NO. 88-100
IN THE SUPREME COURT OF THE STATE OF MONTANA
1-988
IN RE THE MARRIAGE OF
CHRISTINE BOZARTH MILESNICK,
Petitioner and Respondent,
and
THOKAS OWEN MILESNICK,
Respondent and. Appellant.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Joseph Garyv, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
James A. Johnstone, Bozeman, Montana
For Respondent :
John P . Atkins; Bryan & Atkins, Rozeman, Montana
Submitted on Briefs: Sept. 1, 1988
Decided: December 8, 1988
-.. <;3 f 2 (- ,
sled:
Mr. Justice William E. Bunt, Sr., delivered the Opinion of
the Court.
Both parties in a dissolution action appeal the property
distribution ordered by the District Court of the Eighteenth
Judicial District, Gallatin County. The husband also appeals
the District Court's refusal to allocate dependency
exemptions between the parties. We affirm.
The husband raises the following issues on appeal:
1. Whether the District Court abused its discretion by
refusing to allocate the tax exempti-ons for the parties'
dependent children.
2. Whether the District Court abused its discretion in
valuing the husband's interest in a trucking partnership.
3. Whether the District Court abused its discretion by
failing to include the ranch operating debt when it computed
the net worth of the husband's estate.
On cross-appeal, the wife adds the following issue for
review:
1. Whether the District Court abused its discretion by
discounting the value of the parties' stock in the family
ranch corporation.
Christine and Thomas Milesnick were married on September
15, 1979. They were separated on April 1, 1986. During the
marriage, two sons were born. Thomas also adopted
Christine's son of a previous union.
The husband brought substantial assets into the
marriage, including a trucking partnership, a two-story home,
the entire interest in 106 acres, and a one-half interest in
348 acres. The real property was heavily encumbered.
The other interest in the 348 acres was owned by the
husband's parents. In 1980, the parents incorporated their
holdings. Both Thomas and Christine were given, as qifts,
shares in the corporation. Thomas received 2,284 and
Christine received 1,790 of the total 40,000 outstanding
shares.
Throughout the marriage the couple engaged in the
farming and ranching business. The wife did not work
outside the home and ranch until February, 1986. At the time
of the dissolution hearing, she was employed as a secretary
and swimming instructor.
The wife petitioned for dissolution on August 29, 1986.
A two-day hearing was held on May 28 and 29, 1987, after
which the District Court issued findings of fact, conclusions
of law and a decree of dissolution with an accompanying
memorandum.
The District Court awarded the parties joint custody of
the children and ordered the husband to pay child support of
$636 for 10 months each year. The court recommended that the
children reside with the wife during the school year and at.
least one month each summer but declined to specifically
order such an arrangement, leaving it to the parties to work
out the details themselves.
The trial court divided the property of the parties by
comparing the net value of the husband's separate assets as
of 1979, the time of the marriage, and 1986, the time of the
filing of the petition for dissolution. The court concluded
that the husband's property had depreciated by $75,940 over
the seven-year period. The court deducted the amount of
depreciation from the value of the marital assets, leaving a
net of $94,334. It then split that number in half, awarding
each party 50 percent or $47,167. Determining that the
marital property, consisting mainly of stock in First
Security Bank and Milesnick Ranch, Inc., should remain with
the husband, the court ordered Thomas to pay a monetary sum
to Christine as her share of the property award. Thomas was
to pay an initial remittance of $30,000 with the balance to
be paid in four annual installments of $4,300.
Unhappy with the outcome of the decree, both parties
moved the District Court to amend the findings of fact and
conclusions of law. The court denied all but one of the
parties' motions to amend. The amendment adopted, that
allowing cost of living increases for child support, is not
at issue here. The majority of the amendments denied
comprise the topics of the present appeal.
The first issue for our consideration concerns whether
the District Court abused its discretion by refusing to
allocate the federal income tax exemptions for the parties'
dependent children. Resolution of this question involves a
two-step analysis. We must first examine whether the Montana
state courts have jurisdiction to allocate the exemption. If
the state courts have jurisdiction, we must then determine
whether the District Court abused its discretion b 7 failing
l
to make the allocation.
Until the Tax Reform Act of 1984, there was general
agreement that the state courts had the power to assign the
dependency exemptions for the children of parties to a
dissolution action. See, e.g., In Re the Marriage of Greeler
(Minn.Ct.App. 1985), 368 N.W.2d 2; MacDonald v. MacDonald
(N.H. 1982), 443 A.2d 1017; Niederkorn v. Niederkorn
(Mo.Ct.App. 1981), 616 S.W.2d 529. The pertinent statute at
that time, 26 USC S 152 (e) (1976), provided that the
custodial parent received the exemption unless the
dissolution decree gave the exemption to the noncustodial
parent and that parent provided at least $600 toward the
support of the child during the year. If the divorce decree
was silent on the matter, the noncustodial parent was
entitled to the exemption if he or she provided $1,200 or
more in child support during the year and the custodial
parent could not establish that he or she contributed more.
