Justia.com Opinion Summary: The district court dissolved the marriage of Jennifer Dalbey, Appellant, and Matthew Bock. At issue on appeal was whether a trial court in a martial dissolution action has the discretion to order the parties to file a joint income tax return. The court of appeals affirmed the trial court's order requiring the parties to file a joint tax return, concluding that trial courts do have such discretion. The Supreme Court reversed, holding that because a trial court can equitably adjust its division of the marital estate to account for a spouse's unreasonable refusal to file a joint return, resort to a coercive remedy that carries potential liability is unnecessary. Remanded.
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Nebraska Advance Sheets
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283 nebraska reports
Matthew John Bock, appellee, v.
Jennifer Lynn Dalbey, appellant.
___ N.W.2d ___
Filed June 15, 2012. No. S-10-973.
1. Judgments: Appeal and Error. An appellate court independently reviews questions of law decided by a lower court.
2. Divorce: Property Division: Taxes. Ordinarily, a trial court in Nebraska should
not consider the speculative tax consequences of its distribution orders unless it
has ordered the immediate liquidation or sale of an asset or a party must sell an
asset to satisfy a monetary judgment.
3. Injunction: Equity. A mandatory injunction is an equitable remedy that commands the subject of the order to perform an affirmative act to undo a wrongful
act or injury. It is considered an extreme or harsh remedy that should be exercised
sparingly and cautiously.
4. Injunction: Damages. An injunction, in general, is an extraordinary remedy that
a court should ordinarily not grant except in a clear case where there is actual and
substantial injury; a court should not grant an injunction unless the right is clear,
the damage is irreparable, and the remedy at law is inadequate to prevent a failure
of justice.
5. Statutes: Equity: Jurisdiction. When a statute provides an adequate remedy at
law, equity will not entertain jurisdiction, and a party must exhaust the statutory
remedy before it may resort to equity.
6. Divorce: Property Division: Equity. Neb. Rev. Stat. § 42-365 (Reissue 2008)
authorizes a trial court to equitably distribute the marital estate according to what
is fair and reasonable under the circumstances.
7. Divorce: Property Division: Equity: Taxes. Under Neb. Rev. Stat. § 42-365
(Reissue 2008), if a party seeking an equitable adjustment presents the court
with the tax disadvantages of filing separate returns, a trial court may consider
a party’s unreasonable refusal to file a joint return. Evidence of a tax disadvantage would normally include the parties’ calculated joint and separate returns
for comparison.
8. Divorce: Taxes. A trial court does not have discretion to compel parties seeking
marital dissolution to file a joint income tax return.
Petition for further review from the Court of Appeals, Irwin,
Cassel, and Pirtle, Judges, on appeal thereto from the District
Court for Douglas County, John D. Hartigan, Jr., Judge.
Judgment of Court of Appeals reversed, and cause remanded
with directions.
Amy Sherman, of Sherman & Gilner, P.C., L.L.O., for
appellant.
Brent M. Kuhn, of Harris Kuhn Law Firm, L.L.P., for
appellee.
Nebraska Advance Sheets
bock v. dalbey
Cite as 283 Neb. 994
995
Heavican, C.J., Wright, Connolly, Stephan, McCormack,
and Miller-Lerman, JJ.
Connolly, J.
SUMMARY
The district court dissolved the marriage of Jennifer Lynn
Dalbey, the appellant, and Matthew John Bock. We granted
Dalbey’s petition for further review on one question: Does
a trial court in a marital dissolution action have the discretion to order the parties to file a joint income tax return? We
conclude it does not. The Nebraska Court of Appeals affirmed
the trial court’s order requiring the parties to file a joint tax
return. It cited cases showing that courts have conflicting
views and agreed with those courts holding that trial courts do
have this discretion. Because a trial court can equitably adjust
its division of the marital estate to account for a spouse’s
unreasonable refusal to file a joint return, we reverse, and
remand the cause to the Court of Appeals with directions for
further disposition.
BACKGROUND
The parties married in 2006. The district court entered its
dissolution decree in August 2010. Many of the facts of this
case deal with the district court’s division of the marital assets.
But the issue here is the court’s order requiring that the parties file a joint tax return for 2008 and 2009. The parties filed
a joint return for the 2007 tax year. But they had not filed any
tax return for 2008 or 2009. The district court, without citing
authority, ordered the parties to file a joint return. It allocated
the unspecified refunds or assessments to be shared by the parties in a ratio that equaled each party’s contribution of adjusted
gross income to their total adjusted gross income. The record
does not show what their individual income contributions were
for the 2008 and 2009 tax years, but it does show that Bock
earned substantially more income than Dalbey.
