VOIGT, Justice.
[¶ 1] Donna Ray Teeples, the appellant, was to receive a cash payment from her exhusband, Neal J. Teeples, the appellee, as a result of the division of their marital assets pursuant to a divorce. The appellant claims that the payment, made with the funds of an S corporation owned jointly prior to the divorce, impermissibly increased her tax liability and was made with funds that were rightfully owed to her as a prior shareholder in the company. We affirm the district court's decision to the contrary.
[¶ 2] Did the payment received by the appellant satisfy the terms of the Property Settlement Agreement pursuant to the parties' divorce?
[¶ 3] The appellant married the appellee in 1979. The appellant filed for divorce on November 26, 2007. After mediation, the parties signed a Property Settlement Agreement on October 2, 2008. Prior to the division of assets, the parties owned five companies jointly. Pursuant to the agreement, the appellant received Great Basin Industries and the appellee received Industrial Services, Inc. (ISI), Power Source Services, Inc., Sweetwater Holding, and RTR, Inc. Because the value of the property received by the appellee exceeded that received by the appellant, the agreement required the appellee to make a cash payment of $1,100,000 to the appellant on October 3, 2008, and three additional annual payments of $800,000 on the anniversary of the first payment, for a total of $3,500,000. The agreement also provided that "[e]ach party shall be responsible for and each party shall pay the tax due on their separate income tax returns for 2008 and all subsequent years."
[¶ 5] In early 2009, the appellant received a Schedule K-1
[¶ 6] In 2008, ISI switched from the cash method of accounting to the accrual method. The appellee's accountant testified that he told the parties that this change was necessary to stay in line with IRS accounting requirements. This change resulted in an increase of income to the company, and, thereby, to its shareholders for tax year 2008.
[¶ 7] The appellant filed in the divorce action a Second Amended Petition for Order to Show Cause alleging as follows:
The appellant's Memorandum in Support of Second Amended Petition for Order to Show Cause contends that "Mrs. Teeples should have received the $1.1M cash payment from Mr. Teeples outright, free and clear of any tax liability."
The appellant now appeals that decision.
[¶ 9] Although both parties suggest, correctly, that decisions in domestic relations contempt cases are afforded an abuse of discretion standard, we find that the pertinent issue in this case is whether as a matter of law the payment received by the appellant satisfied the terms of the Property Settlement Agreement. Questions of law are reviewed de novo. KM Upstream, LLC v. Elkhorn Constr., Inc., 2012 WY 79, ¶ 44, 278 P.3d 711, 727 (Wyo.2012).
[¶ 10] On appeal, the appellant attempts to differentiate between a "distribution of shareholder income" and a "property settlement payment." The significance of this distinction, according to the appellant, is that the former is subject to taxation, whereas the latter is received tax free. Because the $1,100,000 was drawn from her ISI capital account, the appellant argues that the payment was "nothing more than a partial payment of the income attributable to her for the year 2008" and therefore cannot be a property settlement payment.
[¶ 11] The appellant's argument represents a misperception of the taxation of S corporations. Shareholders in S corporations are taxed based on their pro rata share of the corporation's income. 26 U.S.C.A. § 1366(a)(1) (West 2011). If a corporation makes a distribution of property to a shareholder with respect to that shareholder's stock, the portion of the distribution which is a dividend must be included in the shareholder's income as well. 26 U.S.C.A. § 301(c)(1) (West 2011). The appellant suggests that the $1,100,000 she received was a taxable dividend which led to over $600,000 in income tax liability. The payment received, however, did not constitute a dividend and did not result in additional tax liability to the appellant.
[¶ 12] When the appellant requested and received the advance on the money owed to her, the Property Settlement Agreement itself had not yet been signed by the parties. However, the terms of that agreement, including the division of ownership of the five S corporations and the payment of $3,500,000, had been included in a signed document as of September 17, 2008, which document was to be incorporated into the Property Settlement Agreement. At that point, both parties began treating the assets to be divided, namely ISI and the other S corporations, as their own. On September 23, 2008, the appellant signed a contract as the president of Great Basin Enterprises to buy real estate to conduct the operations of that company.
[¶ 13] Although the parties began treating the companies as their own from the date that the terms of the division of assets were agreed upon, for tax and accounting purposes the assets were not considered divided until the parties signed the Property Settlement Agreement. The default rule to determine a shareholder's ownership percentage requires that the S corporation's income for the taxable year be divided evenly among all days in that year and then apportioned to the shareholders based on their ownership on a given day.
[¶ 14] The appellant does not suggest that the K-1s are incorrect. What the appellant does suggest is that the two payments of $300,000 and $800,000 constituted a dividend and increased impermissibly her income tax liability. This contention is not borne out by the appellant's Schedule K-1. The amount of money or other property distributed to a shareholder in an S corporation will first reduce the shareholder's basis in his stock. 26 U.S.C.A. § 1368(b)(1), (c)(1) (West 2011). If any portion of the distribution remains after reducing the basis to zero, that portion shall be treated as a dividend to the shareholder to the extent that it does not exceed the S corporation's accumulated earnings and profits. 26 U.S.C.A. § 1368(c)(2) (West 2011). Any remaining portion of the distribution will constitute ordinary income to the shareholder. 26 U.S.C.A. § 1368(b)(2), (c)(3) (West 2011). The appellant acknowledges that she received $1,183,221 in cash and property distributions from ISI during 2008. Her Schedule K-1 shows that this entire amount of the payment reduced her basis in ISI. This means that the distribution did not exceed her basis and, therefore, did not constitute a taxable dividend.
[¶ 15] The appellant also argues that because the $1,100,000 was drawn on her capital account in ISI, the payment represented the income attributable to her for 2008 and therefore cannot be a property settlement payment. Although it is not clear, the appellant seems to be suggesting that she is owed the value of her capital account in addition to any payments pursuant to the divorce. A capital account does not, however, serve as a bank account from which a shareholder can withdraw money. Its purpose is to keep track of a shareholder's investment in the company and his basis in his stock. "A subchapter S corporation monitors its retained corporate earnings using an account which is then used to determine each shareholder's basis for taxed but undistributed corporate income." In re Marriage of Joynt, 375 Ill.App.3d 817, 314 Ill.Dec. 551, 874 N.E.2d 916, 919 (2007). Like any other corporation, an S corporation may choose to retain net profits for operating expenses. For that reason, shareholders in S corporations may be taxed on income they never actually receive. In re Marriage of Matthews, 40 Kan.App.2d 422, 193 P.3d 466, 469 (2008). When the assets previously owned jointly by the parties were divided, neither had any continuing rights to the assets received by the other party. "[R]etained earnings and profits of a subchapter S corporation are a corporate asset and remain the corporation's property until severed from the
[¶ 16] Like many taxpayers, the appellant may have been caught off guard by an unexpectedly high tax liability. There is, however, no indication that this was the result of double dealing by her ex-husband.
[¶ 17] The appellant received a payment from the appellee pursuant to their Property Settlement Agreement following their divorce. The appellee paid the appellant with funds from an S corporation he received in the divorce. The appellant contends that because she had previously been a shareholder in this S corporation, the payment constituted a dividend and impermissibly increased her income tax liability. We disagree. The appellant was taxed properly on income earned by the S corporation due to her previous stake in the company. The distribution did not increase her tax liability. Therefore we affirm.