Hayes v. Hayes

The appellant, Sandra Hayes, appeals from the trial court’s final judgment of divorce, contending that the trial court erred in characterizing certain property as the separate, non-marital property of the appellee, Monson Hayes, and that the trial court erred in calculating Monson’s gross income for the purpose of determining his child support obligation.1 For the reasons that follow, we agree with these contentions in part, and thus affirm the trial court’s judgment in part and reverse it in part. 1. Ms. Hayes first contends that the trial court erred by characterizing certain property as the separate, non-marital property of Mr. Hayes. The contested property stems from money provided by Monson’s parents for a down payment and improvements on the Hayeses’ home. When Sandra and Monson purchased their first home, Monson’s parents provided a down payment of $3,500. In addition, Monson’s parents later provided $40,000 for improvements to Sandra’s and Monson’s home. To provide the $40,000, each parent wrote two checks for $10,000. One check from each parent was payable to Sandra and one was payable to Monson. Thus, Sandra and Monson each received $20,000. As for the $40,000 in gifts, Monson and his father testified that the entire $40,000 was intended as a gift only to Monson, but that $20,000 was given to Sandra to avoid the gift tax repercussions that would have arisen if the parents had written checks to Monson for the entire $40,000. The trial court characterized all these gifts as Monson’s separate property.

We conclude that the trial court erred in characterizing the $20,000 written in checks to Sandra as the separate property of Monson. Although it is permissible to legitimately arrange “one’s affairs so as to minimize or avoid taxes,” it is impermissible to engage in “sham transactions designed to camouflage the actual situation.”2 “Equity will not relieve the parties from such sham agreements.”3 Here, the testimony of Monson and his father established that Monson and his parents engaged in a sham transaction the giving of $20,000 to Sandra in order to camouflage the actual tax situation the giving of $40,000 to Monson from the Internal Revenue Service.4 For this reason, equity will not relieve the Hayeses from the structure of the gifts, and the trial court erred in ruling that the entire $40,000 was the separate property of Monson.