In affirming, the Court of Appeals framed the issue as
whether the Supremacy Clause of the U.S. Constitution barred
the district court from ordering the parties to file a joint
Bock v. Dalbey, 19 Neb. App. 210, 809 N.W.2d 785 (2011).
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return. The federal tax code allows married individuals to
elect whether to file joint or separate returns. But the Court
of Appeals determined that this election did not conflict with
a state court’s order to file jointly. It stated that domestic
relations law is generally a state law matter outside of federal jurisdiction.
ASSIGNMENT OF ERROR
In her petition for further review, Dalbey assigns that the
Court of Appeals erred in affirming the district court’s order
that the parties file a joint income tax return.
STANDARD OF REVIEW
[1] We independently review questions of law decided by a
lower court.
ANALYSIS
[2] Ordinarily, a trial court in Nebraska should not consider
the speculative tax consequences of its distribution orders
unless it has ordered the immediate liquidation or sale of an
asset or a party must sell an asset to satisfy a monetary judgment. But the questions here are (1) whether a district court
can consider the tax consequences of one party’s refusal to file
a joint return in dividing the marital estate and (2) whether it
has discretion to order the parties to file a joint return to preserve assets for the marital estate or to equalize its division of
the estate.
Married individuals can elect whether to file a joint or separate return. For joint returns, the federal government taxes the
income of a married couple in the aggregate. Filing jointly
generally, but not always, produces substantial tax savings.
Spitz v. T.O. Haas Tire Co., ante p. 811, ___ N.W.2d ___ (2012).
See Schuman v. Schuman, 265 Neb. 459, 658 N.W.2d 30 (2003). But see
Buche v. Buche, 228 Neb. 624, 423 N.W.2d 488 (1988). See, also, 2 Brett
R. Turner, Equitable Distribution of Property § 8:28 (3d ed. 2005).
I.R.C. § 6013 (2006).
See I.R.C. § 6013(d)(3).
See Leon Gabinet, Tax Aspects of Marital Dissolution § 3:3 (rev. 2d ed.
2005).
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bock v. dalbey
Cite as 283 Neb. 994
997
But a “[h]usband and wife filing a joint return are jointly and
severally liable for all tax for the taxable year (not merely the
amount shown on the return), including interest, additions for
negligence, and fraud penalties if applicable.” The right of
election under the federal tax code and the possible exposure to
liability have prompted several courts to hold that a trial court
cannot order a party to file a joint return.
Few courts, however, have decided this question. This may
partially be because marital tax experts advise divorcing couples to privately negotiate an agreement to file a joint return.
Generally, if the parties have agreed to file a joint return, the
trial court can incorporate or rely on the agreement in equitably
dividing the marital estate and enforce the agreement if necessary. But other appellate courts have disagreed on whether a
trial court, outside of a party’s agreement, can compel a party
to a divorce proceeding to file a joint return.
Of the courts that have held that a trial court cannot compel a party to file a joint return, Leftwich v. Leftwich10 is the
most cited case. There, unless the wife agreed to file joint
tax returns for 2 years of the marriage, the husband would
owe about $40,000 in additional taxes. So the trial court conditioned the wife’s receipt of her share of marital property
upon her filing the joint returns, with the understanding that
the husband would pay any additional taxes. The District of
Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income,
Estates and Gifts § 111.3A.1 at 1 (2012) (emphasis omitted). See I.R.C.
§ 6013(d)(3).
See, e.g., Gabinet, supra note 6.
See, Cox v. Cox, 17 Ark. App. 93, 704 S.W.2d 171 (1986); Kane v. Parry,
24 Conn. App. 307, 588 A.2d 227 (1991); Johansen v. Johansen, 365
N.W.2d 859 (S.D. 1985); Ahmad v. Ahmad, No. 23740, 2010 WL 4703072
(Ohio App. Nov. 19, 2010) (unpublished opinion).
10
Leftwich v. Leftwich, 442 A.2d 139 (D.C. 1982). Accord, Kane, supra note
9; Sweeney v. Sweeney, 583 So. 2d 398 (Fla. App. 1991); In re Marriage
of Butler, 346 N.W.2d 45 (Iowa App. 1984), overruled on other grounds,
In re Marriage of Wertz, 492 N.W.2d 711 (Iowa App. 1992); Teich v. Teich,
240 A.D.2d 258, 658 N.Y.S.2d 599 (1997); Matlock v. Matlock, 750 P.2d
1145 (Okla. App. 1988); Lewis and Lewis, 81 Or. App. 22, 723 P.2d 1079
(1986).
