In re Marriage of Joynt

Opinion

No. 3-06-0919 Filed August 16, 2007. _________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 2007

In re MARRIAGE OF ) Appeal from the Circuit Court ) of the 10th Judicial Circuit, THERESA A. JOYNT, ) Peoria County, Illinois, ) Petitioner-Appellant, ) ) No. 04-D-501 v. ) ) MICHAEL J. JOYNT, ) Honorable ) Stephen A. Kouri, Respondent-Appellee. ) Judge, Presiding. _________________________________________________________________

PRESIDING JUSTICE LYTTON delivered the opinion of the court: _________________________________________________________________

Plaintiff, Theresa Joynt, appeals the trial court’s judgment

dissolving her 12-year marriage to defendant, Michael Joynt.

Theresa argues that the trial court erred in characterizing the

retained earnings of a closely held corporation as non-marital

property. Alternatively, she claims that the trial court’s

distribution of marital assets was inequitable. We affirm.

Theresa filed a petition for dissolution of marriage on August

20, 2004. At trial, the parties stipulated that Michael owned 41

shares of stock in Mississippi Value Stihl, Inc. (MVS), worth

approximately $94,000 and that the stock was nonmarital property.

James Carey, an accountant for MVS, testified that the

company was closely held and designated as a subchapter S

corporation. Michael served as the company’s president and owned 33% of the corporate stock. Michael’s sister owned 19.4% of the

stock, and Michael’s father owned 47.6%. Carey testified that

Michael’s gross pay from the company, approximately $240,000 to

$250,000 per year, was fair compensation in the industry. In 2004,

Michael’s total net income from the corporation after the payment

of taxes was $162,545.

Carey stated that based on the company’s balance sheet, the

retained earnings of the business in 2004 were $3,750,929. Those

earnings were held by MVS for future operating expenses. The

company did not pay dividends to its stockholders from the retained

earnings account. However, if the company chose to do so, it could

pay retained earnings dividends through liquidation of the business

or declaration of the corporate board of directors. Michael would

not be able to receive a retained earnings dividend individually

unless an equal dividend were paid to and agreed upon by a majority

of the shareholders. Michael’s 33% ownership in the corporation

entitled him to one-third of the retained earnings. The estimated

value of Michael’s retained earnings ownership at the time of the

trial was $1,250,309.

Carey further testified that Michael had a buyout contract

with his father. The contract provided that, upon his father’s

death, Michael would become the majority stockholder of the company

by purchasing his father’s stock. At that time, as the majority

shareholder, Michael would be able to determine distribution

payments from the retained earnings without approval from the

remaining shareholder.

2 Carey further testified that the retained earnings are not

reported as an asset. He explained that the corporation’s stock

would be an asset and "then the stock has to be valued." If you

wanted to value the company’s stock at book value, "in essence your

[sic] valuing the retained earnings." Carey stated that a

company’s book value is the assets minus the debts, which equals

the stockholders’ equity.

The trial court concluded that the retained earnings of the

closely held corporation should be classified as nonmarital

property. In so doing, the court emphasized "this is not to

suggest that under no circumstances would retained earnings of a

nonmarital interest in a subchapter S corporation be classified as

marital." The court noted that Michael was the president of the

company and that the value of the retained earnings account had

increased significantly in recent years. However, in reaching its

determination in this case, the court placed "considerable weight

on the significant amount of cash distributed by the company to its

officers over the last three years versus the amount it has

retained, along with the evidence in its entirety on the issue of

control."

In addition to the division of property, the trial court

ordered Michael to pay temporary maintenance and child support, and

awarded Teresa approximately 60% of the marital estate.

ANALYSIS

I. Retained Earnings

On appeal, Theresa contends that the trial court erred in

3 failing to classify Michael’s interest in the retained earnings

account of the closely held corporation as marital property.

Generally, we will not disturb a court’s determination that an

asset is nonmarital unless that finding is against the manifest

weight of the evidence. In re Marriage of Hegge, 285 Ill. App. 3d

138 (1996). However, that standard of review is based on the

presumption that determining whether an asset is marital involves

weighing the credibility of the witnesses. In re Marriage of

Werries, 247 Ill. App. 3d 639 (1993). In this case, the parties

have asked us to rule on the legal effect of certain facts. Those

facts are not in dispute, and the witnesses’ credibility is not an

issue. Accordingly, our review is de novo. In re Marriage of

Peters, 326 Ill. App. 3d 364 (2001).

Whether retained earnings should be classified as marital

property is an issue of first impression in Illinois. As noted by

both parties, however, other states have generally held that

retained earnings are nonmarital. Those jurisdictions have reached

that conclusion based on the evaluation of two primary factors: (1)

the nature and extent of the stock holdings, i.e., is a majority of

the stock held by a single shareholder spouse with the power to

distribute the retained earnings; and (2) to what extent are

retained earnings considered in the value of the corporation. See

1 H. Gitlin, Gitlin on Divorce §8-13(j), at 8-172.2 (3rd ed. 2007)

In Allen v. Allen, 607 S.E.2d 331 (N.C.App. 2005), the court

concluded that the retained earnings in a subchapter S corporation

in which the husband was a 25% shareholder was properly

4 characterized as a nonmarital asset where the earnings were a

component of the book value of the corporation. In In re Marriage

of Robert, 652 N.W.2d 537 (Minn. App. 2002), the court ruled that

the wife’s interest in a subchapter S corporation’s retained

earnings account was not a marital asset since the wife was a

minority shareholder who did not have authority to distribute the

earnings to herself or other shareholders and earnings were not

attributable to her entrepreneurial efforts during the marriage.

