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Spouse May Be Required to Reimburse Community Estate in Texas Divorce

TaxWhen one spouse controls the finances, he or she has the opportunity to use community assets to the benefit of separate property.  The other spouse may challenge the disposition of those funds during a Texas divorce.  The spouse in control of the finances has a fiduciary duty to the other spouse during the course of the marriage.

A Texas appeals court recently considered whether a husband was required to reimburse the community estate for certain expenditures.  The trial court awarded the wife the majority of the community estate and ordered the husband to reimburse it for certain expenditures.  The husband appealed, arguing the evidence did not support the disproportionate division and some of the amounts he was ordered to reimburse.

The husband had entered the marriage a wealthy man with several businesses.  The wife alleged he allowed his separate companies to keep funds he should have received.  Since his businesses were S corps, he was personally responsible for paying taxes on the funds, even if they were not distributed.  The wife sought reimbursement for the undistributed funds and for the income taxes paid from the community estate.  Each party presented expert testimony.  The wife’s expert calculated that the estate had paid $1,000,742 in taxes for the separate companies and was entitled to reimbursement.  The husband’s expert said he did not agree the wife had a valid claim for reimbursement and presented his own calculations, showing $841,108 was paid.  The jury found the community estate had paid $841,108 in income taxes for the husband’s separate businesses.  The trial court included that amount in the valuation of the reconstituted community estate.

The husband argued that the tax burden was his, rather than the companies’, since it passed through to him.  He argued that payment of the taxes did not benefit the companies.  The appeals court agreed that the tax liability was a community debt.  The appeals court noted that there is generally no right to reimbursement to the community estate when its funds are used to pay a community debt.

Under the family code, the estate may be reimbursed for “inadequate compensation for the time, toil, talent, and effort of a spouse by a business entity under the control and direction of that spouse.”  Although the wife framed her request for reimbursement of the retained funds in this way, the jury was only asked whether the income taxes benefited the separate property.  The trial court included the finding in its valuation of the reconstituted estate, so the appeals court found it had based the reimbursement award on the income taxes, instead of retained earnings or inadequate compensation. The trial court erred in ordering reimbursement for the payment of income taxes by the community estate because the estate owed those taxes.

The husband also challenged the reimbursement for his political contributions.  The jury had been instructed to consider the relationship between the husband and the recipients of the contributions, any special circumstances justifying the contributions, and whether the contributions were reasonable in proportion to the total community estate.  The jury found $305,200 was unfairly depleted from the estate due to the contributions.

A spouse in control of community property has a fiduciary duty to the other spouse.  The controlling spouse has a duty not to engage in fraud, and the disposition of the community property must be fair to the other spouse.  There is a presumption of constructive fraud when the controlling spouse disposes of community property without the other spouse’s knowledge or consent, and sometimes even with knowledge if there was no consent.  In determining if constructive fraud occurred, the court will consider the amount contributed as compared to the total community estate, the adequacy of the remaining estate, the relationship between the donor and the recipient, and whether any special circumstances justify the gift.

The husband argued the contributions were an exercise of his First Amendment rights.  He claimed they were reasonable as related to a $3 million community estate.  He argued he had made political contributions throughout the marriage, and his wife had been involved in his political activities.  He argued the contributions were not unfair to the estate.

The wife testified, however, that they had fought about the donations.  She said she had not been aware of the amount contributed and was “appalled” when she learned the amount during the divorce proceedings.

The husband argued his contributions benefitted the estate by leading to political action favorable to the companies.  The appeals court noted that the jury had only found the contributions made after the divorce filing were unfair.  The jury could have found that the increased donations at that time primarily benefitted the husband’s separate estate.  The appeals court found sufficient evidence to support the jury’s finding that the contributions were unfair to the estate.

The husband argued that even if some of the contributions were waste, it was an error for the jury to find all of those made after the divorce filing were waste.  He argued that the waste should be limited to the amount of the contributions that exceeded the annual average for the prior four years.  He argued the wife may not have been aware of how much he had been giving, but she had implicitly consented to that amount.

The appeals court found, however, that the wife did not have any control over the finances.  She had also testified to ongoing arguments regarding the contributions.  The jury could have determined there was no implicit consent even to the amounts contributed before the divorce.

The trial court had awarded the wife approximately 70% of the community estate.  The husband argued this division was an abuse of discretion.  The appeals court found the errors in the reconstitution calculations due to the erroneous inclusion of the income tax payments could have affected the division.  The appeals court therefore remanded to allow the trial court to make a new determination and division of property.

This case shows that taxes owed by a spouse, rather than a separate business, are considered a debt of the community estate.  Those taxes, therefore, may be paid by the community without reimbursement.  If you are considering a divorce involving complex assets, an experienced Texas divorce attorney can protect your rights.  Call McClure Law Group at 214.692.8200.

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