Pemberton v. Pemberton, 2023 Minn. App. Unpub. LEXIS 485; 2023

This is an appeal of the district court’s decree in a complex Minnesota divorce case. While a number of issues were appealed to and decided by the appellate court in this case, including spousal maintenance, this digest focuses on the value of Stephen’s (the husband’s) two business interests and on the determination of the division of tax liabilities the parties incurred during the separation and pendency of this matter.

Holdings. 

1. The district court properly exercised its discretion in not dividing excess tax liabilities because it found Pamela’s (the wife’s) explanation reasonable and credible; and
2. As for 2020 taxes, the district court gave the parties a choice of whether to file jointly or separately. Even though they decided to file separately, the district court divided the combined tax liabilities and allocated half to each party. The appellate court determined that the district court did not abuse its discretion in so deciding.

Facts and district court findings.

The parties were married in 1977 and were both over 65 at the date of the district court’s judgment. The husband worked as a real estate agent, first in S&P Inc. Then, in 2018, the husband and his son started a new company, Pemberton Homes Inc. The husband continued to operate in both companies. The parties physically separated on Nov. 18, 2019. “The parties agreed that the valuation date was December 31, 2019.”

The husband and the wife both moved to amend the findings of the district court as they related to S&P. The district court amended its findings and awarded S&P to the husband at a value of $119,000 with no equalization payment to the wife because of her significant nonmarital assets.

The district court also found that the parties owned 75% of Pemberton Homes and the son owned 25%. The district court awarded the 75% to the husband at a value of $235,000.

In 2018 and 2019, the wife chose to file her income tax returns separately, which resulted in an increase in tax liability for both parties. In its initial findings, the district court did not include this increase in the allocation of assets. Also, for 2020, the district court gave the wife the option of filing separately or jointly. In either event, the tax liability of both parties would be added together and divided by two for allocation purposes. The wife chose to file separately for 2020.

Decision of appellate court. 

The district court did not err by valuing S&P at $119,000. The husband argued that the district court erred in valuing S&P at $119,000 because it included a double counting. The husband’s argument that, since S&P derived all of its income from Pemberton Homes, it was already included there and should not be counted again in S&P. The district court found the argument not persuasive. In its amended findings, the district court assigned a value of $119,000 to S&P, finding “[t]he credible evidence in this case, namely the two formal business valuations conducted by Expert Kiwus [the wife’s expert] reflect there is value in both S&P and Pemberton Homes.”

The district court noted that Harjes (the husband’s expert) did not perform a formal business valuation in this case. His comments were of a general and not specific nature. So S&P was assigned a value of $119,000 consistent with the valuation of Kiwus.

The appellate court noted that Kiwus, in his report, assigned a value of $140,000, less a DLOM of 15% for a fair market value of $119,000. The evidence supported the district court’s value, which was clearly not erroneous. The appellate court will not second-guess the district court’s credibility determination.

The husband also argued that Kiwus’ report conflicted with Minnesota law in that it did not consider (personal) goodwill and the husband’s value to the company. (Rogers v. Rogers) Since the husband raised this issue for the first time on appeal, the district court did not address it. “Husband proposed that the district court adopt Expert Kiwus’s asset approach estimate for S&P. Because Husband raised this argument for the first time on appeal, and the district court did not consider it, the question is not properly before this court.”

The district court did not err when it valued the marital share in Pemberton Homes at $235,000. The husband contended the district court erred in its valuation of Pemberton Homes because it did not address the factors in Nardini v. Nardini and did not address personal goodwill nor the value of the husband to the business. The husband’s arguments failed. (Editor’s note: The eight factors in Nardini are the eight factors listed in R.R. 59-60.) Kiwus did indicate in his report that he considered the Nardini factors. Nardini did not require consideration of the factors but suggested that the court consider those factors as well as factors beyond the book value of a business. (Nielsen v. Nielsen) Goodwill was one of the eight factors, so Kiwus did consider it.

As for the husband being a “key person,” the record does not support a key-man reduction in its value because the husband did not “perform[] highly personal or unique services from which the entire business income is derived.” The value the district court assigned to Pemberton Homes was within the limits of Kiwus’ estimate under the income approach. (Balough v. Balough) Kiwus was a credible expert witness.

The district court did not abuse its discretion by not accounting for the costs from the wife’s decision to file her 2018 and 2019 taxes separately. The appellate court reviewed the district court’s division of debt and found no abuse of discretion. The appellate court must affirm, “if it has an acceptable basis in fact and principle, even though this court may have taken a different approach.” (Blough v. Blough) 

The wife chose to file separately in 2018 and 2019. The district court did not include any additional costs of the separate filings in the allocation of assets. This caused the husband to pay more taxes than if they had filed jointly. The husband argued the additional amount should have been included as “marital debt.” The appellate court disagreed.

The district court had broad discretion when making property divisions including tax liabilities. The wife testified that she filed separately because the husband did some things “financially that [she did not] agree with nor did [she] ever know what was going on,” and she “did not want to be responsible for any audits if [she] signed a marital income tax [return], and [she] wanted to be on [her] own with [her] own honest way of doing things.” The district court found that reasonable and credible. The district court exercised its (proper) discretion regarding the tax liabilities.

The district court did not abuse its discretion by not awarding the wife a share of the value of S&P. The wife argued the district court abused its discretion by not awarding her a share of the value of S&P. The district court found that S&P did not have any independent value (i.e., independent of Pemberton Homes), and testimony supported this conclusion. While the division of assets was not equal and in the husband’s favor, primarily because of the wife’s much greater value of nonmarital assets, the division, which did not include any value for S&P, was not an abuse of discretion by the district court and was affirmed.

The district court did not clearly err by finding that the parties owned 75% of Pemberton Homes. The wife contended that the husband created Pemberton Homes as divorce planning and as a means to transfer his successful business to his son. The record did not support this assertion but instead supports that the husband and their son brought the two businesses together as an efficiency from running two parallel businesses and that they had been talking about it. The husband did not “give away” the business, and the husband would own 75% and the son 25% since the husband was needed to obtain credit. The husband was partnering with his son, not transferring his business to him.

The district court did not abuse its discretion by giving the wife a choice to file 2020 taxes jointly or separately. “The district court’s alternative is not a ‘penalty’; the district court found that if the parties filed jointly, they would share responsibility for any tax liability or equally divide any tax refunds, and that if Wife decided to file separately, the tax liabilities would be added together and the two would share equal responsibility.” The district court had the authority to order a joint return to be filed, but here gave the wife the choice, and, in either case (jointly or separately), the aggregate tax liability would be shared equally. The district court properly exercised its discretion in this matter.