IN THE COURT OF APPEALS OF IOWA
No. 13-1751
Filed December 10, 2014
IN RE THE MARRIAGE OF ANGELA RENEE JOHNSTON
AND JEREMY JAMES JOHNSTON
Upon the Petition of
ANGELA RENEE JOHNSTON,
Petitioner-Appellee,
And Concerning
JEREMY JAMES JOHNSTON,
Respondent-Appellant.
________________________________________________________________
Appeal from the Iowa District Court for Audubon County, Timothy
O'Grady, Judge.
The appellant, Jeremy James Johnston, appeals from the property
division entered as a result of a dissolution of his marriage with Angela Renee
Johnston. AFFIRMED AS MODIFIED.
Gregory J. Siemann, Carroll, for appellant.
Joel Baxter of Wild, Baxter & Sand, P.C., Guthrie Center, for appellee.
Heard by Vaitheswaran, P.J., Mullins, J., and Goodhue, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2013).
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GOODHUE, S.J.
The appellant, Jeremy James Johnston, appeals from the property
division entered as a result of a dissolution of his marriage with Angela Renee
Johnston.
I. Background Facts and Proceedings
Jeremy and Angela were married July 28, 2007. They have no children.
On July, 16, 2013, when the dissolution trial was held, Jeremy was thirty-one
years of age and Angela was thirty-four. Angela has a B.A. in psychology and a
master’s degree in educational psychology. She has been employed as a school
psychologist during the period of the marriage, and her income has increased
from approximately $40,000 per year to $60,000 per year. In addition, her
employment provided the usual fringe benefits. Jeremy has been involved in
farming since he was a teenager. He attended Iowa State University and
received a degree in agriculture but continued to farm while in college and
became a full-time farmer in 2004 when he graduated.
At the time of the marriage Angela had a net worth of $68,000 and Jeremy
had filed a financial statement with his lender showing a net worth of $187,120 as
of January 3, 2007. Jeremy contends his net worth was substantially higher in
July when the parties were married, which he estimates to have been $364,534.
During the marriage Jeremy received a certificate of deposit from his
grandmother in the amount of $27,308.76 and received a $16,000 settlement as
a result of a personal injury received in an automobile accident. In anticipation of
the marriage, the parties purchased one and one-half acres with a house on it
from Jeremy’s father, Steven. The two properties are intertwined with each
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other. The electric utility connection for Jeremy’s house is located on Steven’s
farm, they share driveways memorialized by easements, and Jeremy’s septic
system laterals are in part located on Steven’s land.
Jeremy has always farmed with Steven and they have shared labor and
equipment. Jeremy owns grain bins on Steven’s land, they store machinery in
each other’s machine sheds, and share grain storage. Jeremy owns forty
percent of a cattle herd and Steven owns the other sixty percent. There is no
written contract between Steven and Jeremy other than easements for access
into each other’s property. Jeremy has a sprayer and sprays Steven’s crops as
well as doing custom work for the neighbors. Steven owns a combine, which
both parties use. Jeremy contends he has received an advantage in the form of
equipment usage and services from the joint operations, which he considers a
gift. He contends it was a gift that should be taken into consideration in the
property settlement. Jeremy put together an after-the-fact calculation of the
amount he claimed had been gifted by his father during the marriage and arrived
at the sum of $179,795.69.
The parties are heavily leveraged and Jeremy requested that the assets
be sold, the debts paid, and the remainder divided between the parties with each
party paying the tax due on their share of the proceeds. He contends it is
inequitable to place all of the tax burden on him. The trial court noted in its
decree that the relationship between Steven and Jeremy in their farming
operation and intertwined ownership of their assets would have a detrimental
effect on any sale and accordingly formed an alternative division of the marital
property.
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The trial court set off Jeremy’s injury settlement in the amount of $16,000
and the gift from his grandmother in the amount of $27,508.36 and did not
include those sums in the marital assets of the parties. The trial court made no
allowance for premarital property or allowance to Jeremy for the claimed gift from
Steven and did not consider any tax consequences that might result from the
decree entered.
