The parties were married in 1987 and Husband filed for divorce in 2014. So before we even get into the details of this appeal, consider that this divorce — without children — still is not completely finalized.
Returning to the procedural background, the parties agreed to appoint a special master to hold a three-day evidentiary hearing to resolve all outstanding issues. After the hearing, both parties objected to various rulings and the family court held another two-day trial in July 2018.
After the family court entered its decree, Husband filed a motion “(1) to Correct/ Add Findings of Fact; (2) to Alter or Amend; (3) to Correct Mistakes/Errors; and/or (4) For New Trial.” When it was granted only in part, Husband filed his appeal to contest the denial of his claim for post-service reimbursement; the calculation of the equalization payment Wife owed to Husband; the tax consequences of the decree; and the attorney’s fees awarded to Wife.
On appeal, Husband argued that the family court erred when it refused to hear evidence related to his claim for reimbursement of separate funds he used to pay community expenses during the divorce litigation.
Pursuant to Bobrow v. Bobrow, a spouse can seek reimbursement for community debts or obligations paid with separate funds after service of a petition for divorce or legal separation. Service of the petition is what effectively terminates the “marital community.” This is very important because other cases have held that the community persists even when spouses live separate lives for several years before ultimately filing for divorce or legal separation. So until a petition is served, the marital community (i.e. both spouses) still may be bound by debt incurred by only one spouse.
In this case, the special master applied Bobrow and ordered Wife to reimburse Husband for payment of community obligations after the petition was served. However, this order failed to account for additional payments that would be made after the decision but before the decree was entered.
Husband objected and used his pretrial statement to ask the family court to order additional reimbursement of these expenses. The family court denied Husband’s request in its decree and again when he raised it again by post-decree motion.
The Court of Appeals vacated this part of the decree and instructed the family court to give Husband an opportunity to present evidence of his reimbursement claims for the period of time previously unconsidered.
It is important to note that Bobrow does not establish an automatic right to reimbursement. The family court retains discretion to decline reimbursement so long as these claims are considered in the equitable division of all community property.
Husband next argued that the family court miscalculated the equalization payment it ordered Wife to pay to him. He claimed the court used an incorrect value for Wife’s proceeds from the sale of a townhome and adopted a mathematical mistake that the special master made.
The record indicated that Husband failed to raise his argument regarding the sale proceeds of the townhome in his pretrial statement and again at the evidentiary hearing. Arguments not raised with the trial court cannot be asserted for the first time on appeal.
The Court of Appeals did agree, however, that the family court should have corrected the special master’s mathematical error. It remanded this portion of the decree back to the family court to be adjusted appropriately.
Tax Effecting Assets
Husband also argued reversible error occurred when the family court adopted the special master’s decision not to consider tax effects of an asset Wife used toward the equalization owed to Husband.
Wife used her portion of an individual retirement account (“IRA”) which consisted of $202,000. Husband argued that because those funds would be subject to taxes upon withdrawal that the value should be reduced to reflect the post-tax cash value.
We see this argument all the time from family law attorneys and while it certainly sounds logical, it is not required under Arizona law. Several Arizona cases have held that “courts need not consider the speculative future effects of taxes or inflation” when valuing assets. Only tax consequences arising immediately and definitively from some part of the divorce must be considered.
Additionally, as the Court of Appeals noted, A.R.S. § 25-318(B) explicitly affords family courts discretion to to consider debts and obligations, including taxes, when it divides community property. The family court (and the special master) acted within this discretion to deny Husband’s claim.
Spousal Maintenance Tax Consequences
Husband asserted another tax-related argument when he contested the family court’s characterization of spousal maintenance as a tax neutral event. Prior to 2019, an individual who paid spousal maintenance to a formal spouse was allowed to deduct the maintenance from his or her taxable income and the former spouse who received maintenance was required to add the maintenance to his or her taxable income.
In its November 2018 decree, prior to this change to the tax code, the family court ordered that “[a]ll spousal maintenance paid by Husband to Wife shall not be tax deductible for Husband and shall not be deemed income to Wife for income tax purposes.” Husband argued that the family court abused its discretion when it applied tax rules not yet in effect.
The Court of Appeals rejected this argument and explained that “ultimately it is the Internal Revenue Code and not State court orders that determine one’s eligibility to claim a deduction for Federal income tax purposes.” So even if the family court mischaracterized the tax consequences, federal law controlled.
Husband’s final challenge to the decree is especially interesting. Husband argued that the family court abused its discretion when it declined to reduce the attorney’s fees the special master awarded to Wife.
Pursuant to A.R.S. § 25-324(A), the special master found that Husband had significantly more financial resources than Wife and ordered Husband to pay $50,000 toward Wife’s attorney’s fees.
$50,000 probably sounds like an insane figure, right? But it actually represented less than a quarter of Wife’s total attorney’s fees. The special master found that both parties incurred more than $200,000 in attorney’s fees and this was prior to the two-day evidentiary trial before the superior court, the additional post-decree motion practice, and the appeal.
Husband’s primary argument to support reduction of the fee award was that he lost his job subsequent to the special master’s report. But the Court of Appeals explained that the attorney’s fees award was based on the comparative financial circumstances at the time it was entered and was unaffected by Husband’s prospective financial outlook.