Is a trust fund tax liability from husband’s business a marital debt in Virginia subject to apportionment in equitable distribution?
In the case of Gilliam v. McGrady, the Court of Appeals of Virginia reversed a trial court decision that a trust fund tax liability was a marital debt and sent the case back to the divorce court for further findings.
The parties were married for fifteen years before separating. During the marriage, husband started a painting company. Husband ran the company alone and was solely responsible for signing company checks. The husband refused to discuss his business and its financial condition with his wife. The wife’s parents helped support the couple’s lifestyle, which included private schools for their children and membership in a private country club. Each party blamed the other for the couple’s overspending. Instead of transferring funds to a joint personal account, the husband paid family bills from the company account. While he operated the business, the husband failed to pay payroll taxes due the federal government.
Under the Internal Revenue Code, 26 U.S.C. 6672 an employer holds withholding taxes, federal income taxes and social security, as special funds in trust for the United States. . The officers of the company who are responsible for withholding and paying over these trust fund taxes and who willfully fail to do so become personally liable for the trust fund taxes along with the company.
When the wife discovered that husband was not paying payroll taxes, she hired an accountant to organize the husband’s business records and prepare its tax returns. The husband terminated the accountant’s services after several months. The wife began filing a separate tax return the following year.
The divorce court found that the payroll tax debt was a marital debt because the parties overspent, failed to discuss their budget, were equally at fault for not budgeting, knew the taxes were not being paid, and paid other bills instead of the taxes. The divorce court judge found that funds which would have been used to pay the payroll taxes were instead used to pay the living expenses and other marital debt.
On appeal, the Virginia Court of Appeals first recognized the trial court’s authority for the apportionment of debt in equitable distribution in Section 20-107.3(A) of the Code of Virginia. The court next recognized a logical extension of the presumption that property acquired by either spouse during the marriage and before the last separation is marital property to marital debt, so debt acquired by either party during the marriage should be presumed to be marital debt. In classifying debt as separate or marital, the divorce court judge must consider the purpose of the expenditure, with particular attention to who benefited from the debt. The Court of Appeals found error in the trial court’s approach in this case because the judge did not discuss the purpose of the original debt. The divorce court judge should have considered who benefited from the original debt rather than the failure to pay the debt, noting that debt from any criminal activity such as gambling, criminal fines, or restitution could otherwise be found to be marital debt. The Court of Appeals noted that the trial court’s ruling created an anomalous situation in which the husband had bettered his position by the crime of failing to pay his trust fund tax liability. The trial court had correctly ruled that wife had the burden of proving that the trust fund taxes were not a marital debt, despite the cumbersome nature of husband’s records. The case was remanded, or sent back, to the Virginia Circuit Court judge for further proceedings on the purpose of the trust fund tax debt and who benefitted from it.
You should consult with your Virginia divorce lawyer concerning the apportionment of debts incurred during your marriage.