In re Marriage of Nelson

June 26, 1998

No. 3--97--0716
_________________________________________________________________

IN THE APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 1998

IN RE MARRIAGE OF: ) Appeal from the Circuit Court
GREGORY M. NELSON, ) for the 14th Judicial Circuit,
Petitioner-Appellant, ) Henry County, Illinois
)
v. ) No. 95--D--124
)
) Honorable
TRACIE S. NELSON, ) Clarke C. Barnes
Respondent-Appellee. ) Judge, Presiding
________________________________________________________________

JUSTICE BRESLIN delivered the opinion of the court:
_________________________________________________________________

Petitioner Gregory Nelson appeals the trial court's judgment
dissolving his six year marriage with the respondent, Tracie
Nelson. Greg argues that the trial court: (1) abused its
discretion in computing his net income for purposes of child
support; (2) erred in ordering him to reimburse the marital estate
for payments made on nonmarital assets and in characterizing
certain farmland as marital property; and (3) abused its discretion
in apportioning the marital property between the parties. For the
following reasons, we affirm in part, reverse in part and remand
with directions.
FACTS
In January 1997 a judgment of dissolution was entered
dissolving Greg and Tracie's marriage of six years. The Nelson's
lived together as husband and wife until March of 1995. At that
time, Greg was 38 and Tracie was 31 years of age. Two children
were born to the marriage. Lindsey was three and Derek was five
months when the parties separated. Greg had one son from a
previous marriage who also lived with the parties during the
marriage.
Throughout the marriage, Greg worked as a farmer while Tracie
was employed as a full-time bank teller. Greg's gross income for
1996 was $43,297, for 1995 it was $90,780 and for 1994 it was
$73,877. The record indicates that Tracie earned approximately
$20,000 a year. Her income fluctuated to as low as $5,800 in 1995.
In addition to working in part and full-time teller positions,
Tracie was responsible for caring for three children, running
family errands and doing various household tasks. Tracie used a
large portion of her earnings to pay for household and family
expenses.
Greg and Tracie resided on property that Greg bought on
contract from his mother in 1986. The property included the
couple's home and 160 acres of farmland. While married, Greg and
Tracie made several payments on the purchase contract.
In August of 1992, Greg and his father purchased a farm
referred to as "Clover Township" farm. In 1993 Tracie's name was
added to the deed. The farm was owned one-half by Greg's father
and one-half in joint tenancy between Greg and Tracie. Tracie
signed the note and the mortgage. Over the next few years, Greg's
father presented him with three substantial checks made out to Greg
Nelson. Greg testified that he and his father had an express
agreement that the checks were a gift to him only and were to be
used against the farm's principal. However, no written agreement
was produced at trial. The funds were deposited in Greg and
Tracie's joint checking account and used to pay the mortgage on the
Clover Township farm.
Greg also owned several pieces of nonmarital farm machinery.
During the marriage, Greg purchased replacement farm equipment with
cash and the trade-in of older machinery. He paid the cash
difference between the trade-in value and the cost of the
replacement machinery with funds that were generated during the
marriage. On his tax returns Greg deducted certain depreciation
expenses related to the machinery and the operation of his farming
business.
In the judgment of dissolution, the trial court awarded Tracie
child support in the amount of $350 a week. It arrived at this
figure by averaging Greg's net income for 1994, 1995 and 1996 as
reported on his federal income taxes. The court made additional
findings regarding numerous contested property issues. It found
that Greg failed to present clear and convincing evidence to
overcome the presumption that the Clover Township farm was marital
property. It ordered Greg to reimburse the marital estate for the
payments made during the marriage to reduce the principal
indebtedness on the marital residence. In addition, he was ordered
to reimburse the estate for the cash used to purchase the farm
machinery. After identifying various property items as marital and
nonmarital, the court divided the marital estate equally between
Greg and Tracie. Tracie was awarded marital property in lieu of
maintenance in the amount of $121,000.00. Greg was ordered to pay
the amount in installments over a three-year period. Greg's
posttrial motion was denied and he appeals.
ANALYSIS
We first address Greg's contention that the trial court erred
in computing net income for purposes of determining child support.
A court may order a supporting parent to pay child support in
an amount that is reasonable and necessary for the child's well-
being. 750 ILCS 5/505(a)(West 1996). Generally, the minimum amount
of child support that can be awarded for two children is 25% of the
supporting parent's net income. 750 ILCS 5/505(a)(1)(West 1995).
