Appreciation of Business Interests: What is Substantial Contribution in Tennessee Divorce Law?
Appreciation of Business Interests: What is Substantial Contribution in Tennessee Divorce?
Appreciation of Business Interests: What Is a “Substantial Contribution” in Tennessee Divorce Law?
Just as with investment property and real property, the appreciation of a business interest may be considered marital property at divorce. Even when the spouse who owns the business acquired and ran the business independently of the non-owning spouse, the court may still hold that conditions call for the division of the appreciation value between the two parties. To claim part of the appreciation value of a business, the non-owning spouse must prove that he or she made a substantial contribution to the preservation and appreciation of the business during the marriage. The contributions made by the non-owning spouse must be significant and real, and they must relate to the increased value of the property. The following three cases examine the factors considered by Tennessee courts when determining whether to consider the appreciation of business interests as separate or marital property.
In Brown v. Brown, 913 S.W.2d 163, 166 (Tenn. Ct. App. 1994). Mr. Brown began working for his father’s concrete business two years after he married. After the marriage, Mr. Brown’s father incorporated the business as Brown’s Concrete and Block Company, Inc., and transferred shares of the company’s stock to Mr. Brown. Mr. Brown and his brother eventually became the sole shareholders of the company. Mr. Brown served as the company’s secretary-treasurer and was responsible for the maintenance of the company’s equipment and production at a block plant. Mrs. Brown’s income as a schoolteacher, combined with Mr. Brown’s business interests, afforded the couple an “opulent lifestyle” that included the acquisition of airplanes, automobiles, several horses, and an expensive wardrobe. After twenty-one years of marriage, Mrs. Brown filed for divorce when Mr. Brown left her for another woman. The trial court held that the $1,250,000 appreciation of the value of Mr. Brown’s concrete business was part of the marital estate, which was worth over $2,000,000. In addition to a marital property award of around $425,000, Mrs. Brown was awarded $250,000 for her share of the appreciation value of Mr. Brown’s business. Mr. Brown appealed the trial court’s classification of his interest in the family business as marital property and claimed that Mrs. Brown made no direct contribution to the business.
The Tennessee Court of Appeals agreed with Mr. Brown that his overall interest in the family business was separate property and that Mrs. Brown made no direct contribution to the business. Mr. Brown’s overall interest in the business was his separate property because it was given to him alone as a gift from his father, and Mrs. Brown admittedly made no direct contributions to the concrete business. The court, however, held that the appreciation of the value of the concrete business was marital property that was subject to division between the parties. The parties had no children, but Mrs. Brown “took care” of Mr. Brown, his mother, and his father, and her income as a teacher was commingled with Mr. Brown’s income in a joint bank account. The Court of Appeals held that the trial court correctly classified the appreciation of the value of the business as marital property in light of Mrs. Brown’s substantial indirect contributions as a homemaker. The Court of Appeals further held that the trial court undervalued Mrs. Brown’s overall share of the marital estate. Accordingly, the Tennessee Court of Appeals awarded Mrs. Brown a $120,000 cash award, in addition to the trial court’s original awards of $250,000, for the appreciation of the business and another $425,000 for other marital property.
In contrast, consider Cutsinger v. Cutsinger, 917 S.W.2d 238 (Tenn. Ct. App. 1995). Mr. Cutsinger owned a chiropractic practice as a sole proprietorship. He began the practice two years before he married. Days after the marriage, Mrs. Cutsinger began working at the practice as a licensed nurse. Mr. Cutsinger later became seriously ill with skin cancer and was forced to leave his practice for a year. During Mr. Cutsinger’s absence, Mrs. Cutsinger kept the business open by doing bookkeeping and obtaining other chiropractors to serve the practice’s clients. About two years after Mr. Cutsinger became ill, the parties separated, and Mr. Cutsinger sold the practice for $130,000. The purchase price reflected $62,000 for equipment, $13,000 for the trade name and goodwill, $13,000 for a covenant not to compete, $18,000 for accounts receivable, and a $24,000 consultation fee. When the parties divorced, the trial court divided the value of the practice as marital property, but excluded from this value the amounts paid for the trade name and goodwill and the covenant not to compete. The trial court held that the value of the practice was $104,000 and awarded Mrs. Cutsinger a 30% interest in the purchase price of the chiropractic practice. The $31,200 award included the value of the appreciation of the practice. Mr. Cutsinger appealed the trial court’s decision to divide the practice as marital property and argued that Mrs. Cutsinger presented no evidence that the value of the practice appreciated during the marriage.
