Title: Teeples v. Teeples

State: wyoming

Issuer: Wyoming Supreme Court

Document:

DONNA RAY TEEPLES v. NEAL J. TEEPLES2012 WY 127Case Number: S-12-0007Decided: 09/27/2012This opinion is subject to formal revision before publication in Pacific Reporter Third. Readers are requested to notify the Clerk of the Supreme Court, Supreme Court Building, Cheyenne, Wyoming 82002, of any typographical or other formal errors so that correction can be made before final publication in the permanent volume. 
APRIL TERM, A.D. 2012 

 
DONNA 
RAY TEEPLES,Appellant(Plaintiff),v.NEAL J. 
TEEPLES,Appellee(Defendant).
 
Appeal from the 
District Court of Sweetwater County
The 
Honorable Nena R. James, Judge
 
Representing 
Appellant:
Richard Mathey 
of Mathey Law Office, Green River, Wyoming.
 
Representing 
Appellee:
Weston W. Reeves and 
Anna M. Reeves Olson of Park Street Law Office, Casper, Wyoming.
 
Before KITE, 
C.J., and GOLDEN, HILL, VOIGT, and BURKE, JJ.
 
VOIGT, 
Justice.
 
[¶1]      
Donna Ray Teeples, the appellant, was to receive a cash payment 
from her ex-husband, Neal J. Teeples, the appellee, as a result of 
the division of their marital assets pursuant to a divorce.  
The appellant claims that the payment, made with the funds of an S 
corporation owned jointly prior to the divorce, impermissibly increased her tax 
liability and was made with funds that were rightfully owed to her as a prior 
shareholder in the company.  We affirm the district court’s 
decision to the contrary.
 
ISSUE
 
[¶2]      
Did the payment received by the appellant satisfy the terms of the 
Property Settlement Agreement pursuant to the parties’ divorce?
 
FACTS
 
[¶3]      
The appellant married the appellee in 1979.  
The appellant filed for divorce on November 26, 2007.  
After mediation, the parties signed a Property Settlement Agreement on 
October 2, 2008.  Prior to the division of assets, the parties 
owned five companies jointly.  Pursuant to the agreement, the 
appellant received Great Basin Industries and the appellee received 
Industrial Services, Inc. (ISI), Power Source Services, Inc., Sweetwater 
Holding, and RTR, Inc.  Because the value of the 
property received by the appellee exceeded that received by the 
appellant, the agreement required the appellee to make a cash 
payment of $1,100,000 to the appellant on October 3, 2008, and three additional 
annual payments of $800,000 on the anniversary of the first payment, for a total 
of $3,500,000.  The agreement also provided that “[e]ach party 
shall be responsible for and each party shall pay the tax due on their separate 
income tax returns for 2008 and all subsequent years.”
 
[¶4]      
In September 2008, the appellant requested a partial advance on her first 
payment.  This request was made before the Property Settlement 
Agreement had been signed, but after the terms of the division of assets had 
been agreed upon in a signed document later attached to the 
agreement.  The appellee agreed to this request, 
but because he was out of town, he directed the appellant, who still had the 
power to sign ISI checks, to sign a check issued to herself in the 
amount of $300,000 on September 24, 2008.  
The appellee wrote a check to the appellant 
from ISI for the remaining $800,000 of the first payment on October 
3, 2008.
 