The dependency exemption provision of the Internal
Revenue Code was originally enacted in 1967. Its aim was
to provide a vehicle by which divorced parents could negotiate
the exemption between themselves without involving the
Internal Revenue Service (Service). - Comment, Tax
See,
Planning in Divorce: Both Spouses Benefit from the Tax
Reform Act of 1984 (1985), 21 Willamette L.Rev. 767, 801.
Unfortunately, the statute did not promote amicable
parental settlements. The Service continually found itself
caught in battles over which parent was entitled to the
exemption. Therefore, in 1984, Congress amended the law.
The present statute provides that the parent with
physical custody of the child for the greater part of the
year shall take the exemption unless (1) he or she signs a
waiver that releases the exemption to the noncustodial parent
or ( 2 ) the noncustodial parent received the right to claim
an exemption in a divorce decree dated prior to January 1,
1985 and he or she contributed at least $600 per year in
support. 26 U.S.C. § 152(e). There is no mention in the
statute, as amended, of the effect of the allocation of
exemptions in a decree of dissolution issued after January 1,
1985.
A small number of courts have held that the 1984
amendments divested the states of jurisdiction to award
dependency exemptions in conjunction with dissolution
actions. Lorenz v. Lorenz (Mich.Ct.App. 1988), 419 N.W.2d 770;
In Re the Marriage of Vinson (0r.Ct.App. 1987), 732 P.2d 79,
review denied, 736 P.2d 566. The majority of courts that have
considered the question, however, have held that the
amendments to 26 USC § 152(e) were enacted merely to promote
administrative efficiency and were not intended to encroach
upon the state's power to determine financial matters between
the parties in a dissolution action. Hughes v. Hughes (Ohio
,
1988), 518 N.E.2d 1213, cert. denied, - U.S. - 109 S.Ct.
124, - L.Ed.2d - Cross v. Cross (W.Va. 19871, 363 S.E.2d
;
449; In Re the Marriage of Lincoln (Ariz.Ct.App. 1987), 746
p.2d 13; Fudenberg v. Molstad (Minn.Ct.App. 19861, 390 N.W.2d
The majority's position is supported by the explanation
of the changes given by the Staff of the Joint Congressional
Committee on Taxation.
The present rules governing the allocations of the
dependency exemption are often subjective and
present difficult problems of proof and
substantiation. The Internal Revenue Service
becomes involved in many disputes between parents
who both claim the dependency exemption based on
providing support over the applicable thresholds.
The cost to the parties and the Government to
resolve these disputes is relatively high and the
Government generally has little tax revenue at
stake in the outcome. The committee wishes to
provide more certainty by allowing the custodial
spouse the exemption unless that spouse waives his
or her right to claim the exemption. Thus,
dependency disputes between parents will be
resolved without the involvement of the Internal
Revenue Service.
H.R. Rep. No. 432, Part 11, 98th Cong., 2d Sess. 1498-99,
reprinted - 1984 U.S. Code Cong. & Ad. News 697, 1140.
in
The above report persuades us that the 1984 changes were
not enacted to strip state courts of the power to allocate
dependency exemptions between parties to a dissolution
action. The report demonstrates that the purpose of the
amendments was to reduce the Service's involvement in
litigation over questions of dependency exemptions. We see
no reason why a state court's allocation of the deductions in
a decree of dissolution will interfere with this goal. If a
custodial parent d-efies a district court's order by refusing
to sign the waiver of exemptions, the noncustodial parent can
enforce the decree by way of a contempt action in state
court. The Service need not be involved in any aspect of the
dispute.
Having decided that the District Court had the
jurisdiction to allocate dependency exemptions, we must now
determine whether the court abused its discretion by refusing
to do so. We hold that the assignment of dependency
deductions is a factor a district court may consider when
ordering child support. It is not an abuse of discretion,
however, for a district court to refuse to award the
exemptions to either party.
A failure to assign the deductions to the noncustodial
parent does not prevent that party from ever receiving the
exemptions. The tax code provides that the custodial parent
may voluntarily relinquish the exemptions to the other parent
by signing a waiver. This provision provides flexibility.
It allows the parties to examine, on a yearly basis, their
respective tax burdens to ascertain which party would benefit
most from the exemptions. The District Court may not wish to
interfere with this flexibility by ordering the custodial
parent to execute a waiver or be subject to contempt.
