Opinion ID: 1304539
Heading Depth: 1
Heading Rank: 5

Heading: Charles' stock interest in the Pepsi Cola Bottling Corporation.

Text: From the date of the marriage until February 28, 1979, Charles owned a one-fourth partnership interest in the Pepsi Cola Bottling Company of Twin Falls. However, on March 1, 1979, the assets in the partnership, except the real property, were transferred to a corporation known as the Pepsi Cola Bottling Company of Twin Falls, a corporation. For his one-fourth share of the partnership assets transferred to the corporation, Charles received 4000 shares of stock and $100,000 in 12% debenture notes. The trial court found that following this transfer Charles performed no services for the corporation, but nevertheless received a salary from the corporation, together with dividend payments on his stock interest. The trial court made no finding of the market value of the assets transferred in exchange for the 4000 shares of stock and the $100,000 in debenture notes. On June 6, 1980, approximately fifteen months later, Charles sold all of his stock and the debenture notes of the Pepsi Cola bottling corporation, and his 25% interest in the partnership for the sum of $840,000, payable $125,000 down and the balance in installments. [8] At the time that Charles sold his 4000 shares of corporate stock on June 6, 1980, Charles' share of the undistributed taxable income as defined by 26 U.S.C. § 1373, which had been retained by the corporation, was the sum of $39,171. That income was reported on Charles' joint income tax return and he paid income tax on that undistributed taxable income, apparently with community funds. [9] Isabel contends that the magistrate erred in not finding that Charles' share of the undistributed profits of the corporation in the sum of $39,171, which the corporation had accumulated and retained between March 1, 1979, and June 6, 1980, was community income. Isabel argues that when the stock was sold on June 6, 1980, increased value of the stock reflected this investment of retained earnings, and therefore the community should be reimbursed for those retained earnings. Charles argues, on the other hand, that under our prior cases of Speer v. Quinlan, 96 Idaho 119, 525 P.2d 314 (1974), and Simplot v. Simplot, 96 Idaho 239, 526 P.2d 844 (1974), retained earnings of a corporation in which a spouse has a non-controlling separate property stock interest is not income from that separate property. While the legal principles enunciated in Speer and Simplot are applicable here, this case is factually distinguishable from Speer and Simplot. In Simplot the husband, prior to marriage, had acquired a non-controlling separate property stock interest in the Apex Corporation, the parent corporation of the J.R. Simplot Company, which he retained during the marriage and after the marriage was terminated. The issue in that case was whether or not the community acquired an interest in the separate property stock as a result of both the Apex Corporation and the J.R. Simplot Company retaining as working capital all profits earned during the marriage. In Speer the husband acquired a controlling amount of stock in Speer, Inc., by gift from his parents during the marriage. Under I.C. § 32-903 the stock was clearly separate property when acquired. During the marriage Speer, Inc., never distributed any earnings as dividends. All earnings were retained as working capital and invested in inventory, equipment and raw materials. This Court held in both cases that the divorced spouse gained no interest in the husband's separate property stock as the result of the corporation retaining its profits as working capital rather than distributing them as dividends. In the present case Charles acquired both stock and debentures in the corporation during the marrige from what had originally been his separate property partnership interest. However, as we have held in Part II(a), that partnership interest was enhanced as the result of approximately $75,760.00 of undistributed profits of the partnership which, contrary to the holding of the trial court, we have concluded to be income from the husband's separate partnership property within the meaning of I.C. § 32-906, and thus community property. The property transferred by Charles in exchange for both the stock and debentures partook of both his original separate property interest in the partnership and the retained earnings which we have held in Part II(a) to be community property. In situations such as this, the measure of the community's reimbursement was first set out in Gapsch v. Gapsch, 76 Idaho 44, 277 P.2d 278 (1954) as follows: As a general rule where the separate property of the husband is improved or his equity therein enhanced by community funds the community is entitled to be reimbursed from such separate estate unless such funds used for improvement or enhancement are intended as a gift. The claim for reimbursement has been held to be in the nature of a charge or an equitable lien against such separate property so improved or the equity of the husband therein enlarged. It would appear that the measure of the compensation generally is the increased value of the property due to the improvement; in instances where his equity therein has been increased through the application of community funds to the payment of the debt thereon the measure should be the amount by which such equity is enhanced. 76 Idaho at 53, 277 P.2d at 283. Later, in Suter v. Suter, 97 Idaho 461, 546 P.2d 1169 (1976), we stated, as quoted by the trial court herein:  The measure of reimbursement for community expenditure on separate property is the increase in value of the property attributed thereto, not the amount of value of the community's contributions. In addition, the party claiming reimbursement for community expenditure has the burden of demonstrating that there has been an enhancement of separate property due to those efforts or expenditures and the value of that increase. 97 Idaho at 465, 546 P.2d at 1173. Since the trial court believed that the retained earnings of the partnership were separate rather than community property, it made no finding as to the amount of the community property interest in the retained earnings of the partnership, or any increase in the value of the [separate partnership] property attributed thereto... . 97 Idaho at 465, 546 P.2d at 1173. Additionally, the trial court made no findings as to the market value of the partnership interest which Charles transferred to the corporation on March 1, 1979, in order to determine whether or not there was any increase in the value of the 4000 shares of stock and the $100,000 in debenture notes during the approximately fifteen months that Charles owned them. Furthermore, the trial court made no findings on whether or not any income which accrued on the $100,000 debenture notes owed by the corporation was paid to Charles. The income from such notes, whether paid or accrued, like income from the partnership whether paid or accrued, would constitute community property under I.C. § 32-906. The trial court in its decision did not address the issue of whether there was any interest income from the debenture notes. Accordingly, on remand the trial court should first determine the interest of the community in Charles' otherwise separate property stock and debentures, resulting from the community interest in the partnership retained earnings which were invested in the stock and debentures along with Charles' separate property interest in that partnership, as set out in II(a) above. The trial court should then determine the interest of the community in the proceeds of the June 6, 1980, sale of the corporate stock and debenture notes. Also, the court should determine the community interest in the interest income accruing on the $100,000 debentures.