                   IN THE COURT OF APPEALS OF IOWA

                                   No. 13-1751
                            Filed December 10, 2014


IN RE THE MARRIAGE OF ANGELA RENEE JOHNSTON
AND JEREMY JAMES JOHNSTON

Upon the Petition of
ANGELA RENEE JOHNSTON,
      Petitioner-Appellee,

And Concerning
JEREMY JAMES JOHNSTON,
     Respondent-Appellant.
________________________________________________________________


      Appeal from the Iowa District Court for Audubon County, Timothy

O'Grady, Judge.



      The appellant, Jeremy James Johnston, appeals from the property

division entered as a result of a dissolution of his marriage with Angela Renee

Johnston. AFFIRMED AS MODIFIED.



      Gregory J. Siemann, Carroll, for appellant.

      Joel Baxter of Wild, Baxter & Sand, P.C., Guthrie Center, for appellee.



      Heard by Vaitheswaran, P.J., Mullins, J., and Goodhue, S.J.*

      *Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2013).
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GOODHUE, S.J.

       The appellant, Jeremy James Johnston, appeals from the property

division entered as a result of a dissolution of his marriage with Angela Renee

Johnston.

   I. Background Facts and Proceedings

       Jeremy and Angela were married July 28, 2007. They have no children.

On July, 16, 2013, when the dissolution trial was held, Jeremy was thirty-one

years of age and Angela was thirty-four. Angela has a B.A. in psychology and a

master’s degree in educational psychology. She has been employed as a school

psychologist during the period of the marriage, and her income has increased

from approximately $40,000 per year to $60,000 per year.           In addition, her

employment provided the usual fringe benefits. Jeremy has been involved in

farming since he was a teenager.        He attended Iowa State University and

received a degree in agriculture but continued to farm while in college and

became a full-time farmer in 2004 when he graduated.

       At the time of the marriage Angela had a net worth of $68,000 and Jeremy

had filed a financial statement with his lender showing a net worth of $187,120 as

of January 3, 2007. Jeremy contends his net worth was substantially higher in

July when the parties were married, which he estimates to have been $364,534.

During the marriage Jeremy received a certificate of deposit from his

grandmother in the amount of $27,308.76 and received a $16,000 settlement as

a result of a personal injury received in an automobile accident. In anticipation of

the marriage, the parties purchased one and one-half acres with a house on it

from Jeremy’s father, Steven.     The two properties are intertwined with each
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other. The electric utility connection for Jeremy’s house is located on Steven’s

farm, they share driveways memorialized by easements, and Jeremy’s septic

system laterals are in part located on Steven’s land.

      Jeremy has always farmed with Steven and they have shared labor and

equipment. Jeremy owns grain bins on Steven’s land, they store machinery in

each other’s machine sheds, and share grain storage.        Jeremy owns forty

percent of a cattle herd and Steven owns the other sixty percent. There is no

written contract between Steven and Jeremy other than easements for access

into each other’s property. Jeremy has a sprayer and sprays Steven’s crops as

well as doing custom work for the neighbors. Steven owns a combine, which

both parties use. Jeremy contends he has received an advantage in the form of

equipment usage and services from the joint operations, which he considers a

gift. He contends it was a gift that should be taken into consideration in the

property settlement.   Jeremy put together an after-the-fact calculation of the

amount he claimed had been gifted by his father during the marriage and arrived

at the sum of $179,795.69.

      The parties are heavily leveraged and Jeremy requested that the assets

be sold, the debts paid, and the remainder divided between the parties with each

party paying the tax due on their share of the proceeds.      He contends it is

inequitable to place all of the tax burden on him. The trial court noted in its

decree that the relationship between Steven and Jeremy in their farming

operation and intertwined ownership of their assets would have a detrimental

effect on any sale and accordingly formed an alternative division of the marital

property.
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       The trial court set off Jeremy’s injury settlement in the amount of $16,000

and the gift from his grandmother in the amount of $27,508.36 and did not

include those sums in the marital assets of the parties. The trial court made no

allowance for premarital property or allowance to Jeremy for the claimed gift from

Steven and did not consider any tax consequences that might result from the

decree entered.

