Opinion
No. 10-02-00335-CV
Opinion delivered and filed February 23, 2005.
Appeal from the 378th District Court, Ellis County, Texas, Trial Court # 59,319-D.
Affirmed as reformed.
Julius E. Whittier and James E. Polk, Attorneys at Law, Dallas, TX, for appellant/relator.
David K. Abbott, Attorney at Law, Waxahachie, TX, for appellee/respondent.
Before Chief Justice GRAY, Justice VANCE, and Justice REYNA, (Chief Justice Gray dissents without opinion).
MEMORANDUM OPINION
James E. Polk, II and Annette V. Polk announced the terms of their property settlement in court on April 10, 2000. The judge signed the divorce decree on September 28. On August 29, 2002, Ms. Polk's motion to distribute funds was granted and Mr. Polk's request for reimbursement of installment payments was denied.
Mr. Polk appeals in three issues: (1) whether the parties agreement was so ambiguous as to exclude an undisclosed tax liability on income not reported on Mr. Polk's married-filing-separate return for 1998; (2) whether failure to disclose to Ms. Polk that his married-filing-separate return for 1998 did not include $30,000 in income constituted extrinsic fraud; and (3) whether Mr. Polk is entitled to reimbursement for installment payments made to the IRS and is he entitled to keep farm subsidy payments.
We will sustain Mr. Polk's first issue and overrule his third issue. We will not reach his second issue. Accordingly, we will affirm as reformed the Order on Motion for Authorization to Disburse Funds.
FACTUAL AND PROCEDURAL BACKGROUND
The Polk's divorce decree, entered April 10, 2000, states:
IT IS FURTHER ORDERED AND DECREED that the wife, ANNETTE V. POLK, is awarded the following as her sole and separate property, and the husband is divested of all right, title, interest, and claim in and to that property except for his vendors lien on the parties residence and Colorado Property:
W-1 . . .
W-2 Subject to the Provisions Regarding Sale of Real Property as further set out in this decree, the following real property, including but not limited to any escrow funds, prepaid insurance, utility deposits, and title and closing documents:
[Colorado Farm]
. . .
Provisions Dealing with Sale of Real Property
IT IS FURTHER ORDERED AND DECREED that the [Colorado Farm] . . . shall be sold under the following terms and conditions:
3. JAMES E. POLK, II shall have the right to continue to receive all proceeds derived from the farm enterprise from April 10, 2000 through Sept. 28, 2000 (i.e. government subsidies, sale of crops, etc.) with JAMES E. POLK, II ORDERED to provide a monthly accounting of said expenses and incomes for said property to ANNETTE V. POLK on the first of each month (beginning May 1, 2000) and on the first of each month thereafter through Sept. 28, 2000. Any farm expenses over and above any farm income (derived from the sale of crops, government grants or any type of income received on said property) at the time of the closing of the property shall be paid from the net proceeds from the sale of the property. Any farm income remaining after the payment of farm expenses shall be applied to the proceeds given to ANNETTE V. POLK. At the time of closing JAMES E. POLK, II shall provide a final accounting of all expenses and incomes for the Colorado property. Outstanding farm expenses, if any, shall be turned over to ANNETTE V. POLK for payment from the net sales proceeds or current income earned after September 28, 2000.
4. The net sale proceeds (defined as the gross sales price less cost of sale and full payment of any mortgage indebtedness or liens on the property) shall be transferred from the Title Company Escrow Account to the Constance Smith McGuire Trust Account. IT IS ORDERED that Constance Smith McGuire shall provide notice to R. Allen Jones of receipt of said monies. IT IS FURTHER ORDERED that Constance Smith McGuire shall make checks payable to the creditors as listed below. Constance Smith McGuire shall provide to R. Allen Jones for his review prior to their mailing, copies of the checks along with transmittal letters to the creditors verifying payment of the debt listed below. Any balance due on the 1998 and 1999 Federal Income Taxes shall be paid first from net proceeds of the sale.
Payment of the 1998 and 1999 Federal Income Taxes of Petitioner and Respondent (if any balance due)
. . .
. . .
IT IS ORDERED AND DECREED that ANNETTE V. POLK and JAMES E. POLK, II shall cooperate in preparation of the joint federal income tax returns for 1998 and 1999 by supplying to Phillip Graham all information necessary for the preparation of both returns on or before Friday, April 14, 2000. . . .
IT IS ORDERED AND DECREED that JAMES E. POLK, II shall continue to make Internal Revenue Service monthly payments until the Colorado property is sold, at which time the balance due will be paid in-full from the net proceeds of the sale of that property.
. . .
IT IS FURTHER ORDERED AND DECREED, as part of the division of the estate of the parties, that any community liability not expressly assumed by a party under this decree is to be paid by the party incurring the liability , and the party incurring the liability shall indemnify and hold the other party and his or her property harmless from any failure to so discharge the liability. (Emphasis added).
