Case Law Update Bathke v. Costley: Equitable Distribution and Hypothetical Sale of Assets with Tax Consequences

case law update

The recent case of Bathke v. Costley gave the Florida Court of Appeals, Fifth District, the opportunity to reexamine equitable distribution of marital assets and liabilities when it comes to a potential or hypothetical sale of entities that would incur capital gain taxes. In this case, Benjamin M. Bathke (“Husband”) and Mary Elizabeth Costley (“Wife”) separately appealed the trial court’s final judgment that dissolved the parties’ marriage. The court considered two issues. First, the court looked at whether the trial court abused its discretion in its equitable distribution in failing to consider the tax consequences related to a potential or hypothetical sale of the parties’ business entities. And second, whether imposing a 6.33% interest rate in its order awarding attorneys’ fees to Wife was an error.

On the issue of tax consequences, the parties’ made the following claims in their memorandum of law. Husband asserts the court must consider the tax consequences of the hypothetical sale of business entities because capital gains tax would be unavoidable when Husband sells his interest. Conversely, Wife contests that the court should not consider the consequences of such hypothetical sale because there was no evidence that the sale was imminent or that Husband would incur immediate tax liability. Additionally, Wife had the burden of proving that the trial court’s error was harmless. If the court agreed with Husband in his contention that tax consequences are to be considered in determining the equitable distribution of the marital assets, then Husband would not owe Wife any further sums. Should the court agree with Wife’s position that the tax consequences are not to be considered, then Husband shall owe Wife the sum of $304,118 for purposes of equitable distribution.

At trial, the parties offered evidence as to potential tax consequences. Notably, the experts for both parties testified that Husband could not avoid the tax liability when he sells the businesses. However, the capital gains tax consequence only arises if and when Husband sells the assets. Husband testified that he had no established plans to sell the businesses, but he planned to retire and sell in approximately five years. The trial court concluded that there was no evidence of an “imminent” sale of the businesses.

Florida Fifth District Court of Appeal

On appeal, the Fifth District agreed with Husband’s argument that the trial court abused its discretion when determining equitable distribution because it failed to consider the tax consequences. Upon analysis, the court looked at Florida Statutes, Section 61.075 and its precedent in the case of Miller v. Miller. Looking at the “individual valuation of significant assets,” the court emphasized that it must take into account the tax consequences of the assets to reflect the market value of the assets to the parties. In its reasoning, the court determined that a valuation of assets that fails to account for tax liabilities of different assets does not accurately reflect the assets’ value. A court is permitted to account for future tax consequences even if the sale of that asset is not imminent. If it were not, the court would treat assets with varying tax consequences as equivalent, as the trial court in Miller did, when the tax liabilities presented by the assets create inequivalent value. The trial court, therefore, abused its discretion because the decision was based on an improper application of the law. Moreover, Wife did not satisfy her burden of demonstrating that the trial court error was harmless.

The Fifth District is sending this case back to the trial court to consider whether there is sufficient evidence concerning the tax consequences and, if so, the amount. The appellate court emphasized that its decision is “only that the trial court is not prohibited from accounting for a future tax liability.”

The court’s final finding was that the lower court erred in its application of a 6.33% interest rate in the order awarding Wife attorneys’ fees. The trial court’s application of a 6.33% interest rate did not reflect the statutory interest rate proscribed in section 55.03, Florida Statutes (2020). The Fifth District reversed this portion of the trial court’s decision for entry of an amended order and amortization schedule that reflects that proper statutory interest rate.

Imminent Sale of Doctrine No Longer the Standard

Notably, this case shows the evolution of asset valuation with imbedded tax consequences. Both federal and Florida courts have evolved past the “imminent sale” doctrine. Under the old standard, also known as the “imminent sale” approach, “the value of an asset for divorce purposes is not discounted to reflect potential future taxes unless the taxable event was ‘immediate and specific.’” This doctrine has since been repudiated by federal and tax courts as erroneous and contrary to current asset valuation practices.

Many Florida and Federal courts now adhere to the principles outlined in the case of Bathke v. Costley, Miller v. Miller, and other similar cases. All tax consequences, including contingent tax liabilities, may be taken into account to achieve fair and equitable distribution of assets. This approach may be necessary to properly value assets even if a sale is not imminent.