       The trial court awarded property to Angela that had an undisputed net

value of $80,104, and to Jeremy property that had an undisputed net value of

$942,494 after subtracting the $16,000 accident payment and the debt of

$498,991 that Jeremy was to assume. The trial court in effect valued the marital

assets of the parties at $1,022,598. To equalize the property received by each

party, Jeremy was ordered to pay Angela $431,495. Jeremy was ordered to pay

$97,266 by October 25, 2013, and the balance in $50,000 installments with the

first to be paid on January 7, 2014, and a like payment on January 7 of each

following year until paid in full. The amounts due were to begin bearing interest

at 2.12% per annum on the balance due beginning August 19, 2013.

       Jeremy has appealed, contending that the property division was

inequitable because it failed to take into consideration Steven’s gifts to him by

way of farm machinery or its usage and services, or the premarital property

brought into the marriage.       In addition both parties mentioned the tax

consequences, or lack of tax consequences, to Jeremy created by the property

division.
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   II. Standard of Review

       Dissolution matters are reviewed de novo. In re Marriage of Sullins, 715

N.W.2d 242, 247 (Iowa 2006). Precedent is of little value as each case depends

on its particular facts.   In re Marriage of White, 537 N.W.2d 744, 746 (Iowa

1995). The trial court’s ruling will be modified only when it fails to do equity. In re

Marriage of Schriner, 695 N.W.2d 493, 496 (Iowa 2005).

   III. Discussion

       The final valuations arrived at by the trial court were set out in the decree

and the two subsequent amendments. Apparently the parties had agreed to

freeze their financial status as of December 31, 2012, but the agreement was not

made in writing. Jeremy continued to operate the farm on an ongoing basis after

December 31, 2012, until the date of trial. The court noted it attempted to give

effect to the agreement where possible even though the valuations in

dissolutions are to be made as of the date of the trial.             Nevertheless, the

agreement created significant confusion. Fortunately for this court, neither party

has objected to the property values arrived at by the trial court.

       The objective in a division of property between spouses is to divide the

property equitably based on the factors set out in Iowa Code section 598.21(5)

(2011), but an equitable division is not necessarily an equal division.          In re

Marriage of Hanson, 733 N.W.2d 683, 702 (Iowa 2007). The factors relevant to

this case are: (a) the length of the marriage; (b) the property brought into the

marriage; (c) the contribution of each party to the marriage, giving appropriate

economic value to each party’s contribution and homemaking; (f) the earning

capacity of each party; (i) other economic circumstances of each party; and
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(j) the tax consequences to each party.            See Iowa Code § 598.21(5).

Furthermore,

              Property inherited by either party or gifts received by either
       party prior or during the course of the marriage is the property of
       that party and is not subject to a property division under this section
       except upon a finding that refusal to divide the property is
       inequitable to the other party.

Id. § 598.21(6).

       The trial court set off $27,508.36 Jeremy received as a gift from his

grandmother that had been used to purchase forty percent of Steven’s cattle

herd. This amount was subtracted from Jeremy’s interest in the cattle in the trial

court’s calculation of the marital assets of the party. Also not included as a

marital asset was the $16,000 Jeremy received as a result of the personal injury

award. There is no dispute as to these exclusions from the marital property.

       Jeremy maintains he was subsidized by his father by use of his father’s

machinery and services in his farming operation. There was never a written

agreement between Jeremy and his father, nor was there any testimony that an

oral agreement existed. There was no evidence they charged each other, kept a

record of the exchanges, or intended to do so until the dissolution was filed. The

trial court stated in its original decree, “It is not reasonable or equitable that the

value of the marital assets should be reduced on Jeremy’s retroactive calculation

of the value of labor and equipment shared over the years with his father.”

       Even though in dissolution matters issues raised on appeal are

determined anew, weight is given to the trial court’s findings. In re Marriage of

Witten, 672 N.W.2d 768, 773 (Iowa 2003). Similar post-dissolution calculations

of gifts of work or equipment in joint farming operations have been denied by the
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courts. See In re Marriage of McDermott, 827 N.W.2d 671, 679-80 (Iowa 2013);

In re Marriage of Miller, 552 N.W.2d 460, 463 (Iowa Ct. App. 1996).            The

relationship between Jeremy and Steven was likely mutually beneficial to both

parties. The trial court was not convinced of the credibility of Jeremy’s after-the-

fact computation without any basis of a prior agreement or paperwork. There

may have been some gifting, but Angela also may have been intended to be a

joint beneficiary even though Steven denied any intent of making a gift to Angela.

