On January 26, 2021, a divided Indiana Supreme Court of Appeals decided Maxwell v. Maxwell in which the majority potentially reshapes decades of Indiana statutory and case law regarding the tax impacts of divorce and raises new issues for matrimonial practitioners.
Where the Panels of the Court Parted Ways
Maxwell involved a remand from the Indiana Court of Appeals instructing the trial court to either divide the parties’ marital estate equally or explain the reason to deviate from that presumptive division. On remand, the trial court accepted and adopted the wife’s marital estate balance sheet and found that the wife receiving 60% of the marital estate was a just and reasonable equitable distribution. The husband raised several issues on appeal, including the trial court’s failure to consider the tax consequences associated with his corporate and military pensions. As to that issue, the husband contended that the trial court’s lack of consideration of the tax consequences associated with his pensions resulted in the wife receiving a vastly larger amount than her intended 60% share. The Indiana Court of Appeals noted that Ind. Code § 31-15-7-7 provides that trial courts are to consider the tax consequences of the property disposition in the division of marital estates with respect to the present and future circumstances of each party. The trial court’s property disposition allocated to the husband both his corporate and military pensions, with a substantial equalization payment from the husband to the wife. The Indiana Court of Appeals remanded, agreeing that it was appropriate for the trial court to consider the tax consequences of its disposition and redetermine the amount of the equalization payment. The appellate court cited Eads v. Eads, 114 N.E.3d 868 (Ind. Ct. App. 2018), in support of its reversal in part and remand.
Judge Nancy Vaidik concurred in part and dissented in part, finding that the majority incorrectly concluded that the trial court abused its discretion in not considering the tax consequences associated with the husband’s corporate and military pensions. Since there were no immediate tax consequences from the trial court’s disposition of the husband’s pensions and the amount of future taxes were too speculative, the dissent would affirm the trial court on that issue. Judge Vaidik noted that the Indiana Court of Appeals previously addressed this issue in considering the predecessor statute to Ind. Code § 31-15-7-7, holding that the thrust of that statute was that only tax consequences necessarily arising from the plan of division of marital property should be taken into account. See Harlan v. Harlan, 544 N.E.2d 553 (Ind. Ct. App. 1989), aff’d 560 N.E.2d 1246 (Ind. 1990). The dissent cited cases opining that a tax consequence must occur as a direct result of a court-ordered disposition of a marital estate in order to be considered in the division of marital estates. While acknowledging that there are good reasons to consider the tax consequences of a pension where a spouse is required to make an immediate offset payment to the other spouse, Judge Vaidik recited the countervailing argument that determining the amount of future taxes would require conjecture. The dissent concluded that the Indiana Supreme Court’s summary affirmance of Harlan resolved this issue.
The Implications for Family Law Practitioners
The majority opinion in Maxwell is a marked departure from the conventional interpretation of Ind. Code § 31-15-7-7 and Harlan, as noted in the dissent. Given the disparity of views and competing citations in the majority and dissenting opinions, it may be time for the Indiana Supreme Court to revisit this issue. For family law practitioners, the decision is a clarion call to reconsider tax issues in divorce.
© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume XI, Number 36