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During a divorce, courts in Georgia divide property by determining what property is separate property and what property is marital property. After that determination, the court will make an equitable division of marital property, and typically the parties keep their own separate property. Unfortunately, this process is not always as easy as it sounds. There are gray areas that leave some of us pondering scenarios where the disputed property does not fit squarely into one category.
It is not hard for us to imagine a scenario where an individual buys or obtains stock prior to marriage and that stock appreciates in value during the marriage. Is the value of that appreciation marital property subject to equitable division despite the fact the stocks were purchased before the marriage? On March 28, 2014, the Georgia Supreme Court answered this question.
Can You Divide Stock Appreciation Value Between Divorcing Spouses?
In Sullivan v. Sullivan, three years before getting married, Husband purchased shares of stock in a closely held S corporation using money his mother gave him. Sullivan v. Sullivan, 295 Ga. 24 (2014). Before the marriage and throughout the marriage Husband worked as an operations manager in that S corporation. Id. Ten years after getting married, Husband filed for a divorce. Id. During the divorce, Wife maintained that she was entitled to an equitable division of the appreciation in the value of Husband's shares from the date of the parties' marriage to the date of their divorce. Id. Husband argued that the shares of stock should not be marital property and should be awarded solely to him because they were acquired prior to the marriage, and any increase in value of the shares of stock that occurred during the course of the marriage was not attributable to Wife or the marital unit but to outside market forces. Id. at 24-25. Wife maintained that her efforts to support her Husband in his career were evidence of marital investment, and by extension, the appreciation in the value of Husband's company stock was marital property subject to an equitable division. Id. at 28.
The Court noted that the key to deciding this issue was whether there was an appreciation in the value of the stock during the marriage and if so, whether that appreciation was due to the spouses' individual or joint efforts rather than solely market forces. Id. at 25. At trial, the court determined that Wife failed to present evidence of the stocks' true market value. Id. at 26. Further, the court noted that although Husband was a shareholder and carried a title indicating that he managed the operations of the company, testimony at trial showed that he was primarily responsible for managing the company's pick-ups and deliveries. Id. at 27. Therefore, Husband had little influence in the running of the company. Id. Husband's testimony indicated that the rapid rise in the company's appreciation was due to the company's acquisition of new government contracts, in which he was not involved. Id. Accordingly, the court determined that Wife cannot succeed in her argument that her support of Husband's career was evidence of marital investment because if Husband did not contribute to any growth in the company, then Wife's efforts to support Husband in his career did not indirectly contribute to the growth of the company either. Id. at 28. As a result, the court held that the appreciation in the value of Husband's stocks was not marital property subject to an equitable division. Id.
What About K-1 Income on Your Tax Return?
As a side issue, the court also addressed the issue of K-1 income related to Husband's stock ownership in the S corporation. As a minority shareholder, Husband was apportioned K-1 income to be recorded on his tax return, but the actual cash was retained in the company. Id. at 24. Therefore, the company paid any taxes associated with the K-1 income. Id. Wife argued that the K-1 income was a marital investment; therefore, it was marital property subject to equitable division. Id. at 27. Nevertheless, the court held that even if K-1 income could be a marital investment, the K-1 income in this case was not a marital investment. Id at 27-28. This is because Husband and Wife had no control over whether the K-1 income would be retained in the company or distributed to them. Id. Accordingly, if the marital unit did not control whether K-1 earnings would be retained, their retention could not be an investment by either spouse. Id. at 28.
By: Jason W. Karasik, Attorney, Meriwether & Tharp, LLC