FILED NOVEMBER 5, 2020 In the Office of the Clerk of Court WA State Court of Appeals, Division III
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION THREE
In the Matter of the Marriage of ) ) No. 36842-4-III MARINA PALOMAREZ (fka WILCOX), ) ) Appellant, ) ) v. ) OPINION PUBLISHED IN PART ) MATTHEW EMERY WILCOX, ) ) Respondent. )
KORSMO, A.C.J. — Both parties challenge aspects of the trial court’s ruling
following a marriage dissolution trial.1 Believing that personal expenses paid by a
privately held business must be attributed as income to the working spouse, we conclude
that the court significantly erred in its determination of the husband’s income. We
reverse and remand for further proceedings consistent with this opinion.
FACTS
The parties, appellant/wife Marina Palomarez and respondent/husband Matthew
Wilcox, had been married 25 years at the time of trial in January 2019, but had separated
1 The husband did not cross appeal and therefore cannot receive affirmative relief from this court. RAP 2.4(a). We will address his assignments of error only as they concern issues on which the wife is entitled to relief. No. 36842-4-III In re Marriage of Wilcox
in mid-2015. Relevant highlights from the trial court’s extensive findings are discussed
here to place the appellate issues in context; other relevant facts will be mentioned later
during the discussion of the specific issues presented.
The primary issues at trial involved the valuation of a power sports business
owned by the community and the husband’s income from operating it. The business was
purchased in 2008 for $400,000 and converted to a chapter S corporation in 2014. The
purchase was funded by a $300,000 loan from Mr. Wilcox’s mother.2 A $100,000 loan
by the former owner used to fund the remainder of the purchase was paid off by 2014.
The competing experts for the parties used different methods to value the business.
The wife’s expert used an equity interest valuation process to value the business at
$809,000, and alternatively asserted that the fair market value was $522,000 as of the end
of 2015. The husband’s expert valued the business at $335,000 using an asset-based
theory. Accepting the fair market value approach, with adjustments for inventory
obtained later in the year, the court valued the business at $500,000 as of June 30, 2015,
the time the couple separated. The court believed this approach also was consistent with
the husband’s expert’s valuation after accounting for the fair market value of the
inventory.
2 Although there was some belief that the funds had been an advance of Mr. Wilcox’s inheritance, testimony established that the anticipated inheritance only served as security for the loan.
2 No. 36842-4-III In re Marriage of Wilcox
The profitability of the business factored into the court’s evaluation. For that
purpose, the trial court agreed with the wife’s expert that Mr. Wilcox could earn
$100,000 per year as manager of the business. Mr. Wilcox, however, had only reported
taking $34,000 to $40,000 per year in salary after converting to the S corporation format.
Tax returns showed the company making about $16,000 a month after expenses. In
addition, the company paid a significant amount of Mr. Wilcox’s personal expenses, as
well as about $4,000 per year in community expenses.
The court indicated it would not overrule Mr. Wilcox’s business judgment
concerning the amount of income the business needed to retain from its earnings. For
purposes of spousal maintenance, the trial court assigned an income of $40,000 to the
husband. The court ordered maintenance of $1,000 per month until 2022. At that point,
Mr. Wilcox’s pension from his prior employer will be transferred to Ms. Palomarez as
her separate property. The maintenance award effectively supplemented Ms.
Palomarez’s income until retirement became possible.
The court awarded the business to Mr. Wilcox and the family home, the couple’s
second largest community asset, to Ms. Palomarez. In the final accounting, property
valued at $506,250 was awarded to the husband and property valued at $381,166 was
awarded to the wife. She was also granted her outstanding attorney fees of
approximately $77,000, but after credits and offsets, the final figure was reduced to
roughly $27,000.
3 No. 36842-4-III In re Marriage of Wilcox
Ms. Palomarez timely appealed to this court. A panel heard argument by video
connection.
ANALYSIS
The sole issue addressed in the published portion of this opinion involves the
valuation of the husband’s income from the business. Since the husband used the
business to pay community and personal expenses, the money needs to be treated as
income.
