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Earnings of Closely Held Company Are Not Marital Property, Appeals Court Says

 

In an issue of first impression in Illinois, the Third District Court of Appeal ruled in a divorce business dispute that retained earnings from a closely held corporation are non-marital property. In re Marriage of Joynt, No. 3-06-0919 (Aug. 16, 2007).

Michael Joynt was president of Mississippi Valley Stihl, Inc. (MVS), a family-owned subchapter S corporation in Illinois, when his former wife, Theresa, filed for divorce. He also owned 33% of the stock; his father and sister were the remaining shareholders. During the divorce trial, both spouses stipulated that Michael’s stock was non-marital property. However, the company’s accountant testified that MVS had $3.75 million in retained earnings that year, which were set aside for future expenses and not paid as dividends to shareholders. If they had been paid during the trial, Michael would have had an additional $1.25 million in income. The trial court concluded that Michael’s interest in the retained earnings were non-marital property. Theresa appealed, contending that the retained earnings were income available to her former husband.

The appeals court affirmed the trial court’s decision, noting that the company, not the spouses, paid taxes on retained earnings. Noting that Illinois courts hadn’t addressed the issue before, the judges surveyed decisions from several other states ruling that retained earnings are non-marital property. However, they wrote, that’s not always true when the shareholder spouse has full power to decide whether to pay dividends, or substantial influence over that decision. Furthermore, Michael was fairly compensated for his role as president of MVS, and there was no evidence showing that Michael was using MVS to hide marital assets.

Thus, because Michael did not have full control over the decision to distribute dividends, the justices wrote, retained earnings are not a marital asset. Theresa also claimed the trial court made an inequitable distribution of their marital assets; the justices rejected this as well, noting substantial evidence that the trial court had taken Michael’s assets into account when making its orders.

If you’re facing a similar business division dispute in a divorce, it’s essential to get help from an experienced business attorney to protect your hard-earned business and sort out the legally and personally difficult questions you face. Contact the Chicago business litigation firm of DiTommaso-Lubin for assistance in resolving business related issues in a divorce.