Opinion ID: 1876184
Heading Depth: 1
Heading Rank: 3

Heading: Net-Worth Approach

Text: Randy first argues that the circuit court erred in disregarding his tax returns and applying the IRS Code standards and procedures in determining his disposable income for child support. Administrative Order No. 10 sets forth the guidelines for determining child support. At issue in this case is Section III(c) of Administrative Order No. 10, which provides in relevant part: For self-employed payors, support shall be calculated based on the last two years' federal and state income tax returns and the quarterly estimates for the current year. A self-employed payor's income should include contributions made to retirement plans, alimony paid, and self-employed health insurance paid; this figure appears on line 22 of the current federal income tax form. Depreciation should be allowed as a deduction only to the extent that it reflects actual decrease in value of an asset. Also, the court shall consider the amount the payor is capable of earning or a net worth approach based on property, life-style, etc. (Emphasis added.) Randy argues that, because his tax returns were available, the circuit court clearly erred in relying on net-worth figures alone. The letter opinion reflects that the circuit court began its analysis by considering Randy's tax returns. The circuit court found: Defendant's 2003 tax return indicates a loss of $11,423 on the first page line # 34. However, Schedule A of said return reflects expenditures of $34,275 as itemized deductions. Mr. Rick Taylor, testifying on behalf of the Defendant, stated that based on the 2003 tax return the Defendant receives from his construction business a net weekly income of $509.46. Defendant testified that he contributes $400 per week to his church. [OCSE] asserts that, in addition to this inconsistency which demonstrates Defendant's true income cannot be evaluated by reference to his tax returns, there is commingling of income/expense information between his personal and business standing. Indicative of [OCSE's] position is the Defendant's use of the 2003 Chevrolet pickup. In Defendant's answer to Interrogatory # 4 the Defendant stated that of the vehicles owned, only the 2004 Jeep is driven by his wife, and he instead drives the 2003 Chevrolet pickup for both business and personal use. However, the 2003 tax return at page 20 of the Exhibit the Defendant claims the 2003 Chevrolet is used 100% of the time for business purpose[s]. Taking the income tax records for the past two years and their comparison with the testimony of the Defendant, this Court finds that the inconsistencies render the tax records unreliable for the purpose of determining the Defendant's child support obligation, and therefore, this Court determines that deviation from Administrative Order No. 10 with regard to calculation of support being based on the last two years' federal and state income tax returns is necessary, and support shall be determined utilizing the net worth approach based on property, life-style, etc. as said phrase is found in Administrative Order No. 10. It should also be noted that the Defendant's testimony with regard to his attempts to convince the Court of his dire financial situation, inability to afford additional child support, and attempt to explain the inconsistencies in his tax returns, that his testimony and demeanor on the stand was unconvincing and the Court found his statements in that regard less than credible. Randy suggests in his brief on appeal that the circuit court wholly disregarded his tax returns. That is not the case. Rather, the circuit court first considered Randy's tax returns, and it was only after finding the tax returns unreliable that the circuit court proceeded to the net-worth approach, as allowed by Administrative Order No. 10. Further, to the extent that Randy is suggesting that the mere availability of the tax returns should require only their use in determining child support, we disagree. Available tax returns are of no use if they are unreliable. Here, after reviewing tax returns and hearing witness testimony, the circuit court found the returns to be unreliable. Inconsistencies arising from a comparison of tax returns and witness testimony are matters for the circuit court to resolve. It is well settled that we give due deference to the circuit court's superior position to determine the credibility of the witnesses and the weight to be given to their testimony. See, e.g., Akins v. Mofield, 355 Ark. 215, 132 S.W.3d 760 (2003). We cannot say that the circuit court's finding that the tax records were unreliable is clearly erroneous. Randy next argues that, because the Holland Court recognized that the net-worth method was fraught with dangers, that method should not be used in calculating income for child-support purposes. We disagree. The Holland case involved an appeal of a tax-evasion conviction. In discussing the net-worth approach in criminal cases, the Supreme Court stated: One basic assumption in establishing guilt by this method is that most assets derive from a taxable source, and that when this is not true the taxpayer is in a position to explain the discrepancy. The application of such an assumption raises serious legal problems in the administration of the criminal law. Unlike civil actions for the recovery of deficiencies, where the determinations of the Commissioner have prima facie validity, the prosecution must always prove the criminal charge beyond a reasonable doubt. This has led many of our courts to be disturbed by the use of the net worth method, particularly in its scope and the latitude which it allows prosecutors. Holland, 348 U.S. at 126, 75 S.Ct. 127. Thus, the Holland Court warned of problems that might arise in criminal cases; the Court did not indicate any inherent flaws in the net-worth approach itself. In his second point on appeal, Randy contends that, if the net-worth method is used in determining child support, this court should clarify or modify the method used by the circuit court because it did not present the entire picture and because the standards and procedures it used produced erroneous and unreliable results. As set forth in Holland , the net-worth method involves establishing a beginning net worth at the start of the relevant period and an ending net worth at the end of the period and considers living expenses and allowed deductions for the same period. Id. at 125, 75 S.Ct. 127. Randy fails to explain why the same method cannot be used to establish the expendable income of a child-support payor and, further, he fails to point to any specific errors in the use of that method. Still, Randy contends that, in determining the amount of child support, the circuit court failed to take into account certain items such as depreciation and the fact that he is living on borrowed money. However, these items are considered in the net-worth approach. Any depreciation to vehicles or equipment is taken into account over time as the value of the assets declines. In addition, the use of loans and other forms of credit is also considered in a net-worth approach because the amount of loan indebtedness, along with all other liabilities, is deducted from the value of Randy's assets in arriving at his net worth. In this case, we cannot say that the circuit court's use of the net-worth approach in determining Randy's disposable income is clearly erroneous.