The Order on Motion for Authorization to Disburse Funds, dated August 29, 2002, states:
IT IS ORDERED that Movant, Annette V. Polk, shall pay the following out of the funds currently held in trust by her attorney, Constance Smith McGuire:
A. $17,050.86 to the Internal Revenue Service debt for the year ending December 31, 1998. It is further ORDERED that any amount remaining due to the Internal Revenue Service due to the husband's neglect in reporting $30,000.00 in income shall be the responsibility of James E. Polk, Sr. alone.
. . .
IT IS ORDERED that James E. Polk, II, shall pay to Annette V. Polk, $634.64, which sum represents the amount which was received by James E. Polk, II and was required under the Final Decree of Divorce to be used by him for farm expenses. . . .
IT IS FURTHER ORDERED that the request for reimbursement by Respondent, James E. Polk, II, for monthly payments made to the Internal Revenue Service under the Final Decree of Divorce is DENIED.
According to the testimony of the accountant who prepared the Polks' amended 1998 tax return (married-filing-jointly): (1) Mr. Polk's original 1998 tax return filed in August 1999 (married-filing-separate) omitted $30,000 in self-employment income received by Mr. Polk for services rendered; (2) the original tax liability on Mr. Polk's married-filing-separate 1998 tax return was $15,947 (after Mr. Polk's payment of $8,500 with an extension request); (3) he amended the Polks' tax return for 1998 (to married-filing-jointly) in November 2000 to include Ms. Polk's W-2 income and charitable deductions, and he added $30,000 to Mr. Polk's self-employment income; (4) the amended tax liability is $26,770 (return stated $11,884, but the accountant testified that $14,886 needed to be added because he was mistakenly told that that amount had already been paid with the return); and (5) the additional $30,000 in self-employment income resulted in an additional $10,231 in tax liability.
Mr. Polk told him to add $30,000 as the fair market value of property received for legal services rendered; however, Mr. Polk had actually sold the property and $30,000 was the profit received.
Mr. Polk testified that he completed his married-filing-separate 1998 tax return in a rush because Ms. Polk refused to file a joint return and provide Mr. Polk with her income and deductions. Therefore, Mr. Polk testified that he "figured there may be some things missing" and "I always said it did not actually reflect my income."
The sale of the property for $30,000 was on November 3, 1998, which was prior to Ms. Polk's divorce filing. A receipt for the $30,000 income was provided to Ms. Polk in discovery during the divorce proceedings. Ms. Polk agrees that the $30,000 was all spent prior to the divorce on community and business debts, including the home mortgage and utility payments.
Exact amount on receipt is $29,423.63.
Mr. Polk sent a letter to the accountant dated August 23, 2000, and included documentation of the $30,000 sale. Mr. Polk knew in September 2000, when the divorce decree was signed, that $30,000 was not on his original tax return. He testified that he did not tell Ms. Polk himself of this non-disclosure.
Mr. Polk testified that he actually put the $30,000 as capital gains on his original return because it was a sale of real property instead of on Schedule C as self-employment income. When the accountant did the amended return, he felt that it should be reported on Schedule C instead of asserting capital gains treatment on the sale.
A Notice of Intent to Levy dated May 20, 2002, was received from the IRS and stated that there was a current balance of $27,281.86 due on the 1998 taxes including $60.22 in penalty and $6,307.77 in interest.
To keep the IRS at bay, Mr. Polk made twenty-five $300 installment payments to the IRS between January 2000 and January 2002 totaling $7,526.26. Mr. Polk stopped making payments because the Colorado farm was sold in February 2002. Ms. Polk was to keep the other creditors at bay while waiting for the Colorado farm to sell.
No checks were written in January 2001 and August 2001, two checks were written in July 2001, and three checks were written in October 2001 (one of which was for only $26.26).
THE DIVORCE DECREE
Mr. Polk argues that the terms of the agreement were unambiguous and applied to the tax liability on the $30,000 of income not reported on his 1998 married-filing-separate tax return. Relying on the indemnity clause, Ms. Polk argues that the agreement was ambiguous and the trial court properly construed the decree because she did not expressly assume the tax liability on the $30,000 of income that Mr. Polk did not report on his initial 1998 tax return. She also argues that she relied on Mr. Polk's married-filing-separate 1998 tax return in agreeing to pay the 1998 tax liability.
Under section 9.006 of the Texas Family Code, the court may render "further orders to enforce the division of property made in the decree of divorce . . . to assist in the implementation of or to clarify the prior order." TEX. FAM. CODE ANN. § 9.006(a) (Vernon 1998). Under section 9.007, the trial court does not have authority to "amend, modify, alter, or change the division of property made or approved in the decree of divorce" or "alter or change the substantive division of property." Id. § 9.007(a) (Vernon 1998).
