Court Opinion

ID: 2745434
Source: CourtListenerOpinion
Date Created: 2014-10-24 16:05:33.634485+00
Date Added: 2024-06-11T09:54:13.200591
License: Public Domain

STATE OF MICHIGAN

                            COURT OF APPEALS

ROBERT A. DIEZ,                                                      FOR PUBLICATION
                                                                     October 23, 2014
               Plaintiff/Counter-Defendant-                          9:05 a.m.
               Appellant,

v                                                                    No. 318910
                                                                     Macomb Circuit Court
                                                                     Family Division
MARIE-JESUSA CLOMA DAVEY,                                            LC No. 2010-002362-DC

               Defendant/Counter-Plaintiff-
               Appellee.

Before: HOEKSTRA, P.J., and WILDER and FORT HOOD, JJ.

HOEKSTRA, P. J.

       In this child custody dispute, plaintiff/counter-defendant, Robert A. Diez (“plaintiff”),
appeals as of right the trial court order resolving issues involving child custody and parenting
time, child support, and attorney fees. Because the trial court’s award of custody and parenting
time was not an abuse of discretion and the trial court did not abuse its discretion in awarding
attorney fees to defendant/cross-plaintiff, Maria-Jesusa Cloma Davey (“defendant”), we affirm
those portions of the trial court’s judgment. However, for the reasons explained below, we
vacate the trial court’s award of child support and remand for reconsideration of plaintiff’s
income under the Michigan Child Support Formula (MCSF).

                                       I. BACKGROUND

       Plaintiff is the president and sole shareholder of Supreme Gear Company (“SGC”), a
small business manufacturer of precision gears used in the aerospace industry. SGC is organized
as a corporation and it has elected to be an S Corporation for tax purposes under 26 USC
§ 1362(a)(1). The parties in this case met in 1994 and became romantically involved. They
never married, but, over the course of a 16 year relationship, they had three children together.

         After their relationship ended, plaintiff filed the present lawsuit in April 2010, seeking
sole legal and physical custody of the three minor children. Following more than three years of
litigation, on July 2, 2013, the trial court issued an opinion and order addressing the issues of (1)
custody and parenting time, (2) child support, and (3) defendant’s request for attorney fees.
First, regarding custody and parenting time, the trial court awarded the parties joint legal and
joint physical custody. The parenting time schedule provided defendant with approximately 122
                                                -1-
overnights per year, consisting of alternate weekends from Friday to Monday morning, alternate
weeks in the summer, parenting time during spring break, and holiday parenting time pursuant to
the 16th Circuit Judicial Reasonable Parenting Time Schedule.

        On the issue of child support, the trial court credited the testimony of an expert, CPA
Justin Cherfoli, who opined that plaintiff had an average income of $723,000 over the course of
three years, from 2009 through 2011. Included within this calculation of income were plaintiff’s
wages, distributions from SGC, “perks” such as car expenses paid by SGC, and a portion of
“excess working capital” retained in SCG, meaning those amounts that, in Cherfoli’s judgment,
plaintiff could withdraw from the S-Corporation while maintaining a viable business. Based on
this, and accounting for defendant’s income and plaintiff’s award of 122 overnights, the trial
court set plaintiff’s monthly child support at $7,062.

       Lastly, in regard to attorney fees, the trial court found that defendant was unable to bear
her legal expenses, and that plaintiff should pay all defendant’s attorney fees. After defendant
submitted a bill of costs, the trial court awarded defendant $118,000 in attorney fees. In October
2013, a judgment reflecting the trial court’s opinion and order regarding custody and child
support as well as the award of attorney fees was entered. Plaintiff now appeals as of right.

                                      II. CHILD SUPPORT

        On appeal, plaintiff challenges the child support order entered by the trial court. In
particular, plaintiff disputes whether the trial court erred in relying on an expert’s determination
of “excess working capital” in the S-Corporation as a basis for attributing income to plaintiff.
He also contends that the trial court erred by including within its calculation of plaintiff’s income
funds distributed to plaintiff by SGC for purposes of paying the tax burden attributable to SGC’s
corporate income.

        Relevant to plaintiff’s arguments, the FOC referee held an evidentiary hearing on the
topic of child support. The hearing took place over the course of three days, and it involved
testimony from both parties and three certified public accountants who testified as experts. The
experts reached various conclusions regarding plaintiff’s actual income available for the payment
of child support in the years 2008 through 2011, but, ultimately, the referee and trial court both
relied on the opinion of Justin Cherfoli when determining plaintiff’s income.

