October 14, 2005
Case Law Development: Divorcing Couples Bound by Characterizations of Property for Tax Purposes even if Sham Transactions
If families characterize transactions as gifts to one spouse for gift tax purposes, may the court characterize the nature or intended recipient of that transaction differently for purposes of determining the marital estate? In this case, Husband’s parents, in order to avoid federal gift tax liability, twice wrote $10,000 checks to their son and separate $10,000 checks to their daughter in law in order to help with remodeling the couple’s home. When Husband and Wife divorced, Husband claims that the $20,000 given to Wife was actually intended as a gift solely to Husband and so should not be included in the marital estate. The trial court agreed, but the Georgia Supreme Court held that “Although it is permissible to legitimately arrange one's affairs so as to minimize or avoid taxes, it is impermissible to engage in sham transactions designed to camouflage the actual situation. Equity will not relieve the parties from such sham agreements." (internal quotations and footnotes omitted)
Wife also argued that the trial court erred by failing to consider the value of Husband’s in-kind economic benefits as income for purposes of calculating child support. Wife argued that the value of Husband’s employer’s contributions to health insurance and pension benefits, for example, should have been included in the income calculation. The supreme court disagreed, noting that Georgia statutes allow but do not require consideration of fringe benefits in calculating the gross income for purposes of setting child support. Since the benefits in this case were not considered a part of Monson's gross income for income tax purposes, and were not for daily personal living expenses, such as automobile or housing expenses, the court held that the trial court need not have included these benefits in the income calculation. The court also noted that an amendment to the child support statute that would be taking effect in January 2006 specifically provided that fringe benefits "shall be counted as income if they significantly reduce personal living expenses. "
Hayes v. Hayes, 2005 Ga. LEXIS 659 (October 11, 2005)
Opinion on the web at http://www.gasupreme.us/pdf/s05f0738.pdf (last visited October 12, 2005 bgf)
As a side note, this case came to the supreme court as part of its pilot project to grant all non-frivolous discretionary appeals in domestic relations cases.