1. Divorce_equitable distribution_findings_diminution of stock value
An equitable distribution order was remanded for further findings about whether the
diminution of stock value during the separation was the result of defendant's actions. If not, the
decline in stock value is included in the equitable distribution of marital and divisible property; if
so, the diminution may be considered as a distributional factor.
2. Divorce_equitable distribution_presumption for in-kind division_closely held
corporation
An equitable distribution order was remanded for further findings about the in-kind
distribution presumption where there was evidence that defendant's business was a closely held
corporation not susceptible to division.
3. Divorce_equitable distribution_tax refund_marital property
The trial court did not err in an equitable distribution action by classifying a tax refund as
marital property. The refund was not included on the stipulated list of marital property, but
plaintiff did not waive the inclusion of unlisted property in the equitable distribution.
Furthermore, funds received after the separation may be considered marital property when the
right to receive those funds was acquired before the separation.
4. Divorce_equitable distribution_corporate profits_owned by corporation
The trial court erred in an equitable distribution action by distributing profits from a
Subchapter S corporation as marital property. Profits of a Subchapter S corporation are owned
by the corporation, not by the shareholders.
5. Divorce_equitable distribution_IRA
The trial court erred in an equitable distribution case by not distributing plaintiff's IRA
where the parties included it on their list of marital property and stipulated to its value.
6. Divorce_equitable distribution_distributive award_source of assets
The trial court did not err in an equitable distribution action, as defendant contended, by
failing to point to a source of liquid assets from which defendant could pay a distributive award.
The court entered findings on the income generated by defendant's business and the equity in the
marital home, which was awarded to defendant. There was no concern here that defendant might
incur adverse tax consequences (which the court must take into account).
Hedahl & Radtke, by Debra J. Radtke, for plaintiff-appellee.
Reid, Lewis, Deese, Nance & Person, L.L.P., by Renny W. Deese,
for defendant-appellant.
ELMORE, Judge.
Harvey H. Allen (defendant) appeals from a judgment of
equitable distribution. For the reasons discussed herein, we
reverse in part and remand for further findings on the basis for
the distributive award.
Defendant and Michele Barr Allen (plaintiff) were married on
28 April 1984, separated on 25 June 2000, and divorced on 5
September 2001. The parties adopted two children during the
marriage. Defendant, a licensed engineer, started an engineering
firm where plaintiff was an employee and 25 percent shareholder.
Defendant continued to operate the business after the parties'
separation.
Plaintiff filed this action on 18 July 2000 seeking, inter
alia, an equitable distribution of property. Defendant was awarded
custody of the minor children and exclusive possession of the
marital home. The parties signed a pre-trial order and stipulated
to a schedule listing all property to be distributed by the court.
This schedule included several investment accounts with their
values on the date of the parties' separation. Defendant's
evidence at trial tended to show, and plaintiff does not dispute,
that the value of the accounts declined between the date of
separation and the date of distribution.
In its 23 June 2003 equitable distribution order, the trial
court made the following findings regarding an equitable
distribution:
That the Court has considered as
distributional factors, the following:
a. The income, property and liabilities of each at
the time the division is effective;
b. The 16 year 2 months length of marriage, the
parties' age and health;
c. The need of Defendant to occupy the residence
due to the children;
d. The contributions of Plaintiff/wife in assisting
in the business;
e. The liquidity of the investment accounts and the
Defendant's control over those accounts during the
separation.
. . .
That as a divisible factor, the Court has also
considered the diminution in value of the stocks
that occurred after the date of separation.
The court concluded that an equal division of the property was fair
and divided the marital property listed on the pre-trial schedule,
with the exception of an IRA account in plaintiff's name. The
court then ordered the following additional distribution:
5. That the Defendant is to pay the $5,203.00
of the company profit sharing plan, that he
indicated had been paid to [plaintiff] and one
half of the 1999 income tax refund in the
amount of $5490.00 for a total of $10,693.00.
6. That the Allen-Kimley business is awarded to the
Defendant and that he is solely responsible for all
debt and liability thereon.
7. That the Defendant shall owe the Plaintiff a
distributive award of $223,530.00 with a credit of
$15,000 previously paid as an interim distributive
award leaving $208,530 due, along with the
$10,693.00 for a total of $219,223.00.