[¶5]      
In early 2009, the appellant received a Schedule K-11 related to her previous 
status as a shareholder in ISI, an S corporation.  That 
form indicated $1,659,058 ordinary business income due to the appellant’s 
37.7049% ownership share of ISI for 2008.  The 
Schedule K-1 also included, as “Items affecting shareholder basis,” $1,183,2212 of property 
distributions.  The appellant also received a Schedule K-1 as 
a Great Basin Enterprises shareholder.  This form showed 
ordinary business income of $131,232, representing a 62.2951% ownership 
share.  Finally, the appellant was issued a Schedule K-1 for 
Sweetwater Holdings, Inc., indicating $203,944 income and a 37.7049% ownership 
share.3  The appellant, 
however, did not include the income as listed on her Schedule K-1s on her 
initial income tax return because her accountant was unsure if the appellant had 
received the $1,183,221 distribution from ISI as indicated on her 
Schedule K-1.  Instead, the appellant included $210,662 (less 
deductions) related solely to her Great Basin ownership, reflecting a 100% 
ownership interest in that company.  The appellant attached 
the following statement to her income tax return: “Taxpayer is reporting items 
from schedules K-1 differently than reported on the K-1s.”  
Instead, the statement indicates that the return will reflect a 100% 
ownership interest in Great Basin, a 0% ownership interest in ISI, and a 
0% ownership interest in Sweetwater Holdings, Inc., despite the information 
contained in the Schedule K-1s.  It was only after the 
appellant informed her accountant that she had in fact received cash and 
property distributions amounting to $1,183,221 from ISI during 2008, 
that she amended the initial return to include the portion of income attributed 
to her ownership prior to the division of assets on October 3, 2008, as provided 
in the Schedule K-1s.  This resulted in an additional 
$615,939 tax liability to the appellant.
 
[¶6]      
In 2008, ISI switched from the cash method of accounting to 
the accrual method.  The appellee’s accountant 
testified that he told the parties that this change was necessary to stay in 
line with IRS accounting requirements.  This change resulted 
in an increase of income to the company, and, thereby, to its shareholders for 
tax year 2008.
 
[¶7]      
The appellant filed in the divorce action a Second Amended Petition for 
Order to Show Cause alleging as follows:
 
Respondent has failed 
to make the initial cash payment of $1,100,000 due October 3, 2008.  
Respondent instead issued checks totaling $1,100,000 to Petitioner but 
which in fact were Petitioner’s share of the income of Industrial Services, 
Inc., and Sweetwater Holdings, Inc., and upon which Petitioner must pay U.S. 
income taxes of more than $600,000.
 
The appellant’s 
Memorandum in Support of Second Amended Petition for Order to Show Cause 
contends that “Mrs. Teeples should have received the $1.1M 
cash payment from Mr. Teeples outright, free and clear of any tax 
liability.”
 
[¶8]      
The district court issued a decision letter, stating that:
 
Respondent’s payment 
of $1.1 million out of the ISI account was not an income 
distribution from the corporation, nor did that payment cause Petitioner to 
incur an additional tax liability.  Instead, that tax 
liability was a result of the allocation of income required for Subchapter S 
corporations and each party’s ownership interest. . . .
 
There is no basis 
upon which to find Respondent in contempt or to otherwise modify or set aside 
the agreement. . . .
 
The appellant now 
appeals that decision.
 
STANDARD OF 
REVIEW
 
[¶9]      
Although both parties suggest, correctly, that decisions in domestic 
relations contempt cases are afforded an abuse of discretion standard, we find 
that the pertinent issue in this case is whether as a matter of law the payment 
received by the appellant satisfied the terms of the Property Settlement 
Agreement.  Questions of law are reviewed de 
novo.  KM Upstream, LLC v. Elkhorn Constr., Inc., 
2012 WY 79, ¶ 44, 278 P.3d 711, 727 (Wyo. 2012).
 
DISCUSSION
 
[¶10]   
On appeal, the appellant attempts to differentiate between a 
“distribution of shareholder income” and a “property settlement 
payment.”  The significance of this distinction, according to 
the appellant, is that the former is subject to taxation, whereas the latter is 
received tax free.  Because the $1,100,000 was drawn from 
her ISI capital account, the appellant argues that the payment was 
“nothing more than a partial payment of the income attributable to her for the 
year 2008” and therefore cannot be a property settlement payment.
 
[¶11]   
The appellant’s argument represents a misperception of the taxation of 
S corporations.  Shareholders in S corporations are taxed 
based on their pro rata share of the corporation’s income.  
26 U.S.C.A. § 1366(a)(1) (West 2011).  If a 
corporation makes a distribution of property to a shareholder with respect to 
that shareholder’s stock, the portion of the distribution which is a dividend 
must be included in the shareholder’s income as well.  
26 U.S.C.A. § 301(c)(1) (West 2011).  The 
appellant suggests that the $1,100,000 she received was a taxable dividend which 
led to over $600,000 in income tax liability.  The payment 
received, however, did not constitute a dividend and did not result in 
additional tax liability to the appellant.
 
