Marriage of Gottsacker v. Gottsacker

• Decision Date: 17 July 2003
• Docket Number: No. C1-02-615.,C1-02-615.
• Citation: 664 N.W.2d 848
• Parties: In re the Marriage of Janis Edwards GOTTSACKER, Respondent, v. Gregory Alan GOTTSACKER, Petitioner, Appellant.
• Court: Minnesota Supreme Court

664 N.W.2d 848

In re the Marriage of Janis Edwards GOTTSACKER, Respondent, v. Gregory Alan GOTTSACKER, Petitioner, Appellant.

No. C1-02-615.

Supreme Court of Minnesota.

July 17, 2003.

Alan C. Eidsness, Timothy Mulrooney, Henson & Efron, P.A., Minneapolis, MN, for Appellant.

Susan C. Rhode, Ben M. Henschel, Moss & Barnett, Minneapolis, MN, for Respondent.

Heard, considered, and decided by the court en banc.

OPINION

PAUL H. ANDERSON, Justice.

In this appeal of a marriage dissolution decree, appellant-husband, Gregory Alan Gottsacker (Gottsacker), seeks review of the lower courts' determinations that (1) respondent-wife Janis Edwards Gottsacker's (Edwards)¹ Accumulated Adjustment Account (AAA) in a subchapter S corporation is nonmarital property, and (2) Gottsacker is not entitled to any reimbursement for taxes Edwards paid on the subchapter S corporation's interest during the marriage. Edwards seeks review of the lower courts' determination that her ownership interest in another closely held corporation, which interest she purchased with distributions from the subchapter S corporation, is marital property. We affirm.

Gregory Alan Gottsacker and Janis Edwards were married in October 1991. Seven and one-half years later, in May 1999, Edwards petitioned for dissolution of the marriage. Before and during the marriage, Edwards acquired and owned a minority interest in the following three businesses: Edco Products, Inc. (Edco), which produces steel siding; Edcoat Limited Partnership (Edcoat), a metal-coating service company; and Edcoat General Partnership, Inc. (Edcoat General), Edcoat's general partner. These three businesses are closely held corporations owned primarily by Edwards, her parents, brother, and sister. Edwards acquired Edco shares before she married Gottsacker and continued to acquire shares during the marriage. The Edco stock was a gift from Edwards' parents to Edwards alone, and both parties agree that the actual Edco shares are nonmarital.

Edco is a subchapter S corporation, which is a pass-through entity, so all corporate income is allocated directly to the shareholders. Therefore, the Edco shareholders are taxed on their personal tax returns for corporate income in proportion to their ownership interest, regardless of whether the income is distributed to them or retained by the corporation. If the income is not distributed to the shareholder and is instead retained by the corporation, it is retained as a corporate asset and the difference between the income on which the shareholder paid taxes and the income that was actually distributed to the shareholder is recorded in an AAA. The AAA is not an account in the sense that it actually holds the retained funds, but the account serves as an accounting tool for recording the taxed but undistributed interests of each shareholder. The AAA shows each shareholder's basis for previously-taxed income or losses.

Some of Edwards' Edco interest income was distributed to the parties during their marriage and some if it was retained by the corporation. The parties used the Edco distributions for three purposes: (1) to pay taxes on Edwards' Edco interest; (2) to acquire Edwards' interest in Edcoat and Edcoat General; and (3) to supplement their regular income. The distributions that were used to pay the taxes on Edwards' Edco interest were made to Edwards specifically for that purpose. Each quarter Edco accountants determined Edwards' tax obligation based on her ownership interest. The corporation mailed her a check for that tax amount, Edwards deposited the check into her account, and she then wrote a check to the IRS to cover the tax obligation. The record indicates that some of the Edco deposits were made into Edwards' private checking account, while some were made into the parties' joint checking account. The taxes were always paid with the funds distributed by Edco and were never paid with the parties' other income or assets.

In 1995, the Edwards family formed the limited liability partnership Edcoat to provide services to Edco. At that time, the family also formed an S corporation, Edcoat General, to act as a general partner to Edcoat. Edcoat General has a 1 percent interest in Edcoat and the remaining 99 percent limited liability partnership interest in Edcoat is shared between the members of Edwards' family and key nonfamily members of Edco management. Edwards acquired a 2 percent ownership interest in Edcoat as a gift from her parents, which the parties agree was nonmarital. Edwards acquired an additional 16.33 percent interest in Edcoat, which she purchased with her distributions from Edco. She also used Edco distributions to purchase a 16.67 percent interest in Edcoat General.²

Edwards testified that she had no involvement in the planning for the funding or investing in Edcoat. She received distributions from Edco that Edco's accountants and officers specifically told her to pay over to Edcoat, which she did. Edwards' understanding was that the Edco distributions were made conditioned upon her payment into Edcoat. Conversely, Gottsacker testified that he and Edwards discussed whether to buy into Edcoat.