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Columbia appellate court, concerned with the wife’s liability
exposure, reversed:
The propriety of considering tax matters in divorce
proceedings, however, does not serve as a license for the
trial court to compel a party to execute a joint return. The
trial court is not at liberty to alter basic precepts of federal
or of state tax law. . . .
. . . A married individual possesses complete discretion
to file a separate return, or, with the concurrence of his or
her spouse, a joint return. . . .
To sanction the trial court’s effectively ordering a
spouse to cooperate in filing a joint return would nullify the right of election conferred upon married taxpayers by the Internal Revenue Code. Such a right is not
inconsequential; its exercise affects potential criminal
and/or civil liabilities of taxpayers. . . . Married individ
uals filing a joint return expose themselves to joint and
several liability for any fraudulent or erroneous aspect of
the return.11
The wife’s exposure to liability was the critical factor in the
court’s holding:
Given the wife’s substantial interest in the choice of a
filing status, with its concomitant consequences, we find
that it was error for the trial court to impose a coercive
construction of [I.R.C.] § 6013 [the federal statute permitting a husband and wife to elect to file jointly or separately] on appellant.12
Furthermore, the Leftwich court reasoned that even if the
trial court could override the wife’s election to file a separate
return, under equity principles, it should not have resorted to a
coercive remedy when a less intrusive one existed: “[T]he trial
court well could have remedied any perceived tax disadvantage to the husband by altering the disposition of the marital
property.”13 Other courts that hold a trial court cannot compel
11
Leftwich, supra note 10, 442 A.2d at 144-45.
Id. at 145.
13
Id. at 146.
12
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bock v. dalbey
Cite as 283 Neb. 994
999
the filing of a joint return have also held the trial court may
n
onetheless consider the tax disadvantages of filing separate
returns in its equitable division of the marital estate.14
But other appellate courts have held that a trial court can
compel a party to file a joint tax return.15 Of these cases,
Bursztyn v. Bursztyn16 is a recent, prominent decision on
which the Nebraska Court of Appeals relied. The Bursztyn
court conceded that good arguments exist on both sides of
the issue. It noted, however, that in New Jersey, a trial court
is statutorily required to consider the tax consequences of its
alimony and equitable distribution rulings. The Bursztyn court
considered an abridgment of an individual’s choice whether
to file joint or separate tax returns to be a minor intrusion
of the parties’ individual rights. Finally, the court concluded
that because a trial court has discretion to allocate federal tax
exemptions for dependent children, it could, when appropriate, compel the parties to file joint tax returns to preserve the
marital estate.
Yet the Bursztyn court was nonetheless persuaded by the
Leftwich court’s reasoning that altering the equitable distribution of marital property was a less intrusive option to remedy
a tax disadvantage that a spouse incurs because of the other
spouse’s election to file a separate return. So the Bursztyn
court tempered its decision that a trial court has discretion
to order joint tax returns as follows: “In general, we believe
trial courts should avoid compelling parties to execute joint
tax returns because of the potential liability to which the parties would be exposed, and because there generally exists a
means by which to compensate the parties for the adverse
14
See, Sweeney, supra note 10; In re Marriage of Butler, supra note 10;
Teich, supra note 10; Matlock, supra note 10. Compare Hardebeck v.
Hardebeck, 917 N.E.2d 694 (Ind. App. 2009).
15
See, In re Marriage of Zummo, 167 Ill. App. 3d 566, 521 N.E.2d 621, 118
Ill. Dec. 339 (1988); Theroux v. Boehmler, 410 N.W.2d 354 (Minn. App.
1987); Bursztyn v. Bursztyn, 379 N.J. Super. 385, 879 A.2d 129 (2005);
Fraase v. Fraase, 315 N.W.2d 271 (N.D. 1982); Ahmad, supra note 9. See,
also, In re Marriage of LaFaye, 89 P.3d 455 (Colo. App. 2003).
16
Bursztyn, supra note 15.
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tax consequences of filing separately.”17 In short, the Bursztyn
court required a trial court to consider the equitable adjustment remedy before resorting to a coercive order to file a
joint return.
But in other appellate decisions—including the Nebraska
Court of Appeals’ decision in this appeal—courts holding that
trial courts have discretion to compel the parties to file joint tax
returns have not required a coercive order to be the remedy of
last resort. That is, they have not considered whether adjusting
the equitable distribution of marital property is a less intrusive
way to remedy a spouse’s unprincipled refusal to file a joint
tax return. But we believe that it is the preferable remedy for
four reasons.