         According to his testimony, Cherfoli estimated plaintiff’s income as follows: $1,145,000
in 2011, $637,000 in 2010, $391,000 in 2009, and $2,116,000 in 2008. As a result, he offered a
three year average of $723,000 and a four year average of $1,071,000. He arrived at his
determinations of plaintiff’s income by considering plaintiff’s W-2 income, interest and
dividends, actual distributions, perks, and “additional monies available for income, or for
payment of child support that aren’t in any of the other four categories.” Cherfoli included in his
calculations for 2008 the amount distributed for the purchase of the Holly house and, for all
years, those sums from the company distributed to plaintiff for what plaintiff and his accountant
testified was payment of SGC’s taxes. In the final category, i.e. “additional monies,” Cherfoli
placed a portion of what he characterized as “excess working capital.” Specifically, he defined
“working capital” as current assets—including cash, accounts receivable, and inventory—less
current liabilities. He then considered what money was required to pay for the operations of the

                                                -2-
manufacturing side of the company and any amount beyond this, he considered “excess working
capital,” or, in other words, those funds beyond what he deemed to be required to meet SGC’s
ongoing operating expenses. Using calculations known as the “Bardahl analysis,” Cherfoli
calculated excess working capital of $300,000 in 2010 and $797,000 in 2011. Based on his own
judgment, he concluded that 60 to 65 percent of SGC’s excess working capital was available for
distribution in a given year. Thus, in his opinion, an additional $200,000 could have been
distributed in 2010 and an additional $460,000 could have been distributed in 2011. He did not
discern any distributable excess working capital in 2009.

        By his own admission, Cherfoli had no study to support the percentages he chose as
appropriate distributions of excess working capital. He based the numbers on his own opinion of
what he viewed as “reasonable” when compared with the business’s requirements. In doing so,
he compared SGC with other corporations, noting that SGC operated under a more
“conservative” business model insofar as it had “more cash and less debt than” other companies
in the same industry. Compared to other companies, SGC had 22 percent of its total assets in
cash and a zero debt-to-capital ratio, while others had 6 percent of total assets in cash and an
average debt-to-capital ratio of 20 percent. Cherfoli further opined that distribution of additional
capital would not hinder SGC’s operations because many of SGC’s purchases of needed
equipment could be financed by acquiring new debt, rather than adhering to SGC’s historical
practice of purchasing equipment with cash.1

        Following the hearing, the FOC recommended that plaintiff be ordered to pay $8,806 a
month in child support. In arriving at this figure, the FOC accepted Cherfoli’s opinions and
determined that plaintiff had an average monthly gross income, for 2010 and 2011, of
$74,117.13, or $889,405.56 per year. Included in these figures were amounts paid to plaintiff for
the purpose of satisfying SGC’s tax liability. The FOC concluded that taxes owing by SGC were
plaintiff’s liability.2

1
  Regarding the purchase of equipment, plaintiff testified that the aerospace industry, for which
SGC manufactures gears, is “majorly capital intensive” and requires the regular purchase of new
machinery to stay current in order to continue receiving contracts. According to plaintiff, these
equipment purchases, which occur almost every year, can range anywhere from a few hundred
thousand dollars to upwards of $2,000,000 per machine. Thus, in plaintiff’s view, to stay
competitive, particularly against larger manufacturing companies with more assets, the
corporation needs cash on hand to purchase the necessary new equipment.
2
  The FOC indicated that plaintiff’s attorney stipulated that the amounts paid in taxes for SGC
should be included in plaintiff’s gross income. While counsel did so stipulate, in context, it is
abundantly clear from the record that counsel in no way intended to stipulate to the funds
inclusion for purposes of determining plaintiff’s child support obligations. Plaintiff’s counsel
argued repeatedly, and presented expert testimony to the effect, that taxes paid for income
attributable to SGC should not be considered income to plaintiff for purposes of calculating child
support.

                                                -3-
        Plaintiff objected to the FOC’s recommendation, and the matter was considered by the
trial court. The trial court acknowledged that it must conduct a de novo review, but framed the
matter as whether the referee “erred in crediting Cherfoli’s expert testimony” and ultimately
found no error in the referee’s reliance on Cherfoli’s testimony. Specifically, the trial court
concluded that “Michigan law treats the income of an S corporation as the income of the S
Corporation’s shareholders” and, for this reason, “Cherfoli properly treated the income of
plaintiff’s S corporation as plaintiff’s income.” Indeed, the trial court concluded that Cherfoli’s
analysis “worked to plaintiff’s advantage” because Cherfoli considered only “excess working
capital” rather than all of SGC’s income as income available for distribution. Agreeing with the
referee that Cherfoli was the most credible expert, the trial court accepted Cherfoli’s calculation
of “excess working capital” and his conclusion that 60 to 65 percent of “excess working capital”
was available for distribution. In accepting Cherfoli’s annual figures, the trial court made no
findings regarding whether these figures included amounts dispersed for payment of SGC’s
taxes. Unlike the referee, the trial court used the average of three years, rather than a two year
average used by the FOC, resulting in a gross income of $723,000, and ultimately, a net monthly
income of $35,712. Based on this, and accounting for defendant’s income and plaintiff’s award
of 122 overnights, the trial court set plaintiff’s child support at $7,062 per month.