Section 505 of the Illinois Marriage and Dissolution of
Marriage Act (Act) defines net income for purposes of child support
as the total of all income from all sources minus several
enumerated deductions. 750 ILCS 5/505(a)(3)(West 1996). Those
deductions include: (a) Federal income tax; (b) State income tax;
(c) social security tax; (d) mandatory retirement contributions;
(e) union dues; (f) dependent and individual health insurance
premiums; (g) prior obligations of support paid under court order;
and (h) expenditures for the repayment of debts that represent
reasonable and necessary expenses for the production of income. 750
ILCS 5/505(a)(3)(West 1996); Department of Public Aid ex rel.
Jennings v. White, 286 Ill. App. 3d 213, 675 N.E.2d 985 (1997).
The findings of a trial court as to net income and the award of
child support are within its sound discretion and will not be
disturbed on appeal absent an abuse of discretion. In re Marriage
of Freesen, 275 Ill. App. 3d 97, 655 N.E.2d 1144 (1995).
Greg contends that the child support award of $350 per week is
unreasonable in light of his income as reported on his 1996 federal
tax return. We disagree.
The court arrived at the weekly child support figure of $350
by averaging Greg's net income over three consecutive years --
1994, 1995 and 1996. In 1994 Greg's income (total income less
Tracie's wages, salaries and tips) as claimed on his federal tax
return was $56,230. His total income for 1995 was reported as
$84,884, and in 1996 he produced a total income of $43,297. It is
clear that Greg's income fluctuated from year to year depending on
the profitability of the farming industry. Under these
circumstances the method of income averaging employed by the court
was a reasonable means of determining Greg's net income for
purposes of child support. See Freesen, 275 Ill. App. 3d at 104,
655 N.E.2d at 1149(income averaging necessary when supporting
parent's income fluctuates); In re Marriage of Elies, 248 Ill. App.
3d 1052, 618 N.E.2d 934 (1993)(reasonable to average three years'
income in determining net income). Thus, the court properly
averaged Greg's income for the previous three years.
Greg also claims that the court improperly computed net income
by failing to deduct depreciation expenses in calculating his net
income. Greg insists that his depreciation expenses for farm
machinery should be deducted from net income as a "reasonable and
necessary expense[] for the production of income." 750 ILCS
5/505(a)(3)(h)(West 1996). By contrast, Tracie contends that while
such an expense may or may not be necessary to produce income, it
is not an expenditure for the repayment of debts. Thus, according
to Tracie, excluding it from net income was proper.
Analogous opposing arguments were presented in Gay v. Dunlap,
279 Ill. App. 3d 140, 664 N.E.2d 88 (1996). In that child support
case the defendant wished to deduct a certain amount from his net
income for depreciation and numerous business expenses. In holding
that the expenses were not deductible from net income under the
Act, the court noted that to claim a deduction the proponent must
show: (1) that the expense is a reasonable and necessary expense
for the production of income; and (2) that it falls into the
category of a debt repayment as evidenced by a specific repayment
schedule. Gay, 279 Ill. App. 3d at 148, 664 N.E.2d at 94; cf. In re
Marriage of Partney, 212 Ill. App. 3d 586, 571 N.E.2d 266
(1991)(trial court erred in deducting investment losses from net
income when losses were not evidenced to be necessary for income
production and no repayment schedule was demonstrated).
Greg claimed a depreciation expense for farm equipment on his
federal income tax returns. A review of the record indicates that
neither party disputed that this equipment was necessary for the
production of income. However, to claim this depreciation expense
as a deduction, Greg must also show that the deducted expense was
an expenditure for the repayment of debt. Greg deducted the
depreciated value of purchased farm equipment over several years as
a means of deflating his adjusted gross income for tax purposes.
Nothing in the record demonstrates that the depreciation expenses
claimed on his tax forms were utilized to repay an outstanding
debt. Nor was any specific repayment schedule provided as a result
of the expense. Thus the expense does not reasonably fall into the
category of debt repayment. Accordingly, we hold that the trial
court did not abuse its discretion by excluding Greg's depreciation
expense in determining his net income.
Greg also argues that the court incorrectly refused to deduct
payments of principal on farm operating loans from his net income.
We disagree. Greg's lender provided him with a sum of money to
cover annual operating expenses. Those farm operating expenditures
appeared on the Schedule F of his federal tax return. The court
used the Schedule F to determine Greg's farming income for purposes
of computing his total net income. Thus, allowing Greg another
deduction for the repayment of farm operating loans would permit
him to take the same deduction twice. It defies common sense to
allow a businessperson to deduct both expenses incurred in
purchasing the inputs and his payments to retire the debt incurred
to cover the expenses. We find that the trial court correctly
refused to deduct the repayment of farm operating loans.