Stephen Broz, the accountant for the family's three companies and also the family's personal accountant, testified that the business plan for creating the funding for Edcoat required that each of the Edwards' family members receive a distribution from their Edco interest that they would reinvest into Edcoat. Broz further testified that, for a number of business and tax reasons, this plan for creating Edcoat was chosen over a number of options, including the option of making Edcoat a subsidiary of Edco. Broz testified that Edwards legally could have chosen to retain the distributions from Edco that were intended to be sent to Edcoat; but he stated that if she had done so, the distributions from Edco to Edwards would have ceased and the family would have come up with an alternate plan for funding Edcoat.

After a hearing at which both parties testified and presented expert financial witnesses, a consensual special magistrate concluded that the AAA was analogous to retained corporate earnings. The magistrate stated that such earnings are nonmarital "where the underlying stock of the spouse is nonmarital, and where the husband and wife have not expended efforts to enhance the value of the nonmarital stock." But the magistrate went on to find that Edwards' acquisition of the Edcoat interests was accomplished with marital funds because the Edco distributions were income from a nonmarital asset. The magistrate said, "This income on a nonmarital asset is marital and as a result the acquisition of interests in Edcoat are marital."

Based on these and other findings of fact, Edwards was ordered to pay Gottsacker $401,883 within 60 days and the district court entered a decree of dissolution to that effect. Edwards moved to amend the decree or grant a new trial on a number of grounds, including her request that the court reconsider its failure to apply a lack of marketability discount in determining the value of her Edcoat interest. Gottsacker also moved to amend the decree or for a new trial on a number of grounds. These included his request that the court find the AAA to be marital property or, in the alternative, award him his proportionate share of the marital funds that were used to pay the taxes on the income reflected in the AAA.

The magistrate held a hearing on the parties' motions for post-decree relief and the earlier decree was amended to apply a discount for lack of marketability to the Edcoat valuation. Edwards' monetary obligation to Gottsacker was then reduced from $401,883 to $258,325. The amended decree did not specifically address Gottsacker's reimbursement request, and instead included a catch-all paragraph stating "[t]hat all other motions of either Party should be denied."

Gottsacker appealed the decision to treat the AAA as nonmarital property and Edwards appealed the district court's treatment of her Edcoat interest. The court of appeals affirmed on all issues. The court of appeals held that the AAA was nonmarital property because it is not "income" and, if the AAA is appreciation, it is passive appreciation and is therefore nonmarital. Gottsacker v. Gottsacker, No. C1-02-615, 2002 WL 31655186, at *3 (Minn.App. Nov.26, 2002). The court went on to state that the district court did not abuse its discretion in failing to credit Gottsacker with his share of marital funds used to pay the AAA taxes. It did so on the ground that the district court had no duty to consider the issue because it was not raised at trial. In the alternative, the court of appeals stated that it could not conclude that the district court abused its discretion because the record could have supported a determination that such equitable relief was not warranted. Finally, the court of appeals affirmed the finding that the Edcoat interest was marital property because it was purchased with income from a nonmarital asset, which are marital funds.

Gottsacker petitioned this court for review of the classification of Edwards' Edco AAA as nonmarital and the denial of his request for reimbursement of taxes paid on the AAA. Edwards petitioned for cross-review of the classification of her Edcoat interest as marital property.

I.

The first issue we must decide is whether the lower courts erred in concluding that Edward's Edco AAA is a nonmarital asset. Gottsacker argues that the AAA is the "income" from Edwards' nonmarital interest in Edco and it is, therefore, a marital asset. Alternatively, if we determine the AAA is not income, Gottsacker argues the AAA is the active appreciation of Edwards' interest in Edco.

The district court has broad discretion when dividing marital property in a dissolution action and will not be reversed absent an abuse of that discretion. Rutten v. Rutten, 347 N.W.2d 47, 50 (Minn.1984) (citing as an abuse of discretion a "clearly...