When determining whether to impose a support obligation, the dissolution court
must consider the financial resources of the party seeking support and the ability of the
other spouse to meet his or her needs. RCW 26.09.090. This requires that the trial court
determine the income for both parties and enter a specific finding for income. In re
Marriage of Anthony, 9 Wn. App. 2d 555, 562-63, 446 P.3d 635 (2019). All sources of
income are relevant when calculating maintenance and a party cannot voluntarily reduce
income just to avoid maintenance payments. 20 SCOTT J. HORENSTEIN, WASHINGTON
PRACTICE: FAMILY AND COMMUNITY PROPERTY LAW § 34:9 (2d ed. 2015). When a
couple separates and lives apart, their respective earnings constitute separate property.
RCW 26.16.140.
An S corporation pays no income tax, but passes its profits on to its owner(s) to be
taxed at individual tax rates. Gitlitz v. Comm’r, 531 U.S. 206, 214 n.6, 121 S. Ct. 701,
148 L. Ed. 2d 613 (2001). Corporate income is calculated under the familiar formula of
4 No. 36842-4-III In re Marriage of Wilcox
income minus “ordinary and necessary” business expenses. Comm’r v. Heininger, 320
U.S. 467, 475, 64 S. Ct. 249, 88 L. Ed. 171 (1943). Whether an expense is “ordinary and
necessary” is a factual determination for the tax court. Id. An S corporation is permitted
to retain earnings for business purposes rather than pass the funds on to the owners. 26
U.S.C.A. § 535(c)(1).3 The income, even though not distributed, still is reported on the
individual’s tax returns. E.g., Exs. 11 (l.17); 12 (l.21).
In resolving a dissolution proceeding, a court may look into the structure of a
wholly owned corporate entity for the purposes of ensuring a fair division of assets. W.
G. Platts, Inc. v. Platts, 49 Wn.2d 203, 208-09, 298 P.2d 1107 (1956).4 Washington
applies the rule that “a business’s retained earnings should be considered income to the
business’s sole owner, absent a legitimate business need to retain the earnings.” In re
Marriage of Stenshoel, 72 Wn. App. 800, 806, 866 P.2d 635 (1993). The burden is on
the business owner to demonstrate that retained earnings are solely maintained for the
business. Id. at 806-07. However, it is not an abuse of discretion for the trial court to use
the amount of money drawn by the community to calculate income if that value reflects
the parties’ income and living conditions predissolution. Id.
3 Made applicable to S corporations by 26 U.S.C. § 1371(a). 4 Similarly, when a person solely owns a corporation and closely controls its assets, those corporate assets may be used to satisfy personal debts. Standard Fire Ins. Co. v. Blakeslee, 54 Wn. App. 1, 5, 771 P.2d 1172 (1989).
5 No. 36842-4-III In re Marriage of Wilcox
Application of these standards to the business at issue in this appeal requires some
discussion of relevant financial concerns. Here, the couple’s business grew appreciably
as the economy rebounded from the great recession. Corporate income in tax year 2011
was $16,329 and was $75,787 in 2013. Exs. 1, 3. The corporate tax returns for the years
2014-2017 when the business elected to be an S corporation showed the business making
between $52,917 (2014) and $192,760 (2016). Exs. 6, 12. Despite the dramatic increase
in income, Mr. Wilcox’s salary increased very little. Exs. 5, 8, 12, 14.
The business paid a number of personal expenses. From the point of separation in
mid-2015, Mr. Wilcox paid temporary spousal maintenance in the sum of $2,500 per
month, as well as child support for a brief period until their daughter entered college. He
duly deducted these expenses on his income tax returns. Exs. 11, 14. The business paid
many of Mr. Wilcox’s other personal expenses (car insurance, gas, telephone). Ex. 39.
The business also paid personal expenses of the community prior to separation and
afterwards. Ex. 39. The support payments were made by the business, as were Wilcox’s
attorney fees and expert witness fees. Ex. 39; Report of Proceedings (RP) at 42-43. The
federal income tax withholding for Mr. Wilcox’s income tax was treated as a business
expense on the corporate return. RP at 43-45. As stated earlier, the trial court accepted
Mr. Wilcox’s chosen salary as the foundation for issuing the support rulings, selecting
$40,000 as his salary for that purpose. The remainder of the business profit was
permitted to be retained by the business. Clerk’s Papers (CP) at 112-13. Under the noted
6 No. 36842-4-III In re Marriage of Wilcox
circumstances, we conclude that was error. The actual income was greater than the
attributed income.
