distribution of marital property
     after divorce -- when potential taxes should be considered in
     valuing marital assets. -- In order to insure a "fair and just
     determination and settlement of property rights,"
     predictability is favored over mere surmise in the valuation
     and distribution of marital property after divorce; potential
     tax liability may be considered in valuing marital assets only
     where a taxable event has occurred as a result of the divorce
     or equitable distribution of property or is certain to occur
     within a time frame such that the tax liability can be
     reasonably predicted; a trial court in a divorce action should
     consider potential taxes in valuing marital assets only if (1)
     the recognition of a tax liability is required by the
     dissolution or will occur within a short time; (2) the court
     need not speculate about a party's future dealing with the
     asset; (3) the court need not speculate about possible future
     tax consequences; and (4) the tax liability can be reasonably
     predicted.

2.   Divorce -- when federal tax consequences should be taken into
     account -- no federal income tax consequences would result
     from the court's division of property. -- A chancellor may
     consider "the federal income tax consequences of the court's
     division of property" when she finds that it would be
     inequitable to divide the property half and half; Ark. Code
     Ann.  9-12-315(a)(1)(A)(ix) (Repl. 1993); here, the court was
     unaware of any federal income tax consequence that would
     result from "the court's division of property"; there may be
     in the plan of division of marital property certain tax
     consequences that should be taken into account; however, the
     clear implication is that only tax consequences necessarily
     arising from the plan of distribution are to be taken into
     account, not speculative possibilities.

3.   Divorce -- sale of book of business prospective and not
     required by the decree -- consideration of tax consequences of
     sale error. -- It was error for the trial court to have
     considered the tax consequences of a prospective sale of the
     "book of business" because the decree did not require such a
     sale, and there was no evidence that a sale was imminent.

4.   Divorce -- chancellor had no authority to determine validity
     of an obligation to a third party who was not a party to the
     divorce -- decisions about consideration of marital debts in
     assigning marital property will not be disturbed unless
     clearly erroneous. -- A chancellor has no authority to
     determine the validity of an obligation to a third party who
     is not a party to the divorce; however, a chancellor is to
     take into consideration the estate, liabilities, and needs of
     each party; the supreme court, upon entertaining questions
     about marital debts and whether they should be "considered" in
     assigning marital property as questions of fact, declines to
     reverse decisions about them unless they are clearly
     erroneous.  

5.   Divorce -- chancellor's conclusions as to debt's
     enforceability disregarded -- factual conclusions not found to
     be in error. -- While disregarding the Chancellor's
     conclusions about whether the debt was "enforceable" or
     "owed," the court had no reason to say her factual conclusions
     about the transfer of the money were in error, or that she
     erred in considering the $5,000 as a "liability" of the
     parties.


     Appeal from Pulaski Chancery Court; Ellen Brantley,
Chancellor; affirmed in part; reversed in part.
     Kaplan, Brewer, & Maxey, P.A., by:  Philip E. Kaplan and
Regina Haralson, for appellant.
     Dover & Dixon, P.A., by:  Philip E. Dixon and W. Michael Reif,
for appellee.
     David Newbern, Justice. 
     This is a divorce case.  The only issues on appeal concern
division of the marital property.  The property included major
assets, such as the marital home, which was awarded to Pamela
Grace, and an insurance "book of business," which was awarded to
Theodore Grace.  As we understand it, the "book of business" of an
insurance agent consists of his right to residual payments from
insurance policies sold and from prospective renewals.  The
Chancellor also adjusted the division of property between the
parties by assigning to Mr. Grace a debt the Chancellor termed
"unenforceable" and yet "owed" by the parties to his parents in the
amount of $5000.  We hold the Chancellor erred in subtracting from
the value of the "book of business" the amount of federal tax that
would have to be paid in the event the asset were sold.  We hold it
was not error for the Chancellor to consider the $5000 debt, assign
it to Mr. Grace, and accordingly reduce the award to Mrs. Grace by
half the amount of the debt.

                        1. The tax credit
     A chancellor may consider "the federal income tax consequences
of the court's division of property" when she finds it would be
inequitable to divide the property half and half.  Ark. Code Ann.
 9-12-315(a)(1)(A)(ix) (Repl. 1993).  In this case, there is no
demonstrable federal income tax consequence resulting from the
division of the property.  The Chancellor did not order the "book
of business" to be sold.  Mr. Grace mentioned, at one point in the
proceedings, that he might have to sell that asset in order to
satisfy his obligation to Mrs. Grace, but the Chancellor said in
her summation, "I don't think there's any evidence that he's going
to sell."
     Mr. Grace argues the witnesses who testified about the value
of the "book of business" said a buyer would "expense" the
purchase.  We presume that means a purchaser would be someone in a
position to deduct from business profits the expense of purchasing
the "book of business" for tax purposes.  That ostensibly would
give the asset a higher value to the buyer, thus creating a higher
market value or selling price and, therefore, a greater tax
consequence to the seller.  The argument obviously assumes certain
facts about the hypothetical buyer being in a position to "expense"
the purchase.  The contention is that the evidence of the value of
the asset was thus based on an assumption that Mr. Grace would have
to pay tax on the sale.  Again, no sale has been ordered, and none
seems to be in prospect.
     In support of the Chancellor's decision on this point, Mr.
Grace cites Hogan v. Hogan, 796 S.W.2d 400 (Mo.App. 1990), in which
it was held that it was proper to consider the tax consequence of
a sale of a building in the division of assets because "The concept
of fair market value assumes the sale of the property to an
interested buyer."  The opinion does not show whether or not a sale
was to occur.
     We have not previously addressed the question whether tax
consequences of the sale of an asset should be considered when the
asset is not required to be sold by the divorce decree and when
there is no indication that a sale will occur.  Cases addressing
this issue are collected in Annot., Tax Consequences of
Distribution, 9 ALR 5th 568 (1993).  
     The majority view is exemplified by decisions such as Kaiser
v. Kaiser, 474 N.W.2d 63 (N.D. 1991), and Crooker v. Crooker, 432 A.2d 1293 (Me. 1981).  In the Kaiser case, for example, one of the
marital assets was an oil-well service company.  The Trial Court
awarded it to the husband and, in evaluating it for purposes of
achieving an equal division of all marital assets, subtracted an
amount to be paid in federal taxes upon liquidation.  The North
Dakota Supreme Court held it was an error of law and a manifest
abuse of discretion for the Trial Court to have reduced the value
of the asset by tax consequences which were speculative.  In doing
so, the Court quoted the following from Hovis v. Hovis, 518 Pa.
137, 541 A.2d 1378 (1988):

