Opinion ID: 1304539
Heading Depth: 1
Heading Rank: 4

Heading: Retained earnings in the partnership

Text: Regarding the characterization of the retained earnings of the partnership property, Isabel contends that the magistrate and the district court erred in determining that the Pepsi Cola Bottling partnership retained earnings were the separate property of Charles. The record reflects, and the magistrate found, that while a substantial amount of the earnings of the partnership were distributed to Charles and deposited into the parties' joint bank account which was initially his separate account, some $75,765.00 of the earnings of the partnership were retained and not distributed. [4] Isabel argues that these partnership retained earnings, being income of separate property, were by statute community property, and that, being retained and comingled in the partnership business, Charles' interest in the business was also converted into community property. We agree with Isabel's position that the retained earnings of the separate property partnership interest were community property and that the lower courts erred in failing to so recognize. The starting point in this analysis is the relevant statutes. [5] While I.C. § 32-903 states that [a]ll property of either the husband or the wife owned by him or her before marriage ... shall remain his or her sole and separate property, I.C. § 32-906 provides that [t]he income of all property, separate or community, is community property... . Thus, even though Charles' interest in the Pepsi partnership was owned by him before marriage and thus was initially separate property, all income distributed from the Pepsi partnership was community property. I.C. § 32-906. The issue which we must decide is whether the retained earnings [6] of a partnership constitute income within the scope of I.C. § 32-906. Such earnings can be analogized to the accrued income of a separate property Certificate of Deposit owned by a spouse before marriage, but not redeemable until after marriage. The interest income on such a certificate would clearly constitute community property under I.C. § 32-906, even though it accumulates and is not distributed to the owner/spouse. Earnings from a separate property partnership are essentially no different. To hold otherwise would allow a spouse to place separate income-producing property in a partnership and shelter the income from the community by retaining the income in the partnership, contrary to the legislative policy set out in I.C. § 32-906. Charles nevertheless argues that his retained earnings in the Pepsi partnership should be given the same treatment as corporate retained earnings receive in Idaho under our decisions in Simplot v. Simplot, 96 Idaho 239, 526 P.2d 844 (1974), and Speer v. Quinlan, 96 Idaho 119, 525 P.2d 314 (1974). Both cases held that the retained earnings of a corporation were neither income nor rents and profits of the separate property stock owned by the spouse, within the meaning of I.C. §§ 32-903 and 32-906 and, therefore, the separate property stock remained the husband's separate property upon divorce. However, the fundamental differences between corporations and partnership undercut Charles' arguments. While both are designed to carry out business for profit, a corporation is a separate legal entity distinct from its shareholders; a partnership is not a separate entity, but instead is the sum of the owners' interests. The fundamental ownership and control differences between partnerships and corporations were highlighted by the rationale behind the Simplot decision that: Corporate earnings and profits remain the property of the company, until severed from the assets and distributed as dividends among the stockholders entitled thereto. A stockholder has no property rights in the accumulated earnings and surplus of the corporation, and any right that he may have to cumulated undeclared dividends is not a vested property or constitutional right but is subject to change or cancellation by proper corporate law. It is the declaration of the dividend which creates both the dividend itself and the right of the stockholder to demand and receive it. 96 Idaho at 242, 526 P.2d at 847, citing 11 W.Fletcher, Encyclopedia of the Law of Private Corporations, § 5321 at 613 (1971). [7] A partner, on the other hand, has a right to direct the payment of earnings or, if the other partners disagree, to dissolve the partnership and thereby obtain any retained earnings. I.C. § 53-331(1)(b). A stockholder has no equivalent right since all corporate powers are exercised by the board of directors. I.C. § 30-1-35. A partnership interest is his share of the profits and surplus, and the same is personal property.  I.C. § 53-326 (emphasis added). A shareholder in a corporation owns stock that only represents his voting and monetary interest. Stockholders are not agents of the corporation and do not make business decisions, but partners are agent[s] of the partnership for the purpose of its business, and the act of every partner, including the execution and partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority. I.C. § 53-309 (emphasis added). A partnership, then, is a contract of mutual agency, where each partner acts as a principal in his own behalf and as an agent for his co-partners, State v. Cosgrove, 36 Idaho 278, 285, 210 P. 393 (1922), while the corporation is a separate and distinct entity, apart from the owners. The partner can exercise direct control over the business, while the stockholder exercises only limited and indirect control over the corporation. It is clear that unlike Simplot, where the husband was a stockholder and the decision of the directors to reinvest the earnings [was] a matter of business judgment, outside of the husband's control, 96 Idaho at 242, 526 P.2d at 847, a partner is an integral part of a business with the ability to affect the flow of profits and distributions or to retain them within the business. Based on these fundamental differences between corporations and partnerships regarding control and management of the business, we hold that the earnings of a separate property partnership, whether retained or distributed, are community property within the scope of I.C. § 32-906. Our decision today is in conflict with the Idaho Court of Appeals decision in Brazier v. Brazier, 111 Idaho 692, 726 P.2d 1143 (1986). Brazier addressed the same partnership retained earnings issue raised in this case, but came to an opposite conclusion based on a belief that, because the facts in that case showed that the wife's separate property partnership interest was managed by a manager (the wife's father) exercising a power conferred by the partnership agreement, Brazier v. Brazier, supra at 695, 726 P.2d at 1146, that the retained earnings could be analogized to the corporate setting. However, based on the foregoing discussion it is clear that most of the considerations underlying Simplot v. Simplot, supra , do not carry over to the partnership setting. The underlying tenets of partnership law allow a partner direct and immediate control over the partnership assets and income. To the extent that Brazier is inconsistent with our decision in this case, it is overruled.