As noted in Stenshoel, the entirety of the retained income was available to Mr.
Wilcox in the absence of a demonstrated business need. Mr. Wilcox had already paid the
personal taxes on the income, establishing it as his own. His judgment about any
business need for the funding was important information for the trial court to consider,
but it was not dispositive. Plowing the income back into the company could serve a
business purpose such as providing a corporate line of credit instead of using a
commercial line of credit. Or it could simply increase Mr. Wilcox’s equity in the
business—a personal gain rather than a business need. The trial court needed to identify
the business benefit of the retained earnings before excluding that income from its
consideration.
Similarly, Mr. Wilcox had a substantial number of personal obligations paid for by
the corporation, some of which were deducted as business expenses and some of which
likely were not.5 However, deductibility is irrelevant to the question of whether the
payments were income to Mr. Wilcox. When the corporation stepped in and paid expenses
5 For instance, personal attorney fees are not deductible expenses. Garcia v. Comm’r, T.C. Summ. Op. 2018-38, 2018 WL 3763347. Attorney fees spent defending against a federal investigation are a business expense. Comm’r v. Heininger, 320 U.S. 467, 474-75, 64 S. Ct. 249, 88 L. Ed. 171 (1943).
7 No. 36842-4-III In re Marriage of Wilcox
that benefited Mr. Wilcox personally, the payments were the equivalent of income. The
trial court needed to account for that income when establishing maintenance.
The 2017 tax return filed by Mr. Wilcox demonstrates the nature of the problem.
Despite a personal income of $39,891, Mr. Wilcox paid $38,812 in personal income tax
because the business profit of $167,390 was also included in his income. Ex. 14. The
corporation recognized its profits as Mr. Wilcox’s income, despite his choice to leave that
money in the business. He also deducted from his income the $30,000 in “alimony” paid
to Ms. Palomarez. Ex. 14. He was not capable of paying either the taxes or the spousal
support based from his official salary. Likewise, the business, a community asset, paid
those obligations and other personal expenses such as his personal attorney and fees.
We conclude that when one spouse’s personal expenses are paid by a corporation,
the dissolution court must attribute those payments as income when calculating a support
obligation. Here, the court erred in not doing so. Similarly, when one spouse receives
income from a closely held corporation under his management and returns that income to
the corporation, the trial court must carefully scrutinize the decision and may only
exclude from the income calculation the money legitimately needed by the corporation.
Stenshoel, 72 Wn. App. 800. Mr. Wilcox, as manager of the business, had a fiduciary
obligation to manage the community asset on behalf of the community. Whether it was
appropriate to return the money to the business rather than treat the income as his
separate property was a significant question for the court to answer. The court erred in
8 No. 36842-4-III In re Marriage of Wilcox
failing to identify a business need for the cash.6 For both reasons, the income
determination was erroneous and we therefore reverse the spousal maintenance award.7
Reversed and remanded for further proceedings consistent with this opinion.
A majority of the panel having determined that only the foregoing portion of this
opinion will be printed in the Washington Appellate Reports and that the remainder,
having no precedential value, shall be filed for public record pursuant to RCW 2.06.040,
it is so ordered.
Remaining Issues
Ms. Palomarez alleges several additional errors, some of which have merit. In
light of our remand, we address most of those contentions briefly. Because we are
reversing the maintenance award and the property division, we leave it to the discretion
of the trial judge whether other aspects of the property division that are either not
challenged here or are affirmed need to be revisited when making a new property
division. After discussing the challenged aspects of the property award, we turn to Ms.
Palomarez’s request for attorney fees.
6 The trial court recognized the problem in its very detailed and thorough findings of fact, but declined to dig deeper in the absence of evidence that the corporation had disbursed additional cash to Mr. Wilcox. CP at 112 n.77. Mr. Wilcox’s own testimony that the maintenance and attorney fee payments were made by the business justified looking more carefully at Wilcox’s use of the business income. 7 We do not address Ms. Palomarez’s other challenges to the maintenance award since it will have to be considered anew and the award may change on remand.