The trial court awarded property to Angela that had an undisputed net
value of $80,104, and to Jeremy property that had an undisputed net value of
$942,494 after subtracting the $16,000 accident payment and the debt of
$498,991 that Jeremy was to assume. The trial court in effect valued the marital
assets of the parties at $1,022,598. To equalize the property received by each
party, Jeremy was ordered to pay Angela $431,495. Jeremy was ordered to pay
$97,266 by October 25, 2013, and the balance in $50,000 installments with the
first to be paid on January 7, 2014, and a like payment on January 7 of each
following year until paid in full. The amounts due were to begin bearing interest
at 2.12% per annum on the balance due beginning August 19, 2013.
Jeremy has appealed, contending that the property division was
inequitable because it failed to take into consideration Steven’s gifts to him by
way of farm machinery or its usage and services, or the premarital property
brought into the marriage. In addition both parties mentioned the tax
consequences, or lack of tax consequences, to Jeremy created by the property
division.
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II. Standard of Review
Dissolution matters are reviewed de novo. In re Marriage of Sullins, 715
N.W.2d 242, 247 (Iowa 2006). Precedent is of little value as each case depends
on its particular facts. In re Marriage of White, 537 N.W.2d 744, 746 (Iowa
1995). The trial court’s ruling will be modified only when it fails to do equity. In re
Marriage of Schriner, 695 N.W.2d 493, 496 (Iowa 2005).
III. Discussion
The final valuations arrived at by the trial court were set out in the decree
and the two subsequent amendments. Apparently the parties had agreed to
freeze their financial status as of December 31, 2012, but the agreement was not
made in writing. Jeremy continued to operate the farm on an ongoing basis after
December 31, 2012, until the date of trial. The court noted it attempted to give
effect to the agreement where possible even though the valuations in
dissolutions are to be made as of the date of the trial. Nevertheless, the
agreement created significant confusion. Fortunately for this court, neither party
has objected to the property values arrived at by the trial court.
The objective in a division of property between spouses is to divide the
property equitably based on the factors set out in Iowa Code section 598.21(5)
(2011), but an equitable division is not necessarily an equal division. In re
Marriage of Hanson, 733 N.W.2d 683, 702 (Iowa 2007). The factors relevant to
this case are: (a) the length of the marriage; (b) the property brought into the
marriage; (c) the contribution of each party to the marriage, giving appropriate
economic value to each party’s contribution and homemaking; (f) the earning
capacity of each party; (i) other economic circumstances of each party; and
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(j) the tax consequences to each party. See Iowa Code § 598.21(5).
Furthermore,
Property inherited by either party or gifts received by either
party prior or during the course of the marriage is the property of
that party and is not subject to a property division under this section
except upon a finding that refusal to divide the property is
inequitable to the other party.
Id. § 598.21(6).
The trial court set off $27,508.36 Jeremy received as a gift from his
grandmother that had been used to purchase forty percent of Steven’s cattle
herd. This amount was subtracted from Jeremy’s interest in the cattle in the trial
court’s calculation of the marital assets of the party. Also not included as a
marital asset was the $16,000 Jeremy received as a result of the personal injury
award. There is no dispute as to these exclusions from the marital property.
Jeremy maintains he was subsidized by his father by use of his father’s
machinery and services in his farming operation. There was never a written
agreement between Jeremy and his father, nor was there any testimony that an
oral agreement existed. There was no evidence they charged each other, kept a
record of the exchanges, or intended to do so until the dissolution was filed. The
trial court stated in its original decree, “It is not reasonable or equitable that the
value of the marital assets should be reduced on Jeremy’s retroactive calculation
of the value of labor and equipment shared over the years with his father.”
Even though in dissolution matters issues raised on appeal are
determined anew, weight is given to the trial court’s findings. In re Marriage of
Witten, 672 N.W.2d 768, 773 (Iowa 2003). Similar post-dissolution calculations
of gifts of work or equipment in joint farming operations have been denied by the
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courts. See In re Marriage of McDermott, 827 N.W.2d 671, 679-80 (Iowa 2013);
In re Marriage of Miller, 552 N.W.2d 460, 463 (Iowa Ct. App. 1996). The
relationship between Jeremy and Steven was likely mutually beneficial to both
parties. The trial court was not convinced of the credibility of Jeremy’s after-the-
fact computation without any basis of a prior agreement or paperwork. There
may have been some gifting, but Angela also may have been intended to be a
joint beneficiary even though Steven denied any intent of making a gift to Angela.
A parent’s assistance to help a child establish a farming operation or any other
business is a long-held tradition and should be encouraged rather than
discouraged. Nevertheless, in this particular case because of the lack of
documentation contemporary with the gift, it is difficult to quantify the claimed
gifting with any specific value.