First, the U.S. Tax Court is not bound by orders compelling
the parties to sign a joint return. It will look to the husband and
wife’s intent, and if one of them signed only because a state
court ordered him or her to do so, the return may or may not
be treated as a joint return.18 This means that a trial court cannot know with certainty whether its equitable division of the
marital estate based on consideration of a joint tax return will
be given effect by federal authorities or courts.
[3-5] Second, an order compelling the parties to file joint
tax returns is a mandatory injunction. A mandatory injunction is an equitable remedy that commands the subject of the
order to perform an affirmative act to undo a wrongful act
or injury.19 It is considered an extreme or harsh remedy that
should be exercised sparingly and cautiously.20 Further, an
injunction, in general, is an extraordinary remedy that a court
should ordinarily not grant except in a clear case where there
is actual and substantial injury. And a court should not grant
an injunction unless the right is clear, the damage is irreparable, and the remedy at law is inadequate to prevent a failure
17
Id. at 398, 879 A.2d at 137.
Compare Price v. Commissioner, 86 T.C.M. (CCH) 203 (2003), with
Anderson v. Commissioner, 47 T.C.M. (CCH) 1123 (1984).
19
See, Barthel v. Liermann, 2 Neb. App. 347, 509 N.W.2d 660 (1993); 42
Am. Jur. 2d Injunctions § 6 (2010).
20
Barthel, supra note 19.
18
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Cite as 283 Neb. 994
1001
of justice.21 Finally, when a statute provides an adequate
remedy at law, equity will not entertain jurisdiction, and a
party must exhaust the statutory remedy before it may resort
to equity.22
[6] Here, the statutory remedy is found in Neb. Rev. Stat.
§ 42-365 (Reissue 2008). This statute authorizes a trial court to
equitably distribute the marital estate according to what is fair
and reasonable under the circumstances.23 Because § 42-365
is broad in its scope, we agree with the decisions of courts
that hold a trial court may adjust its equitable division of the
marital estate to account for the tax consequences of filing
separate returns.
[7] Therefore, under § 42-365, we hold that if a party
seeking an equitable adjustment presents the court with the
tax disadvantages of filing separate returns, a trial court may
consider a party’s unreasonable refusal to file a joint return.
Evidence of a tax disadvantage would normally include the
parties’ calculated joint and separate returns for comparison.24 But because we conclude that § 42-365 permits a court
to adjust its division of the marital estate to fit the equities
of the case, we agree with the Leftwich court that equity
principles weigh against permitting a trial court to resort
to the coercive remedy of compelling a party to file a joint
tax return.
Third, a resisting spouse’s exposure to liability under the
federal tax code is too difficult to predict if compelled to file
a joint return. We agree with the Court of Appeals that trial
courts in marital dissolution proceedings can order the parties
to take actions with tax consequences, such as allocating the
dependency exemptions.25 But allocating dependency exemptions is not analogous to compelling a spouse to file a joint
21
See Hogelin v. City of Columbus, 274 Neb. 453, 741 N.W.2d 617 (2007).
Teadtke v. Havranek, 279 Neb. 284, 777 N.W.2d 810 (2010).
23
See, Claborn v. Claborn, 267 Neb. 201, 673 N.W.2d 533 (2004); Shuck v.
Shuck, 18 Neb. App. 867, 806 N.W.2d 580 (2011).
24
See, Gabinet, supra note 6; 2 Turner, supra note 3, § 8:30.
25
See Hall v. Hall, 238 Neb. 686, 472 N.W.2d 217 (1991), citing Babka v.
Babka, 234 Neb. 674, 452 N.W.2d 286 (1990).
22
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tax return because of the potential liability. And we doubt that
a trial court could be certain that the spouse resisting a joint
return would not be exposed to joint and several liability for
the tax consequences of the return.
In its decision, the Court of Appeals noted that the tax code
provides relief from joint and several liability for an “innocent
spouse.”26 Obtaining relief under the innocent spouse statute,
however, is far from certain. The regulations are complicated,27
and predicting liability would frequently require considerable
tax expertise.
