In Virginia, assets acquired during marriage except from gift or inheritance are presumed marital. Stumbo extended that presumption to debt incurred during marriage. Stumbo v. Stumbo, 20 Va. App. 685, 692-93, 460 SE 2nd 591, 595 (1995). And Smith classifies debt based on its purpose; and tells courts to perform equitable distribution if the debt is marital. Smith v. Smith, 43 Va. App. 279, 290 n. 5, 597 S.E. 2nd 250, 255 n.5 (2004).

             Now, along comes Gilliam, further refining the rule for characterizing debt. In Gilliam, Virginia Court of Appeals Judge Robert P. Frank carves out a “trust fund tax” or “criminal implication” separate debt, even if both spouses benefitted from the proceeds. Gilliam v. McCrady, Record No. 0288-08-2 (Va. App., March 4, 2009).

[1]

            Here is how it works: Proceeds of debt are the money you obtain when debt is incurred; for example, as a result of personal loans, credit card charges, cash advances, and the funds you receive by lying, cheating and stealing. In Gilliam, the husband failed to withhold taxes on employee income at his closely-held corporation, racking up a debt of $118,000.00 to the IRS by the time of equitable distribution.

            The starting premise is that when a husband (or wife) brings home ill-gotten gains like jet skis, snow mobiles and flat screen TV’s, the debt is presumed marital. The first line of inquiry is “Who benefitted?”  And the answer usually is the spouses.

            The only thing making during-the-marriage debt separate used to be incurring it outside the family; for example, entertaining a girlfriend. But that has changed. Now, if husband robbed, cheated or stole money (in other words, if there were “criminal implications”), the second question is “What was the purpose of the original debt?”  Here, the purpose of withholding employee taxes was to fund an implied trust for the people of the United States; in other words, to benefit a third party unrelated to the spouses.

[2]

            The trial court was deemed to be “plainly wrong” when it failed to answer that second question; and chose instead to call the tax debt “marital” because the parties both lived beyond their means. The trial court was reversed because extra money of one spouse almost always inures to the benefit of the entire household, making it impossible to establish a marital debt – separate debt distinction utilizing that criterion.

            In my opinion, the Court of Appeals overlooked an important third inquiry: “Was the non debt-acquiring spouse innocent of involvement in the obtaining of the money?” 

            In the facts presented, the wife did everything possible to persuade Gilliam to cease and desist; to convince him to pay the back taxes; and ultimately to separate herself from the illicit gains (by filing separate tax returns). The Wife’s proof of all this by a preponderance of the evidence should have been part of the required trial court determination following remand; and a prerequisite to finding Gilliam separately responsible for the unpaid taxes.

            When the Court of Appeals stopped short of articulating this final element of the separate-debt equation; it may have considered it implicit that the lower court would find out if the wife was complicit. Alas, we will need additional appellate precedent to know for sure.

Read the opinion here.



[1] The opinion might have been articulated more clearly. Greater attention seems to be shown in recounting irrelevant facts and quoting the lower court than in explaining how the new test for separate debt should be applied.

[2] The Gilliam rationale is so pithy that it raises more questions than it answers: For example, what if a nefarious husband intentionally underpaid his quarterly withholding and filed separately; or claimed too many exemptions and filed jointly? If those actions are not crimes, might the delinquent taxes still be a separate debt? Does a spouse have to be avoiding taxes criminally, or on income other than their own?