          ...In order to insure a "fair and just determination and
     settlement of property rights" we favor predictability over
     mere surmise in the valuation and distribution of marital
     property after divorce.  Accordingly, we hold that potential
     tax liability may be considered in valuing marital assets only
     where a taxable event has occurred as a result of the divorce
     or equitable distribution of property or is certain to occur
     within a time frame such that the tax liability can be
     reasonably predicted.

The North Dakota Court continued as follows:

     We agree with the foregoing decisions holding that a trial 
     court in a divorce action should consider potential taxes in
     valuing marital assets only if (1) the recognition of a tax
     liability is required by the dissolution or will occur within
     a short time; (2) the court need not speculate about a party's
     future dealing with the asset; (3) the court need not
     speculate about possible future tax consequences; and (4) the
     tax liability can be reasonably predicted.

     In this case Mr. Grace is asking not only that we speculate
that he will sell the asset in question but that when and if he
does so his tax liability will be the same as it would be today. 
Although the argument is based on an accountant's testimony about
a prospective buyer of the "book of business," he also asks us to
speculate that a prospective buyer would "expense" the purchase and
that the tax consequences to such a buyer would be the same as
would occur today.  As the North Dakota and Pennsylvania Supreme
Courts, we prefer not to engage in such speculation.    
     With respect to  9-12-315, we need only point out that we
have not been made aware of any federal income tax consequence
which will result from "the court's division of property."  In
considering a similar statute, an Indiana appellate court stated:

          The thrust of the Statute is to recognize that there may
     be in the plan of division of marital property certain tax
     consequences which should be taken into account.  The clear
     ... [implication] is that only tax consequences necessarily
     arising from the plan of distribution are to be taken into
     account, not speculative possibilities.  The Statute limits
     the trial court to consider only the tax consequences of "of
     the property disposition." [Emphases in the original.]

Harlan v. Harlan, 544 N.E.2d 553 (Ind. App. 1989).  We hold it was
error to consider the tax consequences of a prospective sale of the
"book of business" because the decree did not require such a sale
and there was no evidence that a sale was imminent.

                          2. The "debt"
     Theodore and Pamela Grace received $5,000 from his parents. 
The money was intended to finance landscaping of their new home. 
While there is some doubt as to the exact time the money was
received, it was no later than 1989.  Mr. Grace's mother testified
it was intended that the money be repaid.  It had not been repaid
at the time of the divorce in 1995.  Pamela Grace testified she
could not remember any discussion about repayment, apparently
contesting any obligation to pay the money back.
     The Chancellor remarked that the debt was "unenforceable" but
that it was "owed" by the parties.  She apparently considered it
unenforceable due to Ark. Code Ann.  16-56-105(1) (1987), which
places a three-year limitation on "any contract, obligation, or
liability not under seal and not in writing ...."  As we pointed
out in Hackett v. Hackett, 278 Ark. 82, 643 S.W.2d 560 (1982), a
chancellor has no authority to determine the validity of an
obligation to a third party who is not a party to the divorce.  Our
statute on division of marital property provides, however, that a
chancellor is to "take into consideration ... [the] [e]state,
liabilities, and needs of each party ...." Ark. Code Ann.  9-15-
315(a)(1)(A)(vii) (Repl. 1993).    We have entertained questions
about marital debts and whether they should be "considered" in
assigning marital property as questions of fact, and we decline to
reverse decisions about them unless they are clearly erroneous. 
Ark. R. Civ. P. 52(a); Pinkston v. Pinkston, 278 Ark. 233, 644 S.W.2d 930 (1983); McEndree v. McEndree, 255 Ark. 243, 499 S.W.2d 596 (1973).  See also Warren v. Warren, 33 Ark. App. 63, 800 S.W.2d 730 (1990).  
     While we disregard the Chancellor's conclusions about whether
the debt in this case was "enforceable" or "owed," we have no
reason to say her factual conclusions about the transfer of the
money are in error, or that she erred in considering the $5,000 as
a "liability" of the parties.
     We could perhaps modify the decree and give Pamela Grace an
additional share of the marital property in the amount of $42,370,
or half of the $84,740 tax liability for which Theodore Grace was
given credit in the original decree.  We note, however, that the
decree provides for a final adjustment figure owed to Mrs. Grace in
the amount of $22,100 to be paid by Mr. Grace at the rate of
$500.00 per month with interest at the rate of 8.25% per annum.  In
view of the fact the entry of a decree consistent with this opinion
may make it advisable to consider other payment arrangements, we
choose to remand the case to the Chancellor for further orders. 
     Affirmed in part, reversed in part, and remanded.