9 No. 36842-4-III In re Marriage of Wilcox
Property Division Issues
Before discussing specific challenges to the property division, we start by
mentioning the principles that govern our review of these issues. Those principles
involve the basic statutes governing dissolution of marriage and community property, as
well as the standard for appellate review of trial rulings.
Washington is a community property state. Chapter 26.16 RCW. Thus, property
“acquired after marriage” “is community property.” RCW 26.16.030. The “word
‘acquired’ should be construed to encompass wages and other property acquired through
the toil, talent, or other productive faculty of either spouse.” In re Marriage of Brown,
100 Wn.2d 729, 737, 675 P.2d 1207 (1984). Each spouse has equal authority to manage
community property, but neither can encumber real estate without the consent of the other,
and the ability to give away property by gift or bequest is limited. RCW 26.16.030.
All property is before the court for distribution in dissolution proceedings and the
trial court must characterize the property as community or separate. In re Marriage of
Brewer, 137 Wn.2d 756, 766, 976 P.2d 102 (1999); Baker v. Baker, 80 Wn.2d 736, 745,
498 P.2d 315 (1972). We review property characterization rulings de novo. In re
Marriage of Chumbley, 150 Wn.2d 1, 5, 74 P.3d 129 (2003).
The distribution does not have to be equal. In re Marriage of Washburn, 101
Wn.2d 168, 179, 677 P.2d 152 (1984). After a long-term marriage (over 25 years), the
court’s primary goal is to establish equal financial footing for both individuals for the rest
10 No. 36842-4-III In re Marriage of Wilcox
of their lives. In re Marriage of Doneen, 197 Wn. App. 941, 949, 391 P.3d 594 (2017).
We review the distribution for abuse of discretion. In re Marriage of Rockwell, 141 Wn.
App. 235, 242-44, 170 P.3d 572 (2007). Discretion is abused when it is exercised on
untenable grounds or for untenable reasons. State ex rel. Carroll v. Junker, 79 Wn.2d 12,
26, 482 P.2d 775 (1971). A court acts on untenable grounds when its factual findings are
not supported by the record; it acts for untenable reasons if it uses an incorrect standard
of law or the facts do not meet the requirements of the standard of law. State v.
Rundquist, 79 Wn. App. 786, 793, 905 P.2d 922 (1995).
An appellate court reviews a trial court’s decision following a bench trial to
determine whether substantial evidence supports any challenged findings and whether the
findings support the conclusions of law. State v. Hovig, 149 Wn. App. 1, 8, 202 P.3d 318
(2009). “Substantial evidence” is sufficient evidence to persuade a fair-minded person of
the truth of the declared premise. Panorama Vill. Homeowners Ass’n v. Golden Rule
Roofing, Inc., 102 Wn. App. 422, 425, 10 P.3d 417 (2000). Conclusions of law are
reviewed de novo. Robel v. Roundup Corp., 148 Wn.2d 35, 42, 59 P.3d 611 (2002). We
defer to the trial court’s credibility determinations, and we will not reweigh evidence
even if we would have resolved conflicting evidence differently. Thorndike v. Hesperian
Orchards, Inc., 54 Wn.2d 570, 575, 343 P.2d 183 (1959); Quinn v. Cherry Lane Auto
Plaza, Inc., 153 Wn. App. 710, 717, 225 P.3d 266 (2009).
11 No. 36842-4-III In re Marriage of Wilcox
Overall Property Award. Ms. Palomarez argues that the overall property division
does not leave the parties on equal footing. Doneen, 197 Wn. App. at 949. She correctly
points out that the $506,250 awarded to Mr. Wilcox and the $381,166 awarded to her
resulted in Wilcox receiving 57 percent of the community property. Since the only
significant income-producing asset was granted to the husband, the property disparity is
actually greater and will grow over time.
