Rose v. Rose, 2016 MT 7 (Jan. 12, 2016) (Baker, J.) (7-0, aff’d)
Issue: Whether the district court erred in allocating delinquent tax liability equally between the parties after taxing authorities determined one party was an “innocent spouse.”
Short Answer: No.
Facts: Sherri and Michael married in 1994 and have three children. They lived in Billings for most of their marriage, separating in late 2012. Sherri petitioned for dissolution in March 2013, and the district court held a bench trial in April 2014.
At trial, Michael proposed that the parties’ cumulative state and federal tax liability of about $90,000 be considered marital debt, and that the parties’ Billings and Red Lodge properties be sold to pay the delinquent taxes. He testified that the income that should have been used to pay the taxes was put into improving those properties, and on “vacations and what have you.”
Sherri testified that both the IRS and Montana Department of Revenue had concluded Sherri was an “innocent spouse,” and was not liable for any of the delinquent taxes. She proposed that the tax liability be considered wholly Michael’s, and that she be awarded the Billings property.
Procedural Posture & Holding: The district court found that the tax liability was a marital debt and that the parties’ properties should be sold to pay the proceeds. Sherri appeals, and the Supreme Court affirms.
Reasoning: Sherri argues that to obtain innocent spouse status, she had to prove that she did not know and had no reason to know that the taxes had not been paid, and that it would be inequitable to hold her liable for the debt. Michael contends the agency determinations have no preclusive effect on the district court, and that the court properly found that the parties put the money into joint living expenses and the Billings property.
Neither claim nor issue preclusion apply here, as they apply only to administrative decisions that have been upheld on judicial review. Moreover, the issue in the innocent spouse determination is not identical to the issue of dividing a marital estate. Section 40-4-202(1), MCA, requires the district court equitably apportion the marital estate “regardless of how or when it was acquired.” Funk, 2012 MT 14, ¶ 13. It follows that the court must also apportion marital debt equitably, and may do regardless of which party is responsible for it. As long as the delinquent tax debt was incurred during the marriage, an innocent spouse determination by the IRS or DOR does not preclude a district court from equitably apportioning the debt to an “innocent spouse.”
The district court was presented with very little evidence regarding Sherri’s status as an “innocent spouse.” Based on this limited evidence, the court did not err in finding that the tax liabilities were joint marital obligations.