## Facts

- Judith W. Harrington (wife) filed for dissolution of a nearly 25-year marriage to Ronald G. Harrington (husband) in Ventura County.
- During the dissolution, the parties sold the family residence and realized $480,000 in profit, divided equally ($240,000 each).
- Ronald used part of his share to buy Judith’s community interest in his law practice and to pay Judith for her waiver of spousal support.
- Each spouse attempted to defer capital-gains tax under then-existing rollover rules by buying a replacement residence.
- Ronald bought a replacement residence sufficient to defer gain on his share.
- Judith bought a $120,000 condominium and made $5,000 in improvements, deferring tax only to that extent; she recognized gain on about $115,000 and incurred about $52,000 in capital-gains tax.
- Judith sought an order requiring Ronald to pay half of her capital-gains tax, arguing fairness and relying in part on a settlement clause stating the court retained jurisdiction over the 1988 tax returns and other jointly filed returns.
- Ronald asserted an oral agreement that each would be responsible for taxes on his or her own half; Judith denied any tax-allocation agreement.
- The trial court denied Judith’s request and ruled each spouse was responsible for capital-gains tax attributable to his or her share; Judith appealed.

## Issues

1. Whether, after equal division of community residence sale proceeds, a dissolution court must or may reallocate capital-gains tax so the spouses share the tax equally when the spouses’ post-division reinvestment choices produce different tax liabilities.
2. Whether retained jurisdiction over certain tax returns authorizes shifting one spouse’s post-division capital-gains tax liability to the other.
3. Whether substantial evidence supported the trial court’s resolution of disputed evidence concerning an oral agreement on tax responsibility.

## Decision

- The Court of Appeal affirmed the order denying Judith’s motion.
- The court held each spouse was individually responsible for capital-gains tax arising from that spouse’s share of the proceeds, where differing liabilities resulted from separate post-division reinvestment decisions.
- The court treated the trial court’s resolution of conflicting evidence about an oral agreement as supported by substantial evidence and declined to reweigh credibility.
- The retained-jurisdiction clause regarding tax returns did not require or authorize reallocating taxes tied to each party’s separate post-division use of proceeds.

## Legal Principles

- Equal division of community property at dissolution does not require equalization of later tax burdens that depend on each spouse’s post-division financial choices.
- Courts generally do not allocate speculative or contingent tax consequences that cannot be reliably determined at the time of property division and that turn on future individual conduct.
- Capital-gains tax consequences following a sale and division of proceeds are borne by the individual taxpayer when the liability arises from that taxpayer’s subsequent investment or reinvestment decisions.
- Appellate review defers to the trial court’s credibility determinations and factual resolutions when supported by substantial evidence.
- A clause retaining jurisdiction over jointly filed returns permits supervision of return-related disputes but does not convert post-division, individually incurred tax liabilities into shared obligations.

## Conclusion

The court affirmed that, following an equal division of profits from the sale of a community residence, each former spouse bears the capital-gains tax consequences attributable to that spouse’s share when the ultimate tax liability results from the spouse’s own post-division reinvestment decisions, and retained jurisdiction over tax returns does not justify reallocating such individual liabilities.


In re Marriage of Harrington, 6 Cal. App. 4th 1847 (Cal. Ct. App. 1992)