Swope v. Swope, 19115

• Decision Date: 27 May 1992
• Docket Number: No. 19115,19115
• Citation: 834 P.2d 298,122 Idaho 296
• Parties: Charles H. SWOPE, Plaintiff-Appellant-Cross Respondent, v. Isabel SWOPE, Defendant-Respondent-Cross Appellant. Boise, February 1992 Term
• Court: Idaho Supreme Court

Page 298

834 P.2d 298

122 Idaho 296

Charles H. SWOPE, Plaintiff-Appellant-Cross Respondent, v. Isabel SWOPE, Defendant-Respondent-Cross Appellant.

No. 19115.

Supreme Court of Idaho,

Boise, February 1992 Term.

May 27, 1992.

Webb, Pedersen & Webb, Twin Falls, for plaintiff-appellant. Lloyd J. Webb, argued.

Hepworth, Nungester & Lezamiz, Twin Falls, for defendant-respondent. Jeffrey E. Rolig, argued.

BAKES, Chief Justice.

This is a second appeal in a divorce action arising from a decision of the magistrate court following remand from this Court in Swope v. Swope, 112 Idaho 974, 739 P.2d 273 (1987) (Swope I ). Both parties appealed to the district court from the magistrate's distribution of the property. The district court affirmed in part and reversed in part the magistrate court's decision. Both parties again appealed the district court's decision to this Court. A summary of the facts are as follows.

Charles and Isabel Swope were married on July 30, 1976. Charles filed for divorce on November 7, 1980. On January 21, 1981, the trial court granted Charles' motion for partial summary judgment to dissolve the marriage, but did not resolve the property division issues at that time. In our opinion in Swope I, supra, we described the property which was involved as follows:

At the time of marriage, Charles owned an undivided 1/4 interest in a partnership which owned both the real and personal property associated with the operation of the Pepsi Cola Bottling Company of Twin Falls. The business was incorporated on March 1, 1979, but the real property remained in the partnership and was leased to the corporation. Charles received stock in the corporation and maintained his same percentage ownership in the partnership. The corporation made a Subchapter "S" election to be taxed as a partnership pursuant to the Internal Revenue Code and the Idaho Income Tax Act. [For his one-fourth share of the partnership assets transferred to the corporation, Charles received four thousand shares of stock and $100,000 in 12% debenture notes.]

During the years that the parties were married, income taxes on the undistributed earnings from both his separate property interest in the partnership and from the retained earnings of the Subchapter "S" corporation were paid with community funds by Charles.

Charles's interest in the bottling company was sold on June 6, 1980, for $840,000, with $125,000 paid down and monthly payments of $10,007.06 at 15% per annum on the unpaid principal balance. This sale included all of Charles's corporate stock and debentures in the corporation as well as his partnership interest in the real property....

....

At the time that Charles sold his 4000 shares of corporate stock on June 6, 1980, Charles' share of the undistributed taxable income as defined by 26 U.S.C. § 1373, which had been retained by the corporation, was the sum of $39,171.

That income was reported on Charles' joint income tax return and he paid income tax on that undistributed taxable income, apparently with community funds.

112 Idaho at 979, 982, 739 P.2d 273 (footnote omitted).

In Swope I, the magistrate originally determined that the retained earnings in both the partnership and the corporation were not community property. As a result, the magistrate concluded that Isabel was not entitled to a share of the proceeds of the contract of sale.

In Swope I, this Court held that the retained earnings in the separate property partnership were community property and remanded to the trial court to "determine the interest of the community in Charles' otherwise separate property stock and debentures, resulting from the community interest in the partnership retained earnings which were invested in the stock and debentures...." 112 Idaho at 984, 739 P.2d 273. We held that if the retained earnings of the partnership had enhanced the value of the partnership assets transferred to the corporation, then the community would be entitled to an interest in the corporate stock and debenture notes and in the proceeds of the June 6, 1980, sale of those stocks and notes. We also directed the trial court to determine the community interest in the interest income accruing on the $100,000 of debentures.