A divorcing spouse compelled to sign a joint return faces
potential liability on two fronts. First of all, I.R.C. § 6015(b)
and (c) can provide relief from an understatement of tax or
a divorced spouse’s portion of an assessed deficiency, but
these provisions do not provide relief from an underpayment
of reported tax. Because subsections (b) and (c) do not apply
to underpayments of tax, a claimant can seek equitable relief
from an underpayment of tax only under § 6015(f).28 Among
the multiple factors that federal tax regulators will consider are
whether the claimant had reason to know that the tax would
not be paid and whether the claimant significantly benefited
from the unpaid liability.29 Summed up, for a divorcing spouse
with little or no taxable income for the tax year, signing a joint
tax return may pose considerable liability risk with no appreciable benefit.
Next, to seek relief from understatements of tax or assessed
deficiencies under I.R.C. § 6015(b) and (c), an innocent
spouse must not have had knowledge of the other spouse’s
“item” on the joint tax return that resulted in the understatement or deficiency assessment.30 “A spouse knowing of the
facts giving rise to a deficiency has actual knowledge, even
if he or she does not understand the tax consequences of the
26
27
28
29
30
See I.R.C. § 6015(b) and (c) (2006).
See Bittker & Lokken, supra note 7, §§ 111.3A.2 and 111.3A.3.
See Washington v. Commissioner, 120 T.C. 137 (2003).
See id.
See I.R.C. § 6015(b)(1)(B) and (c)(3)(C).
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facts or the error in the return’s treatment of the item.”31 The
knowledge component applies to both omissions of income
and erroneous deductions, although the test can differ depending on whether omitted income or an erroneous deduction is
at issue.32 In general, however, federal courts review these
issues for whether a reasonably prudent person, under the
circumstances, would have known that the return contained a
substantial understatement of tax or that further investigation
was required.33 If so, and the claimant did not take reasonable
steps to investigate, relief will be denied.34
These rules show that a coerced filing of a joint tax return
can be fraught with unanticipated liability. Because the risks
frequently outweigh the benefits, in private negotiations a
spouse will often not agree to a joint return without the other
spouse’s agreement to share in the tax savings and to promise
indemnity.35 We believe that these decisions are best left to
the parties to negotiate after considering the risks and benefits of a joint return. If a spouse unreasonably refuses to file
a joint return, the other spouse can take the matter up with
the court.
Fourth, the rules related to filing deadlines under the federal tax code create practical hurdles to allowing a trial court
to compel the parties to file joint returns. Under § 6013(b) of
the tax code, a husband and wife can only elect to file a joint
return for up to 3 years after they filed separate returns. But the
opposite is not true. If the husband and wife filed a joint return,
they cannot revoke that decision after the filing time limits for
the taxable year have expired.36
So if a trial court orders a party to file a joint return, he
or she will usually have to comply quickly or risk being held
31
See Bittker & Lokken, supra note 7, § 111.3A.3 at 4 (citing regulations
and case examples).
32
See, e.g., Cheshire v. C.I.R., 282 F.3d 326 (5th Cir. 2002); Resser v. C.I.R.,
74 F.3d 1528, 1536 n.9 (7th Cir. 1996).
33
See id.
34
See id.
35
See Gabinet, supra note 6.
36
See I.R.C. § 6013(f)(4); 26 C.F.R. § 1.6013-1(a)(1) (2011).
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in contempt.37 Yet even if the party appeals the order, the
party cannot revoke the joint return. The party’s only avenue
for relief from federal tax liability is the tax code’s innocent spouse statute. As discussed, that option is a precarious
road at best. Thus, the tax code’s time limitations also weigh
against permitting trial courts to order the parties to file a
joint return.
[8] For all of these reasons, we hold that a trial court does
not have discretion to compel parties seeking marital dissolution to file a joint income tax return.
CONCLUSION
We conclude that the Court of Appeals erred in holding
that a district court has discretion to compel the parties to a
marital dissolution proceeding to file a joint income tax return.
Because a trial court can equitably adjust its division of the
marital estate to account for a spouse’s unreasonable refusal
to file a joint return, resort to a coercive remedy that carries
potential liability is unnecessary. We therefore reverse that
portion of the Court of Appeals’ decision affirming the district
court’s order requiring the parties to file a joint tax return. We
remand the cause to the Court of Appeals with directions to
remand the cause to the district court with directions to vacate
that portion of its order that we have reversed.
R eversed and remanded with directions.
37
See Ahmad, supra note 9.
Carlos H., appellant, v.
Lindsay M., appellee.
___ N.W.2d ___
Filed June 15, 2012. No. S-11-548.
1. Adoption: Appeal and Error. Appeals in adoption proceedings are reviewed by
an appellate court for error appearing on the record.
2. Judgments: Appeal and Error. When reviewing a judgment for errors appearing on the record, the inquiry is whether the decision conforms to the law,
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