Vanwassenhove v. Vanwassenhove

Decision Date10 April 2000
Docket NumberNo. 24940.,24940.
PartiesMichael D. VANWASSENHOVE, Plaintiff-Appellant, v. Beth M. VANWASSENHOVE, Defendant-Respondent.
CourtIdaho Court of Appeals

Cosho, Humphrey, Greener & Welsh, Boise, for appellant. Stanley W. Welsh argued.

Alexanderson, David, Rainey & Whitney, Caldwell, for respondent. Ronald P. Rainey argued.

PERRY, Chief Judge.

Michael D. Vanwassenhove appeals from an order of the district court, reversing and remanding the magistrate's distribution of property in a decree of divorce. For the reasons set forth below, we affirm in part, reverse in part, and remand the case for further proceedings.

I. BACKGROUND

Michael and Beth M. VanWassenhove were married on June 27, 1974. Prior to their marriage, Michael owned an 80-acre farm. It is undisputed that this farm is Michael's separate property. At the time of their marriage, Michael owed $45,789.25 of principal on the loan for the farm's purchase. It is undisputed that the farm loan was Michael's separate debt. From the time of their marriage until 1981, Michael and Beth lived and worked on the farm. During this time, they paid $18,766.61 towards the principal on the farm loan. It is undisputed that this amount was paid from community funds and that the community is entitled to reimbursement in that amount. Michael and Beth moved from the farm in 1981, and the farm was rented to Michael's brother. The rental income from the farm was used to pay the remaining $27,022.67 of the principal on the farm loan, which was paid in full in 1990.

Michael and Beth separated in July 1994. In February 1995, Michael held a farm equipment sale. It is undisputed that the farm equipment was community property and that the proceeds from the sale constituted community funds. The sale netted $56,755.31. This money was placed in a bank account controlled exclusively by Michael. In June 1995, Michael sent $10,000 of the proceeds from the farm equipment sale to Beth. Michael testified that he spent the remaining proceeds on community debt and a $6,500 pickup for one of their sons.

On December 26, 1995, Michael filed for divorce. Following trial, the magistrate concluded that the community was not entitled to reimbursement for the rental income from the farm that was used to pay the principal on the farm loan. The magistrate also concluded that the community was not entitled to reimbursement for the proceeds from the farm equipment sale. Beth appealed to the district court, which reversed the magistrate on both of these issues. Michael appeals.

II. DISCUSSION

On review of a decision of the district court, rendered in its appellate capacity, we examine the record of the trial court independently of, but with due regard for, the district court's intermediate appellate decision. Hentges v. Hentges, 115 Idaho 192, 194, 765 P.2d 1094, 1096 (Ct.App.1988).

A. Rental Income

Michael argues on appeal that the magistrate was correct in concluding that the community is not entitled to reimbursement for the farm's rental income that was used to pay the principal on the farm loan. Although Michael concedes that the "net" rental income from the farm was community property, he contends that the principal payments on the farm loan constituted an expense that should be subtracted from the gross rental proceeds in calculating the net rental income. Michael contends, as a result, that the principal payments were not made from the net rental income belonging to the community and that the community was therefore not entitled to reimbursement. In response, Beth asserts that principal payments do not constitute such an expense and are necessarily paid from net rental income rather than gross rental income.

Because the issue of how net rental income is calculated is a pure question of law, we exercise free review. Kawai Farms, Inc. v. Longstreet, 121 Idaho 610, 613, 826 P.2d 1322, 1325 (1992); Cole v. Kunzler, 115 Idaho 552, 555, 768 P.2d 815, 818 (Ct.App.1989). Idaho Code Section 32-906(1) provides that "the income of all property, separate or community, is community property." It is a well-settled principle of Idaho community property law that only net income from separate property becomes community property. Malone v. Malone, 64 Idaho 252, 261, 130 P.2d 674, 678 (1942); Weilmunster v. Weilmunster, 124 Idaho 227, 236, 858 P.2d 766, 775 (Ct.App.1993). The Idaho Supreme Court has explained that to "hold otherwise would cause the community to, in time, entirely consume the separate estates of the members thereof and would nullify [§ 32-903] and [§ 32-906] of the code." Malone, 64, Idaho at 261, 130 P.2d at 678. Thus, the net income rule protects both "the rights and interests of individual spouses in the preservation and maintenance of separate property as well as . . . the interests of the community." Houska v. Houska, 95 Idaho 568, 571, 512 P.2d 1317, 1320 (1973).

According to Michael, payment of the principal on the farm loan was necessary for the preservation of his separate property interest in the farm and that the principal payments should, therefore, be paid from the farm's gross income rather than its net income. In light of the policy enunciated by the Idaho Supreme Court in Malone and Houska, however, we hold that the right of a spouse to preserve and maintain separate property extends only to the spouse's equity in the separate property at the time of marriage. Payments of loan principal do more than merely preserve the separate property value—they increase the separate estate's equity in the property. If Michael's argument were accepted, his separate estate would have been enhanced by more than $27,000 during the course of the marriage through application of farm rental income to his separate debt. Such application of rental income is not necessary in order to avoid the effect condemned in Malone, the consumption of the separate estate by the community. We therefore hold that principal payments on separate property debt are paid from net income rather than from gross income. This holding is also consistent with the method of calculating net income approved by the generally accepted accounting principles, which do not treat payments on the principal of a mortgage loan as an expense when calculating net income. Accordingly, the principal payments on Michael's farm loan in the amount of $27,022.67 were necessarily paid from the farm's net rental income. Consequently, the magistrate erred in determining that the community was not entitled to reimbursement.

B. Proceeds...

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