Opinion ID: 1370822
Heading Depth: 1
Heading Rank: 1

Heading: retention and reinvestment of earned surplus

Text: By the time of the trial, Speer, Inc., had accumulated net after-tax earnings of $339,493, thus substantially increasing the shareholders' equity in the corporation. No cash dividends were ever distributed by the corporation, nor were any stock dividends issued. Raymond Speer testified that the $339,493 retained by Speer, Inc., was represented by [v]arious assets such as [a]ccounts [r]eceivable, raw materials inventory, finished goods inventory, machinery, furniture and fixtures and the like. It is true, as respondent points out, that Raymond Speer's position as majority stockholder as well as president and general manager of Speer, Inc., gave him substantial influence over the decision to retain the net earnings or to disburse them in the form of cash dividends. However, no contention is made that retention of the net earnings was unreasonable from a business point of view or that the earnings were retained to defraud the Raymond Speer community. Had part or all of the earned surplus been distributed by the corporation in the form of cash dividends, such dividends as were attributable to Raymond Speer's stock would have been community property under I.C. § 32-906, which provides that the rents and profits of separate property are community property. Presumably, the Speer community would have received 65% of the hypothetical dividend distribution, in proportion to Raymond Speer's ownership of 65% of the corporate stock. Because the net earnings were never disbursed by the corporation, they cannot be considered to be income or rents and profits as contemplated in I.C. § 32-906. Therefore, the retention of the earnings in the business does not present a case of community funds being invested in a separate property business. Nevertheless, the fact remains that, because of business exigencies, monies that might otherwise have been distributed to the community as cash dividends, instead remained in the business in which Raymond Speer holds a separate property ownership interest. Discretionary division of community property pursuant to I.C. § 32-712 is one mechanism by which any inequities may be remedied. As part of its re-examination of the amount of community property to be divided between Mr. and Mrs. Speer, the district court should determine the extent to which the community would have been benefited, had 65% of the distributable earnings of the corporation been received by the community in the form of dividends. At least two factors must be taken into consideration in determining what proportion of the retained earnings would have been available for distribution in the form of cash dividends. First, on remand it is possible that the district court may determine that Raymond Speer was undercompensated for his labor in the corporation. To the extent that the district court finds that the Speer community was entitled to additional compensation for Raymond's labor, the amount of potentially distributable earnings here under consideration must be reduced. This is because any salary payments to Raymond Speer would have been deducted from the income of the corporation in the process of arriving at the figure for net earnings. The amount of retained net earnings under consideration should also be reduced to the extent that the salary of the other employee-stockholder, Forrest Luthy, was inadequate. Consideration should be given toward the maintenance of the corporate solvency. Any attempt to compensate Mrs. Speer for detriment that the community may have experienced because of the retention of the earned surplus must, of necessity, be inexact. Nevertheless, such a procedure would be no more lacking in precision than awarding damages for pain and suffering, which has been accomplished satisfactorily by the courts for many years. Because of its decision regarding the distribution of property, the district court denied an award of alimony to Mrs. Speer. In view of this opinion, the district court on remand may reconsider the issue of alimony.