Jeremy contends the property division was inequitable because the
premarital property was not considered, and we agree. As of January 1, 2007,
Jeremy filed a financial statement showing a net worth of $187,120. As of the
date of the marriage Angela testified she had a net worth of $68,000. A financial
statement filed with their lender January 7, 2008, showed a net worth of
$533,948. Jeremy attempts to show his net worth as of the date of marriage by
averaging his financial statement of January 7, 2008, with his January 1, 2007
financial statement and thereby establishing a net worth of $364,534. It can be
acknowledged that Jeremy’s net worth could have been appreciably higher on
July 28, 2007, the date of the marriage, than it was on January 1, 2007, but how
to calculate that increase reasonably is problematic. Angela correctly contends
that the increase in net worth from January 1, 2007, to January 7, 2008, was in
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part the result of her efforts and contributions after the marriage. Her argument
has merit. Nevertheless, the jump in the net worth by January of 2008 indicates
there was some increase in Jeremy’s net worth between January 2007 and the
date of the marriage.
The tax consequence of the decree as it exists was not specifically raised
as creating an inequity in the property division, but both parties discussed it in
their respective briefs, and it was an issue thoroughly discussed and subject to
extensive testimony at the time of trial. It is with good reason that Jeremy wants
the property sold and divided with each party paying the tax due on their part of
the sale. When no sale is anticipated it has been held that the tax consequence
of a sale is not to be considered. McDermott, 827 N.W.2d at 684; In re Marriage
of Friedman, 466 N.W.2d 689, 691 (Iowa 1991). These cases are
distinguishable from the situation under consideration. In both of the cited cases
capital assets were involved and the capital gains tax was the primary tax that
would have been assessed.
The Johnstons’ agricultural assets are primarily machinery and equipment,
§ 1231 property under the internal revenue code, and not capital assets subject
to favorable tax treatment. See 26 U.S.C.A. § 1231. Even when buildings are
involved the parties have taken advantage of the special allowance for
depreciation. In the event of a sale the sale price, to the extent it exceeds the
remaining basis, will need to be recaptured as ordinary income. There is
testimony from the Johnstons’ tax preparer that the property the Johnstons had
paid $986,025 to purchase had only a $140,000 remaining basis due largely to
accelerated depreciation. There was testimony that the tax on liquidation of the
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depreciated assets was estimated to be $250,000. Angela indicated the
$250,000 in tax consequences from the sale was excessive but provided no
alternative calculation and pointed out no fallacy in Jeremy’s expert’s calculation
of the tax that would be due. More importantly even if liquidation is avoided,
Jeremy is left with assets with very little basis to depreciate. Whether the assets
are sold or retained, Jeremy will be paying back the depreciation taken either
through a current loss of depreciation if retained or on the recaptured
depreciation if sold.
We conclude it is appropriate to consider the tax consequences when one
party is awarded a disparate amount of the marital assets that have a reduced
tax basis because the parties have taken excess depreciation even though a sale
may not be anticipated. It is particularly appropriate to do so when the excess
depreciation has augmented the parties’ apparent marital assets. An exact
determination of how the excess depreciation might financially impact Jeremy in
the future or how much the savings created by the excess depreciation has
increased the parties’ apparent marital assets is not possible. The estimated tax
on the sale gives guidance but is not a tool that can be used with precision. The
lack of a precise measurement does not deter us from considering the tax
consequences of the property division regardless of whether a sale is
anticipated. This is a situation rarely encountered when capital assets such as
land and corporate stock are involved.
The parties have enjoyed a substantial gain in net worth during the
marriage. Partially this gain is due to good decision-making, commendable
efforts, and an outstanding agricultural economy, but it is also because of their
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ability to take depreciation, and particularly section 179 and special depreciation,
which allows an owner to deduct up to one hundred percent of the cost of an
asset in the year of purchase. 26 U.S.C.A. § 179. The parties’ depreciation
schedule attached to their 2011 tax return, the last joint return the parties filed,
reveals they had taken approximately $490,000 of section 179 depreciation and
over $87,000 of special depreciation prior to December 31, 2011, most of which
took place during the marriage. Even though Angela was making from $40,000
to $60,000 each year, refunds of over $14,000 were received by the parties
during the marriage. The excess depreciation has substantially increased the net
worth of the parties by deferring their income tax and diminishing Jeremy’s self-
employment tax during the marriage.
