# FILED
August 30, 1999 Cecil Crowson, Jr. Appellate Cou rt Clerk IN THE COURT OF A

PPEALS OF TENN ESSEE AT JA CKSON EDWIN CARROLL ELAM, ) ) Plaintiff/Counter Deft./ ) McNairy Chancery No. 7187 Third Party Deft./Appellee, ) ) Appeal No . 02A01-9812-CH- 00362 VS. ) ) MARTHA PEA

RL (SWINEY) ELAM, ) ) Defendant/Counter Pltf./ ) Appellant, ) ) CANDICE LOU GARRISON, ) ) Third Party Deft./ ) Appellant. ) APPEAL FROM

THE CHANCE RY COURT O F McNAIRY COUNTY AT SELMER, TENNESSEE THE HONORABLE DEWEY C. WHITENTON, CHANCELLOR CHADWICK G. HUNT REYNOLDS, REYNOLDS & HUNT Savannah, Tennessee Attorney for Appellants CHARLES L. TROTTER, JR. TROTTER & JACKSON, P.L.L.C. Huntingdon, Tennessee Attorney for Appellee

REVERSED AND

REMANDED

ALAN E. HIGHERS, J.

CONCUR: DAVID R. FA

RMER, J. HOLLY KIRBY LI LLARD, J.
MarthaElam (“Wife” or “Appellant”) appeals the trial court’ s order which awarded2

Edwin Elam (“Husband” or “Appel lee”) an undivided 1/3 interest in the 171-acre tract of real property after deducting the

sum of $24,750 (the value of Wife’s separate interest at the time of inheritance), and awar ded Husband an equitable lien on the 60-acre tract of land (the “Homeplace”) for 1⁄2 of the undeter mined value over $32,800. The t rial court awarded Wife an inter es t in the 171-acre property in the amount of $24,750 an d a 2/3 interest in value of said property over that amount. The trial court refused to set asidethe conveyance of the Homeplace tract from Wife to Wife’s daughter, Candice Garr ison (“Garriso n” or “Appellant”), but made it s ubject to the equitable li en of Husband.

I. Factual and Procedur al History

The Elams married on August 4, 1966. Husband sued Wife for divorce on October 21, 1997. W ife file d her own complaint on October 30, 1997. Husband commenced a thirdparty action on December

16, 1997 against Garrison to set aside a

conveyance of marital real estate from Wife to her daughter, Garrison. The Chancel lor consolidated the cases and tried them on Ma y 8, 1998 wit hout a ju ry.

In 1986 Wife’s mother died testate. Wife inherited an intere st in two pieces of real estate at the heart of this litigation. One is known as the Homeplace, which includes a house and 60 acres of land. The other is k nown simply as

the 171-acr

e farm. Wife took the Homeplace outright and inher ited a 1⁄2 undivided interest with her brother in the 171-acre farm. On October 2, 1987, Wife and Husband bought Wife’s brother’s 1⁄2 interest for $7,500 as tenan ts by the en tirety.
Upon stipulation of the parties, th e agreed value of the Homeplace at the time of the inheritance was $32,800. Husband wor ked on and improved the Homeplace, including the surrounding acreage.The Elams took up residence at the Homeplace in 1996. Husband testified that over $102,000 was spent in refurbi shing the Homeplace and that in his opinion the total value of the land and improvements was approximately $190,000. Mr. Mark Alexander, a licensed appraiser, testified that based upon his survey of the3

Homeplace, the value of the home and i mprovements was $75,000 - $80,000.

Wif e conveyed the Homeplace to G arrison on September 16, 1997. Hu sband moved the court toset aside the conveyanc e. The Chancellor overru led Husband’s motion but awarded Husband an equitable lien u pon the property for 1⁄2 of the undetermi ned value
over and abov e the $32,800 (the stipulated val ue at the time of inheritance). The Chancellor

ordered the property sold. On appeal, Wife contends that the trial court err ed in ordering t he prope rty sold without giving Wife an opportunity to buy out Husband’s interest.

Wife also inheriteda 1⁄2 interest in the 171-acre farm pursuant to her mother’s will. Wife and Husband purchased the other 1⁄2 inter est from Wife’s brother for $7,500. Husband later entered into a mining lease with Adamsville Sand and Gravel to excavate large g ravel deposi ts locate d on this tract. Husband testified that in his opinion the v alue of the 171-
acre tract wasapproximately $300,000. The ap praiser testified the val ue of the land was $180,000. The appraiser further testified that he was only licensed to appraise commercial property up to $250,000 and that in his opinionthe mineral rights w ould cause the value of the property to exceed th is amount.

