Opinion ID: 2543667
Heading Depth: 1
Heading Rank: 7

Heading: Policy ArgumentEarnings as a Shield

Text: Courts have been reluctant, for policy reasons, to allow a blanket rule that retained earnings of a Subchapter S corporation are not income to be considered when calculating support. Allowing support to be calculated in this way would encourage shareholders to retain earnings in favor of their own long-term financial interests without regard for the need for support. See, e.g., Anderson v. Anderson, 60 Ark. App. 221, 230, 963 S.W.2d 604 (1998). The Arkansas appellate courts have directed that even where the child support calculation chart would allow the taxpayer to deduct from income the amount paid to the shareholder to offset taxation on earnings retained, it is not error for the court ordering support to disallow the deduction when necessary. The chart used to calculate support is merely a rebuttable presumption of the appropriate amount of child support and the presumption can be disregarded where the court makes express findings of fact as to why the presumptive amount is inappropriate. 60 Ark. App. at 233-35. A factual analysis into whether the retained earnings income should be included is almost always appropriate. Even when working with a statutory formula, evidence to be considered when awarding support includes the extent of the shareholder's ownership and whether distributions could have been distributed to the shareholder. Gianniny v. Gianniny, 683 N.Y.S.2d 769, 771, (N.Y. App. 1998). An overview of the entire factual history of retained earnings and distributions is recommended. See Cauble v. Cauble, 133 N.C. App. 390, 396-99, 515 S.E.2d 708 (1999). For many jurisdictions, the absence of evidence that the parent wished to shield income from support obligations is highly persuasive. Fennell, 753 A.2d at 869 (Pa. Super.); Williams, 74 Ohio App.3d at 843. In Williams, an Ohio appellate court was asked to determine the appropriate amount of income available for child support after a father, a 50 percent shareholder in a corporation, voluntarily ceased drawing a salary from the corporation but continued to receive installment payments of principal and interest on loans he had made to the corporation. The income stream from the loans was awarded to the father as part of the property distribution. The father had the ability to be paid a salary at any time; however, doing so would prohibit the corporation from making loan repayments. The Williams case demonstrates the potential for manipulation of reportable income. The Williams court interpreted the state's statute defining income for purposes of child support. The court determined that it was apparent from the statutory definition that income for purposes of the child support computation was sufficiently broad enough to include the retained earnings of the father's corporation. As appellee was the owner of 50 percent of the corporation's stock, the value of his stock increased greatly. Under these circumstances, and in light of the expansive definition of income in the statute, the court concluded it would be grossly inequitable to allow the supporting shareholder parent to sit upon his assets, hide behind the shield of corporate business decisions, and prevent his children from enjoying the standard of living they would have enjoyed had the marriage continued. 74 Ohio App.3d at 843. Under such circumstances, it was unreasonable and an abuse of discretion for the trial court not to consider the retained earnings of the corporation when ruling upon the motion to modify the support order. 74 Ohio App.3d at 842-43. As this Ohio case demonstrates, the potential for abuse is present. However, even where the support statute or rule contains a broad definition which could encompass earnings and distributions, a case-by-case analysis is appropriate. Kansas Guidelines are broadly worded and could be interpreted so that Subchapter S corporate earnings or distributions are included in the definition of domestic gross income. However, in this matter, based on the district court's finding, it would be inappropriate to include the corporate earnings or distributions when setting income for purposes of determining the proper amount of support. As this case demonstrates, no blanket rule would be workable.