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CLASSIFICATION OF RETAINED EARNINGS
© 1998 National Legal Research Group, Inc.
WISCONSIN: Metz v. Keener, ___ Wis. 2d ___, 573 N.W.2d 865 (Ct. App. 1997).
The retained earnings fund of the wife's inherited corporation was properly included in the marital estate.
In 1984, three years before the parties' marriage, the wife inherited the shares of a Subchapter S corporation which operated a McDonald's franchise. She successfully managed and expanded the corporation, and her income increased from $52,000 in 1987, the year of the parties' marriage, to $148,000 in 1995. Following the inheritance, the corporation retained some of its earnings in an "accumulated adjustment account." This retained earnings account steadily increased both before and during the parties' marriage, eventually reaching a level of $714,000.
In the parties' property division proceedings, the trial court included the retained earnings fund as a marital asset. The wife appealed, contending that the inclusion of the retained earnings in the marital estate was contrary to law. She argued that the corporate earnings in the retained earnings account were a component of the appreciation of her inherited corporation and, as such, should not be considered part of the marital estate. The husband contended that the retained earnings fund was a divisible marital asset because it was produced after the inheritance by income generated by the corporation.
The Wisconsin Court of Appeals began by addressing the wife's argument that the retained earnings represented appreciation in the value of the corporation itself rather than income generated by the corporation. The court said it fully accepted that a corporation's retained earnings may serve to increase the value of the stockholder's shares. But, in Wisconsin, income generated by an exempt asset is viewed as separate and distinct from the asset itself, the court said, citing Arneson v. Arneson, 120 Wis. 2d 236, 355 N.W.2d 16 (Ct. App. 1984).
The wife attempted to distinguish Arneson on the basis that here the retained earnings fund did not pass through her hands because it was always held by the corporation. The record did not support that argument, the court found. For one thing, the wife had used portions of the retained earnings to purchase additional McDonald's franchises. Moreover, under the Subchapter S structure of the corporation, the wife had paid income taxes on the retained earnings, and thus had full access, control, and right to the undistributed income.
As additional authority supporting the inclusion of the retained earnings in the marital estate, the court cited Fowler v. Fowler, 158 Wis. 2d 508, 463 N.W.2d 370 (Ct. App. 1990) (where dividend income generated by inherited stock was used to procure additional stock, the additional stock was properly included in the marital estate), and Lendman v. Lendman, 157 Wis. 2d 606, 460 N.W.2d 781 (Ct. App. 1990) (appreciation in value of corporation occasioned by application of corporate income to retirement of corporate debt represented a marital asset subject to property division).
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