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Division of an Income Tax Refund in Divorce

by merlin on May 24th, 2012
  • Sumo

The issue of division of an income tax refund comes up often in divorce cases, it seems.  However, the proper way to divide it is not widely understood by judges and practitioners in Georgia.  Often, nobody appeals the issue and the ordinary understanding that most folks seem to have prevails.

This understanding – a 50/50 split – is dead wrong.

After a ruling expressly addressing the issue (phrased by the judge, and reflected by opposing counsel in his proposed written Order,as “representing the interest of [the adverse party]) decided that there should be a fifty-fifty split, a serious look at the prevailing law on the issue followed.  It seemed contrary to common sense that money taken from a party by the federal government for taxes, then refunded by the federal government in proportion to the earnings of that party removed by them, should be given to the other party just because of some abstract notion of equal sharing, without first discerning who earned the money that it was taken from originally.

The newest case on this issue is United States of America v. Anthony, 1999 WL 424884 (D. Ariz. 1999)(Westlaw citation only).  The case stated that “the source of an overpayment of income tax determines the character of the refund and the filing of a joint return does not create an interest by one spouse in the other spouse’s income”.  Id. at 2.  This rule was announced by the Court earlier in the case of Ragan v. CIR, which is discussed below.  It represents the general rule on income tax refund proceeds, and how they should be distributed.

Ragan v. Commissioner of Internal Revenue, 135 F.3d 329 (5th Cir. 1998)(decided by the federal Court of Appeals following a settlement before the Tax Court in a bankruptcy and divorce matter) was a Texas case, so it was decided under a community property regime (meaning that everything during the marriage is fifty-fifty automatically, and that “common sense” idea of how property is split following divorce prevails).  Revenue Ruling 80-7  says that “[i]n a community property state, each spouse is considered the recipient of one-half the wages upon which taxes are withheld and thus is entitled to a credit for one-half of the taxes that are withheld.”  Therefore, under the law that applied in the Texas bankruptcy and divorce in question, one-half the refund was deemed to come from the income of one of the spouses.  Of course, Revenue Ruling 74-611 states that filing jointly does not give one spouse an interest in the income of the other.  However, “a joint income tax return does not create new property interests for the husband or wife in each other’s income tax overpayment.”  Id.  In other words, even under a community property scheme, the income of one party doesn’t automatically become the income of the other for income tax purposes, and a refund of the overpayment of tax isn’t automatically converted to provide the other party with a windfall.

What the Court decided is something that seems to be unknown among practitioners and judges in Georgia, but this issue arises often enough that it must be properly applied.

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