In addition to the excess depreciation, tax consequences also emanate
from the fact that the tax returns of the parties have been filed on a cash basis.
The assets awarded to Jeremy included over $150,000 in prepaid seed and
fertilizer. The prepayment substantially decreased the tax payable during the
year the prepaid expenses were made and increased the apparent marital assets
of the parties. The prepayment of those expenses means Jeremy could not
deduct them in the following year when the production and the income from the
expenses took place. Once again taxable income has been deferred. To divide
the equity in the parties’ assets equally and shift all the deferred tax to Jeremy is
not an equitable result.
The contention that Jeremy can continue to defer the tax as he has done
in the past is unrealistic. During the period of marriage a taxpayer had the option
to take section 179 depreciation for the full cost of the equipment up to $250,000
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to $500,000 in the year of purchase. For that to continue is highly unlikely,
looking at the provisions of the statute. See 26 U.S.C.A. § 179.
Furthermore, the Johnstons have been able to acquire the machinery and
equipment and prepay expenses to take advantage of deductions by expanding
and using borrowed money. There are limitations on Jeremy’s future ability to
expand by using borrowed money. Any lender will necessarily have to consider
the property settlement obligations and potential depreciation recapture in the
event of a forced liquidation with the knowledge that farm income and the value
of agricultural assets vary substantially from year to year. The trial court was
justifiably concerned about the parties not recovering full value if it were to order
a liquidation sale as a part of the dissolution. In the same manner a banker must
measure the discount in the event of a repossession sale.
Finally, the property settlement may require liquidation if Jeremy is unable
to borrow funds to continue the operation and pay the property settlement
ordered. Two banks had refused to finance him as of the date of a posttrial
hearing on October 2, 2013. The denials were exhibits made of record. There is
an undercurrent in the record that Jeremy’s father would bail him out, but that
should not be involved in our determination of the marital property division.
Potential family assistance is not one of the factors listed under Iowa Code
section 598.21(5) to be considered in property divisions.
Our supreme court has recognized a public policy in favor of preserving
family farms and providing awards and payment schedules in order that the farm
operation may remain viable. In re Marriage of Callenius, 309 N.W.2d 510, 515
(Iowa 1981). Jeremy is receiving a substantial cash award but the 2012 tax
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return reveals it is was not even equivalent to his 2012 cash rent. Each payment
made by Jeremy to Angela will require income sufficient to make the payment
due as well as income to pay the tax on the funds generated to make the
payment. Because of the reduced basis in the property he has been awarded
and the resulting depreciation base there will be very little if any excess cash flow
available. The six years of this marriage have included the most profitable years
for Iowa grain production in recent history. There is little reason to expect that
level of income to continue. There is a very real possibility that Jeremy will need
to borrow or sell assets to make equalizing payments to Angela, which further
justifies consideration of the tax consequences. See In re Marriage of Hogeland,
448 N.W.2d 678, 680-81 (Iowa Ct. App. 1989).
IV. Conclusion
We have concluded it is more equitable to award each party the value of
their premarital property. An equitable division does not necessarily mean an
equal division. In re Marriage of Webb, 426 N.W.2d 402, 405 (Iowa 1988). We
approve the property and debt division made by the trial court but reduce the
cash settlement due from Jeremy to Angela to $260,000. We have subtracted
Jeremy’s premarital property of $187,420 and Angela’s premarital property of
$68,000 from the total equity of $1,022,598, leaving marital assets available for
division of $767,178. If a sale were to be conducted and $250,000 of tax
became due the marital assets would be reduced to $517,178. We believe the
adjustment appropriately takes into consideration the disparity of what each
brought into the marriage and the tax consequences of the deferred income tax.
The $260,000 equalization payment shall bear interest per the original decree at
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the rate of 2.12% per annum beginning as of August 19, 2013. An initial
payment shall be made January 10, 2015, of $80,000, followed by annual
payments in increments of $40,000 per annum beginning on the tenth day of
January 2016, and continuing on the tenth day of January of each succeeding
year until the principal balance and the accrued interest have been paid in full.
We deny Angela’s request for appellate attorney fees. Costs on appeal
are assessed one-half to each party.
AFFIRMED AS MODIFIED.