Marital Assets Being Used For Tax Bill Made Separate Assets Martial

Tennessee law case summary on classifying marital and separate property in divorce and family law from the Court of Appeals.

Melody Crunk Telfer v. George Curtiss Telfer – Tennessee divorce property classification

The husband and wife were married in 1985.  Until 2000, they were both employed, and their practice was to deposit their paychecks into a joint checking account.  The wife’s father was chairman and owner of RJ Young Company, and in 1995, he decided to transfer some of his assets to the wife for estate tax purposes.  He set up a partnership which owned the land where RJ Young was located, and began transferring ownership to the wife.  By 1999, she owned a 74.8% interest in the partnership, with a value of over $400,000.  In 2000, she began receiving distributions from the partnership in the amount of $8500 per month.  These were deposited into the joint checking account and were used for marital expenses.  Because of this additional income, the wife stopped working outside the home.

The wife’s father also set up another entity, which initially had no assets.    $900 was paid for an initial 90% ownership interest.  Until 2000, no income was received from these entities.  However, there were significant tax liabilities, and these taxes were paid with marital funds.  For example, in 2005, one of the entities had income of over $600,000, all of which was retained.  This resulted in a tax bill for the couple of approximately $331,000.  To pay this, the husband liquidated a joint brokerage account, which had been money that the husband inherited from his aunt.  Also, a home equity line of credit on the parties’ home was used to finance the tax payment while waiting for funds from the brokerage account.  After this kerfuffle, as the court called it, the entities began making distributions to cover tax payments.

During this time, the husband had also started a business to build expensive homes.  Due to the collapse of the real estate market, this venture was not successful.

All of these events placed a strain on the marriage, and in 2010, the wife filed for divorce in Williamson County and alleged irreconcilable differences.  A trial was held on the issue of the entities received from the wife’s father–whether they were marital property or the wife’s separate property.  Among the witnesses was Thomas Price, a CPA hired by the husband as expert witness.  The trial court concluded that the property from the father had been intended as a gift, and that it was the wife’s separate property.  As for the appreciation in value, the trial court found that there had been no contribution from both parties, even though proceeds went into a joint account.  The trial court also held that payment of the tax liabilities from the joint account was not controlling.  Therefore, the trial court held that the wife’s interest in the two entities was her separate property.  The husband appealed to the Tennessee Court of Appeals.

On appeal, the husband argued that this was error for a number of reasons.  First, the payment of the tax obligations had substantially contributed to the appreciation, and had done so with marital assets.  Also, by incurring losses personally, he argued that these had benefitted the entities by reducing tax liabilities.

The wife first argued that the appeal should be dismissed because the husband’s brief did not include a table showing all marital property.  But because of the narrow issue, the court concluded that such a table was not necessary.

The court then dealt with the second entity, which had been created with the initial $900 payment.  With respect to this entity, the court of appeals affirmed the trial court, since there was no evidence to preponderate against the trial court’s finding of separate property.

The court then considered the appreciation of both entities.  It noted that the distributions had been commingled with marital property, and were used to pay marital expenses.  And it took particular note of the fact that the tax liabilities had been paid with marital assets.  In most cases, it noted that the payment of these taxes did have a benefit to the entity in preserving and increasing value.  It therefore held that the appreciation of both companies should have been treated as a marital asset.

Since the trial court had held to the contrary, the Court of Appeals reversed and remanded the case for the trial court to make determinations as to the relevant amounts of appreciation.

No. M2012-00691-COA-R3-CV (Tenn. Ct. App. June 28, 2013).

See original opinion for exact language.  Legal citations omitted.

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