Dad’s Increase in Retained Earnings is Income for Child Support

Tennessee law case summary on child support income for business owner father in Tennessee divorce and family law from the Tennessee Court of Appeals.

Sandusky v. Sandusky – Tennessee Child Support – Income Determination for Business Owner Father

Brenda Sandusky brought an action in the Chancery Court for Wayne County alleging her ex-husband, Danny Sandusky, failed to pay the previously ordered amount of child support.  Mr. Sandusky countered with his own petition seeking a reduction in his child support payments.  After several hearings, the trial court:  (i) substantially reduced Mr. Sandusky’s child support obligation; (ii) ordered him to pay the specific college expenses of his daughter; and (iii) ordered payment of child support arrearage at $100 per month.

When the Sanduskys divorced in April of 1988 on the ground of irreconcilable differences, Mr. Sandusky was the sole owner of Sandusky Trucking Company and an independent timber contractor.  At that time, the parties’ two children, a son and a daughter, were minors.  The agreed-upon Marital Dissolution Agreement (“MDA”) specifically addressed child care and support.  The MDA granted Mrs. Sandusky physical custody while Mr. Sandusky agreed to reimburse her for all reasonable expenditures associated with the support and maintenance of the children.  This arrangement gave rise to Mrs. Sandusky’s first contempt petition, which alleged that Mr. Sandusky refused to reimburse her for more than $15,000 in reasonable child care expenses.  Mr. Sandusky filed a counter-complaint seeking modification of his child support obligation. After a hearing, the trial court ordered Mr. Sandusky to reimburse $10,000 of Mrs. Sandusky’s expenditures and set his child support obligation at a definite monthly payment of $2,666. In an earlier proceeding, the court of appeals affirmed the trial court’s decision, including, specifically, the trial court’s attributing to Mr. Sandusky’s income from the trucking company he had transferred to his father without adequate consideration.

Mrs. Sandusky’s second successful petition for contempt for nonpayment of child support in March 1996 resulted an order requiring Mr. Sandusky to pay child support.  After Mr. Sandusky inasmuch stated in open court that he had no intention of complying with the court orders to pay the amounts he owed his ex-wife, the court found him in contempt and ordered him to pay nearly $47,000 in arrearage.  After a 1997 hearing, the trial court determined that Mr. Sandusky still owed almost $24,000 and again ordered him to pay the arrearage immediately.

After their daughter graduated and had reached age 18, instead of paying $1,750, Mr. Sandusky began to pay $688 per month, which he asserted was 21% of his income.  Mrs. Sandusky sought contempt sanctions on the ground that Mr. Sandusky was yet again behind in his child support payments.  Upon the daughter’s enrolling in college, Mrs. Sandusky added a claim that Mr. Sandusky breached the MDA by failing to pay the reasonable expenses associated with the children’s college educations.

From the end of 1997 to the start of 1998, the trial court held hearings on the various outstanding issues, after which it reduced Mr. Sandusky’s child support payment from $1,750 to $865.  The trial court ordered Mr. Sandusky to pay for tuition and books and $600 per month toward his daughter’s college education pursuant to the MDA, and allowed him to pay his $6,372 arrearage in $100 per month payments.  After the trial court denied Mrs. Sandusky’s motion to alter and amend the judgment, she appealed.

The court of appeals first noted that the trial court made no factual findings when disposing of the case, which left nothing for the appellate court to use as a presumption of correctness.

The first issue of appeal was whether the trial court correctly determined the monthly amount of support due after the couple’s daughter reached age 18.  Mr. Sandusky asserted a variance because his income had been reduced since the prior setting of child support.  He testified that his 1996 income, as reflected in his W-2 form was $33,000.  His salary from Sandusky Trucking Company was reduced in 1996.  The transcript of the trial court hearing on this issue, along with the supporting briefs, made it clear that Mr. Sandusky’s argument that he was entitled to a reduction was based solely on his reduced salary.  His salary from the trucking company was $50,000 in 1991, and at the time of entry of the previous order of support, it was $41,600.  At the date of the appeal it was $31,800, and he earned $1,200 per year from another position. As a result, Mr. Sandusky’s earned income decreased only $8,600.

