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Divisible Property in Equitable Distribution

North Carolina General Statutes Section 50-20(b) (4) defines divisible property. Divisible property covers certain values created post-separation.

A husband that continued to work in a dental practice post-separation did not create active appreciation.   Husband did not change anything about his business methods to increase business. The growth between the date of separation and the date of trial is presumptively divisible, and husband did not rebut the presumption. The increase in the dental practice was passive and was therefore not divisible property.  Romulus v. Romulus, 215 N.C. App. 495, 715 S.E.2d 308 (2011).

Contrast Romulus to Montague. In Montague, there were two types of payments the rental property LLC paid to husband post-separation: (1) fees for management of the rental property; and (2) distributions. The husband managed the rental LLC and received fees for management services, which were his separate property; he actively earned these fees.  However, the distributions were classified as distributions on the tax returns and were passive income to the marital estate and were thus, divisible. Montague v. Montague, 767 S.E. 2s 71 (2014). CPAs, the tax return classification matters in equitable distribution.

Hill is another case that recognizes tax return classification as binding on the court. Wife has an S corporation for her speech pathology practice. She took money post-separation in two ways: (1) low salary and (2) shareholder distribution. The trial court didn’t like the CPA’s classification for tax purposes and found that the low salary and high distribution were ways to avoid withholdings and FICA. The Court of Appeals corrected the trial court and indicated that it was incorrect for the trial court to re-classify the post-DOS distributions as W-2 income for the Wife, and thus her separate property. The tax return ruled, and husband got his share of the post-separation S distributions. Hill v. Hill, 748 S.E.2d 352 (2013).

Shopping center rental income is partially divisible property. Husband owned a corporation holding a shopping center, which Husband managed. The corporation paid rental income to the husband from the date of separation to the date of trial in the grand sum of $2,183,762. Part of the money was compensation for husband, and part of the distributions were passive income to be divided in the equitable distribution. The court determined that five percent of the distribution ($304,104) was a reasonable and fair compensation to husband. The remainder ($1,879,748) was divisible property and passive. Binder v. Binder, 753 S.E.2d 743 (2013). For the business owner, speed in settlement matters.

Do preservation efforts generate value? In Brackney, the answer was no. Preservation efforts were simply unappreciated, so to speak. Prior to the date of separation, the parties sold their residence and contracted to build another house. Part of the sales proceeds from the residence were placed into an account. Then the parties separated. Husband took the initiative to close on the new house and obtain a mortgage. At the time of the equitable distribution trial, the new house had appreciated $181,000. The question is: does wife get any of the $181,000? The Brackney court held that wife got her half of the $181,000 as husband’s preservation actions did not create this new divisible value. Brackney v. Brackney, 199 N.C. App 375 (2009).

Stock options that are received during the marriage and before the date of separation are marital, even if the exercise date is after the date of separation. Fountain v. Fountain, 148 N.C. App. 329 (2002).

Stock grants with vesting schedules acquired during the marriage and before the date of separation but received after separation are divisible property. Ubertaccio v. Ubertaccio, 161 N.C. App. 352, aff’d for the reasons in the concurrence, 359 N.C. 175 (2004).