The court held that as a result of tran smutat ion, Husband was entitle d to an undivided 1/3 interest in the 171-acr e tract after deducting $24,750 (the sti pulated value of Wife’s i nterest at the time of inheritanc e). This property w

as also ordered sold if the partiescould not reach a settlement within 90 days from the entry of the order. Wife argues that she should have been awarded her initial 1⁄2 interest in this property and an equ al share of the 1⁄2 interest purchas ed by Hu sband an d Wife, resu lting i n 3/4 int erest t o Wife and 1/4 interest to Husband. Hu sband argues that the trial court erred in awarding him a 1/3 interest in the property. Husband asserts heshould have been awarded 1⁄2 interest in the 171-acre tract after setti ng apart $24,750 for Wife’s separate interest.
II. Property Division4

In accordance with Tenn.R.App .P . 13(d), the role of this Cou rt is to review the record made in the trial court de novo w ith the presumption that the tri al court's findings of fact are correct unless the evidence preponderates otherwise. Thus, we w ill affirm the trial court's decision unless there is an error of law affecting the result or unless the evidence preponderatesagainst the trial cour t' s factua l determinations. Campanali v. Campanali , 695 S.W.2d 193, 194 (Tenn. App.1985) (citations omit ted).
A. The Homepl ace Wife inherited the Homeplace w hen her mother died in 1986. From the outset, Husband worked on andimproved the Homeplace, inc luding the surrounding

acreage. The Homeplace h ou se itse lf dated t o 1909 and

has his

torica l sign ificanc

e, but Wife ackn o wledged at trial it was not in good condition when she inherited it. Boards were rotted, and the back porch was unusabl e. The porch was partiall y rotted and leaked. The electrical wiri ng was antiquated.

F rom the time Wife inherited the Homeplace, Husband bui lt fences, rep aired th e barn and built sheds. As soon as th e tenants left in 1989 o r 1990, the Elams began rebuilding the house. Husband borrowed money to pay for the improvements o n t he Homeplace. He firmed up parts of the flooring . He sheetrocked t he wal ls. He put down baseboards. He added new windows,new doors, new ceiling, new floori ng, new trim and replaced the siding. He rew ired and replumbed. When the Elams sold their house at R iver Hei ghts in Crump, the Elams paid the mor tgage and invested the $25 ,000 equity in th e Homeplace. After selling th e house at River Heights , the Elams took up residence at the Homeplace. Although the records w ere des troyed in a fire, Husband es timated he ultimately spent $102,000 on the Ho meplace house itself and another $25,000 on improvement

s to the Homep lace groun ds and the 171- acre farm.

Prior to trial, and unbeknownst t o Husband, Wife conveyed theHomeplace to her daughter by a previous marriage, Candice Lou Garrison. Husb and comm enced a third party action against Ms. Gar rison to set aside a convey ance of marital real estate from5

Wife to Garrison.

At trial, Hus band tes tified t hat the Ho meplace was wo rt h, in his estimation, $190,000 ($65,000 for the 60 acres of land, and $125,000 f or the house and outbuild ings ). An appraiser

testified thatin his opinion the Homeplace was worth $75,000. Wife did not offer her personal opinion. Tax appraisal r ecords were introduced which valued the Homeplace at $32,800 at the time of inheritance i n 1986.

At the conclusion of the trial, the Chancellor found that there were no grounds for setting aside the deed executed by Wif e to her daughter, Appellant Garrison, which was signed and delivered prior t o separation. The trial cour t found tha t th e Homeplace was worth approximately$32,800 at the time of inheritance and had increased in value due to improvements. The trial court found Husband to be entitled to 1⁄2 of the undetermined value
over $32,800 and awarded him an equit able lien on said property. The trial court then ordered the property sold if no agreement was reached by the parties within 90 days.

W ife argues that the Chancellor abused his discretion in ordering the sale i n ligh t of the fact that neither of the original parties ow ns the property and the fact that the Chancellor

refused to set aside the conveyance. Wife also argues that the Chancellor is fo rcing the sale of property that has been in the possession of Wife’s fam ily fo r generations. Wife asserts that if the Court h ad grante d weight to the testimony of the appraiser, it could easily hav e ordered Wife to pay 1⁄2 of the value over $32,800 to Husband and allowed the inherited property to remain in thefamily. Wife testified at trial that she w as prepared to pay Husb and for h is intere st in orde r to keep t he prope rty she h ad inherited and which h ad long be en in her f amily.

In light of the fact that Wife inheritedthis property from her famil y, and the property has been in Wife’s fam ily for generations, this Court is of the opinion that W ife should be allowed to pay Husband his inter est. Additionally, forcing the sale of the property will result in harsh tax consequences due to the large cap ital gain which will ar ise from the sale.6

Tennessee Code Annotated §36-4-121(c) directs thecourt to consider tax consequences as one of the relevant factors in maki ng an equitable divi sion of marital property. Tenn. Code Ann. §36-4-121(c)(9).

