Opinion ID: 1788790
Heading Depth: 1
Heading Rank: 12

Heading: Paul's Income

Text: On appeal, Kimberley contends that the court should have added the depreciation expenses taken by P.G. Farms to Paul's income. Paul, on the other hand, argues that P.G. Farms is a separate corporate entity and that, therefore, neither P.G. Farms' income nor its depreciation expenses are relevant to his income for child support purposes. The paramount concern and question in determining child support, whether in the initial marital dissolution action or in the proceedings for modification of decree, is the best interests of the child. Claborn v. Claborn, 267 Neb. 201, 673 N.W.2d 533 (2004). The main principle behind the Nebraska Child Support Guidelines is to recognize the equal duty of both parents to contribute to the support of their children in proportion to their respective incomes. Noonan v. Noonan, 261 Neb. 552, 624 N.W.2d 314 (2001). In general, child support payments should be set according to the Nebraska Child Support Guidelines, which compute the presumptive share of each parent's child support obligation. Claborn, supra . The Nebraska Child Support Guidelines provide that in calculating the amount of support to be paid, a court must consider the total monthly income, defined as the income of both parties derived from all sources, except all means-tested public assistance benefits and payments received for children of prior marriages. Marcovitz v. Rogers, 267 Neb. 456, 675 N.W.2d 132 (2004); Nebraska Child Support Guidelines, paragraph D. In the past, we have not set forth a rigid definition of what constitutes income, but have instead relied on a flexible, fact-specific inquiry that recognizes the wide variety of circumstances that may be present in child support cases. Workman v. Workman, 262 Neb. 373, 632 N.W.2d 286 (2001). Thus, income for the purpose of child support is not necessarily synonymous with taxable income. Gase v. Gase, 266 Neb. 975, 671 N.W.2d 223 (2003); Rhoades v. Rhoades, 258 Neb. 721, 605 N.W.2d 454 (2000); Rauch v. Rauch, 256 Neb. 257, 590 N.W.2d 170 (1999). We take a flexible approach in determining a person's income for purposes of child support, because child support proceedings are, despite the child support guidelines, equitable in nature. Thus, a court is allowed, for example, to add in-kind benefits derived from an employer or third party to a party's income. See, Workman, supra ; State on behalf of Hopkins v. Batt, 253 Neb. 852, 573 N.W.2d 425 (1998); Baratta v. Baratta, 245 Neb. 103, 511 N.W.2d 104 (1994). Likewise, we believe that a party's income, for purposes of determining child support, does not necessarily stop at the corporate structure of a closely held corporation. Although, ordinarily, a corporation is regarded as a separate entity, distinct from the members who compose it, equity allows a court to disregard the corporate veil when necessary to do justice. See Medlock v. Medlock, 263 Neb. 666, 642 N.W.2d 113 (2002). As noted previously, justice, in child support determinations, is the best interests of the child. Claborn, supra . Thus, we determine that under the appropriate factual circumstances, equity may require a trial court to calculate a party's income by looking through the legal structure of a closely held corporation of which the party is a shareholder. Stated otherwise, equity may demand that a court consider as income the earnings of a closely held corporation of which a party is a shareholder. The real question, however, is deciding what type of factual scenario justifies casting aside the corporate identity to place corporate income on the shareholder's side of the ledger. While the following is by no means meant to be exclusive, the facts of the instant case provide such an example: The record establishes that throughout its existence, P.G. Farms has been used to pay for many of the parties' living expenses. For example, not only does P.G. Farms own the home in which the parties lived, it also paid for many of the costs of home ownership, including utilities, real estate taxes, homeowners insurance, yard care, and pool maintenance. In addition, P.G. Farms purchased the family's groceries and a number of the household furnishings, including a theater system, a washer and dryer, and bar stools. As Paul testified, my salary from P.G. Farms is $6,000 a year. But there's other benefits from the company that we have had since the company was established that I would call a benefit in lieu of salary. As mentioned previously, Kimberley and Paul were the sole and equal owners of P.G. Farms. In its decree, the trial court awarded Kimberley half of the value of P.G. Farms' assets. However, the court awarded Paul all of the shares of P.G. Farms' stock, thereby making him the sole owner of P.G. Farms. Thus, where P.G. Farms was once used to supplement the parties' income by paying for a number of the family's living expenses, P.G. Farms' considerable revenue stream will now inure solely to the benefit of Paul. In addition, the evidence reveals that throughout the parties' marriage, Paul was in sole control of the parties', as well as P.G. Farms', financial decisions. Therefore, the decision to treat P.G. Farms as the family's corporate piggy bank was Paul's. Likewise, the decision to pay Paul a salary of $6,000, while building value in the corporation, was Paul's. We note these facts not to question Paul's business decisions, but to show that Paul had, and continues to have, the ability to earn considerably more income than the $6,000 he receives from P.G. Farms. Moreover, the amount of salary and/or benefits in lieu of salary that Paul receives from P.G. Farms is, and will remain, Paul's decision. In cases such as these, a trial court should not only add in-kind benefits derived from an employer to a party's income, see Workman v. Workman, 262 Neb. 373, 632 N.W.2d 286 (2001), but should also take into consideration the party's actual earning capacity. Nebraska Child Support Guidelines, paragraph D. See, also, Noonan v. Noonan, 261 Neb. 552, 624 N.W.2d 314 (2001) (noting importance of determining party's actual earning capacity in child support cases); Knippelmier v. Knippelmier, 238 Neb. 428, 470 N.W.2d 798 (1991) (same). The need to examine a party's earning