[¶12]   
When the appellant requested and received the advance on the money owed 
to her, the Property Settlement Agreement itself had not yet been signed by the 
parties.  However, the terms of that agreement, including the 
division of ownership of the five S corporations and the payment of 
$3,500,000, had been included in a signed document as of September 17, 2008, 
which document was to be incorporated into the Property Settlement 
Agreement.  At that point, both parties began treating the 
assets to be divided, namely ISI and the other S corporations, as 
their own.  On September 23, 2008, the appellant signed a 
contract as the president of Great Basin Enterprises to buy real estate to 
conduct the operations of that company.
 
[¶13]   
Although the parties began treating the companies as their own from the 
date that the terms of the division of assets were agreed upon, for tax and 
accounting purposes the assets were not considered divided until the parties 
signed the Property Settlement Agreement.  The default rule to 
determine a shareholder’s ownership percentage requires that the S corporation’s 
income for the taxable year be divided evenly among all days in that year and 
then apportioned to the shareholders based on their ownership on a 
given day.4  
26 U.S.C.A. § 1377(a)(1) (West 2011).  
Here, the appellant was a 50% shareholder in all of the S corporations 
jointly owned with her ex-husband until the division of assets, at which point 
she owned 100% of the stock of Great Basin Enterprises and 0% of the other four 
S corporations, including ISI.  As reflected in her 
Schedule K-1s, this resulted in 62.2951% ownership in Great Basin 
Enterprises and 37.7049% ownership in ISI and Sweetwater Holdings 
for tax year 2008.  These numbers reflect the percent of the 
2008 income of each S corporation that passed through to the appellant for 
income tax purposes.  The IRS instructions are clear: “You are 
liable for tax on your share of the corporation’s income, whether or not 
distributed.”  Shareholder’s Instructions for Schedule K-1 
(Form 1120S), supra note 1.  Furthermore, 
the Property Settlement Agreement signed by both parties indicates that they 
will each pay their own portion of their 2008 income tax.  

 
[¶14]   
The appellant does not suggest that the K-1s are 
incorrect.  What the appellant does suggest is that the two 
payments of $300,000 and $800,000 constituted a dividend and increased 
impermissibly her income tax liability.  This contention is 
not borne out by the appellant’s Schedule K-1.  The amount of 
money or other property distributed to a shareholder in an S corporation will 
first reduce the shareholder’s basis in his stock.  
26 U.S.C.A. §§ 1368(b)(1), (c)(1) (West 2011).  
If any portion of the distribution remains after reducing the basis to 
zero, that portion shall be treated as a dividend to the shareholder to the 
extent that it does not exceed the S corporation’s accumulated earnings and 
profits.  26 U.S.C.A. § 1368(c)(2) (West 
2011).  Any remaining portion of the distribution will 
constitute ordinary income to the shareholder.  
26 U.S.C.A. §§ 1368(b)(2), (c)(3) (West 
2011).  The appellant acknowledges that she received 
$1,183,221 in cash and property distributions from ISI during 
2008.  Her Schedule K-1 shows that this entire amount of the 
payment reduced her basis in ISI.  This means that the 
distribution did not exceed her basis and, therefore, did not constitute a 
taxable dividend.5  “Schedule K-1 
does not show actual dividend distributions the corporation made to 
you.  The corporation must report such amounts totaling $10 or 
more for the calendar year on Form 1099-DIV, Dividends and Distributions.” 
Shareholder’s Instructions for Schedule K-1 (Form 1120S), 
supra note 1.  There is no evidence in the record to 
suggest that the appellant received such a form.  The 
appellant’s income tax liability due to ISI reflected her share of 
the income earned by that company during 2008 and was not increased by any 
distribution or payment.  Her own accountant acknowledged as 
much: “The distributions do not change the tax liability reflected on K-1 on 
line 1.  The income distributed -- the income reported to an 
individual is what the tax is paid on, not the distribution.”
 
