Melody Crunk Telfer v. George Curtiss Telfer

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

March 27, 2013 Session

MELODY CRUNK TELFER

v.

GEORGE CURTISS TELFER

Appeal from the Williamson County Chancery Court

No. 38088 D.J. Alissandratos, Chancellor, Sitting by Designation

No. M2012-00691-COA-R3-CV - Filed June 28, 2013

This divorce appeal involves the classification of the appreciation in value of separate

property. During the marriage, the wife’s family gave her ownership interests in two family

companies. The parties used marital funds to pay their tax liabilities arising out of income

from the companies that was attributed to them for tax purposes but retained by the

companies. The trial court held that the appreciation in value of the wife’s ownership

interests in the family companies were her separate property. We hold that, under the

circumstances of this case, the parties substantially contributed to the preservation and

appreciation in value of the wife’s separate assets, and so reverse the trial court’s

classification of the appreciation in value as her separate property.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court is Affirmed

in Part, Reversed in Part, and Remanded

H OLLY M. K IRBY, J., delivered the opinion of the Court, in which A LAN E. H IGHERS, P.J.,

W.S., and J. S TEVEN S TAFFORD, J., joined.

James L. Weatherly, Jr., Nashville, Tennessee for Defendant/Appellant, George Curtiss

Telfer

Ralph W. Mello, Nashville, Tennessee for Plaintiff/Appellee, Melody Crunk Telfer

OPINION

F ACTS AND P ROCEEDINGS B ELOW

Plaintiff/Appellee Melody Crunk Telfer (“Wife”) and Defendant/Appellant George Curtiss

Telfer (“Husband”) were married in 1985. Until 2000, Husband worked in the automotive

finance and banking industry and Wife worked in sales. During that time, both parties

deposited their employment earnings into a joint checking account.

Wife’s father, John Crunk, was the chairman and owner of RJ Young Company. In 1995,

Mr. Crunk decided to transfer ownership of some of his assets to Wife through the creation

of business entities, in order to avoid the payment of gift and inheritance taxes upon his

death. One of the entities Mr. Crunk set up was Crunk Connected Products (“CCP”), a

partnership that owned the real estate upon which RJ Young was situated.1 Mr. Crunk began

gifting Wife a percentage of the ownership interest in CCP. By October 1999, by virtue of

Mr. Crunk’s gifts, Wife owned a 74.8% interest in CCP, valued at $416,795.

Beginning in 2000, Wife began receiving distributions from CCP in the amount of $8,500

per month. These distributions were deposited into the parties’ joint checking account and

used to pay marital expenses. These distributions and other income from companies

belonging to Wife’s family were sufficient to enable Wife to cease working outside the

home.2

Subsequently, Mr. Crunk decided to equalize the distribution of his assets between Wife and

her brother. To do so, in May 1999, Mr. Crunk created another business entity, Young

Leasing, LLC, for the purpose of transferring wealth to Wife.3 Neither Husband nor Wife

was involved in setting up Young Leasing, and Wife was not present when the company was

1

It appears that RJ Young paid monthly rent to CCP. The rent money was in turn used to repay loans taken

out by CCP, and then some of the remaining monies were distributed to the owners. CCP also owned a

digital sign and a condominium in Florida; both generated revenue for the company. Based on the K-1

statements, it appears that, beginning in 2002, the majority of the money earned by CCP was retained in the

company.

2

In 1999 or 2000, Wife began working for RJ Young Company, earning approximately $1900 per month.

This was also deposited into the parties’ joint checking account.

3

Similar to CCP, it appears that Young Leasing had no employees and all of its business was comprised of

RJ Young Company’s equipment lease agreements and service agreements for RJ Young customers. Young

Leasing apparently paid RJ Young for the lease agreements in an amount that exceeded the cost of the

equipment, so that RJ Young received a profit on every lease; however the revenues generated by the leases

remained with Young Leasing and ultimately enured to Wife’s benefit.

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created. The sum of $900 was paid for Wife’s 90% ownership interest in the company.4

Prior to the $900 payment, Young Leasing had no assets. Young Leasing did not

immediately make any distributions to Wife, and in fact operated at a loss until 2005.

As a result of the companies set up by Wife’s family, the parties had significant tax liabilities.

Income reflected on the K-1 statements from CCP and Young Leasing was included in the

parties’ joint income tax returns. However, from 1999-2006, the parties received no monies

from CCP or Young Leasing to pay the increased tax liability incurred as a result of Wife’s

ownership interest in the companies. Consequently, they paid the increased income taxes

with marital funds. It appears from the record that the parties paid the taxes on all of the

income generated by CCP and Young Leasing each year, regardless of whether the

companies’ income was retained or distributed to Wife.