On remand, the magistrate concluded that the community was not entitled to any reimbursement for the retained earnings in the partnership because Isabel had not shown any enhancement in the value of the partnership assets or business as a result of the retained partnership earnings. Therefore, the magistrate concluded that the community had no interest in Charles' separate property stock and debenture notes of the corporation as a result of the retained earnings in the partnership. However, the magistrate did hold that the $39,171 of retained earnings of the corporation was community property or, at least that Isabel was entitled to one-half of those corporate retained earnings because the court deemed those retained earnings to have been distributed to Charles as of the date that Charles sold his stock, apparently on the assumption that the sale price of the stock was $39,171 higher than it would have been without the retained earnings in the corporation. The magistrate refused to award Isabel judgment interest on the interest earned on bonds which the magistrate had awarded to her in the divorce decree but which Charles retained and controlled from August, 1983, to April, 1988, holding that Isabel was only entitled to "the interest applicable to the particular bond or certificate of deposit according to its terms."

Isabel appealed the magistrate's decision regarding the valuation of the partnership, the failure to award her a portion of the contract of sale proceeds, and the amount of interest which had accrued on the interest earned by the bonds. Charles cross appealed the magistrate's decision to award Isabel one-half of the retained earnings in the corporation.

On appeal, the district court reversed the magistrate's decision not to award Isabel one-half of the partnership retained earnings, which the district court valued at $65,765.00, entitling Isabel to $32,882.50. The district court affirmed the magistrate's decision to award Isabel one-half the retained earnings in the corporation and awarded Isabel prejudgment interest on her share of the partnership and corporate retained earnings. The district court reversed the trial court's determination that Isabel was not entitled to judgment interest on the interest which had accrued on the bonds that were awarded to Isabel. The district court held that Isabel was entitled to judgment interest at 18%, pursuant to I.C. § 28-22-104. Charles appealed the district court's decision; Isabel cross appealed.

When we review a case appealed from a district court's appellate review of a magistrate's decision, the district court's decision is instructive; however, we independently review the decision of the magistrate. McNelis v. McNelis, 119 Idaho 349, 806 P.2d 442 (1991). If the magistrate's findings of fact are supported by substantial and competent evidence, we will uphold those findings on appeal. I.R.C.P. 52; McNelis, supra.

I

First, we consider the magistrate's determination that the community is not entitled to reimbursement for the earnings retained in the partnership. In its findings of fact and conclusions of law, the magistrate found that the partnership retained $75,765.00 ¹ of undistributed profits between the date of the marriage and the date of incorporation. The magistrate on remand considered the partnership retained earnings as community property, but concluded that the community was not entitled to reimbursement because Isabel had not made any showing that those earnings contributed to the enhancement in value of the partnership business. The magistrate found that, while the value of the business increased during the years of the marriage, it could have been due to any or all of the following factors:

(a) Socioeconomic trends of the consuming population

(b) Climatic conditions

(c) Trends in national popularity

(d) National and local advertising

(e) Capital invested in the business

(f) Ability to finance

(g) Ability to provide product to meet demand

(h) Business management

(i) Value of the franchise

(j) Value of the tangible assets of the business

(k) Amount of liability

The magistrate explained its decision as follows:

There is no question that the value of the plaintiff's interest in the Pepsi Cola Bottling Company of Twin Falls, Inc. increased over the years of the marriage. The real question to be answered by the defendant was why did the value of the plaintiff's interest in the Pepsi Cola Bottling Company of Twin Falls, Inc. increase. If this increase is due solely to the use of the [$65,765.00] community property, the defendant would be entitled to one-half of the value of the increase. The exact reason for the increase in value of the plaintiff's interest in the Pepsi Cola Bottling Company of Twin Falls, Inc. has not been answered by the defendant. It is the conclusion of this court that the increase in value could have been attributable to any or all of the factors numerated in Finding of Fact No. 1. To determine that any or all of the increase in valuation of the plaintiff's interest in a nationally franchised bottling company is attributable solely to the [$65,765.00] of undistributed profits is pure speculation. Accordingly, the defendant has failed in her burden to show the value of the enhancement of the plaintiff's interest in the Pepsi Cola bottling Company of Twin Falls, Inc. and is not entitled to reimbursement.

In Swope I, we held that the right of the community for reimbursement from the separate partnership property was based on the enhancement in value rule, stating:

In situations such as this, the measure of the community's reimbursement was first set out in Gapsch v. Gapsch, 76 Idaho 44, 277 P.2d 278 (1954) as follows:

"As a general rule where the separate property of...