[¶15]   
The appellant also argues that because the $1,100,000 was drawn on her 
capital account in ISI, the payment represented the income attributable 
to her for 2008 and therefore cannot be a property settlement 
payment.  Although it is not clear, the appellant seems to be 
suggesting that she is owed the value of her capital account in addition to any 
payments pursuant to the divorce.  A capital account does not, 
however, serve as a bank account from which a shareholder can withdraw 
money.  Its purpose is to keep track of a shareholder’s 
investment in the company and his basis in his stock.  “A 
subchapter S corporation monitors its retained corporate earnings using an 
account which is then used to determine each shareholder's basis for taxed but 
undistributed corporate income.”  In re Marriage of 
Joynt, 874 N.E.2d 916, 919 (Ill. App. Ct. 2007). 
 Like any other corporation, an S corporation may choose to 
retain net profits for operating expenses.  For that reason, 
shareholders in S corporations may be taxed on income they never actually 
receive.  In re Marriage of Matthews, 
193 P.3d 466, 469 (Kan. Ct. App. 2008).  When the 
assets previously owned jointly by the parties were divided, neither had any 
continuing rights to the assets received by the other party.  
“[R]etained earnings and profits of a subchapter S corporation are 
a corporate asset and remain the corporation's property until severed from the 
other corporate assets and distributed as dividends.”  In 
re Marriage of Joynt, 874 N.E.2d  at 919.  
The appellant did not have a right to any of the income earned by 
ISI, much like the appellee no longer had a right to Great 
Basin Industries’ assets.
 
[¶16]   
Like many taxpayers, the appellant may have been caught off guard by an 
unexpectedly high tax liability.  There is, however, no 
indication that this was the result of double dealing by her 
ex-husband.6  The appellant 
received the money she was owed from her ex-husband without any additional tax 
liability, regardless of the fact that the money was drawn from an S corporation 
in which he was the sole owner, rather than from a personal account.
 
CONCLUSION
 
[¶17]   
The appellant received a payment from the appellee pursuant 
to their Property Settlement Agreement following their divorce.  
The appellee paid the appellant with funds from an S 
corporation he received in the divorce.  The appellant 
contends that because she had previously been a shareholder in this S 
corporation, the payment constituted a dividend and impermissibly increased her 
income tax liability.  We disagree.  The 
appellant was taxed properly on income earned by the S corporation due to her 
previous stake in the company.  The distribution did not 
increase her tax liability.  Therefore we affirm.
 
FOOTNOTES
1The function 
of a Schedule K-1 is to reflect a shareholder’s share of the corporation’s 
income.  Shareholder’s Instructions for Schedule K-1 (Form 
1120S), http//www.irs.gov/pub/rs-pdf/1120ssk.pdf (last visited 
September 24, 2012).
2The $83,221, 
in addition to the $1,100,000 payment that is at issue, represents equipment 
received from ISI as part of the Property Settlement 
Agreement.  This additional amount is not at issue.
3The record 
does not include evidence of a Schedule K-1 issued to the appellant with regard 
to either RTR, Inc. or Power Source Services, Inc.
4When one 
shareholder’s interest is terminated, shareholders may elect to split a taxable 
year in two, with the first one ending on the date of the termination, so that 
the shareholder whose interest is terminated will only be subject to tax on 
income earned during the time that he or she actually held stock in the 
company.  26 U.S.C.A. § 1377(a)(2) (West 
2011).  No such election was made in this case.
5In fact, 
should he choose to sell the stock in ISI he received from the 
appellant, the appellee will face greater tax liability as a result 
of the basis reduction.
6The, perhaps, 
surprisingly high tax liability was likely the result of ISI’s 2008 
switch from the cash to the accrual method of accounting.  The 
accrual method of accounting requires that income is calculated based on when an 
invoice is issued, rather than when the payment is actually received, as with 
the cash method.  33A Am. 
Jur. 2d Federal Taxation §§6150, 6200 
(2012).  The result is that in the initial months following a 
switch to the accrual method, estimated taxes will be higher than before the 
switch because income will be reported earlier.  In reality, 
the appellant’s ex-husband was also burdened by additional taxation as a result 
of the switch to the accrual method.