Husband contributed to the increase in value of theproperty andis entitled to 1⁄2 of the increase in value as per the trial court’s or der. The partieshave not challenged the tr ial court’s decision not to set aside the trans fer to Garrison, and this Court will not address that ruling. Howev

er, the increase in val ue of the property was part of the “marital pot” to be divided between Husband and Wife by the trial court, and Wife shall be ultimately liable forpaying Husband his interest in cash. How ever, if payment is not made to Husband, the property shall be sold, with Husband receiving his interest and Garrison, the owner of the property, receivi ng the balance.

For the above noted reasons , the tri al court erred in ordering the Homeplace property sold. Wife shall be given the opportunity to pay Husband the value of his interest in the property. This matter shal l be remanded to the trial court for a deter mination of value of the Homeplace.

B. 171-acre Farm Wife also i nherited a 1⁄2 in terest in a 171-acre trac t of land upon the death of her mother. Husband and Wife then purchased the outstanding 1⁄2 interest in the property from Wife’s brother

for $7,500 as tenants by the enti reties. At trial, tax appraisal records were introduced which val ued the property at $49,000 at the time of inheritance. The 171-acre farm as inherited by Wife was unimproved, but relativ es of both Elams adjoin the pr operty . Husband negotiated a favorabl e written lease in la te 1996 with Adamsvil le Sand and Gravel Company t o take advantage of the grav el deposits on th e property. The Elam ’s 1997 U. S. Individ ual Incom e Tax R eturn reflects gravel ro yalties received of $22,493. Besides the gravel l ease, Husband clearedparts of the property as needed, improved the roads on the farm and bush hogged th e entire 1 71 acres a nnually.7

At trial, Husband valued the 171-acre farm, including mineral r ights, at $300,000. Wife’s trial expert valued the 171-acre farm at $180,000 excl uding mineral rights. The expert testified that he was lic ensed to appraise property up to $250,000 and that, in his opinion, the value of the proper ty including mineral

rights might exc

eed $250,000.

The trial court found that Wif e inherited a 1⁄2 undivided interest in the tract under her mother’s will and Husband and Wife purchased the remaining 1⁄2 interest in said tract, all of which is subject to a gravel operation.The trial court ruled that,after deducting the value
o f 1⁄2 of th e real estate value of $49,000 i n 1986 ( $24,750), Husband was entitled to an undivided 1/3 interest in the undetermined value of said l and and grave l inter est and Wife
was entitled toa 2/3 interest in the same. The trial court ruled that if the parties coul d not dividethe property according to his order within n inety days, the tract of land should be sold and the proceeds divi ded as per the determined interes t of each.

On appeal, Wife contends that Husband is only enti tled to a 1/4 interest in the property, as his equal share of the 1⁄2 interest purc hased by Husband and Wife f rom Wife’s brother. Wife further contends that the trial court sh ould not have ordered the property sold, but should have allowed Wife to pay Husband for his interest i n the prop erty. Husband contends that after subtracting the value of W ife’s share of the property at the time of inheritance, Husband is entitled to 1⁄2 of the increase i n value.

As with the Homeplace property, we find that the trial court erred in ordering the sale of the 171-acre farm. Due to the fact that this property was inher ited by Wife and has been in Wife’s family for generations, and due to the great tax liabil ity

which will be i mposed on the parties with such a large capital gain, the trial court should have allowed Wife to retain the land and pay Husband for his interes t. Wife testified that she believed she woul d be able to borrow the necessar y money to pay Husband an d pay it back out of the gravel operation. The trial co urt should have set a value for the pr operty and allowed Wife the opportu nity to pay H usband t he value o f his inte rest in th e propert y.8

With regard to the division of the 171-acre farm , we first no te that the 1⁄2 interest purchased by Husband and Wife as tena nts in the entireties is clearly marital and should be d ivided equally bet

ween the parties. Additi onally, absent proof of transmutati on, th e val ue of Wife’s 1⁄2 interest at the time of inheritance ( $24,750) is clearly Wife’s separate property. What remains to be divided is the increase in value of Wife’s 1⁄2 interest.

In making its ruling,the Chancellor ruled that after deducting $24,750, Husband as a result of transmutation is entitled to an undivided 1 /3 interest i n the land and gravel interest. The doc t rine of transmutation was addr essed by this Court i n the case of McClellan v. McC lellan , 873 S.W.2d 350 (Te nn. App. 1993).