In 2005, for the first time, Young Leasing did not operate at a loss. That year, it earned

approximately $619,000; these earnings were retained by the company. This 2005 income

was reported on the K-1 statements for Wife, even though the income was not distributed to

her. As a result, in 2006, this “phantom” income attributed to Wife, in addition to the parties’

other sources of income, generated a personal tax liability of approximately $331,000.

When the parties were notified on approximately April 5 or 7, 2006 of this looming $331,000

tax liability, they realized that they were unable to pay the tax liability from their earnings

and distributions from CCP. In order to pay the taxes, on April 17, 2006, Husband

liquidated the parties’ joint brokerage account, which contained approximately $317,000 that

Husband inherited from his aunt. After liquidating this joint account, a check was written

to the United States Treasury for the outstanding tax liability. However, the parties were

concerned about the waiting period associated with the liquidation of the brokerage account,

so on April 18, 2006, Husband withdrew $300,000 from the home equity line of credit on the

marital residence, in order to temporarily cover the tax liability until the brokerage funds

became available. On April 25, the money from the brokerage account was deposited into

the parties’ joint checking account and that same day Husband repaid the $300,000 loan on

the home equity line of credit; this left the joint brokerage account completely depleted.5 It

is undisputed that the funds used to pay this tax liability were marital.

4

The record is unclear as to the origin of the $900 payment on behalf of Wife.

5

Apparently, the parties had earmarked the funds in this joint brokerage account for a particular piece of

property known as “Rock Island,” which was under construction. After the joint brokerage account was

liquidated to pay their taxes, the parties decided to continue with the “Rock Island” project using funds from

Wife’s trust account.

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After the kerfuffle over the 2005 phantom income from Wife’s companies and the resulting

2006 tax liabilities, Young Leasing began making distributions to Wife of $75,000 per

quarter, an amount that correlated with quarterly tax estimates. After that, quarterly checks

were apparently deposited into the parties’ joint checking account. In turn, the parties made

quarterly payments to the IRS, thus avoiding the difficulty that arose in April 2006.

Meanwhile, in 2003, Husband left the banking industry and started his own company, Telfer

Investments, to build and sell expensive homes. Husband used marital funds to finance the

company, but titled it in his name only. For all intents and purposes, Husband ran Telfer

Investments and Wife had little to do with its operations. The timing proved unfortunate; the

housing market declined and Husband’s venture accumulated a great deal of debt. As a

result, in 2009, Wife’s family paid off the debt associated with Telfer Investments, and

Husband in turn transferred control of the company to Wife. The losses associated with

Telfer Investments were included on the parties’ joint income tax return and were used to

offset the income from Wife’s companies, both distributed and retained.

The financial issues and numerous other factors placed strain on the parties’ marriage. In

2010, Wife filed a complaint for divorce in the Chancery Court for Williamson County,

Tennessee, alleging irreconcilable differences. Contentious litigation ensued over numerous

issues, most of which are not pertinent to this appeal. The litigation included sharp disputes

over the primary issues in this appeal, namely, the classification of Wife’s companies and

their appreciation in value as either separate or marital property, for purposes of equitably

dividing the marital estate.

At a pretrial conference held in November 2011, the parties agreed to bifurcate the divorce

trial, in order to first address the classification issues associated with Wife’s interests in CCP

and Young Leasing.6 Prior to the bifurcated hearing, the parties stipulated to the following

facts:

A. The parties stipulate that [Wife] owned the 74.8% interest in Crunk

Connected Products at issue in the first part of this litigation as her separate

property in October 1999 and that the value of her 74.8% interest in Crunk

Connected Products, LLC at that time was $416,795.

B. The parties further stipulate that the value of said 74.8% interest in Crunk

Connected Products, LLC at the time of trial, and for purposes of this divorce,

is between $2,859,100 and $5,854,087.

6

The second part of the divorce trial was to address all of the remaining issues, including the equitable

division of marital property, alimony, and parenting issues.

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C. The parties further stipulate that at the time of trial, and for purposes in this

divorce, the value of the 90% interest in Young Leasing, LLC at issue in the

first part of this litigation is between $672,400 and $1,750,009.

Thus, the parties stipulated that CCP should be classified as Wife’s separate property, but did

not stipulate that Young Leasing was her separate property.

Consequently, the trial court held an evidentiary hearing in December 2011 to address first

the classification of Young Leasing and then, if Young Leasing were held to be the Wife’s

separate property, the classification of the appreciation in value of both of Wife’s companies.

At the hearing, the trial court heard testimony from several witnesses, including Husband,

Wife, Wife’s father Mr. Crunk, and a certified public accountant who testified as an expert

witness for Husband.