Other jurisdictions have also classified retained earnings

accounts as nonmarital. See Swope v. Swope, 834 P.2d 298 (Idaho

1992) (marital estate has no interest in retained earnings of

corporation, the stock of which is held as separate property,

unless the spouse stockholder has sufficient control of the

corporation to be able to cause the earnings to be retained); In re

Marriage of Hoffmann, 676 S.W.2d 817 (Mo. 1984) (retained earnings

of closely held corporation in which husband’s ownership interest

was 35% did not constitute marital property).

On the other hand, when a shareholder spouse has a majority of

stock or otherwise has substantial influence over the decision to

retain the net earnings or to disburse them in the form of cash

dividends, courts have held that retained earnings are marital

property. In Metz-Keener v. Keener, 573 N.W.2d 865 (Wis. 1997),

the court determined that the retained earnings fund of a

corporation inherited by the wife was income separate from the

corporation and should be included in the marital estate. The

court reached that conclusion because the wife had "full ownership

5 and possession of all the corporate shares and that she [was] the

sole managing force behind the corporation." Metz-Keener, 573

N.W.2d at 869; see also Heineman v. Heineman, 768 S.W.2d 130 (Mo.

App. W.D. 1989) (retained earnings account in wife’s previously

unincorporated art studio corporation was marital property because

wife was sole shareholder and earnings were retained in lieu of

salary). Thus, if the shareholder spouse controls the corporate

distribution, the retained earnings are marital property.

Here, MVS’s retained earnings are nonmarital. The company’s

stock was held in unequal shares by three individuals. Michael

possessed only a minority percentage of those shares and was not a

controlling shareholder. As only one of three board members, he

could not have unilaterally declared or withheld dividends.

Although Teresa acknowledges the opposing authority, she

maintains that the retained earnings should be classified as a

marital asset because they are not corporate assets but rather

income available to the shareholder.

A subchapter S corporation is a pass-through entity utilized

for federal tax purposes. See Metz, 573 N.W.2d 865. Unlike a

subchapter C corporation, MVS does not pay corporate-level taxes on

its income. Instead, the corporation’s income is taxed directly to

its shareholders based on their ownership of corporate stock,

whether or not the income is actually distributed to the

shareholders. See I.R.C. §§1361-1379 (2000) (defining and

explaining subchapter S and subchapter C corporations). A

subchapter S corporation monitors its retained corporate earnings

6 using an account which is then used to determine each shareholder’s

basis for taxed but undistributed corporate income. However,

retained earnings and profits of a subchapter S corporation are a

corporate asset and remain the corporation’s property until severed

from the other corporate assets and distributed as dividends. See

Robert, 652 N.W.2d at 543; Hoffmann, 676 S.W.2d at 827.

In this case, the retained earnings were part of the corporate

assets. The expert witness testified that the earnings were held

by the corporation to pay expenses. Although, under the pass-

through provisions for subchapter S corporations, these

undistributed earnings were taxed to Michael and Teresa as "income"

on their individual income tax return, MVS paid the tax through

year-end designated payments made to Michael. Further, as the

president of the company, Michael received a salary, plus biannual

bonuses, as compensation for managing the daily operations. The

only expert testimony found in the record indicates that Michael’s

compensation during the marriage was reasonable and fair for the

services he provided.

While the trial court expressed its concern that MVS’s

retained earnings account may have been used to "shelter" marital

income, the court found insufficient evidence to support that

conclusion. See Speer v. Quinlan, 525 P.2d 314 (Idaho 1974)

(although shareholder spouse was president of closely held

corporation, no evidence that corporate earnings were retained to

defraud marital estate). We agree with the trial court’s

assessment of the record.

7 Because, Michael was unable to authorize a payment of the

retained earnings as a dividend without shareholder approval and

because the earnings were a corporate asset, we hold that the

retained earnings account of the corporation is a nonmarital asset.

II. Division of Marital Assets

Alternatively, Theresa claims that the trial court abused its

discretion in its division of marital assets.

The touchstone of whether apportionment of marital property

was proper is whether it is equitable in nature; each case resting

on its own facts. In re Marriage of Scoville, 233 Ill. App. 3d 746

(1992). An equitable division of property does not require

mathematical equality. In re Marriage of Gentry, 188 Ill. App. 3d

372 (1989). Section 503 of the Illinois Marriage and Dissolution

of Marriage Act (Act) (750 ILCS 5/101 et seq. 2004)) lists certain

factors to consider, including: (1) the value of the property

assigned to each spouse; (2) the duration of the marriage; (3) the

relevant economic circumstances of each spouse; (4) the age,

health, station and occupation of each spouse; (5) the custodial

provision for any children; and (6) the reasonable opportunity of

each spouse for future acquisition of capital assets and income.

750 ILCS 5/503(d) (West 2004). Absent an abuse of discretion, this

court will not disturb the trial court’s distribution of assets.

In re Marriage of Kerber, 215 Ill. App. 3d 248 (1991).

The court specifically considered Michael’s ownership of

substantial nonmarital assets and made its award of marital

property at 60% to Theresa and 40% to Michael. In addition to the

8 division of marital property, the trial court also awarded Teresa

temporary maintenance, required Michael to maintain medical

insurance coverage for her and the children, and ordered Michael to

pay 75% of her uncovered medical expenses and 90% of the uncovered

health related expenses for the children. The court adequately

considered all the factors of section 503(d) in making its

distribution of marital property, including the value of the

nonmarital assets, Theresa’s health, and her relative inability to

acquire capital assets and income. In light of these factors, we

find that the court did not abuse its discretion in awarding

Theresa 60% of the marital estate.

CONCLUSION

The judgment of the circuit court of Peoria County is

affirmed.

CARTER and SCHMIDT, JJ., concurring.