A parent’s assistance to help a child establish a farming operation or any other

business is a long-held tradition and should be encouraged rather than

discouraged.    Nevertheless, in this particular case because of the lack of

documentation contemporary with the gift, it is difficult to quantify the claimed

gifting with any specific value.

       Jeremy contends the property division was inequitable because the

premarital property was not considered, and we agree. As of January 1, 2007,

Jeremy filed a financial statement showing a net worth of $187,120. As of the

date of the marriage Angela testified she had a net worth of $68,000. A financial

statement filed with their lender January 7, 2008, showed a net worth of

$533,948. Jeremy attempts to show his net worth as of the date of marriage by

averaging his financial statement of January 7, 2008, with his January 1, 2007

financial statement and thereby establishing a net worth of $364,534. It can be

acknowledged that Jeremy’s net worth could have been appreciably higher on

July 28, 2007, the date of the marriage, than it was on January 1, 2007, but how

to calculate that increase reasonably is problematic. Angela correctly contends

that the increase in net worth from January 1, 2007, to January 7, 2008, was in
                                        8


part the result of her efforts and contributions after the marriage. Her argument

has merit. Nevertheless, the jump in the net worth by January of 2008 indicates

there was some increase in Jeremy’s net worth between January 2007 and the

date of the marriage.

      The tax consequence of the decree as it exists was not specifically raised

as creating an inequity in the property division, but both parties discussed it in

their respective briefs, and it was an issue thoroughly discussed and subject to

extensive testimony at the time of trial. It is with good reason that Jeremy wants

the property sold and divided with each party paying the tax due on their part of

the sale. When no sale is anticipated it has been held that the tax consequence

of a sale is not to be considered. McDermott, 827 N.W.2d at 684; In re Marriage

of Friedman, 466 N.W.2d 689, 691 (Iowa 1991).                 These cases are

distinguishable from the situation under consideration. In both of the cited cases

capital assets were involved and the capital gains tax was the primary tax that

would have been assessed.

      The Johnstons’ agricultural assets are primarily machinery and equipment,

§ 1231 property under the internal revenue code, and not capital assets subject

to favorable tax treatment. See 26 U.S.C.A. § 1231. Even when buildings are

involved the parties have taken advantage of the special allowance for

depreciation. In the event of a sale the sale price, to the extent it exceeds the

remaining basis, will need to be recaptured as ordinary income.          There is

testimony from the Johnstons’ tax preparer that the property the Johnstons had

paid $986,025 to purchase had only a $140,000 remaining basis due largely to

accelerated depreciation. There was testimony that the tax on liquidation of the
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depreciated assets was estimated to be $250,000.            Angela indicated the

$250,000 in tax consequences from the sale was excessive but provided no

alternative calculation and pointed out no fallacy in Jeremy’s expert’s calculation

of the tax that would be due. More importantly even if liquidation is avoided,

Jeremy is left with assets with very little basis to depreciate. Whether the assets

are sold or retained, Jeremy will be paying back the depreciation taken either

through a current loss of depreciation if retained or on the recaptured

depreciation if sold.

       We conclude it is appropriate to consider the tax consequences when one

party is awarded a disparate amount of the marital assets that have a reduced

tax basis because the parties have taken excess depreciation even though a sale

may not be anticipated. It is particularly appropriate to do so when the excess

depreciation has augmented the parties’ apparent marital assets.         An exact

determination of how the excess depreciation might financially impact Jeremy in

the future or how much the savings created by the excess depreciation has

increased the parties’ apparent marital assets is not possible. The estimated tax

on the sale gives guidance but is not a tool that can be used with precision. The

lack of a precise measurement does not deter us from considering the tax

consequences of the property division regardless of whether a sale is

anticipated. This is a situation rarely encountered when capital assets such as

land and corporate stock are involved.

       The parties have enjoyed a substantial gain in net worth during the

marriage.   Partially this gain is due to good decision-making, commendable

efforts, and an outstanding agricultural economy, but it is also because of their
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ability to take depreciation, and particularly section 179 and special depreciation,

which allows an owner to deduct up to one hundred percent of the cost of an

asset in the year of purchase. 26 U.S.C.A. § 179. The parties’ depreciation

schedule attached to their 2011 tax return, the last joint return the parties filed,

reveals they had taken approximately $490,000 of section 179 depreciation and

over $87,000 of special depreciation prior to December 31, 2011, most of which

took place during the marriage. Even though Angela was making from $40,000

to $60,000 each year, refunds of over $14,000 were received by the parties

during the marriage. The excess depreciation has substantially increased the net

worth of the parties by deferring their income tax and diminishing Jeremy’s self-

employment tax during the marriage.