8. That the Defendant shall pay the $219,223.00 by
paying $10,000.00 at the closing of his refinancing
the marital home within 30 days of the entry of
this order and the remaining $209,223 within six
years at the rate of $17,435.25 every six months at
eight percent (8%) interest.
I. [1] By his first assignment of error, defendant argues that
the diminution in value of the parties' investment accounts after
the date of separation and prior to the date of distribution should
be classified as divisible property. The court distributed the
accounts at their date of separation values. Defendant's evidence
at trial indicated that the value of the accounts had declined
considerably following the date of separation. Plaintiff contends
that the trial court properly viewed the decline in stock value as
a distributional factor.
In equitable distribution actions, the trial court is required
to classify, value, and distribute the marital and divisible
property of the parties. Fountain v. Fountain, 148 N.C. App. 329,
332, 559 S.E.2d 25, 29 (2002). Once the court classifies property
as marital or divisible property, it must distribute that property
equitably. Larkin v. Larkin, 165 N.C. App. 390, 598 S.E.2d 651,
655 (2004). Divisible property is defined in part as follows:
All appreciation and diminution in value of
marital property and divisible property of the
parties occurring after the date of separation
and prior to the date of distribution, except
that appreciation or diminution in value which
is the result of postseparation actions or
activities of a spouse shall not be treated as
divisible property.
N.C. Gen. Stat. § 50-20(b)(4)(a) (2003). Any appreciation or
diminution due to a spouse's post-separation activities may be
considered by the trial court as a distributional factor. See,
e.g., Hay v. Hay, 148 N.C. App. 649, 655, 559 S.E.2d 268, 273
(2002) (trial court may treat post-separation mortgage payments as
a distributional factor); Larkin, ___ N.C. App. at ___, n. 2, 598
S.E.2d at 655 (parties' post-separation withdrawals from a joint
checking account could not be considered divisible property giventheir actions in actively depleting it without accounting to each
other).
Here, the trial judge made a specific finding that the
investment accounts were under defendant's control during the
separation period. It is undisputed from the record that plaintiff
and defendant held two Prav AmeriTrade accounts (AmeriTrade
accounts) jointly and several accounts with Aim Fund Centura (Aim
accounts). The record shows that defendant was a day trader and
traded on the AmeriTrade accounts during the marriage, but that he
ceased this trading activity prior to the separation. Evidence of
plaintiff's access to certain accounts after the separation was
contradictory. Defendant testified that plaintiff continued to
have access to the AmeriTrade accounts after the separation.
Plaintiff testified that she could not gain access to the parties'
Aim accounts because they were in the company's name and could be
signed over to her only by the company's president or an officer.
After examining the record, we conclude that there is
insufficient evidence to determine whether defendant's actions
contributed to the diminution of the stock value after the
separation date. We, therefore, reverse the trial court on this
assignment of error and remand to allow the court to make
additional findings of fact on whether the diminution in stock
value was the result of defendant's post-separation actions. If
the court determines that the diminution in value was not
attributable to defendant's actions, then the court must include
the stock decline in the equitable distribution of marital and
divisible property. See N.C. Gen. Stat. § 50-20(a) (2003).
Conversely, if the court finds that the diminution was the result
of the actions of defendant, then the diminution may be consideredas a distributional factor. N.C. Gen. Stat. § 50-20 (c)(11a)
(2003) (acts of either party to “waste, neglect, devalue or convert
the marital property or divisible property, during the period after
separation of the parties and before the time of distribution”).
II.
[2] By his next assignment of error, defendant argues that the
court failed to state a finding sufficient to indicate its basis
for entering a distributive award . We agree. N.C. Gen. Stat. §
50-20(e) (2003) creates a presumption that an in-kind distribution
of marital or divisible property is equitable, but permits a
distributive award “to facilitate, effectuate, or supplement” the
distribution. The judgment of equitable distribution must contain
a finding of fact, supported by evidence in the record, that the
presumption in favor of an in-kind distribution has been rebutted.
Heath v. Heath, 132 N.C. App. 36, 38, 509 S.E.2d 804, 805 (1999).