Furthermore, by providing that the custodial parent may
claim the exemption unless he or she executes a release, the
statute has given that parent added leverage to ensure that
the noncustodial parent pays the court-ordered child support.
By leaving the exemptions in the hands of the custodial
parent, the district court gives the noncustodial parent an
incentive to keep current with his or her child support
payments. It also gives the custodial parent added
bargaining power at tax time.
In summary, we hold that the 1984 amendments to the
federal statute regarding exemptions for dependent children
of divorced parents did not divest state courts of
jurisdiction to allocate the exemptions in a decree of
dissolution. A district court may assign the exemptions j.f
it finds that the allocations would serve the best interests
of the children and the parties. However, a district court's
refusal to award the exemptions does not constitute an abuse
of discretion.
The next issue called to our attention concerns the
value of the husband's interest in a trucking partnership.
The husband argues that no substantial credible evidence
exists to support the partnership value found by the District
Court.
In 1977, the husband formed a partnership with another
individual. The partnership purchased a cattle truck and a
Public Service Commission permit authorizing the commercial
hauling of livestock throughout the state. In 1984, the
truck was destroyed. The only partnership asset that
remained at the time of the dissolution was the PSC permit.
The husband testified that the partnership was worth
$2,000. The wife did not testify as to the value of the
partnership, although she estimated its worth as $2,500 i n
her proposed findings of fact and conclusions of law. The
District Court valued the partnership at $10,000. The court
based its valuation on the tax returns of the parties, such
returns showing a partnership gain three out of five years.
A district court has far reaching discretionary powers
to determine the value of property in a dissolution action.
Its valuation can be premised on expert testimony, lay
testimony, documentary evidence, or any combination thereof.
- In Re the Marriage of Reich (Mont. 1986), 720 P.2d 286,
See
287-88, 43 St.Rep. 1167, 1168-69; In Re the Marriage of Garst
(1983), 206 Mont. 89, 94-95, 669 P.2d 1063, 1066. As long as
the valuation is reasonable in light of the evidence
submitted, we will not disturb that finding on appeal. In Re
the Marriage of Luisi (Mont. 1988), 756 P.2d 456, 459, 45
St.Rep. 1023, 1026; In Re the Marriage of Staudt (Mont.
1985), 700 P.2d 175, 177, 42 St.Rep. 740, 743.
Conflicting evidence was before the District Court in
the present case. When confronted with conflicting evidence,
the court must use its fact-finding powers to determine which
evidence is more credible. Having had the opportunity to
observe the witnesses, the trial court is in a position
superior to that of the appellate court to judge the
credibility of the testimony. In Re the Custody of Holm
(1985), 698 P.2d 414, 417, 42 St.Rep. 504, 507. Unless there
is a clear preponderance of the evidence against the District
Court's valuation, its findings, where based on substantial
though conflicting evidence, will not be disturbed on appeal.
Garst, 206 Mont. at 93-94, 669 P.2d at 1066.
The conflicting evidence in the instant case leads us to
conclude that the District Court did not abuse its discretion
by assessing the partnership value at $10,000. On one hand,
the husband testified that the livestock truck was destroyed
in 1984 and that the value of the remaining asset, the PSC
permit, was only $2,000. The 1986 tax return, which
attributed no income to the partnership, supported the
husband's appraisal. On the other hand, the 1981 to 1985 tax
returns reflected partnership gains three out of five years.
The 1985 return in particular showed an income of $12,638,
even though the truck had not been in service that year. The
husband testified that a portion of the 1985 income was due
to an insurance settlement on the truck. However, no
evidence was introduced to account for the remainder of that
year's income. There was also testimony that the permit
could be leased to other trucking outfits for a percentage of
the profits.
With all of the evidence taken together, it was
reasonable for the District Court to assume that, although
the truck had been destroyed. in 1984, the partnership
retained income producing potential and thus had a higher
value than that attributed to it by the husband. There was
substantial documentary evidence to support the District
Court's valuation. The valuation was reasonable in light of
the evidence submitted. There was no abuse of discretion.
The husband next contends that the District Court abused
its discretion by failing to include the 1986 farm operating
debt when it computed the net worth of his estate. The
husband argues that the trial court erred by valuing the debt
at a time different from the time at which it evaluated the
other assets and liabilities. We do not agree that this
procedure was error.
Generally, valuation of assets should be made at or near
the time of the dissolution hearing. In Re the Marriage of
Hammill (Mont. 1987), 732 P.2d 403, 406, 44 St.Rep. 220, 223.