With respect to the classification of Young Leasing, the evidence adduced at the hearing

showed that Wife acquired her interest in the company during the marriage. An operation

agreement entered into evidence stated that $900 was paid on Wife’s behalf for her 90%

interest in Young Leasing. Wife testified that her father gifted Young Leasing to her and that

she did not make the $900 capital contribution to form the company. Wife said that she “was

not privy to how these companies were set up, but I know I did not write a check or bring my

own money into this.”

Mr. Crunk corroborated Wife’s testimony on this issue. He explained that Young Leasing

was set up as an effort “to try to equalize the assets between [his son and Wife].” At first Mr.

Crunk was unsure of the origin of the $900 initial investment to form Young Leasing, but

then later said that he believed that the $900 was supplied by RJ Young. Mr. Crunk testified

that RJ Young did all the bookkeeping and collections for Young Leasing and that Young

Leasing had no employees.

In his testimony, Husband acknowledged that neither he nor Wife made any cash

contribution in order for Wife to acquire her ownership interest in Young Leasing. A CPA

hired by Husband as an expert witness, Thomas Price, testified that there was likely no

capitalization for Young Leasing and the $900 payment referenced in the operating

agreement was in fact a loan from RJ Young to Young Leasing, as opposed to a capital

contribution. Mr. Price testified that the payment more closely resembled “a liability paid

back to the entity that was loaning the thousand dollars.”

Both parties testified at the evidentiary hearing about how they handled their finances during

marriage. Wife conceded that she made no attempt to keep the parties’ money separate

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during their marriage. She said that they just put the money she received from her businesses

“in a joint checking account.” Wife’s testimony indicated little knowledge of where her

income came from each month. She said that she was unfamiliar with the separate checks

from CCP and Young Leasing; she explained that she just knew that she “got money from

the company and was able to live off of it.” She professed to not know what a K-1 statement

was. Wife confirmed that she was the majority owner of CCP, but said that she never

reviewed the company’s operating agreement to ascertain her rights as majority owner; she

chose instead to just leave those decisions to her family.

Husband confirmed that the parties made no attempt to separate their money; all of their

earnings were deposited into a single joint bank account. As to the distributions to Wife

made by CCP, Husband testified that no distributions were made until 1999. He explained

that, from 1995 to 1999, the parties received K-1 statements from CCP but no income. Once

CCP began making distributions, Husband said, they got monthly checks of $8,500. These

monthly checks were deposited in the parties’ joint account and there was no attempt to keep

the funds separate from other family money used for marital expenses. Any remaining

incomee arned by CCP, Husband testified, was retained by the company and not distributed.

Husband testified that, after Young Leasing was formed in 1999, the parties continued to pay

the taxes associated with the income that was distributed to them, as well as the taxes on any

income that was attributed to them for tax purposes but retained by the companies. He said

that all of those taxes were paid with marital funds from the parties’ joint checking account.7

Husband testified that the parties’ April 2006 scramble to pay their taxes arose because CCP

and Young Leasing reported substantially more income on the K-1 statements for 2005, and

this suddenly increased the parties’ annual income from approximately $225,000 to over a

million dollars. Asked if there was a discussion in April 2006 about the companies

distributing money to Wife to pay the taxes associated with the retained income, Husband

said that he and Wife discussed it and Wife spoke with members of her family, but “the

bottom line was that there wasn’t going to be a distribution to cover this tax liability.” To

cover the tax liability, Husband said, he drew against his inheritance that he had deposited

in the parties’ joint brokerage account as well as the home equity line of credit on the marital

home. After their check to the IRS cleared, the home equity line of credit was repaid, but

the joint brokerage account that had contained Husband’s inheritance was closed.

After the April 2006 tax incident, Husband testified, Young Leasing began making quarterly

distributions to Wife of $75,000 per quarter “in correlation to the quarterly tax estimates that

would be due.” Husband said that each such distribution from Young Leasing was deposited

into the parties’ joint checking account. The parties then sent a corresponding quarterly

7

The K-1 statements in the record appear to indicate that Young Leasing operated at a loss until 2005.

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income tax payment to the IRS. Husband explained that, at some point in 2007, the deposits

into the parties’ joint checking account from CCP and Young Leasing were combined, so one

of the statements reflected a direct deposit into the parties’ checking account of $83,500.

Husband also identified the checks from the parties’ joint checking account that were sent

to the United States Treasury and the IRS for income tax payments. A few of the checks

were signed by Wife, but most were signed by Husband. The tax payments were in varying

amounts.8 Husband testified that the parties “never discussed” filing separate income tax

returns.

At the conclusion of the first part of the bifurcated proceeding, the trial court issued an oral

ruling on the issues that were the subject of the hearing. At the outset, the trial court

commented that all of the witnesses who testified were “very truthful and honest with this

Court.”

In the oral ruling, the trial court first made the factual finding that Wife’s father intended the

two companies to be gifts to Wife and that “she didn’t earn it.” Thus, the trial court

concluded that Wife’s ownership interests in the companies were her separate property. It

then addressed whether the appreciation in the value of the companies during the marriage

should be classified as marital property. The trial court explained its view of the evidence on

the distributions made by Wife’s companies and the parties’ payment of their tax liability,

and whether Husband had substantially contributed to the appreciation in value of the

companies:

Now, all we have from that cash flow that came out. And [Wife] chose to –

I think appropriately, to put that into the joint funds that they had at the bank.

They had a joint account.

But the payment of the money from that cash flow for taxes did nothing, in this

Court’s opinion, to meet the statutory obligation, which is that you must show

that there has been by both parties a substantial contribution to the preservation

and appreciation of the assets. It didn’t do that, and I’ve listened carefully, and

I appreciate the argument to the contrary, but I just respectfully disagree with

that. It didn’t do a thing to preserve either [CCP] or Young Leasing. It didn’t

do a thing to preserve that asset in any shape, form, or fashion that this Court

can see. . . .

8

Most of the checks to the United States Treasury are in the amount of $75,000. However, several are in

amounts that exceed $75,000, e.g., $117,100 in January 2007, $120,000 in April 2007, and others are less

than $75,000, e.g., $52,000 in September 2008.

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But the mere fact that the cash flows from these [companies] went into a joint

account and were used to pay the taxes that naturally come from the income

does not preserve the corpus, which is the leasing company and the

partnership. Therefore, accordingly, the Court does find that this is not a

marital asset, that [Husband] has no interest in, as a matter of law, in Young

Leasing or in [CCP].

Thus, the trial court held that the fact that the checks from the companies were deposited into

a joint account, and the fact that the payment of the parties’ tax liabilities were paid from

joint assets, did not amount to a substantial contribution to the appreciation in value of the

companies. For that reason, the trial court held that the appreciation in the value of the

companies during the parties’ marriage was also Wife’s separate property, and thus would

not be included in the trial court’s equitable division of the marital property.

In February 2012, the trial court’s oral findings on these issues were incorporated by

reference into the written order that adjudicated all of the issues in the divorce litigation.

Pertinent to this appeal, the written order held that Wife’s interest in both companies was

“her separate property when acquired by her and remain her separate property” and that

Husband “has no marital interest in either property.” Husband now appeals.

ISSUES ON A PPEAL AND S TANDARD OF R EVIEW

On appeal, Husband raises numerous issues and subissues:

I. Whether the trial court erred in classifying the appreciation of [Wife’s]

interest in Crunk Connected Products and Young Leasing, LLC, as separate

property?

A. Whether the parties substantially contributed to the

preservation and appreciation of Crunk Connected Properties

and Young Leasing, LLC, by filing joint tax returns and using

martial funds to pay the increased tax liability associated with

[Wife’s] interests?

B. Whether the parties substantially contributed to the

preservation and appreciation of Crunk Connected Products and

Young Leasing, LLC by using marital business losses from

Telfer Investments to reduce the increased tax liability

associated with [Wife’s] interests?

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C. Whether the parties substantially contributed to the

preservation and appreciation of Crunk Connected Products and

Young Leasing, LLC by using assets inherited by [Husband] and

the equity in the jointly owned marital residence to pay the

increased tax liability associated with [Wife’s] interests in 2005?

D. Whether the partie[s] substantially contributed to th[e]

preservation and appreciation of Crunk Connected Products and

Young Leasing, LLC by using [Husband’s] marital earnings to

[pay] the family’s expenses?

E. Whether’s [Wife’s] interest in Young Leasing, LLC,

constituted marital pro[p]erty pursuant to Tenn. Code Ann. § 36-

4-121(b)(1)(A)?

II. Alternatively, whether [Husband] should be awarded an equitable portion

of the assets used by [Wife] to appreciate and preserve her ownership interest

in Crunk Connected Products and Young Leasing, LLC, under the doctrines

of unjust enrichment and dissipation?

A. Whether [Husband] should be reimbursed his inherited

monies used to pay the 2005 tax liability incurred as a result of

[Wife’s] ownership interest in Crunk Connected Products and

Young Leasing, LLC, under the doctrine of unjust enrichment?

B. Whether [Husband] should be awarded an equitable portion

of the value of the marital business losses used by [Wife] to

appreciate and preserve her ownership interest in Crunk

Connected Products and Young Leasing, LLC under the

doctrines of dissipation and unjust enrichment?

III. Whether [Husband] should be awarded his attorney’s fee at trial and on

appeal?

In addition to responding to Husband’s arguments, Wife contends that Husband’s appeal

should be dismissed for failure to comply with Rule 7 of the Rules of the Court of Appeals.

Questions regarding the classification of property as marital or separate are inherently

factual. The trial court’s findings of fact regarding the classification of an asset are reviewed

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de novo with a presumption of correctness, unless the evidence preponderates otherwise.

Tenn. R. App. P. 13(d); Owens v. Owens, 241 S.W.3d 478, 485 (Tenn. Ct. App. 2007). The

trial court’s conclusions of law are reviewed de novo, with no presumption of correctness.

Larsen-Ball v. Ball, 301 S.W.3d 228, 232 (Tenn. 2010); Union Carbine Corp. v.

Huddleston, 854 S.W.2d 87, 91 (Tenn. 1993).

A NALYSIS

Tenn. Ct. App. R. 7

As a preliminary matter, we address Wife’s argument that Husband’s appeal should be

dismissed because he failed to include a Rule 7 table in his appellate brief.9 Rule 7 of the

Rules of the Court of Appeals states that, in any domestic relations appeal in which “either

party takes issue with the classification of property or debt or with the manner in which the

trial court divided or allocated the marital property or debt,” the brief of the party raising the

issue must include a table listing all property and debt considered by the trial court. Tenn.

Ct. App. R. 7(a). This Court has previously held that issues on appeal involving the

valuation and division of property can be waived for failure to comply with Rule 7. See, e.g.,

Harden v. Harden, No. M2009-01302-COA-R3-CV, 2010 WL 2612688, at *8; 2010 Tenn.

App. LEXIS 419, at *21 (Tenn. Ct. App. June 30, 2010).

In this case, the issues on appeal are limited to the classification of Young Leasing and the

appreciation in value of both of Wife’s companies. The proceedings below were bifurcated

and the underlying facts concerning the monetary value of the appreciation of the companies

have been stipulated. Under these circumstances, we exercise our discretion under Rule 1(b)

of the Rules of the Court of Appeals and consider the merits of the appeal, despite Husband’s

failure to comply with Tenn. Ct. App. R. 7. See Tenn. Ct. App. R. 1(b).

Classification as Marital or Separate

The remaining issues on appeal center on the classification, as marital or separate property,

of Wife’s ownership interest in Young Leasing and the appreciation in the value of both

businesses acquired by Wife during the marriage, CCP and Young Leasing.

The classification of a particular asset as separate or marital is a question of fact which must

be determined in light of the all the circumstances. Snodgrass v. Snodgrass, 295 S.W.3d

240, 245 (Tenn. 2009). Tennessee Code Annotated § 36-4-121 defines the key terms and

sets forth the parameters for the determination:

9

After Wife raised the Rule 7 issue in her appellate brief, Husband included a Rule 7 table in his reply brief.

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(b) For purposes of this chapter:

(1)(A) “Marital property” means all real and personal property, both tangible

and intangible, acquired by either or both spouses during the course of the

marriage up to the date of the final divorce hearing and owned by either or

both spouses as of the date of filing of a complaint for divorce . . . .

(B) “Marital property” includes income from, and any increase in value during

the marriage of, property determined to be separate property in accordance

with subdivision (b)(2) if each party substantially contributed to its

preservation and appreciation . . . .

...

(D) As used in this subsection (b), “substantial contribution” may include, but

not be limited to, the direct or indirect contribution of a spouse as homemaker,

wage earner, parent or family financial manager, together with such other

factors as the court having jurisdiction thereof may determine.

Tenn. Code Ann. § 36-4-121(b). The spouse who seeks to include the other spouse’s

property in the marital estate has the burden of proving that the property fits within the

statutory definition of marital property. Keyt v. Keyt, 244 S.W.3d 321, 328 (Tenn. 2007).

In this case, therefore, Husband bears the burden of proof.

We address first the issue of whether Young Leasing is Wife’s separate property. Husband

argued at the trial, and now argues on appeal, that Young Leasing is marital property. The

trial court below held that Young Leasing was Wife’s “separate property when acquired by

her and remain[s] her separate property.”

On appeal, Husband argues Young Leasing should be deemed marital property because it

was formed during the marriage, had no assets when formed, and the proof is unclear as to

the origin of the $900 initial payment on Wife’s behalf to acquire her 90% ownership interest

in the company. The value of Young Leasing when formed, or the lack thereof, may impact

the monetary value of its appreciation during the marriage, but we do not see how it affects

whether the company is marital property. Wife’s father, Mr. Crunk, testified that he gifted

the interest in the company to his daughter. He explained that his intent was to “equalize”

assets between his children and avoid gift taxes, and that this business would be worth a great

deal. While the evidence on the origin of the initial $900 payment on Wife’s behalf was not

clear, Husband put on no proof that it came from marital funds. From our review of

evidence, we cannot conclude that it preponderates against the trial court’s finding that

Young Leasing was gifted to Wife by her father and is Wife’s separate property. See Fox

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v. Fox, No. M2004-02616-COA-R3-CV, 2006 WL 2535407, at *4 (Tenn. Ct. App. Sept. 1,

2006). Therefore, we affirm the trial court’s factual finding on this issue.

We consider next Husband’s argument that the appreciation in value of both CCP and Young

Leasing constitutes marital property that should have been included in the trial court’s

equitable division of the marital estate. As set forth in Section 36-4-121, quoted above, in

order for the appreciation in value of Wife’s separate property to be deemed marital property,

Husband must prove that each party substantially contributed to its preservation and

appreciation. Tenn. Code Ann. § 36-4-121(b)(1)(D).

Whether a spouse substantially contributed to the preservation and appreciation of the other

spouse’s separate property is a question of fact. Keyt, 244 S.W.3d at 329 (citing Sherrill v.

Sherrill, 831 S.W.2d 293, 295 (Tenn. Ct. App. 1992)). Such a contribution may be either

“direct” or “indirect.” Tenn. Code Ann. §36-4-121(b)(1)(D); McFarland v. McFarland, No.

M2005-01260-COA-R3-CV, 2007 WL 2254576, at *6; 2007 Tenn. App. LEXIS 509, at *17-

18 (Tenn. Ct. App. Aug. 6, 2007). Regardless, it must satisfy two requirements. First, “some

link between the marital efforts of a spouse and the appreciation of the separate property

must be established before the separate property’s appreciation is considered marital

property.” Langschmidt v. Langschmidt, 81 S.W.3d 741, 746 (Tenn. 2002); see also Keyt,

244 S.W.3d at 329. Second, the contribution must be “real and significant.” Keyt, 244

S.W.3d at 329; Wright-Miller v. Miller, 984 S.W.2d 936, 944 (Tenn. Ct. App. 1998) (citing

Brown v. Brown, 913 S.W.2d 163, 167 (Tenn. Ct. App. 1994)). However, the contributions

of the spouse who seeks to have the appreciation deemed marital property “need not be

monetarily commensurate to the appreciation in the separate property’s value, nor must they

relate directly to the separate property at issue.” Wright-Miller, 984 S.W.2d at 944.

On appeal, Husband makes several arguments on this issue. We focus on his first argument,

that the parties substantially contributed to the preservation and appreciation of Wife’s

companies “by including the income distributed and retained by the companies in the parties’

joint tax returns and using marital funds to pay the increased tax liability created by [Wife’s]

business interests.”

As authority, Husband cites this Court’s decision in Schuett v. Schuett, No.

W2003-00337-COA-R3-CV, 2004 WL 689917; 2004 Tenn. App. LEXIS 193 (Tenn. Ct.

App. Mar. 31, 2004). Schuett involved the equitable division of marital property; the

property at issue was an investment account inherited by the wife that remained in her name

only. The trial court classified the increase in the value of the account as separate property,

and on appeal the husband claimed that it should have been classified as marital property.

The investment account generated income due to both dividends and capital gains. The

resulting taxes were paid with her husband’s employment income, a marital asset. Schuett,

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2004 WL 689917, at *3; 2004 Tenn. App. LEXIS 193, at *10-11. The income generated by

the investment account was reinvested back into the account each year. The payment of the

parties’ income taxes on the income from the account with marital funds in Schuett permitted

the wife’s investment account to grow, because the alternative was to use the income

generated by the account to pay the parties’ tax liabilities associated with the account. The

husband argued on appeal that the payment of the income taxes arising out of the wife’s

separate investment account with marital funds substantially contributed to the preservation

and appreciation in value of the account.

The appellate court in Schuett agreed with the husband’s argument. It noted that, for ten

years, “all income generated by the [wife’s] account was always reinvested back into the

account to allow it to grow” because the parties had paid the taxes associated with the

account’s capital gains and dividend income from their marital funds. Schuett, 2004 WL

689917, at *3; 2004 Tenn. App. LEXIS 193, at *11 (citations omitted). The Schuett Court

reasoned:

Not only did such actions constitute preserving the separate asset, allowing it

to grow rather than using funds in the account to pay taxes, but, by utilizing

marital funds to pay the taxes rather than funds in the account itself, such

contributions allowed the [investment] account to appreciate more than it

otherwise would have, if the funds in the account been used to pay the income

taxes.

Schuett, 2004 WL 689917, at *3; 2004 Tenn. App. LEXIS 193, at *11. Thus, the appellate

court in Schuett reasoned that the corpus of the wife’s investment account grew because

marital funds were expended to cover the parties’ tax liabilities, allowing the wife to avoid

using money in the account or generated by the account to pay those tax liabilities.

Wife contends that the principles on which the Court relied in Schuett are inapplicable here.

She notes first that the wife in Schuett admitted that the income from which the tax liabilities

arose, and for which the marital funds were expended, was reinvested in the wife’s

investment account, whereas in the present case the distributions were placed in the parties’

joint bank account and used to support the parties. Wife also points out that Schuett

involved an investment account as opposed to “family businesses that grew through

continued efforts and gifts of family members.” She emphasizes that the wife in Schuett was

financially dependent on the husband; his employment income paid the taxes on the wife’s

investment account as well as all marital expenses. In the present case, Wife contends,

Wife contributed the money to the marital estate that paid the taxes on her companies and

Husband provided little or no income to pay the marital expenses. In support of her position,

Wife cites Crocker v. Crocker, No. 02A01-9801-CH-00014, 1999 WL 250184, at *4-5

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(Tenn. Ct. App. April 28, 1999), in which business losses generated by the wife were deemed

to have contributed to the husband’s overall net worth only by permitting him to use those

losses to offset his income for tax purposes, and were not a contribution to the appreciation

or preservation of a specific asset.

In the case at bar, Wife received substantial distributions from both companies. She received

$8,500 per month from CCP, and, beginning in 2006, she received $75,000 quarterly

distributions from Young Leasing. These distributions were deposited into the parties’ joint

account, along with any employment income the parties earned. The funds in the parties’

joint bank account were used to pay both marital expenses and the parties’ income tax

liabilities.10 Because the distributions were deposited in the parties’ joint bank account with

other marital funds, with no intention to keep them separate, Wife’s distribution income was

commingled and became a marital asset.11 See Langschmidt v. Langschmidt, 81 S.W.3d

741, 747 (Tenn. 2002) (“Separate property becomes marital property by commingling if

inextricably mingled with marital property.”).

Husband argues on appeal that the fact that the distribution income from the companies was

deposited into the parties’ joint bank account and was included on the parties’ joint income

tax return militates in favor of a finding that the appreciation in the value of the companies

was marital property. We see no link between this fact and the preservation or appreciation

in value of Wife’s companies. It indicates only that the periodic distributions from the

companies constituted marital property, but that is not in question on appeal. Therefore, we

must reject this argument by Husband.

Husband also contends that the parties’ use of marital funds to pay the parties’ income taxes

associated with the distributions Wife received from the companies weighs in favor of a

finding that the appreciation in value of the companies is marital property. Again, we do not

see a connection between the payment of the parties’ income taxes on the distribution income

and the appreciation or preservation of Wife’s companies as a whole. The payment of the

parties’ tax obligation on this income did not serve to “preserve the corpus” in the

companies, and we do not view it as a basis to conclude that the parties substantially

contributed to the appreciation and preservation of Wife’s companies. Schuett, 2004 WL

689917, at *3; 2004 Tenn. App. LEXIS 193, at *11.

10

Prior to receiving the quarterly disbursements of $75,000, the parties’ paid the tax liabilities associated with

the companies with their marital assets only.

11

“Commingling does not occur if the separate property can be traced into its product or if the separate

property continues to be segregated.” Eldridge v. Eldridge, 137 S.W.3d 1, 14 (Tenn. Ct. App. 2002). Wife

does not argue that tracing is possible in this case, and from our thorough review of the bank statements on

the parties’ joint account, we see no way to trace the distribution income.

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Husband contends further that the parties’ substantial contribution to the preservation and

appreciation of Wife’s companies is shown by the use of marital funds to pay their income

tax liabilities arising out of the income that was retained by each of the companies but

included on the parties’ joint tax return. Husband contends that, because the parties used

marital funds from the parties’ joint account to pay the tax liability associated with the

income retained in Wife’s companies, Wife’s companies were able to retain Wife’s earnings

instead of distributing the funds to Wife to cover the taxes. This allowed the companies to

grow and appreciate in value. In fact, as Husband points out, in 2005, virtually Wife’s entire

share of the income earned by the companies was retained by the companies. The resulting

2006 tax liability associated with the retained earnings necessitated the liquidation of the

parties’ joint brokerage account, consisting primarily of Husband’s inheritance. Husband

argues that the payment with marital funds of the parties’ tax liabilities associated with the

income retained in the companies constitutes a substantial contribution by both parties.

To address this argument, we discuss each company separately.

As to CCP, similar to Schuett, marital funds were used to pay the tax liabilities created by

the income that was retained by CCP. Prior to 2006, the parties paid their income tax

liabilities associated with CCP with their employment income. In 2006, their tax liabilities

arising in part from income retained by CCP but attributed to Wife for tax purposes were

paid with marital funds from the liquidated joint brokerage account.3 At the time, Husband

testified, the parties explored the possibility of CCP distributing some of the retained income

to Wife to cover the parties’ suddenly large tax liabilities, but “the bottom line was that there

wasn’t going to be a distribution to cover this tax liability.” The parties’ use of marital funds

to cover their tax liabilities arising out of the CCP income that was attributed to Wife but not

distributed to her allowed CCP to retain income that could have been utilized to pay the

parties’ income taxes. This helped preserve CCP and allowed it to grow and appreciate in

value. Under these circumstances, we find a causal link between the use of the parties’

marital funds and the preservation and appreciation in value of CCP.