While the trial court did the best it could by giving the wife the house, the pension,
and other remaining larger assets, the resulting disparity does give us pause. Still, we
need not decide the issue at this time. As a result of the rulings discussed below, the
disparity will be close to 60-40 in favor of the higher earner. The trial court necessarily
will have to reconsider the total property division and determine whether a transfer
payment or some other arrangement is appropriate when issuing the new property award.
Rent. The court “awarded”8 Ms. Palomarez $1,000 in rent for each of the 42
months she lived in the house prior to trial. She paid the remaining $35,000 on the
mortgage from her separate income (primarily the support payment). Accordingly, the
trial court offset the $42,000 in rent by the $35,000 benefit to the community, and offset
half of the remaining $7,000 against the attorney fee award. We reverse the rent ruling
and the ensuing offset awards.
8 Although the trial court treated it as a property award, in practice this was an assessment of an obligation.
12 No. 36842-4-III In re Marriage of Wilcox
Mr. Wilcox never requested rent and Ms. Palomarez had no inkling it was a
potential concern, particularly where both parties desired that she be awarded the home.
In similar circumstances, Division One once wrote that, while it is common for one spouse
to be temporarily awarded a house,
[i]t is highly unusual, however, to retroactively assign a rental charge to the spouse occupying the family community property home during the pendency of the case, and then reduce that spouse’s distributive share of community property accordingly. As in this case, such a determination may significantly impact the residency decisions and requests of a spouse long after the fact.
In re Marriage of Nuss, 65 Wn. App. 334, 338, 828 P.2d 627 (1992). The court
concluded it was an abuse of discretion to charge the wife rent even though the husband
made all house payments from his separate property. Id. at 338-39. Here, of course, the
occupant spouse was the one who made the mortgage payments pending trial from her
separate income. It was an even clearer case of abuse of discretion than in Nuss.
The decision to assess rent contrasts with the treatment of the business. In
addition to his salary, Mr. Wilcox claimed the business income as his own by including it
in his individual returns in 2016 and 2017, even though the separated couple had filed a
joint return in 2015.9 He treated the business as his own separate property, even while
9 It would have simplified several problems if the couple had continued the joint filing of their tax return while giving each an equal share of the profits to do with as they pleased or if each had taken one-half of the annual profit and reported it on his or her respective tax return.
13 No. 36842-4-III In re Marriage of Wilcox
returning the profit to the corporation. Mr. Wilcox owed nothing to the community for
his use of the business while Ms. Palomarez was charged rent to live in the community
house while she was paying the housing expenses.10 The disparate treatment constituted
an abuse of discretion.
Line of Credit. The couple had obtained a line of credit, secured by the family
home, in conjunction with the original purchase of the business. While separated, the
business paid off the nearly $20,000 remaining balance on the line of credit. The trial
court then awarded the debt to the husband and offset half of that amount against the
wife’s property. She correctly points out that this amounted to double counting because
the corporation, not Mr. Wilcox, paid off the debt and that action was accounted for on
the books of the business and, therefore, in its valuation.
The brief of appellant appropriately documents the business records that account
for these actions. Under these facts, it amounted to double counting to treat the retired
business debt as personal property of the parties. We reverse both the award of the debt
to the husband and half of that debt to the wife.
Husband’s Salary. Ms. Palomarez also argues that the court erred in valuing Mr.
Wilcox’s salary at $40,000 when her expert testified that it was worth $100,000 in similar
business operations. This argument fails on multiple grounds.
10 We imagine that she again will be credited for the mortgage payments on remand.
14 No. 36842-4-III In re Marriage of Wilcox
For purposes of spousal support, we have already explained the adjustments the
court needs to make on remand. Here, Ms. Palomarez argues that the business valuation
should be higher due after imputing a higher management salary to the business operator,
Mr. Wilcox. This argument supported the equity interest valuation approach used by her
expert that the trial judge declined to apply. One problem with this argument is that she
does not assign error to the business valuation, so the topic is not before us. RAP
10.3(g).11 A second problem is that the court did use the alternative fair market value
approach suggested by her expert. Any error likely is waived.