Mr. Sandusky’s child support obligation was set by the court in October 1995, and the trial court specifically stated that the award was calculated as 32% of an income of $100,000—Mr. Sandusky’s assumed net income.  Without determining the specific amount of his income, the trial court included Mr. Sandusky’s admitted income, profits from Sandusky Trucking Company and other income.

In its earlier Sandusky opinion, the court of appeals found that the trucking company had a substantial net worth:  the 1992 tax return showed the stockholder equity to be $545,596.  The company had consistently paid Mr. Sandusky a salary of $40,000 to $50,000 per year prior to 1995.  Since his support obligation was originally set on the basis of his salary and the income from his business available to him, the appellate court reasoned that it was compelled to consider any decrease or offsetting increase in the business income.  The trucking company continued to have a substantial net worth, as its total assets in 1996 were $814,209, with $181,347 in debt.  Further, the retained earnings increased from approximately $450,000 in 1992 to over $600,000 in 1996.  Included in the expenses and deductions were claims for depreciation.  The company claimed $68,947 in 1992-1993, $79,522, in 1993-1994, $105,164 in 1994-1995 and $96,926 in 1995-1996.

Mr. Sandusky testified that his company’s net taxable income and cash on hand had decreased because—on advice from his accountant—he acquired and maintained assets and investment properties (equipment and tracts of timber), in order to avoid or reduce corporate income taxes.  Mr. Sandusky’s accountant testified that this type of reduction of taxable corporate income was normal in the course of business.  The accountant defined retained earnings as a cumulative profit figure that has not been paid out in dividends.  The corporation retained those earnings.  The accountant also stated that Mr. Sandusky could not spend the corporation’s earnings unless the money was first paid to him as salary or dividend, and then it would be taxable to him as personal income.

In this case, the court of appeals said that where a business is solely owned, the company’s accumulation of retained earnings can be considered in determining the income available to the sole shareholder who has set his or her own salary. The financial condition of the trucking company was such that it could pay its sole shareholder a larger salary or issue dividends.  The court of appeals was unconvinced that Mr. Sandusky’s reduced salary from the company he owned demonstrated an actual reduction in income justifying a decrease in his child support obligation, and said that he could not avoid a support obligation by simply arranging a smaller salary while his solely-owned business prospered.  Further, Mr. Sandusky’s business decision to increase his company’s inventory and assets resulted in the lowering of the company’s taxable income.  While he was free to make those decisions as a business owner—that action, the retention of earnings—and the lowering of his salary resulted in understating his personal income.  When that money which would have been available to him as personal income was considered, the court of appeals found no reason to reduce his income.

The appellate court said that it and the trial court had previously determined that the potential income from the trucking company was properly considered in determining Mr. Sandusky’s income for purposes of setting child support.  In light of the financial condition of that company, as compared to its condition when the award was originally set, the court of appeals found no justification for a reduction of Mr. Sandusky’s child support obligation and reversed that decision.  The child support was ordered to remain at the amount set in the April 1997 order:  $1,750 per month.

The court of appeals reversed the trial court’s decision on Mr. Sandusky’s obligations regarding his daughter’s college education, finding that the figures presented by the Vice President of Columbia State Community College were reasonable.  Mr. Sandusky was ordered to pay the daughter’s tuition, including fees, when it was due, and in the amount billed by the college.  In addition, he was ordered to pay $1,153 per month in expenses for two semesters each year for a four year education, as long as the daughter attended college full time.

Sandusky v. Sandusky, 1999 WL 734531 (Tenn. Ct. App. 1999).

Memphis divorce attorney, Miles Mason, Sr., JD, CPA, practices family law exclusively with the Miles Mason Family Law Group, PLC. To learn more about Tennessee child support laws and guidelines, read and view:

A Memphis child support attorney from the Miles Mason Family Law Group can help you with Tennessee child support issues including setting or modifying child support. See our Consultation and Fees page and call 901-683-1850.

Topics

Copyright © 2024 Miles Mason Family Law Group, PLC   - Disclaimer