Michigan court explains treatment of S corp’s retained earnings in divorce

Jensen v. Jensen, 2018 Mich. App. LEXIS 40 (Jan. 9, 2018)

The overarching issue in a recent Michigan divorce case was appreciation. Did the nonowner spouse (wife) have a right to a portion of the increase in value of her husband’s separate property, an S corporation? A related issue, and one that posed a question of first impression in Michigan, was how to treat the company’s retained earnings.

Specifically, the wife claimed the earnings were attributable to the owner spouse (husband) and therefore were part of the marital estate. The trial court rejected the argument. In advocating her position with the Michigan Court of Appeals, the wife referred to federal tax law and how it treats the income of an S corporation and also asked the court to look to other (foreign) jurisdictions that have adopted bright-line rules on when to include such earnings.

The Michigan appeals court decided to go its own way, developing a multistep analysis that is applicable on a case-by-case basis.

In the instant case, the Court of Appeals found the lower court’s decision not to include the retained earnings in the marital estate was not error.

To find out more about the appeals court analysis, click here.