Accordingly, we affirm the trial court's calculation of Greg's net
income.
In addition, Greg insists that the court's child support award
was an abuse of discretion because it ordered Greg to maintain
health insurance coverage for the children when Tracie could have
obtained coverage at a lower premium.
In its order the court expressly provided that Greg was to
provide medical, dental, optical and pharmaceutical insurance
coverage for the two children. However, it also emphasized that,
in the event Tracie had insurance coverage provided through her
place of employment, she should apply for such coverage and be
reimbursed for the costs by Greg upon his written request that she
do so.
The court allowed Greg to either provide the coverage
individually or through Tracie's employment. The record indicates
that coverage was available for both children through Tracie's
employer at a much lower premium rate than through Greg's insurer.
Considering the financial position of both parties, we find that
the court did not abuse its discretion in ordering Greg to provide
insurance coverage for the children through Tracie's place of
employment.
Next we must determine whether the court erred in ordering
Greg to reimburse the marital estate for marital funds contributed
to nonmarital assets.
Section 503(c)(2) of the Act provides a right to reimbursement
for contributions made by one estate which have enhanced the value
of an item of property classified as belonging to another estate.
750 ILCS 5/503(c)(2)(West 1996). The reimbursement is made to the
contributing estate, not to the contributing spouse. In re Marriage
of Morse, 143 Ill. App. 3d 849, 493 N.E.2d 1088 (1986). A
contribution to an estate must be traceable by clear and convincing
evidence to establish a right of reimbursement. In re Marriage of
Albrecht, 266 Ill. App. 3d 399, 639 N.E.2d 953 (1994).
Greg contends that the court incorrectly required
reimbursement to the marital estate for purchase contract payments
on the nonmarital residence. We disagree.
The court determined that the residence in which the parties
lived during their six year marriage was a nonmarital asset. But
while married, Tracie and Greg made purchase contract payments on
the residential home. These payments were traceable to their joint
checking account. While we recognize that the residence was a
nonmarital asset, Tracie's contributions to the marital residence
were significant. Tracie worked full time, provided health care
benefits for the two children and completed household chores.
Without these efforts, funds to pay the purchase contract of the
nonmarital asset may not have been available. Thus, reimbursement
of the payments is not against the manifest weight of the evidence.
Greg next argues that the ordered reimbursement to the marital
estate of funds used to purchase nonmarital farm machinery was
erroneous.
Greg used funds from the couple's joint checking account to
purchase farm machinery. The machinery was purchased using trade-
in equipment that was obtained prior to the marriage. But the cash
difference was supplied with marital property. Accordingly, the
court did not abuse its discretion in ordering Greg to reimburse
the marital estate the value of the cash payment for the non-
marital farm machinery.
In addition, Greg claims that the Clover Township farm should
have been designated nonmarital property because his father
provided cash gifts which he used for payment on the farm's
mortgage. We disagree.
Property acquired during a marriage is presumed to be marital
property absent clear and convincing evidence establishing
otherwise. In re Marriage of Werries, 247 Ill. App. 3d 639, 616 N.E.2d 1379 (1993). Nonmarital property may be presumptively
transmuted into marital property as a gift to the marital estate by
an affirmative act of the contributing spouse, such as placing the
assets into a form of joint tenancy. In re Marriage of Durante, 201
Ill. App. 3d 376, 559 N.E.2d 56 (1990). A trial court's
characterization of an asset will be overturned only if it is
against the manifest weight of the evidence. In re Marriage of
Leisner, 219 Ill. App. 3d 752, 579 N.E.2d 1091 (1991).
One-half interest in Clover Township farm was acquired during
the marriage and held in joint tenancy by Tracie and Greg. Tracie
signed the note securing the mortgage. Therefore, the farm is
presumed to be marital property absent clear and convincing
evidence showing otherwise. Greg was unable to produce a written
agreement to support his allegation that the checks his father
presented him were gifts to the nonmarital estate rather than the
marital estate. The record indicates only that the checks were
placed in the parties' joint checking account and used to pay the
loan. No agreement, oral or otherwise, was adduced at trial
indicating that Tracie was no longer a co-owner of the farm. Thus,
Greg failed to rebut the presumption that the money used to pay for
the property was a gift to the marital estate. Accordingly, the
trial court's characterization of the Clover Township farm as
marital property was not against the manifest weight of the
evidence.
