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.
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PRESIDING JUSTICE LYTTON delivered the opinion of the court:
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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.
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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
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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
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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
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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
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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.
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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
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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.
Affirmed.
CARTER and SCHMIDT, JJ., concurring.
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