Schwartz v. Schwartz , 275 Ga. 107 ( 2002 )

Hunstein, Justice,

dissenting.

The majority holds that because Stephen was responsible for paying any additional tax liability of the parties, he is automatically entitled to the parties’ joint tax refunds, reading this entitlement into a settlement agreement despite the express admission by the parties that this issue was never contemplated by them. I dissent because there is a complete absence of evidence to support the majority’s holding that under the terms of the agreement Stephen is solely entitled to the joint tax refunds and because the majority imposes upon the agreement an intent and disposition of marital property never intended by the parties.

1. It is undisputed that at the time the parties entered into the agreement, some state and federal taxes had been paid through periodic withholding of income to Stephen during the marriage. During settlement negotiations Stephen announced that the couple had underpaid their 1997 taxes and he anticipated a substantial tax liability when the joint return was filed. The parties admitted and the trial court specifically found that the agreement is silent as to the distribution of tax refunds because no such refund was anticipated. There was no need to provide for the distribution of a refund under these circumstances and thus, no such provision was included in the settlement agreement.

In construing contracts, courts should

ascertain the parties’ intent after considering the whole agreement and interpret each of the provisions so as to harmonize with the others. [Cit.] That is, “[i]n construing contracts, it is important to look to the substantial purpose which must be supposed to have influenced the minds of the parties, rather than at the details of making such purpose effectual.” [Cit.]

Friedman v. Friedman, 259 Ga. 530, 532-533 (384 SE2d 641) (1989). Despite the uncontested fact that no provision was made in the agreement to provide for the distribution of tax refunds, the majority strains both logic and the rules of construction to provide for a contractual contingency not anticipated by the parties. In so doing, the majority concedes, as it must, that nothing in the settlement agreement indicates that the parties intended that Stephen would be responsible for the tax liabilities and then share any overpayment with Leticia and that to construe the agreement as Leticia urges would result in a windfall “not contemplated by the parties.” Majority Op. at 109. It is precisely because of the absence of intent as to the division of overpayments and the fact that the parties failed to contemplate the division of an unanticipated refund that the majority errs.⁹

Nothing in the settlement agreement supports the majority’s finding that Leticia relinquished her interest in Stephen’s 1997 income, which was the subject of the tax refunds in issue. The language on which the majority relies provides:

[Leticia] and [Stephen] shall file joint tax returns for 1997. [Stephen] shall be responsible for all state and federal income taxes for the year of 1997. The Parties shall file separate returns for 1998. The parties agree that none of the income of [Stephen] payable from Anesthesiology Consultants, P.C., for the 1997 and 1998 shall be income to [Leticia]. Post divorce payments made by [Stephen] for the marital residence including principle interest tax, insurance, and home owner association dues shall be considered alimony and shall be deductible by [Stephen] and income to [Leticia].

[Leticia] shall be allowed to deduct the interest on the mortgage as well as property taxes and any other such cost she can deduct subject to IRS regulation.

Other provisions in the agreement thoroughly addressed the distribution of marital property and specifically divided assets comprised in part of Stephen’s 1997 income. The tax provision quoted above is limited in its subject matter to tax issues and grants tax benefits and imposes tax liabilities upon the parties. The attribution of the 1997 income to Stephen solely for tax purposes did not remove this income from the marital estate. Thus, while the tax provision reflects that Stephen was responsible for the payment of taxes, it cannot in context with the settlement agreement as a whole be construed as providing for Leticia’s relinquishment of all her interest in the 1997 income. To read the tax provision in this manner as proposed by the majority would place the tax provision in direct conflict with the distribution provisions in the agreement. This conflict is contrary to the well-established rules of contract construction which the majority recites but fails to apply.

Moreover, like the rest of the settlement agreement, this tax paragraph is completely silent as to the parties’ ownership interests in joint tax refunds. Even had the parties intended to apportion tax refunds, which they admitted they did not, or intended that Leticia convey all of her interest in Stephen’s 1997 income for purposes of the division of marital assets, they would have used more apt and definitive language to distribute such property as they did in those sections of the agreement specifically addressing the distribution of marital property.

The majority has created out of whole cloth a settlement provision never contemplated by the parties. The provision it imposes upon the parties directly conflicts with matters upon which the parties expressly did agree. I would recognize the undisputed fact that the parties made no provision for the distribution of joint tax refunds and rather than rectify that omission as the majority does, I would find that the refunds are unaffected by the divorce decree. See Newborn v. Clay, 263 Ga. 622, 623 (436 SE2d 654) (1993) (“parties to a divorce decree must specifically describe and dispose of property in which both parties have an interest or the decree will not divest either party of their interest in the property”). See Cousins v. Cousins, 253 Ga. 30 (2) (315 SE2d 420) (1984) (stock dividends not distributed in divorce agreement are unaffected by decree).