                                 A. STANDARD OF REVIEW

        On appeal, this Court reviews child support orders for an abuse of discretion. Malone v
Malone, 279 Mich. App. 280, 284; 761 NW2d 102 (2008). In contrast, we review the trial court’s
factual findings for clear error. Borowsky v Borowsky, 273 Mich. App. 666, 672; 733 NW2d 71
(2007). Issues involving statutory interpretation or the proper interpretation of the MCSF pose
questions of law which we review de novo. Id. As when interpreting statutes, this Court must
ensure compliance with the plain language of the MCSF and may not read anything into the
MCSF that is not present. Peterson v Peterson, 272 Mich. App. 511, 518; 727 NW2d 393 (2006).
Whether the trial court properly applied the MCSF to the facts of the case also presents a
question of law that we review do novo. Clarke v Clarke, 297 Mich. App. 172, 179; 823 NW2d
318 (2012).

                           B. THE MCSF & CORPORATE INCOME

        Parents of a minor child have a well-recognized obligation to support that child. Shinkle
v Shinkle (On Rehearing), 255 Mich. App. 221, 225; 663 NW2d 481 (2003), citing MCL 722.3.
By statute, excepting those factual instances where application of the MCSF would be unjust or
inappropriate, a parent’s child support contribution is determined by use of the formula provided
in the MCSF. MCL 552.605(2). See also Clarke, 297 Mich. App. at 179. That is, the MCSF has
the force of law insofar as, by statute, a trial court is presumptively required to order child
support in an amount determined by application of the child support formula. MCL 552.605(2);
Stallworth v Stallworth, 275 Mich. App. 282, 284; 738 NW2d 264 (2007). See also 2013 MCSF
1.01(B) (“Unless rebutted by facts in a specific case, the law presumes that [the MCSF] sets
appropriate levels of support.”).

       The MCSF was designed “based upon the needs of the child and the actual resources of
each parent.” MCL 552.519(3)(a)(vi). Pursuant to the MCSF the first step in calculating each
parent’s support obligation involves determination of both parents’ individual incomes. 2013

                                               -4-
MCSF 2. “The objective of determining net income is to establish, as accurately as possible,
how much money a parent should have available for support.” 2013 MCSF 2.01(B) (emphasis
added). The MCSF directs that “[a]ll relevant aspects of a parent’s financial status are open for
consideration when determining support,” 2013 MCSF 2.01(B), and a parent’s income calculated
under the MCSF “will not be the same as that person’s take home pay, net taxable income, or
similar terms that describe income for other purposes,” MCSF 2.01(A).

       Specifically included within “income” for purposes of child support calculations are
numerous itemized sources of compensation and financial gain. See 2013 MCSF 2.01(C). Most
relevant to the present dispute, income includes: “Earnings generated from a business,
partnership, contract, self-employment, or other similar arrangement, or from rentals.” 2013
MCSF 2.01(C)(2). More particularly, the MCSF includes a list identifying forms of
compensation to which courts should pay particular attention when endeavoring to calculate the
income of a business owner, executive, or self-employed individual. 2013 MCSF 2.01(E)(4).
These forms of compensation include:

       (a) Distributed profits, profit sharing, officers' fees and other compensation,
       management or consulting fees, commissions, and bonuses.

                                             ***

       (d) Reduced or deferred income. Because a parent’s compensation can be
       rearranged to hide income, determine whether unnecessary reductions in salaries,
       fees, or distributed profits have occurred by comparing amounts and rates to
       historical patterns.

       (i) Unless the business can demonstrate legitimate reasons for a substantial
       reduction in the percentage of distributed profits, use a three-year average to
       determine the amount to include as a parent’s income.

       (ii) Unless a business can demonstrate legitimate reasons for reductions (as a
       percentage of gross business income) in salaries, bonuses, management fees, or
       other amounts paid to a parent, use a three-year average to determine the amount
       to include as a parent’s income. [2013 MCSF 2.01(E)(4).]

        In considering the various sources of income a business owner or self-employed
individual may possess, the MCSF expressly recognizes, and discusses, an inherent difficulty in
ascertaining income for these individuals. 2013 MCSF 2.01(E)(1). This difficulty arises
because:

       (a) These individuals often have types of income and expenses not frequently
       encountered when determining income for most people.

       (b) Taxation rules, business records, and forms associated with business
       ownership and self-employment differ from those that apply to individuals
       employed by others. