Appeal from the District Court of Sweetwater County The Honorable Nena R. James, Judge
The opinion of the court was delivered by: Voigt, Justice.
Before KITE, C.J., and GOLDEN, HILL, VOIGT, and BURKE, JJ.
[¶1] Donna Ray Teeples, the appellant, was to receive a cash payment from her ex-husband, Neal J. Teeples, the appellee, as a result of the division of their marital assets pursuant to a divorce. The appellant claims that the payment, made with the funds of an S corporation owned jointly prior to the divorce, impermissibly increased her tax liability and was made with funds that were rightfully owed to her as a prior shareholder in the company. We affirm the district court's decision to the contrary.
[¶2] Did the payment received by the appellant satisfy the terms of the Property Settlement Agreement pursuant to the parties' divorce?
[¶3] The appellant married the appellee in 1979. The appellant filed for divorce on November 26, 2007. After mediation, the parties signed a Property Settlement Agreement on October 2, 2008. Prior to the division of assets, the parties owned five companies jointly. Pursuant to the agreement, the appellant received Great Basin Industries and the appellee received Industrial Services, Inc. (ISI), Power Source Services, Inc., Sweetwater Holding, and RTR, Inc. Because the value of the property received by the appellee exceeded that received by the appellant, the agreement required the appellee to make a cash payment of $1,100,000 to the appellant on October 3, 2008, and three additional annual payments of $800,000 on the anniversary of the first payment, for a total of $3,500,000. The agreement also provided that "[e]ach party shall be responsible for and each party shall pay the tax due on their separate income tax returns for 2008 and all subsequent years."
[¶4] In September 2008, the appellant requested a partial advance on her first payment. This request was made before the Property Settlement Agreement had been signed, but after the terms of the division of assets had been agreed upon in a signed document later attached to the agreement. The appellee agreed to this request, but because he was out of town, he directed the appellant, who still had the power to sign ISI checks, to sign a check issued to herself in the amount of $300,000 on September 24, 2008. The appellee wrote a check to the appellant from ISI for the remaining $800,000 of the first payment on October 3, 2008.
[¶5] In early 2009, the appellant received a Schedule K-1*fn1
related to her previous status as a shareholder in ISI, an S
corporation. That form indicated $1,659,058 ordinary
business income due to the appellant's 37.7049% ownership share of ISI
for 2008. The Schedule K-1 also included, as "Items affecting
shareholder basis," $1,183,221*fn2 of property
distributions. The appellant also received a Schedule K-1 as a Great
Basin Enterprises shareholder. This form showed ordinary business
income of $131,232, representing a 62.2951% ownership share. Finally,
the appellant was issued a Schedule K-1 for Sweetwater Holdings, Inc.,
indicating $203,944 income and a 37.7049% ownership share.*fn3
The appellant, however, did not include the income as listed
on her Schedule K-1s on her initial income tax return because her
accountant was unsure if the appellant had received the $1,183,221
distribution from ISI as indicated on her Schedule K-1. Instead, the
appellant included $210,662 (less deductions) related solely to her
Great Basin ownership, reflecting a 100% ownership interest in that
company. The appellant attached the following statement to her income
tax return: "Taxpayer is reporting items from schedules K-1
differently than reported on the K-1s." Instead, the statement
indicates that the return will reflect a 100% ownership interest in
Great Basin, a 0% ownership interest in ISI, and a 0% ownership
interest in Sweetwater Holdings, Inc., despite the information
contained in the Schedule K-1s. It was only after the appellant
informed her accountant that she had in fact received cash and
property distributions amounting to $1,183,221 from ISI during 2008,
that she amended the initial return to include the portion of income
attributed to her ownership prior to the division of assets on October
3, 2008, as provided in the Schedule K-1s. This resulted in an
additional $615,939 tax liability to the appellant.
[¶6] In 2008, ISI switched from the cash method of accounting to the accrual method. The appellee's accountant testified that he told the parties that this change was necessary to stay in line with IRS accounting requirements. This change resulted in an increase of income to the company, and, thereby, to its shareholders for tax year 2008.
[¶7] The appellant filed in the divorce action a Second Amended Petition for Order to Show Cause alleging as follows:
Respondent has failed to make the initial cash payment of $1,100,000 due October 3, 2008. Respondent instead issued checks totaling $1,100,000 to Petitioner but which in fact were Petitioner's share of the income of Industrial Services, Inc., and Sweetwater Holdings, Inc., and upon which Petitioner must pay U.S. income taxes of more than $600,000.
The appellant's Memorandum in Support of Second Amended Petition for Order to Show Cause contends that "Mrs. Teeples should have received the $1.1M cash payment from Mr. Teeples ...