       In addition to the excess depreciation, tax consequences also emanate

from the fact that the tax returns of the parties have been filed on a cash basis.

The assets awarded to Jeremy included over $150,000 in prepaid seed and

fertilizer. The prepayment substantially decreased the tax payable during the

year the prepaid expenses were made and increased the apparent marital assets

of the parties. The prepayment of those expenses means Jeremy could not

deduct them in the following year when the production and the income from the

expenses took place. Once again taxable income has been deferred. To divide

the equity in the parties’ assets equally and shift all the deferred tax to Jeremy is

not an equitable result.

       The contention that Jeremy can continue to defer the tax as he has done

in the past is unrealistic. During the period of marriage a taxpayer had the option

to take section 179 depreciation for the full cost of the equipment up to $250,000
                                         11


to $500,000 in the year of purchase. For that to continue is highly unlikely,

looking at the provisions of the statute. See 26 U.S.C.A. § 179.

       Furthermore, the Johnstons have been able to acquire the machinery and

equipment and prepay expenses to take advantage of deductions by expanding

and using borrowed money. There are limitations on Jeremy’s future ability to

expand by using borrowed money. Any lender will necessarily have to consider

the property settlement obligations and potential depreciation recapture in the

event of a forced liquidation with the knowledge that farm income and the value

of agricultural assets vary substantially from year to year. The trial court was

justifiably concerned about the parties not recovering full value if it were to order

a liquidation sale as a part of the dissolution. In the same manner a banker must

measure the discount in the event of a repossession sale.

       Finally, the property settlement may require liquidation if Jeremy is unable

to borrow funds to continue the operation and pay the property settlement

ordered. Two banks had refused to finance him as of the date of a posttrial

hearing on October 2, 2013. The denials were exhibits made of record. There is

an undercurrent in the record that Jeremy’s father would bail him out, but that

should not be involved in our determination of the marital property division.

Potential family assistance is not one of the factors listed under Iowa Code

section 598.21(5) to be considered in property divisions.

       Our supreme court has recognized a public policy in favor of preserving

family farms and providing awards and payment schedules in order that the farm

operation may remain viable. In re Marriage of Callenius, 309 N.W.2d 510, 515

(Iowa 1981). Jeremy is receiving a substantial cash award but the 2012 tax
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return reveals it is was not even equivalent to his 2012 cash rent. Each payment

made by Jeremy to Angela will require income sufficient to make the payment

due as well as income to pay the tax on the funds generated to make the

payment. Because of the reduced basis in the property he has been awarded

and the resulting depreciation base there will be very little if any excess cash flow

available. The six years of this marriage have included the most profitable years

for Iowa grain production in recent history. There is little reason to expect that

level of income to continue. There is a very real possibility that Jeremy will need

to borrow or sell assets to make equalizing payments to Angela, which further

justifies consideration of the tax consequences. See In re Marriage of Hogeland,

448 N.W.2d 678, 680-81 (Iowa Ct. App. 1989).

   IV. Conclusion

       We have concluded it is more equitable to award each party the value of

their premarital property. An equitable division does not necessarily mean an

equal division. In re Marriage of Webb, 426 N.W.2d 402, 405 (Iowa 1988). We

approve the property and debt division made by the trial court but reduce the

cash settlement due from Jeremy to Angela to $260,000. We have subtracted

Jeremy’s premarital property of $187,420 and Angela’s premarital property of

$68,000 from the total equity of $1,022,598, leaving marital assets available for

division of $767,178.    If a sale were to be conducted and $250,000 of tax

became due the marital assets would be reduced to $517,178. We believe the

adjustment appropriately takes into consideration the disparity of what each

brought into the marriage and the tax consequences of the deferred income tax.

The $260,000 equalization payment shall bear interest per the original decree at
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the rate of 2.12% per annum beginning as of August 19, 2013.              An initial

payment shall be made January 10, 2015, of $80,000, followed by annual

payments in increments of $40,000 per annum beginning on the tenth day of

January 2016, and continuing on the tenth day of January of each succeeding

year until the principal balance and the accrued interest have been paid in full.

       We deny Angela’s request for appellate attorney fees. Costs on appeal

are assessed one-half to each party.

       AFFIRMED AS MODIFIED.