2. Because the parties’ interests in the tax refunds were unaffected by the divorce decree, I would address the question upon which this Court granted the application for discretionary appeal, namely, which spouse in this divorce action is entitled to the joint tax refunds. The issue of who has an ownership interest in joint tax refunds is one of first impression in Georgia and there is a dearth of foreign authority. As a general proposition in bankruptcy and tax liability cases, courts have allocated joint tax refunds proportionally in accordance with tax withholdings for the taxable year or have aliocated joint tax refunds proportionally based on the income produced. See Gordon v. United States, 757 F2d 1157, 1160 (11th Cir. 1985); In re Lyall, 191 BR 78, 85 (II) (C) (E.D. Va. 1996) and cases cited therein. But see Bass v. Hall, 79 BR 653, 656 (W.D. Va. 1987) (considering parties’ equitable interests in joint refunds and allocating refunds equally between husband and wife without regard to tax withholdings or income produced). In domestic relations cases, however, most courts have rejected the notion that “the rigid application of principles of property or trust law should govern the distribution of an income tax refund upon the dissolution of a marriage and the division of marital assets,” Angelo v. Angelo, 74 A.D.2d 327, 333 (IV) (S. Ct. N.Y. 1980), and instead have adopted a policy of examining each case on its own facts so as “not [to] be fettered in achieving an equitable apportionment of assets on the dissolution of a marriage by the iron clasp of a mechanical formula.” Id. See also Nill v. Nill, 584 NE2d 602, 604-606 (I) (B) (Ind. Ct. App. 1992); In re Aldrich, 250 B.R. 907 (W.D. Tenn. 2000). Under this standard, courts look to the totality of the circumstances under which the spouses maintained the financial arrangements of their household, including, inter alia, who derived the income, the purpose for which a joint return was filed, whether the parties maintained joint financial accounts on which both were entitled to draw on the funds, assigned responsibilities for discharging financial obligations of the family, and the size of the joint refund. See Nill, supra at 605-606; Angelo, supra at 333. Still other courts in divorce actions have held as a matter of law that income received from a joint tax return is marital property regardless of who earned the income or the family’s financial arrangements. See Ormiston v. Ormiston, 523 NE2d 148, 150 (Ill. Ct. App., 1st Dist. 1988); Phillips v. Phillips, 351 SE2d 178, 180 (S.C. Ct. App. 1986); Moseley v. Moseley, 642 SW2d 953, 959 (Mo. Ct. App. 1982).

Apparently following that line of cases holding that joint tax refunds should be allocated proportionally based on income produced, the trial court in this case determined that Stephen was entitled to the joint tax refunds because he was the sole source of taxable income on which the refunds were paid. I think the better rule of law, and the rule most consistent with the holdings of this Court, is one requiring the courts to consider the facts and financial circumstances involved in each case. I agree with the Angelo court that:

[t]he financial arrangements between husband and wife are intensely personal; what suits one household would throw another in disarray. Sometimes the spouses join in discharging the financial responsibilities of the family; sometimes one spouse defers to the other in managing their affairs. Sometimes they agree to keep their individual earnings and property separately; sometimes they agree to merge them. Sometimes their agreement is formal; in most instances it is not. All of these circumstances must be weighed by the court when the marriage is no longer sustainable and the distribution of the family assets is the issue. The filing of a joint income tax return must therefore be viewed in the circumstances of the general financial background of the marriage.

Decided March 11, 2002 Reconsideration denied April 11, 2002. Howard & Whatley, Molly M. Howard, for appellant. James C. Metis III, for appellee.

Angelo, supra at 333 (IV).

This holding is consistent with both the statutory and case law of this State authorizing the court or jury in divorce actions to award a spouse real and personal property held in the name of the other spouse under principles of equitable distribution. See OCGA § 19-5-13; Stokes v. Stokes, 246 Ga. 765 (3) (273 SE2d 169) (1980) and cases cited therein; Hendrix v. Hendrix, 224 Ga. 662 (163 SE2d 917) (1968). The purpose behind the doctrine of equitable distribution is to “assure that property accumulated during the marriage be fairly distributed between the parties.” Campbell v. Campbell, 255 Ga. 461, 462 (339 SE2d 591) (1986). Applying the same principle to this case, I would hold that the apportionment between spouses of joint tax refunds not disposed of in a settlement agreement must be made by reference to the facts of each case and the specific circumstances under which the spouses maintained the financial arrangements of their household. See, e.g., Nill, supra at 605-606. Because the trial court failed to take such factors into consideration when awarding the entirety of the joint tax refunds to Stephen, I would reverse the trial court’s order granting a declaratory judgment in Stephen’s favor and remand to the trial court for proceedings consistent with this opinion.

I am authorized to state that Justice Benham and Justice Hines join in this dissent.

9 In support of its holding the majority notes the numerous ways in which Stephen could have manipulated the parties’ tax payments so as to avoid the existence of an overpayment. See Majority Op. at n. 6. The issue before the Court, however, is not what Stephen could have done to affect the amount of the tax refund but the parties’ intent with regard to the division of such refunds at the time they entered into the settlement agreement.