The analysis as to Young Leasing is slightly more complicated. After Young Leasing was

created in 1999, it operated at a loss until 2005. Thus, in the absence of any income -

retained or otherwise - from Young Leasing between 1999 and 2005, the parties had no

associated income tax liabilities. In 2005, however, Young Leasing generated income

attributed to Wife for tax purposes of approximately $619,000. This resulted in substantially

increased tax liability for the parties in 2006, without the corresponding actual income to pay

the taxes. Again, in 2006, to pay these taxes, the parties liquidated their joint brokerage

3

As discussed below, after 2006, the parties’ tax liabilities were paid with the quarterly distributions made

by Young Leasing.

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account, which had contained Husband’s inheritance. Some $317,000 from this joint account

was used to pay the increased tax liability associated with the income generated and retained

by Young Leasing, CCP, and all other income earned by the parties that tax year. The

parties’ combined tax liability for 2006 totaled approximately $331,000. After 2006, of

course, Young Leasing began issuing distributions to Wife in the amount of $75,000

quarterly to cover the tax liabilities associated with the income from Young Leasing, both

retained and distributed, as well as the taxes on all other income earned by the parties. The

distributions were deposited into the parties’ joint checking account quarterly and shortly

after that the parties’ quarterly tax payments were made.

It is questionable whether the payment of the parties’ taxes after 2006 constituted a

substantial contribution by the parties to the preservation and appreciation of Young Leasing.

Husband testified that the $75,000 quarterly distributions from Young Leasing were made

“in correlation to the quarterly tax estimates that would be due.” The quarterly distributions

were essentially funneled through the parties’ joint bank account to the IRS, to pay the taxes

owed by the parties on both companies.

The payment of the parties’ 2006 tax liability, however, is another matter. In 2006, Young

Leasing retained income attributed to Wife, and the parties clearly utilized marital funds to

pay the associated tax liability. While it was a one-time payment, the amount of the parties’

overall tax liability was substantial, $331,000; as was the amount in the joint brokerage

account, namely, $317,000 that was inherited by Husband. To be considered a substantial

contribution to the preservation and appreciation of a spouse’s separate property, the parties’

contribution “need not be monetarily commensurate to the appreciation in the separate

property’s value, nor must [it] relate directly to the separate property at issue.”

Wright-Miller v. Miller, 984 S.W.2d at 944 (citing Brown, 913 S.W.2d at 167). Under the

circumstances, it is fair to find a causal link between the expenditure of these marital funds

in 2006 and the preservation and appreciation in value of Young Leasing in 2006.

In addition, the proof showed that, during the parties’ marriage, Husband served as the

family’s financial manager and Wife had little knowledge of or involvement in their financial

matters. Under Section 36-4-121(b)(1)(D), quoted above, substantial contribution may

include “the direct or indirect contribution of a spouse as . . . family financial manager,

together with such other factors as the court having jurisdiction thereof may determine.”

Tenn. Code Ann. § 36-4-121(b)(1)(D). This is of particular significance with respect to the

payment of the parties’ 2006 tax liability, since the proof showed that the unexpected 2005

income attributed to the parties but not distributed to them necessitated hasty action by

Husband to cover the parties’ suddenly imminent tax liability.

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Considering all of these circumstances, we must conclude that the evidence preponderates

in favor of a finding that the parties made real and significant contributions to appreciation

and preservation of both Young Leasing and CCP. Consequently, we must hold that the

appreciation in value of both companies during the marriage is marital property.

This holding requires us to remand the case to the trial court. On remand, the trial court

must, of course, equitably divide the appreciation in value of both CCP and Young Leasing

during the marriage. In addition, however, adding the appreciation in these companies to the

marital estate significantly affects the size of the overall marital estate. Consequently, on

remand, the trial court may, in its discretion, reconsider its equitable division of the entire

marital estate, in light of all factors it deems relevant.

Finally, Husband seeks an award of attorney fees both at trial and on appeal. After reviewing

Husband’s arguments, we find no abuse of the trial court’s discretion in its denial of

Husband’s request for attorneys fees below. We respectfully decline to award Husband

attorney fees on appeal. The remaining issues raised on appeal are pretermitted.

C ONCLUSION

The decision of the trial court is affirmed in part, reversed in part, and the case is remanded

for further proceedings consistent with this Opinion. Costs on appeal are assessed one-half

against Defendant/Appellant George Curtiss Telfer and his surety, and one-half against

Plaintiff/Appellee Melody Crunk Telfer, for which execution may issue if necessary.

___________________________

HOLLY M. KIRBY, JUDGE

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