This case involves the interpretation of the provisions regarding tax liability and farm subsidy payments. Regarding interpretation of divorce decrees, the Texas Supreme Court has stated:
When interpreting a divorce decree, courts apply the general rules regarding construction of judgments. Wilde v. Murchie, 949 S.W.2d 331, 332, 40 Tex. Sup. Ct. J. 910 (Tex. 1997) (per curiam) (citing Constance v. Constance, 544 S.W.2d 659, 660, 20 Tex. Sup. Ct. J. 106 (Tex. 1976)). Judgments should be construed as a whole to harmonize and give effect to the entire decree. Constance, 544 S.W.2d at 660. "If the decree, when read as a whole, is unambiguous as to the property's disposition, the court must effectuate the order in light of the literal language used." Wilde, 949 S.W.2d at 332; see also Baxter v. Ruddle, 794 S.W.2d 761, 763, 33 Tex. Sup. Ct. J. 687 (Tex. 1990). If the decree is ambiguous, the court should review the record along with the decree to aid in interpreting the judgment. Wilde, 949 S.W.2d at 332. In addition, if a judgment is ambiguous — that is, subject to more than one reasonable interpretation — courts should adopt the construction that correctly applies the law. MacGregor v. Rich, 941 S.W.2d 74, 75, 40 Tex. Sup. Ct. J. 298 (Tex. 1997) (per curiam). As with other written instruments, whether a divorce decree is ambiguous is a question of law. Coker v. Coker, 650 S.W.2d 391, 394, 26 Tex. Sup. Ct. J. 368 (Tex. 1983).
Shanks v. Treadway, 110 S.W.3d 444, 447 (Tex. 2003).
1998 Tax Liability and Installment Payments
First, it is clear from the unambiguous terms "ANNETTE V. POLK and JAMES E. POLK, II shall cooperate in preparation of the joint federal income tax returns for 1998" that the 1998 tax liability had not yet been calculated and neither party knew the exact tax liability.
Further, from the unambiguous terms "[a]ny balance due on the 1998 and 1999 Federal Income Taxes shall be paid first from net proceeds of the sale," Ms. Polk was to pay the balance due on the 1998 taxes after the Colorado farm was sold.
Based on the unambiguous tax preparation provision and the terms "JAMES E. POLK, II shall continue to make Internal Revenue Service monthly payments until the Colorado property is sold, at which time the balance due will be paid in-full from the net proceeds of the sale of that property," it is clear that the "balance due" would be calculated based on the subsequent preparation of the 1998 married-filing-jointly return minus Mr. Polk's monthly installment payments. If the parties intended otherwise, they could have expressly stated a specific amount as the "balance due." Thus, we agree with the trial court that Mr. Polk is not entitled to reimbursement for his tax installment payments made to the IRS in the amount of $7,526.26.
We need not consider the terms "any community liability not expressly assumed by a party under this decree is to be paid by the party incurring the liability," because we do not find the provision applicable to the tax liability for the $30,000 in income not reported to the IRS on Mr. Polk's married-filing-separate 1998 tax return.
Based on the dollar amounts set out above, it is our conclusion that, not including penalties and interest, the total amount due to the IRS at the time the Colorado farm was sold is:
$ 26,770.00 (tax due on 1998 married-filing-jointly return)
-$ 7,526.26 (Mr. Polk's installment payments to the IRS for the 1998 tax liability) ____________ $ 19,243.74 (plus unpaid penalties and interest)
We conclude that the granting of the motion to distribute funds modified the substantive division of tax liabilities made in the divorce decree. See Shanks, 110 S.W.3d at 447. We sustain Mr. Polk's first issue regarding the tax liability but overrule his third issue regarding reimbursement for tax installment payments. We reform page two of the Order on Motion for Authorization to Disburse Funds to state:
IT IS ORDERED that Movant, Annette V. Polk, shall pay the following out of the funds currently held in trust by her attorney, Constance Smith McGuire:
A. All taxes, penalties, and interest due to the Internal Revenue Service for the tax year ending December 31, 1998.Farm Subsidy Payment
On October 6, 2000, Mr. Polk faxed a letter to Ms. McGuire that he was in receipt of $634.54 for a government farm subsidy. Mr. Polk testified that he did not use this money to pay any of the farm bills even though there were outstanding bills. He testified that he actually used it to pay the IRS some installment payments because he was short. Mr. Polk argues that he is entitled to keep this money.
It is clear from the unambiguous terms "[a]ny farm income remaining after the payment of farm expenses shall be applied to the proceeds given to ANNETTE V. POLK" that the farm subsidy payments of $634.54 received by Mr. Polk should be turned over to Ms. Polk.
We overrule Mr. Polk's third issue regarding his entitlement to keep the farm subsidy payments.
Because we conclude the decree is unambiguous, it is unnecessary for us to address Mr. Polk's second issue. See TEX. R. APP. P. 47.1. Further, even if we reached Mr. Polk's second issue, Ms. Polk argues and we agree that Mr. Polk's second issue regarding fraud is not ripe because Ms. Polk admits that she has not filed a Bill of Review for fraud, and the issue of fraud was not tried by consent.
CONCLUSION
Having sustained Mr. Polk's first issue and overruled his third issue, we affirm the Order on Motion for Authorization to Disburse Funds as reformed on page two to state:
IT IS ORDERED that Movant, Annette V. Polk, shall pay the following out of the funds currently held in trust by her attorney, Constance Smith McGuire:
1. All taxes, penalties, and interest due to the Internal Revenue Service for the tax year ending December 31, 1998.