capacity is especially true when it appears that the parent is capable of earning more income than is presently being earned. Rauch v. Rauch, 256 Neb. 257, 264, 590 N.W.2d 170, 175 (1999). Moreover, while we do not doubt that building equity in a corporation in lieu of taking salary can be a wise business decision, the support of one's children is a fundamental obligation which takes precedence over almost everything else. Id. at 263-64, 590 N.W.2d at 175. Here, it would simply be inequitable for Paul's children to suffer because of his decision to build value in P.G. Farms by depressing his salary. See id. See, also, Gase v. Gase, 266 Neb. 975, 671 N.W.2d 223 (2003); Gammel v. Gammel, 259 Neb. 738, 612 N.W.2d 207 (2000); Sabatka v. Sabatka, 245 Neb. 109, 511 N.W.2d 107 (1994). We note that our resolution of this matter is not unique. A number of courts have determined that perquisites supplied by a business to an employee, or a closely held corporation to a shareholder, should be considered as income for purposes of determining child support. See, Mascaro v. Mascaro, 569 Pa. 255, 803 A.2d 1186 (2002); Clark v. Clark, 172 Vt. 351, 779 A.2d 42 (2001); Heisey v. Heisey, 430 Pa.Super. 16, 633 A.2d 211 (1993); Com. ex rel. Gutzeit v. Gutzeit, 200 Pa.Super. 401, 189 A.2d 324 (1963). In addition, when a sole or majority shareholder uses the closely held corporation to pay for numerous personal expenses, courts have been willing to pierce the corporate veil and treat the corporation's income as the shareholder's own. See, Morgan v. Ackerman, 964 S.W.2d 865 (Mo.App.1998); Palazzo v. Palazzo, 9 Conn.App. 486, 519 A.2d 1230 (1987); Hurd v. Hurd, 397 So.2d 133 (Ala.Civ.App.1980). Similarly, when a party is the sole or majority shareholder of a closely held corporation and determines his or her own salary, courts have been willing to pierce the corporate veil for the purpose of determining the party's income for child support. See, Bleth v. Bleth, 607 N.W.2d 577 (N.D.2000); Ochs v. Nelson, 538 N.W.2d 527 (S.D.1995); Mitts v. Mitts, 39 S.W.3d 142 (Tenn.App.2001); Morgan, supra ; Isanti County v. Formhals, 358 N.W.2d 703 (Minn.App.1984); Com. ex rel. Maier v. Maier, 274 Pa.Super. 580, 418 A.2d 558 (1980). Simply put, courts throughout the nation have been unwavering in their attempt to reach an equitable outcome when it comes to determining a party's income for child support. In sum, the court was within its discretion to look to P.G. Farms to determine Paul's income for child support purposes. However, we remain unable to determine how the trial court arrived at $10,208 as Paul's net monthly income. In any event, such a determination is a factual matter best left to the discretion of the trial court, and because we remand for a new determination of Paul's income, we need not dwell on this issue any further. During the hearing on Kimberley's motion for a new trial, the trial court made it clear that it did not include P.G. Farms' depreciation expenses when determining Paul's monthly income. The record shows that in 1999, P.G. Farms had a gross income of over $1.08 million and took a $189,700 writeoff for depreciation. Among other deductions, P.G. Farms' depreciation writeoff left it with a taxable income of $48,589. As noted above, Kimberley contends that the court should have included P.G. Farm's depreciation expenses when determining Paul's income. Paragraph D of the Nebraska Child Support Guidelines, which discusses the proper treatment of depreciation expenses, was amended effective September 1, 2002. However, we must turn to the provision in effect at the time the dissolution action was filed. That provision states, If a party is self-employed, depreciation claimed on tax returns should be added back to income or loss from the business or farm to arrive at an annualized total monthly income. Nebraska Child Support Guidelines, paragraph D. Thus, under usual circumstances, before we could add claimed depreciation to Paul's income, we would need to determine if Paul should have been considered as self-employed. See, Gase v. Gase, 266 Neb. 975, 671 N.W.2d 223 (2003); Gammel v. Gammel, 259 Neb. 738, 612 N.W.2d 207 (2000). These, however, are not the usual circumstances. In the instant case, equity compels us to disregard the corporate entity, of which Paul is the sole shareholder, to determine Paul's true income. Thus, the measure of Paul's income is driven, in large part, by the profitability of his closely held corporation, P.G. Farms. Therefore, it is imperative that the court determine P.G. Farms' true income. To that end, corporate income, much like individual income, at least for the purposes of child support, is not necessarily synonymous with taxable income. Under these circumstances, we determine that depreciation expenses must be considered in determining P.G. Farms' income. Otherwise, Paul would be allowed to benefit from his choice to build equity in P.G. Farms by taking depreciation and lowering profits. See, Gase, supra ; Gammel, supra . Obviously, such a situation would work against the best interests of Paul's children because Paul would have a tax incentive to keep P.G. Farms' income as low as possible. Thus, the depreciation reported on P.G. Farms' tax returns must be added back to its income. See Gammel, supra (noting that for child support purposes, Nebraska Child Support Guidelines treat depreciation as book figure which does not involve any cash outlay nor reduce actual dollar income and, therefore, should not be allowed as deduction). In sum, we determine that the court did not abuse its discretion by looking to P.G. Farms to determine Paul's income. However, we conclude that the court abused its discretion by failing to add P.G. Farms' depreciation expenses to P.G. Farms' income before looking to P.G. Farms' income to determine Paul's income. Therefore, we reverse, and remand for a new determination of Paul's income. On remand, when determining Paul's income, the trial court should consider, in addition to looking to Paul's reported income, (1) the in-kind benefits, e.g., perquisites, that Paul receives from P.G. Farms; (2) P.G. Farms' depreciation expenses; and (3) with due regard for business realities, the amount of P.G. Farms' income which should equitably be attributed to Paul.