The last question is whether the court abused its discretion
in distributing the marital property between the parties.
Section 503 of the Act provides that a trial court is to
divide the marital property in just proportions taking into account
all relevant factors, including: the value of the marital
property; the economic circumstances of each spouse; the income of
each spouse; and each spouse's age, health and employability. 750
ILCS 5/503(d)(West 1996). Just proportions does not mean strict
equality, but only an equitable division based on the surrounding
circumstances. Albrecht, 266 Ill. App. 3d at 402, 639 N.E.2d at
956. A trial court's division of marital property will not be
reversed absent an abuse of discretion. In re Marriage of Eidson,
235 Ill. App. 3d 907, 601 N.E.2d 298 (1992). An abuse occurs when
no reasonable person would take the view adopted by the trial
court. In re Marriage of Cheger, 213 Ill. App. 3d 371, 571 N.E.2d 1135 (1991).
After carefully reviewing the property distribution and
payments ordered in this case, we find that Tracie was awarded a
portion of the marital estate nearly equal to the portion awarded
to Greg. We fail to find any support in the record for Greg's
conclusion that the marital estate is equal to $54,540, thus Tracie
should be awarded only $27,270. In addition, we do not agree that
Tracie's contribution to the acquisition of the marital property
was minimal. Tracie completed necessary household chores that
helped Greg continue working on the farm. During the marriage, she
worked, cared for three children and paid for many of the family's
day-to-day expenses. Therefore, we find that the trial court's
division of marital assets equally between the parties was not an
abuse of discretion.
However, we acknowledge that the trial court failed to assign
the value of the marital furnishings Tracie possessed to the
portion of the marital estate she received. The trial court
assigned a value to Greg's furniture and furnishing. But it
neglected to assign a value to the furnishings Tracie took with her
that were derived from the marriage. Greg testified that the
marital furniture Tracie retained at the time of separation was
worth $17,450. A list of this furniture was entered into evidence.
It included a VCR, a bedroom set, a baby's bedroom set, an oak
table, and many other household furnishings. His testimony was not
contradicted. The value of the marital estate should be adjusted
to include the $17,450 of marital furniture, and that marital asset
should be credited to Tracie.
We have carefully considered all the remaining contentions of
the parties and believe that no further discussion is necessary.
Accordingly, we reverse and remand this case to the circuit
court with directions to credit Tracie's portion of the marital
estate for the marital furnishings she possesses and adjust Greg's
property distribution payment accordingly.
For the foregoing reasons, the judgment of the circuit court
of Henry County is affirmed in part, reversed in part and remanded
for further proceedings consistent with this order.
Affirmed in part, reversed in part and remanded.
HOMER, P.J., partial concurrence/partial dissent.
HOLDRIDGE, J., special concurrence.
PRESIDING JUSTICE HOMER, concurring in part and dissenting in
part:
I believe the trial court erred in adding back all of Greg's
Schedule F depreciation in determining his net income for purposes
of child support. Therefore, I must respectfully dissent from that
part of the majority's opinion affirming the trial court on this
issue.
In computing Greg's farm income the trial court disallowed his
deductions for all Schedule F depreciation. Citing section
505(a)(3)(h) of the Act defining "net income" (750 ILCS
5/505(a)(3)(h) (West 1996)), the majority agreed with the trial
judge, pointing out that "[n]othing in the record demonstrates that
the depreciation expenses claimed on his tax forms were utilized to
repay an outstanding debt." Such rigid adherence to the language
of the statute is overly simplistic and ignores the basic and
fundamental principles of accounting.
"Income" is defined as the "[t]he true increase in amount of
wealth which comes to a person during a stated period of time."
Black's Law Dictionary 763 (6th ed. 1990). "Depreciation" means
"spreading out the cost of a capital asset over its estimated
useful life;" "decline in value of property caused by wear or
obsolescence;" and "[c]onsistent, gradual process of estimating and
allocating cost of capital investments over estimated useful life
of asset in order to match cost against earnings." Black's Law
Dictionary 441 (6th ed. 1990). Considering these generally
accepted accounting principles, it is clear that depreciation
expenses of deteriorating assets, such as farm machinery, can
constitute reasonable and necessary expenses for the production of
income.