This rule, however, is not hard and fast. The choice of time
for valuation is within the broad discretion of the district
court. In Re the Marriage of Krause (1982!, 200 Mont. 368,
379, 654 P.2d 963, 968; In Re the Marriage of Krum (1980!,
188 Mont. 498, 503, 614 P.2d 525, 527. If a single valuation
date would lead to an inequitable distribution of property,
the District Court may choose several different times for
valuation. - In Re the Marriage of Halverson (Mont.
See,
1 9 8 8 ) ~749 p.2d 518, 45 St.Rep. 162; In Re the Marriage of
Hurley (Mont. 1.986), 721 P.2d 1279, 1286, 43 St.Rep. 1271,
In the instant case, the District Court used September,
1986, a time shortly after the petition for dissolution had
been filed, as the valuation date for the majority of the
assets and liabilities. The court assessed the operating
debt, however, as of the date of the dissolution hearing,
nine months after the petition had been filed. The husband
argues that this failure to appraise all of the assets and
liabilities at the same time resulted in an overvaluation of
his net worth.
In September, 1986, the husband owned livestock w0rt.h
$138,319 and owed an operating debt of $24,000. By the time
of the dissolution hearing, some of the cattle had been sold
and the operating debt had been paid with the proceeds. The
sale of the cattle and payment of the debt were made to
effectuate a tax savings to the husband.
In its memorandum denying the husband's motion to amend
the findings of fact, the trial court recognized that, alonq
with erasing the operating debt, the sale of cattle reduced
the value of the herd. The court refused, however, to
include the operating debt in its computations. It also
declined to decrease its valuation of the herd. The court
stated that these factors had been included in its overall
valuation of the assets as well as its decision to distribute
the property equally between the parties.
Under the circumstances, we cannot hold that the
District Court abused its discretion. The memorandum
demonstrates that the court considered the facts as presented
and determined that differing valuation dates would aid in
the equitable division of the property. In the final
analysis, an equitable distribution was accomplished. We
therefore affirm the District Court o n this issue.
On cross appeal, the wife argues that the District Court
erred by discounting the value of the parties1 stock in the
Milesnick family corporation. She maintains that discounting
stock in a closely held corporation is improper where the
stock's value has been based on an appraisal of the
underlying assets.
Milesnick Ranch, Inc. was formed by the husband's
parents in 1980. Soon after the creation of the corporation,
the parents began gifting the stock to their children and
their children's spouses. Through this gifting program
Thomas received 2,284 and Christine received 1,790 of
the total 40,000 shares outstanding.
In a letter introduced into evidence by the husband, the
corporation's accountants placed the fair market value of the
Milesnick Ranch stock at $53.85 per share. The appraisal was
based on net asset value, that is, the sum of the fair market
value of the assets less the liabilities. In its findings of
fact, the District Court discounted the stock by 25 percent,
from $53.85 to $40.39, to take into account the couple's
status as minority shareholders in the corporation.
We have previously approved the practice of
discounting stock in a closely held corporation. In Re the
Marriage of Jorgensen (1979), 180 Mont. 294, 300, 590 P.2d
606, 610. However, a district court need not discount the
stock in a close corporation in all instances. See, In Re
the Marriage of Johnston (Mont. 1986), 726 P.2d 322, 43
St.Rep. 1808; In Re the Marriage of Buxbaum (1984), 214 Mont.
1, 692 P.2d 411.
The wife relies on Buxbaum for the proposition that
discounting stock is improper whenever the market value is
founded on net asset value, as it is in the instant case.
This is not so. Whether a discount is proper depends on the
facts of the case, not on the method used to ascertain the
underlying value of the stock. In Buxbaum we approved the
district court's decision not to discount for a minority
interest because the court found that, even though the
husband was a minority shareholder, he had actual control of
the corporation.
A discount for a minority interest is appropriate when
the minority shareholder has no ability to control salaries,
dividends, profit distributions and day-to-day corporate
operations. Jorqensen, 180 Mont. at 300, 590 P.2d at 610. In
the present case, there is no doubt that Thomas and Christine
Milesnick were minority shareholders. Together they owned
only 4,074 shares of stock, a little over 10 percent of the
total number. Furthermore, although Thomas worked with his
parents on the ranch and had some input into day-to-day
operations, the parents had the final say on all major
decisions. We do not believe, under these circumstances,
that the District Court abused its discretion by discounting
the stock in Mil-esnick Ranch by 25 percent due to the
parties' minority interest in the corporation.
In conclusion, we hold that the District Court did not
err in its valuation of the husband's partnership interest or
in its valuation of the parties' stock in Milesnick Ranch.
Nor did the District Court err by failing to include the
operating debt in its computation of the net worth of the
husband's estate or by refusing to all-ocate the tax
exemptions for the parties' dependent children.
We affirm the District Court.
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