Recent revisions to A.R.S. 25-318(B) will become effective on January 1, 2009. A.R.S. 25-318 addresses the division of property and assets in an action for dissolution of marriage. The revised text of A.R.S. 25-318(B) now states "[i]n dividing property, the court may consider all debts and obligations that are related to the property, including accrued or accruing taxes that would become due on the receipt, sale or other disposition of the property. The court may also consider the exempt status of particular property pursuant to title 33, chapter 8."
Previously, Arizona law limited the ability of the court to address tax consequences when allocating property and debts. The seminal case in the area is the Supreme Court of Arizona's decision in In re the Marriage of Goldstein, 583 P.2d 1343 (1978). The court held that the trial court properly declined to consider the husband's tax bracket in allocating certain property to the husband, because there were no immediate tax consequences associated with the distribution of the property, and considering possible future tax variables and consequences was speculative. This position was affirmed in Johnson v. Johnson, 131 Ariz. 38(1981), where the court refused to consider the value of an unmatured pension plan in light of tax rate or bracket. However, in Koelsch v. Koelsch, 148 Ariz. 176(1986), the court allowed consideration of tax consequences on a pension plan because the appellant was close to retirement, and the tax consequences could therefore be determined with reasonable certainty.
Therefore, under previous law, the court could not consider the tax consequences associated with an award of property, unless the tax consequences were imminent. This approach had a negative effect of rendering some property distributions unequal. For example, in an action for dissolution where two homes of equal monetary value are the only property owned by the parties, the court would consider a division whereby one spouse keeps the marital residence while the other retains the second home to be equitable. However, the spouse awarded the second home will incur capital gains taxes when that home is sold, while the spouse awarded the marital residence will likely not owe any taxes upon the sale of that residence. The second home is therefore worth less than the marital residence because of the associated tax liability, but a court would have been unable to consider the capital gains issue unless sale of the second home was imminent.
The new wording of A.R.S. 25-318(B) appears to open the door and allow the court to address future tax consequences when equitably allocating assets and debts. Addressing the future tax consequences is not mandatory to the court - it is instead an option that a judge can exercise when appropriate. It is unclear how the change in the statute will effect the cases cited above. It is also likely that we will see litigation clarifying this area in the future.
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