In the instant case, the trial court did not make findings
pertaining to the presumption that an in-kind division of the
property was equitable. Yet, the record contains evidence that
defendant's business was a closely held corporation and not
susceptible of division. Such evidence would support a finding
that the in-kind presumption was rebutted. Fountain, 148 N.C. App.
at 339, 559 S.E.2d at 33 (when the property interest is a closely
held corporation, the presumption may be rebutted). We remand for
the entry of further findings of fact regarding the basis for the
court's distributive award.
III.
[3] Defendant's next assignment of error challenges the
court's award of $5,490.00, approximately one-half of the parties'
1999 federal income tax refund, to plaintiff. The record showsthat the parties filed their federal income tax return jointly in
1999 and applied this tax refund toward the 2000 estimated income
tax. In 2000, the parties filed separately. Both parties agree
that the equitable distribution order contains a typographical
error and that the correct value of one-half of the tax return was
$5,940.00. The parties disagree, however, on the classification of
this asset. Defendant contends that the parties did not include
the tax refund on the stipulated list of marital property, and thus
the evidence does not support a conclusion that this is a marital
asset. We disagree.
Here, the parties signed a pre-trial order containing a
stipulation that all property to be classified, evaluated, and
distributed was disclosed on the attached schedules. When entered,
this order was binding upon the parties as to all assets classified
as marital property. See Hamby v. Hamby, 143 N.C. App. 635, 642-
43, 547 S.E.2d 110, 114-15 (2001) (where parties stipulated in pre-
trial order that retirement and deferred compensation plans were
marital property, neither party could later challenge this
classification). However, with respect to any property not listed
in the pre-trial agreement between the parties, plaintiff has not
waived its inclusion in the equitable distribution. See Fitzgerald
v. Fitzgerald, 161 N.C. App. 414, 418, 588 S.E.2d 517, 521 (2003)
(plaintiff spouse did not waive inclusion of defendant's profit-
sharing plan in marital property distribution where parties did not
enter into any agreement concerning the plan prior to trial). We
hold that the trial judge did not err in considering the tax refund
as marital property.
Defendant argues, nonetheless, that the tax refund was not
“presently owned” by either spouse on the date of separation andtherefore does not meet the definition of marital property. We
reject this argument. Marital property is defined as “all real and
personal property acquired by either spouse or both spouses during
the course of the marriage and before the date of the separation of
the parties, and presently owned, except property determined to be
separate property or divisible property . . .” N.C. Gen. Stat. §
50-20(b)(1) (2003). The spouse claiming that the property is
separate bears the burden of proof, as under N.C. Gen. Stat. § 50-
20(b)(1), “[i]t is presumed that all property acquired after the
date of marriage and before the date of separation is marital
property . . .” Id. Further, funds received after the separation
may appropriately be considered as marital property when the right
to receive those funds was acquired during the marriage and before
the separation. Rice v. Rice, 159 N.C. App. 487, 495, 584 S.E.2d
317, 323 (2003). Therefore, the fact that the parties chose to
defer receipt of this property does not change the character of it,
as it was acquired during the marriage. See Talent v. Talent, 76
N.C. App. 545, 555, 334 S.E.2d 256, 262 (1985). The trial judge
did not err in classifying the tax refund as marital property. On
remand, the amount of the refund awarded to plaintiff can be
corrected to $5,940.00.
IV.
[4] Next, defendant assigns error to the court's award of a
$5,203.00 profit sharing distribution to plaintiff. The trial
court's distribution of this asset appears to be based upon
testimony regarding defendant's 2001 reported income. The first
reference in the record to this asset is within expert testimony
concerning the valuation of the business. Defendant's 2001 income
tax return indicated that during the previous year there was a$15,000 “pass-through” of earnings from the company, a Subchapter
S corporation, and that plaintiff's share of this profit was
$5,203.00. Defendant testified that he had not paid out a
shareholder distribution in this amount to plaintiff.
As discussed supra, the fact that the profit sharing
distribution was not included in the pre-trial list of property to
be divided did not preclude the trial judge from considering it as
such. However, the evidence does not support a finding or
conclusion that this asset is marital property. Profits of a
Subchapter S corporation are owned by the corporation, not by the
shareholders, and are referred to as “retained earnings.” In re
Marriage of Brand, 44 P.3d 321, 325 (Kan. 2002). Income tax is
paid by the shareholders, rather than the corporation, and income
is allocated to shareholders based upon their proportionate
ownership of stock. Id. Although North Carolina courts have not
addressed the issue, other jurisdictions have held that as a
general matter, retained earnings of a corporation are not marital
property until distributed to the shareholders. See, e.g., Robert
v. Zygmunt, 652 N.W.2d 537, 542 (Minn. App. 2002); Thomas v.
