At least in the PA divorce courts, the tax-effecting question is clear

Balicki v. Balicki, 2010 PA. Super. 134 (July 30, 2010)

In 2005, the Pennsylvania legislature amended the state’s Divorce Code, adding two specific considerations in the family courts’ equitable division of property:

1. The Federal, State, and local tax ramifications associated with each asset to be divided, distributed, or assigned, which ramifications need not be immediate or certain;
2. The expense of sale, transfer or liquidation associated with a particular asset, which expense need not be immediate or certain.

A test case. In 2005, the Balickis filed for divorce. At trial before a special master, the husband argued that any valuation of his part ownership in an insurance agency should consider the tax consequences and expenses of selling the business, as required by the newly amended Divorce Code. The wife argued that these considerations applied only if the husband was likely to sell his interest in the business. In this case, the insurance company had been in the husband’s family for two generations, and the couple’s adult children might someday inherit the business, just as their father did.

The special master agreed that, under these circumstances, it was inappropriate to reduce the value of the insurance agency by the “hypothetical” expenses of a sale, and valued the husband’s interest at $610,000. The husband filed an exception with the trial court, claiming the master’s orders violated “the clear directive” from the state legislature to consider the tax ramifications and expenses of a sale, “which need not be immediate and certain.” The trial court agreed:

It is crystal clear that the Legislature intended to stop the practice of the lower courts analyzing the prospect of [a] sale of an asset, and Master Miller was mistaken to do so. We believe the Legislature intends the assets simply be given the value they would have at distribution after deducting every expense necessary to achieve liquidation.

Although the statute requires the family courts only to consider the tax consequences of liquidation (along with several additional factors) without making the deduction mandatory, in this case, the trial court found that tax-effecting was “fair and just,” and valued the insurance agency at roughly $406,000.

The wife appealed the decision. After reviewing the statute and its legislative history, however, the appellate court found that the 2005 amendments to the Divorce Code were intended to eliminate uncertainty regarding whether a sale of an asset (and its tax ramifications) were “immediate and certain.” The court also found that, given the husband’s obligations under the divorce decree to make a short-term cash settlement to the wife, he might very well have to sell his interest in the insurance agency. Accordingly, tax-effecting the business was appropriate in this case, and the court confirmed the $406,000 value.