Tax Debts During Divorce in New Jersey

In a recent New Jersey property division case, the father appealed from a court order denying his motion to compel his former wife to contribute toward debts they’d incurred while married. The couple had been married for 32 years, and they divorced in 2014. Their matrimonial settlement agreement was incorporated into their final divorce judgment. It included allocations of marital debt. There was language about how the couple would handle an IRS tax lien that had attached to their home.

The tax lien arose because from 1999-2004, the couple hadn’t filed federal income tax returns or paid federal income taxes. Eventually, the IRS put a lien on their home. In the settlement agreement, they agreed that they would pay off the debt by selling the home. The home sold in 2015, and at the time, they owed the IRS more than $102,000 in back taxes. From 2011 to the time of the sale, the husband’s wages were garnished by the IRS, and they collected $41,580 that way.

The settlement agreement agreed they would evenly split the proceeds after paying the tax liens, and the liens were there due to the failure to pay income tax. The agreement referenced the wage garnishment and stated the couple would work with their accountant to try to reduce the tax liens. The agreement also agreed that any liens or judgments for anything besides the taxes would be the responsibility of whoever’s name was on the judgment or lien.

The husband’s debts would be his sole responsibility, and he would indemnify the wife for liability for that debt, while the wife’s debt would be her sole responsibility, and she would hold the husband harmless for any liability for that debt. The couple also agreed that all tax liabilities, other than for 1999-2004, were the sole responsibility of the respective parties, and each would hold the other harmless for liabilities assessed against either for state or federal income tax.

While married, the husband and his mother were co-owners of an automobile business. They didn’t pay New Jersey taxes for this business in 1996 and 1997. When the house sold in 2015, the taxes were $130,175.62. During the closing, the couple didn’t appear, but their real estate attorney did appear and signed documents for the couple under a power of attorney. From the proceeds of the sale, there were amounts allocated to pay debts based on the settlement agreement. The couple’s attorney signed something on behalf of the husband that made him completely responsible for taxes owed to the state.

After closing, the wife moved to enforce provisions of their agreement. The husband cross-moved, asking to have the wife contribute toward tax payments he’d made through wage garnishment. He argued that the settlement agreement required the couple to contribute equally to all of the taxes owed, rather than just the balance at the time the house was sold. He also wanted to vacate the settlement agreement because he wasn’t aware of the tax debt owed to the state at the time he’d signed the agreement, and he wouldn’t have agreed to the settlement agreement unless it stated the wife was responsible for these.

The court denied both requests. It reasoned that since the settlement agreement didn’t explicitly say the wife was responsible for IRS debt garnished from the husband’s wages, she couldn’t be compelled to contribute to those taxes. It also found the husband was aware of the debt to the State.

The husband claimed the court made a mistake in denying his requests for relief. The appellate court disagreed with the husband about most of his arguments. It found the record was clear the husband knew about the state taxes at the time of signing the agreement. It also found that the agreement clearly stated that all tax debts other than what was incurred from ’99-’04 were the sole responsibility of the respective parties. The court did disagree with the lower court’s decision to reject the husband’s request to compel the wife to contribute toward payments he’d made through wage garnishment.

If you are considering a divorce in Bergen County, and you are concerned about property distribution, it is important to retain an experienced and aggressive property division attorney to seek an appropriate outcome. Contact the lawyers of Leopold Law at (201) 345-5907 or through our online form. We have attorneys available who can handle all aspects of a divorce.