Facts: During the marriage, Wife’s father gave her ownership interests in two family companies in order to avoid the payment of gift and inheritance taxes upon his death. As a result, the parties had significant tax liabilities. Income from the companies was included in the parties’ joint income tax returns. However, the parties received no money from the companies to pay the increased tax liability incurred as a result of Wife’s ownership interest in the companies. Consequently, they paid the increased income taxes with marital funds. The parties paid the taxes on all of the income generated by the companies, regardless of whether that income was retained in the company or distributed to Wife.

The trial court concluded that Wife’s ownership interest in the companies was her separate property because her father gave them to her as gifts. The trial court further found that the fact that income from the companies was deposited into a joint account, and the fact that the payment of the parties’ tax liabilities were paid from joint assets, did not amount to a substantial contribution to the appreciation in value of the companies. For that reason, the trial court held that the appreciation in the value of the companies during the parties marriage was also Wife’s separate property.

Husband appealed.

On Appeal: The Court of Appeals reversed the trial court.

After unsuccessfully arguing that Wife’s interests in the company’s were marital property, Husband argued that the parties substantially contributed to the preservation and appreciation of Wife’s companies by including the income distributed and retained by the companies in the parties’ joint tax returns and using marital funds to pay the increased tax liability created by Wife’s business interests. Specifically, Husband argued that because the parties used marital funds from the parties’ joint account to pay the tax liability associated with the income retained in Wife’s companies, Wife’s companies were able to retain Wife’s earnings instead of distributing the funds to Wife to cover the taxes. This, Husband argued, allowed the companies to grow and appreciate in value.

In order for the appreciation in value of Wife’s separate property to be deemed marital property, Husband must prove that each party substantially contributed to its preservation and appreciation.

Whether a spouse substantially contributed to the preservation and appreciation of the other spouse’s separate property is a question of fact. Such a contribution may be either direct or indirect. Regardless, it must satisfy two requirements. First, some link between the marital efforts of a spouse and the appreciation of the separate property must be established before the separate property’s appreciation is considered marital property. Second, the contribution must be real and significant. However, the contributions of the spouse who seeks to have the appreciation deemed marital property need not be monetarily commensurate to the appreciation in the separate property’s value, nor must they relate directly to the separate property at issue.

The Court agreed, writing:

The parties’ use of marital funds to cover their tax liabilities arising out of the [business] income that was attributed to Wife but not distributed to her allowed [the business] to retain income that could have been utilized to pay the parties’ income taxes. This helped preserve [the business] and allowed it to grow and appreciate in value. Under these circumstances, we find a causal link between the use of the parties’ marital funds and the preservation and appreciation in value of [the business]….

Considering all of these circumstances, we must conclude that the evidence preponderates in favor of a finding that the parties made real and significant contributions to appreciation and preservation of both [companies]. Consequently, we must hold that the appreciation in value of both companies during the marriage is marital property.

Accordingly, the trial court was reversed and the case remanded for further proceedings.

K.O.’s Comment: In a similar case, Schuett v. Schuett, the Court held there was no causal connection between the payment of the parties’ income taxes on income distributed from one party’s separate property and the appreciation or preservation of the separate property as a whole. The payment of the parties’ tax obligation on income received did not serve to “preserve the corpus” in the separate property and, therefore, failed to provide a basis to conclude that the parties’ substantially contributed to the appreciation and preservation of the separate property. What distinguishes this case from Schuett is the fact that marital funds were used to pay taxes on income retained by the separate property, i.e., income that was not distributed to one or both of the parties.

Telfer v. Telfer (Tennessee Court of Appeals, Middle Section, June 28, 2013).

Information provided by K.O. Herston: Knoxville, Tennessee Divorce, Matrimonial and Family Law Attorney.

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