The divorce court classified husband’s interest in the retained earnings of a closely held subchapter S corporation as nonmarital property. It awarded wife approximately 60% of the marital estate. Wife appealed.
Wife maintained that the retained earnings should be classified as a marital asset. Because they are not corporate assets but rather income available to the shareholder husband.
The trial court had concluded that the retained earnings of the closely held corporation should be classified as nonmarital property. In so doing, the court emphasized “this is not to suggest that under no circumstances would retained earnings of a nonmarital interest in a subchapter S corporation be classified as marital.”
A shareholder spouse could have a majority of stock or otherwise has substantial influence over the decision to retain the net earnings. Or to disburse them in the form of cash dividends. Then, courts have held that retained earnings are marital property. Especially if a party had “full ownership and possession of all the corporate shares and was the sole managing force behind the corporation”. If the shareholder spouse controls the corporate distribution, the retained earnings are marital property.
Here, husband’s retained earnings are nonmarital. The company’s stock was held in unequal shares by three individuals. Husband possessed only a minority percentage of those shares and was not a controlling shareholder. As only one of three board members, he could not have unilaterally declared or withheld dividends.
IRMO Joynt, 375 Ill.App.3d 817