Thomas, 738 S.W.2d 342, 344 (Tex. App. 1987); Hoffman v. Hoffman,
676 S.W.2d 817, 827 (Mo. 1984).
Here, defendant testified that he was not aware of the “pass-
through” assets indicated on his 2001 tax return. Plaintiff has
failed to meet her burden of proving that the retained earnings of
the Allen business were acquired by either spouse during the
marriage. As such, the evidence does not support a classification
of the $5,203.00 earnings as marital property. Rather, the pass-
through earnings were one component of the book value of thecorporation. The trial court's distribution of the earnings as
marital property was error.
V.
[5] Next, defendant argues that the trial court erred in
failing to distribute plaintiff's Prav IRA account (IRA). The
parties included this asset on the list of marital property
attached to the pre-trial order and stipulated to its value on the
date of separation.
(See footnote 1)
In its findings, the trial court listed the
marital property but failed to include plaintiff's IRA. Because
the parties stipulated that plaintiff's IRA was property to be
distributed and not separate property, the trial court erred in not
including the IRA within the property division. See Hamby, 143
N.C. App. at 643, 547 S.E.2d at 115; see also White v. Davis, 163
N.C. App. 21, 29, 592 S.E.2d 265, 271 (2004) (stipulation in pre-
trial order classifying defendant's interest in medical practice as
marital property was binding on the court and the parties). We
remand for the court to incorporate the IRA as marital property and
properly distribute it.
VI.
[6] Finally, defendant argues that the court failed to point
to a source of liquid assets from which defendant could pay the
distributive award. We disagree. The trial court stated that
defendant owed a total distributive award of $219,223.00 and
“[t]hat Defendant shall pay the $219,223.00 by paying $10,000.00 at
the closing of his refinancing the marital home within 30 days of
the entry of this order and the remaining $209,223 within six yearsat the rate of $17,435.25 every six months at eight percent (8%)
interest.”
Defendant cites to the case of Embler v. Embler, 159 N.C. App.
186, 582 S.E.2d 628 (2003), as support for his argument that the
court failed to specify a sufficient source of liquid assets from
which he could make the distributive award payments. On the facts
of this case, we believe that Embler is distinguishable. In
Embler, the trial court ordered the defendant spouse to pay a
distributive award of $24,876.00 within sixty days. The defendant
argued on appeal that he had insufficient liquid assets and would
incur penalties if he withdrew the necessary funds from his
retirement accounts. A panel of this Court held that the trial
court should have determined whether the defendant had sufficient
liquid assets and adjusted the distributive award in order to
offset any adverse financial consequences to be incurred by using
non-liquid assets. Embler, 159 N.C. App. at 188-89, 582 S.E.2d at
630.
In the instant case, the trial court entered findings on the
income generated by the Allen business in 2001 and on the equity in
the marital home , which was awarded to defendant. Specifically,
the court found that the business paid an income of $144,000.00 in
2001 and that defendant receives an additional $1,000.00 each month
for renting space at the residence. With respect to the marital
residence, the court found that as of the separation date it had
been appraised at $327,000.00 and the net equity was $68,599.00,
and that after the separation date defendant had increased the
equity line. The court directed defendant to pay the initial
$10,000.00 of the distributive award from the refinancing of the
marital home. As the money derived from refinancing the mortgageon the marital home was a source of liquid funds available to
defendant, the concern that defendant might incur adverse tax
consequences by borrowing from non-liquid sources is not implicated
here. Embler, 159 N.C. App. at 188-89, 582 S.E.2d at 630 (if
defendant is to pay distributive award from non-liquid assets or by
obtaining a loan, trial court must take tax consequences into
account). Likewise, defendant's income from his operation of the
business was an obvious source of liquid assets available to pay
the remainder of the award over a period of six years. Defendant's
assignment of error is overruled.
Affirmed in part, reversed in part, and remanded.
Judges CALABRIA and STEELMAN concur.
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