As has been observed elsewhere, section 505(a)(3) may work
satisfactorily for employees who receive a paycheck, but it cannot
be rigidly applied to determine the income of self-employed
individuals. In re Marriage of Minear, 287 Ill. App. 3d 1073,
1086, 679 N.E.2d 856, 866 (1997) (Cook, J., dissenting), aff'd, No.
83414 (January 11, 1998); see also Gay, 279 Ill. App. 3d at 150-52,
664 N.E.2d at 95-96 (Cook, P.J., concurring in part and dissenting
in part).
Ours is not the first court to consider depreciation within
the context of section 505(a)(3)(h) which provides a deduction from
net income for "[e]xpenditures for repayment of debts that
represent reasonable and necessary expenses for the production of
income." 750 ILCS 5/505(a)(3)(h) (West 1996). Two other Illinois
appellate court districts, reaching disparate conclusions, have
also recently considered the question of whether depreciation
constitutes such an expenditure. See Posey v. Tate, 275 Ill. App.
3d 822, 827, 656 N.E.2d 222, 226 (1st Dist. 1995) (holding that
deduction of straight line depreciation is proper when shown to be
a reasonable and necessary expense for the production of income);
Minear, 287 Ill. App. 3d at 1076-077, 679 N.E.2d at 859-60 (4th
Dist. 1997) (holding that depreciation is not an expenditure for
the repayment of debt and therefore not deductible).[fn1]
The curious wording and limited context of section
505(a)(3)(h) provide little assistance in evaluating whether
depreciation can be a proper deduction in a given situation. For
that reason, we should avoid the strained analysis engaged in by
other courts and instead apply generally accepted accounting
principles to this issue.
I would hold that depreciation expenses may be deducted to
arrive at net income for purposes of the child support guidelines
when (1) the cost of the capital asset has been shown to be a
reasonable and necessary expenditure for the production of income,
and (2) the claimed deduction reasonably represents the decline in
the value of the asset caused by wear or obsolescence. Such a test
would not place us at odds with the statute defining "net income,"
since we would be holding that proper depreciation deductions are
necessary to ascertain the amount of "income from all sources" in
the first instance. See 750 ILCS 5/505(a)(3) (West 1996).
For these reasons, I would reverse the trial court's
calculation of Greg's net income and remand the cause for
redetermination of child support.
JUSTICE HOLDRIDGE, specially concurring:
I agree with the majority's holdings herein. I write
separately on the issue of depreciation. In calculating net
income under the Illinois Marriage and Dissolution of Marriage
Act (Act), the only deductions from gross income that are
allowable are those specifically enumerated in the Act. (750
ILCS 5/505(a)(3) et seq. (Michie 1996)). While there may be
circumstances where a reduction in income for depreciation would
be appropriate, the clear and unambiguous language of the Act
does not permit it.
I respectfully disagree with Justice Homer's special
concurrence wherein he indicates he would apply generally
accepted accounting principles and hold that depreciation
expenses may be deducted from net income despite the "curious
wording" of section 505(a)(3)(h)of the Act. Although this
suggestion may make some sense if we were writing legislation, we
are not. The only way we could do this would be to ignore the
plain and unambiguous language of the Act.
The Act as written is clear; depreciation allowances given
by the federal government as deductions against taxable income on
an individual's federal income tax return, and depreciation
allowances on balance sheets prepared by accountants are not
"expenditures for the repayment of debt." Simply put,
depreciation is not repayment of a debt and cannot be deducted
against gross income under the Act. See, Gay v. Dunlap, 279 Ill.
App. 3d 149 (1996).
Our supreme court recently decided the case of In re
Marriage of Minear, Ill. 2d (No. 83414, decided March
26, 1998), wherein it had an opportunity to rule on this issue.
Unfortunately, it chose not to decide whether a depreciation
expense may ever be excluded from consideration in determining an
individual's available income. Minear, slip op. at 7. It is
unfortunate that the high court chose not to resolve this issue
when the opportunity was presented. Until the high court finally
chooses to resolve this issue, or the legislature changes the
language of the Act, court's should decline the invitation to act
as a super-legislative body and re-write the Act to allow for the
adjustment of net income by the amount of the depreciation
allowance claimed on the payor's federal tax return or balance
sheet.
[fn1] In affirming the appellate court's decision in Minear,
our supreme court held that it was unnecessary to determine
whether depreciation may in all cases be excluded in determining
net income, because the appellant in that case failed to offer
sufficient evidence to support his claimed depreciation
deduction. In re Marriage of Minear, No. 83414, slip op. at 5-6
(January 11, 1998).