The Tennessee Court of Appeals agreed with Mr. Cutsinger and held that the appreciation value of the chiropractic practice was Mr. Cutsinger’s separate property. Although Mrs. Cutsinger successfully proved that she made a valuable contribution to the practice, she failed to present evidence that detailed the value of the business prior to the marriage. Mrs. Cutsinger’s testimony that the practice increased from around five patients per day at the beginning of the marriage to around forty per day at the end of the marriage was not sufficient to prove an increase in the value of the practice. The court found that it could not be “conclusively inferred” that the business appreciated in value just because it serviced more clients. The appeal, though, was not a complete loss for Mrs. Cutsinger. The court held that 47.73% of the practice’s $62,000 worth of equipment was marital property because it was purchased jointly by Mr. and Mrs. Cutsinger during the marriage. While Mrs. Cutsinger did not receive any of the appreciation value of the practice, she was ultimately awarded half of the value of the equipment purchased during the marriage, which totaled $15,106.30.
Raulston v. Raulston, No. E2005-02463-COA-R3-CV, 2006 WL 2737996 (Tenn. Ct. App., July 19, 2006) is another instructive case. About a decade before Mr. Raulston married Mrs. Raulston, he began an business that installed and maintained underground irrigation systems, landscaping, and lighting at businesses and residences. The trial court held that the value of the irrigation business before the marriage was negligible, and it classified the irrigation business and the building that housed the business as marital property subject to division between the parties. Mrs. Raulston was awarded$120,000 for the appreciation of the value of the irrigation business during the marriage, which reflected almost half of the entire value of the marital estate. The trial court also awarded Mrs. Raulston $5,625 for the appreciation of the value of the building that housed the irrigation company. Mr. Raulston appealed and argued that the trial court erred in awarding Mrs. Raulston part of the appreciation of the value of the business and building. Mr. Raulston claimed that Mrs. Raulston made no substantial contribution to the business because she was compensated for her work at the business, the marriage was short, and she had time to work other jobs during the marriage. Furthermore, Mr. Raulston claimed Mrs. Raulston was not entitled to any of the appreciation of the value of the business because she failed to adequately prove the value of the business at the time of the marriage.
The Tennessee Court of Appeals affirmed the trial court’s decision to divide the appreciation value of the business as marital property. Although the irrigation business compensated Mrs. Raulston for her employment, her salary did not factor into the court’s decision to classify the appreciation value as marital property. Mrs. Raulston’s substantial paid and unpaid contributions led to the growth of the business and were sufficient to prove that the appreciation value of the business was marital property. It was not necessary for Mrs. Raulston to prove the value of the business before the marriage. The court credited testimony presented by Mrs. Raulston over contradictory testimony presented by Mr. Raulston to find that the business was insolvent and had no value before the marriage. The Court of Appeals, however, reversed the trial court’s decision to divide the appreciation of the building that housed the business. The court held that the building that housed the company was Mr. Raulston’s separate property because the only appreciation to the building was a product of improvements made by Mr. Raulston and his father prior to the marriage. The mortgage payments made on the building after the parties married were inconsequential in light of Mrs. Raulston’s failure to prove a substantial contribution to the building specifically.
Memphis divorce lawyer, Miles Mason, Sr., JD, CPA practices family law exclusively and is founder of the Miles Mason Family Law Group, PLC, in Memphis, Tennessee. He authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. Miles is past Chair of the Tennessee Bar Association Family Law Section and is a prolific author and public speaker on divorce trial practice presenting seminars to attorneys, forensic accountants, and business valuation experts. For more information, see MemphisDivorce.com.