Transmutation occurs when separa t e property is treated in such a way as to give evidenceof an intentio n that it bec ome ma rital property. One method of causing transmutation is t o purchase property with separ ate funds butto take title in joint tenancy. This may also be done by placi ng separate property in the names of both spouses. The rationale underl ying both of these doctrines is that dealing with property

in these ways creates a rebutt

able pre sumptio n of a

gift to themarital estate. This presumption is based upon the provision in many marital property statutes that property

acquired during the marriage is presumed marital. The presumption can be rebutted by evidence of circumstances or communications clearly indicating an intent that the property remain separat e. Id . at 351.

While transmutation might apply to the situation at hand, the tr ial court m ade no mention of the property being tr eated in such a way as to give evidence of an i ntention that the property become marital. There was no evidence th at the parties took title to Wife ’s inherited 1⁄2 interest i n joint tenancy, and therefore no presumption of a gift to the marital estate. Furthermore, under the doctr ine oftransmutation, the value of the property at the time of Wife’s inhe ritance ( Wife’s separate property) could become mari tal property by transmutation. Yet, under the tri al court’s ruling, the valueof Wife’s 1⁄2 interes t at the time of inheritance remains her s eparate property, but the i ncrease i n value of h er 1⁄2 interest becamemarital property by transmutation. It is inconsistent for the parties to treat W ife’s original 1⁄2 interest as separate property, while treating the increase in valu e of same 1⁄2 interest as marital proper ty.9

It is more logical to this Court, that the trial court wa s attempting to divide the increase in value between the parties, as it did with theHomeplace. An increase in th e value of separate property consti tutes marital property if (1) it occurred duri ng the marriage and (2) the non-owner

spouse made some substantial contr ibution to thepreservation and appreciation of the separa te prope rty. Cohen v. Cohen , 937 S.W.2d 823, 833 (Tenn. 1996). In the ca

se of Harrison v. Harrison , 912 S.W.2d 124 (Tenn. 1995), the husband had an interest in a tract of farmland which was found to be his separate property. The 45.5-
acre tract of farmland increased in v alue from $7,000 a t the time of th e parties marria ge to $1,361,750 at the time of their divorce. The sol e cause of the appreciationin value was the constr

uction o f a interstate highway across a portion of the larger 125-acre tract. The Tennessee Supreme Court found that, as the sol e cause of the appreciation in v alue was the construction of the interstate, the wife’s activities did not substantially contribute to the preservation and appreciation in valu e of the pr o perty. Id . at 127. The increase in val ue remained the separate property of the husband. Id

.

In the case at hand, Hu sband clearly contributed t o the increase in value o f the property and is therefore entitled to so me p ortion of the increase in value of W ife’s separate 1⁄2 interest. In keeping with the trial cour

t’s ruling on the H omeplace, H usband would be awarded 1⁄2 of the increase in val ue of Wife’s separate 1⁄2 interest in the 171 -acre farm. Wife would be awarded the value of her separate property at the time of inheritance ($24,750), Husband and Wife would equally divide the increase in value of Wife’s separate 1⁄2 interest, and Husband and Wife would equal ly divide t he va lue of the rem aining 1⁄2 interest which wa s c learly marital property. Simply stated, after first deducting W ife’s $24,750 interest, Hus band and Wife would share equally in the value above that amount.
However, it is unclear fromthe record how much of the increase in the value of the 171-acre tract is the re

sult of Husband’s activities in keeping up the land and Husband’s efforts in obtaining the g ravel lease, and how much of the increase in value is due to simple appreciation or inflation. The tract of land was valued at $49,000 in 1986 and is now valued at $180,000 to $300,000.10

On remand, the trial court sh ould take evidence to determine w hat percentage of the increas e in value is due to Husband’s efforts in maintaining the property and in obtaining the gravel lease, and whatpercentage of the increase in value is due

to simple appreciation or inflation. Any incr ease in value to whic

h Husband con tri buted should be treated as marital property and divided between Husband and Wife. Alternatively, If the trial court wishes to treat

the property as marital by way of transmutati on, we see no reason for the trial court to

set aside the original value of Wife’s 1⁄2 separate interest before di viding the property between the parties.

For all t he forego ing reasons, the trial court erred in awar

ding Husband a 1/3 interest in the 171-acr e farm a fter deducting the origi nal value of Wife’s separate 1⁄2 interest. The trial court also erred in ordering the property sold without first assessing the value of the property and al lowing Wife to buy out Husband’s i nterest.

III. Conclusion

The judgment of the trial court is hereby reverse d and remande d for f urther proceedings consistent with this opinion. C osts of this appeal are taxed to Appel lee, for which execu tion may is sue if ne cessary.

HIGHERS, J.

CONCUR:11

CRAWFORD, P.J., W.S.

FARMER, J.