Even if the issue were properly before us, though, we would conclude that the trial
court did not abuse its discretion. It heard the competing testimony of the two witnesses
and explained, thoroughly and carefully, the reasons that it rejected two of the approaches
offered and, instead, accepted a third approach put forth by the wife’s expert. The court
had very tenable bases for acting as it did. There was no abuse of discretion.
Down Payment. The trial court awarded Mr. Wilcox credit for $20,000 allegedly
contributed to the down payment on the community house from the sale of the home he
owned before the couple married. Mr. Wilcox failed to prove this point. Substantial
evidence does not support the trial court’s finding.
11 Mr. Wilcox assigns error to the valuation and argues that the court overvalued the business. Because he did not cross appeal, we do not consider his claim. In light of the trial court’s carefully reasoned opinion, we would reject this argument if it were properly before us.
15 No. 36842-4-III In re Marriage of Wilcox
Mr. Wilcox did not testify concerning the source of the down payment. His
attorney repeatedly asked Ms. Palomarez whether $20,000 came from the sale of Mr.
Wilcox’s prior house; she repeatedly answered she did not know. On appeal, Mr. Wilcox
argues that because she was not credible, the evidence supported the finding.12 This is an
error of logic. One cannot draw an affirmative conclusion from a negative premise. I.
COPI & C. COHEN, INTRODUCTION TO LOGIC 277-78 (10th ed. 1998); J. BRENNAN, A
HANDBOOK OF LOGIC 79-81 (2d ed. 1961).
Assuming that her denial was incorrect, the only conclusion that could be drawn
from the testimony is that she did know where the money came from. That is far short of
establishing that the down payment actually did come from Mr. Wilcox’s separate
property. Substantial evidence did not support the finding that $20,000 came from Mr.
Wilcox. The court erred in awarding the liability to Ms. Palomarez.
Community Expenses Paid by Business. Ms. Palomarez next argues that the trial
court erred in treating personal and community expenses as “a wash” for valuation
purposes. We disagree.
For purposes of computing income for awarding maintenance, we have already
directed that the trial court consider expenses paid on Mr. Wilcox’s behalf be included in
12 The trial court expressly found that Mr. Wilcox generally was credible, but the court had significant doubts about Ms. Palomarez. In matters of business financing, neither was particularly sophisticated and the court discounted the testimony of both. CP at 79-80, 99.
16 No. 36842-4-III In re Marriage of Wilcox
his income. To the extent that Ms. Palomarez seeks an award of property, we conclude
that this issue, too, was resolved by the valuation of the business and its assignment to
Mr. Wilcox. To the extent she seeks to attribute such payments for the purpose of
dividing community property, it also would amount to double counting the payments as
both personal and business property.
The court did not err.
Escrow Refund. Lastly, Ms. Palomarez argues that the trial court erred in splitting
the $986.10 escrow refund check. For two reasons, we disagree. First, she did not
establish that the refund came as a result of unused escrow funded by her personal
payments. While that may, in fact, be true, she did not trace back to an “empty” escrow
account that she thereafter funded.
Secondly, and more fundamentally, the house was a community asset at the time it
was paid off. She presumably will be credited, as she was initially, for paying off the
mortgage when the court addresses the property division on remand. If so, it again would
amount to double credit for her to claim the overpayment (unused escrow funds) as both
her personal property and as a portion of the community debt that must be repaid to her.
The trial court did not err by dividing the refund.
We reverse the property division and remand for the court to again consider the
appropriate division in light of the rulings listed above. Some of the offsets to the trial
court’s attorney fee award also will need to be removed.
17 No. 36842-4-III In re Marriage of Wilcox
Attorney Fees
Ms. Palomarez seeks attorney fees on appeal. Both parties have filed financial
affidavits addressing their current financial circumstances. We conclude that Ms.
Palomarez has need and Mr. Wilcox has the ability to pay the fees. RCW 26.09.140.
Ms. Palomarez is entitled to her reasonable attorney fees on appeal upon timely
request. RAP 18.1. Our commissioner will resolve any timely objection to the request.
Reversed and remanded for further proceedings consistent with this opinion.
_________________________________ Korsmo, A.C.J.
WE CONCUR:
_________________________________ Siddoway, J.
_________________________________ Lawrence-Berrey, J.