Appreciation of Investment Property: What Is Substantial Contribution in Tennessee Divorce Law?

Appreciation of Investment Property: What is Substantial Contribution in Tennessee Divorce Law?

Appreciation of Investment Property: What Is “Substantial Contribution” in Tennessee Divorce Law?

Tennessee courts divide the value of investment property between two spouses at divorce if investments are acquired during any portion the marriage, even until the date of the final divorce hearing.  In contrast, investment property is considered each spouse’s separate property if the investments are acquired before marriage, or if a spouse acquires the investment in exchange for property he or she owned before the marriage.  When the value of an investment increases during a marriage, the gains accrued during the marriage are considered marital property if the investments are related to employment.    A spouse may also share in the appreciation of an investment if both spouses substantially contributed to its preservation and appreciation.  These contributions must be “real and significant,” and there must be a link between the appreciation of the property and the spouse’s contributions.  Spouses are not entitled to gains on investments when the investments are acquired before the marriage and are unrelated to either spouse’s employment.  The following cases illustrate the factors examined by Tennessee courts when determining whether to consider investments separate or marital property.

In Mitts v. Mitts, 39 S.W.3d 142, 145 (Tenn. Ct. App. 2000), Mr. Mitts owned shares of stock in Coca Cola and shares of a country club that he managed while he was married to his wife.  Mr. Mitts’ father originally owned the country club, which was bought by an outside corporation while Mr. Mitts was a child for the development of a residential neighborhood.  As a gift, Mr. Mitts’ father left him shares of stocks in the country club that represented 9.44% of the total interest in the club.   Mr. Mitts’ duties at the country club included hiring employees, maintaining the golf course, and organizing golf tournaments.  Mrs. Mitts was a homemaker.  When Mr. Mitts and his wife divorced, the trial court held that his stock in the country club was separate property not subject to division by the court.  The Coca Cola stock was also held as separate property even though Mr. Mitts conveyed the shares to his mother shortly before filing for divorce.  Mrs. Mitts appealed the trial court’s holding and claimed that Mr. Mitts’ investments in the country club and Coca Cola were marital property subject to division by the court.

The Tennessee Court of Appeals affirmed the trial court’s decision that Mr. Mitts’ stocks were separate property.  Although Mrs. Mitts’ efforts as a wife and homemaker and Mr. Mitts’ efforts in managing the country club may have contributed to the value of the country club directly or indirectly, the court credited the increase in the value of the country club stock to the sale of the raw land surrounding the country club to real estate developers.  Furthermore, the court found that the Coca Cola stock was Mr. Mitts’ separate property until he conveyed it to his mother.  Although Mrs. Mitts alleged on appeal that Mr. Mitts fraudulently conveyed the Coca Cola stock to his mother in anticipation of divorce, she failed to allege fraud in her original petition for divorce.  As a result, the appreciation value of Mr. Mitts’ country club and Coca Cola stocks was not marital property subject to division between the parties.

Next, consider Keyt v. Keyt, 244 S.W.3d 321 (Tenn. 2007). Mr. Keyt was employed by a trucking company owned principally by his father.  Before the parties married, Mr. Keyt’s parents implemented an estate plan where Mr. Keyt was given shares in the company that totaled $253,229.  Mr. Keyt remained employed by the trucking company in various capacities during the length of the marriage.  The same year Mr. Keyt filed for divorce, the shareholders of the trucking company agreed to sell the business.  Mr. Keyt grossed $1,283,367.65 from the sale of his stock and also retained an interest in the company’s real estate that totaled $709,904.  The trial court classified both the $1,030,139 appreciation value of the stock and the $709,904 real estate interest as marital property and awarded Mrs. Keyt 37.5% of the marital estate.  The Tennessee Court of Appeals affirmed the trial court’s classification of Mr. Keyt’s stocks as marital property.

The Tennessee Supreme Court reversed the trial court’s classification and held that the appreciation value of the stock and real estate interest was Mr. Keyt’s separate property.  The Court looked to Tennessee statutory language that states both spouses must make a contribution to the appreciation of the investment before the appreciation is considered marital property.   Accordingly, the Court first examined whether Mr. Keyt made a substantial contribution to the value of the stock.  Mrs. Keyt claimed that Mr. Keyt contributed substantially to the value of the stock through his various positions at the trucking company, for which he traveled “three or four nights a week” and worked for 23 years.  Mr. Keyt countered that he made no substantial contribution to the appreciation of the stock because he held no managerial authority or responsibility for obtaining new customers at the trucking company.  Finding that Mr. Keyt did not substantially contribute to the value of the stock in his work, which was comparable to that of a “low—to mid-level employee,” the Court held that the appreciation of the stock was Mr. Keyt’s separate property.

Another case, Yates v. Yates, No. 02A01-9706-CH-00122, 1997 WL 746377 (Tenn. Ct. App. Dec. 19, 2007) is in stark contrast to Keyt.  Through the length of his marriage, Mr. Yates managed the appliance division of a furniture and appliance company owned by his father.  Mr. Yates owned a 10% interest in the company’s stock worth $211,606.  Mr. Yates’ wife worked at the furniture and appliance company during part of the marriage and also contributed to the household as a homemaker and primary caretaker of the couple’s children.  When the parties divorced, the trial court held that the value of the appreciation of the stock owned by Mr. Yates was marital property subject to division between the parties.  In addition to awarding Mrs. Yates child support and alimony, the court gave Mrs. Yates $332,408 in marital property and Mr. Yates $337,433 in marital property.

The Tennessee Court of Appeals affirmed the trial court’s holding that the appreciation value of Mr. Yates’ stock was marital property.  Looking at Mrs. Yates’ contributions to the stock appreciation, the court noted that a non-owning spouse’s contributions may be indirect and may include contributions made as a homemaker.    It was not necessary that Mrs. Yates’ contributions be “monetarily commensurate to the appreciation in the separate property’s value, nor must [her contributions] relate directly to the separate property at issue.”  The court found that Mrs. Yates’ employment at the appliance company, involvement as a wife and homemaker, attendance at Mr. Yates’ business trips and meetings, and organization of company social functions constituted a substantial contribution to the appliance company for purposes of the appreciation of Mr. Yates’ stock.  Additionally, the court held that Mr. Yates also made a substantial contribution to the value of the appliance company stock.   Mr. Yates’ duties at the family-owned corporation included the purchase and sale of appliances, and the company’s certified public accountant testified that Mr. Yates’ father’s duties at the company decreased in the previous year.   The court held that Mr. Yates’ job performance as a manager directly impacted the price of the appliance company stock, and thus the appreciation of the stock was marital property subject to division between the parties.

For more information about “Appreciation of Separate Property” possibly becoming marital property, see:

• Appreciation of Real Estate: What Is “Substantial Contribution” in Tennessee Divorce Law?
• Appreciation of Premarital Retirement Accounts Separate Property Again Thanks to Tennessee Divorce Law Change
• Forensic Accountants’ Full Employment Act: Appreciation of Separate Property

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 www.MemphisDivorce.com.