The recent decision by the Maryland Court of Special Appeals in Baker v. Baker reminds us that in order to avoid differences in the interpretation of an agreement, it is crucial for an agreement to expressly contain the complete articulation of each and every element of the agreement. If a clear and complete articulation of the terms of an agreement is absent, the court will look to principles of law and regulation to resolve an issue.
The Baker case involved the allocation of a marital asset that was not specifically addressed in the marital settlement agreement signed by the parties. The language of the agreement of the parties required Wife to relinquish to Husband any interest she might have in any jointly titled investment or bank accounts. At the time of the divorce, the parties had a capital-loss carry-forward that resulted from losses in their investment accounts, but this specific asset was not discussed in their agreement. The carry-forward came about because the Internal Revenue Code limits the amount of a capital loss that taxpayers may use to reduce their tax liability in any given year, but allows taxpayers to defer (or carry-forward) the excess loss to reduce tax liabilities in future years. After the divorce, Ms. Baker used about 50% of the capital-loss carry-forward to offset the gains she had realized from the sale of a parcel of real property.
Mr. Baker argued that because their agreement stated that Wife was required to relinquish any interest she may have had in any jointly titled investment account, Husband was entitled all of the capital-loss carry-forward asset. While the trial judge agreed with Husband, the Court of Special Appeals rejected Husband’s argument and found that the Circuit Court erred. The Court of Special Appeals held that because the carry-forward was not an “interest in” the jointly titled investment account within the meaning of the agreement of the parties, the allocation of the of the capital-loss carry-forward asset is controlled by Treasury regulation and does not belong exclusively to Husband.
As the Court of Special Appeals explained, the capital-loss carry-forward is plainly not an asset in the investment accounts themselves, but is an interest that is separate and apart from the interest in the investment accounts. Had the agreement stated that Wife relinquishes any interest that relates to the investment accounts, or arises from the investment accounts, or results from the activity in the investment accounts, the decision in this case might have favored Husband. However, as a matter of law in the opinion of the Court of Special Appeals, Wife never relinquished her interest in the capital-loss carry-forward, a separate and distinct marital asset. Husband was entitled to 50% of the capital-loss carry-forward, not the entire offset.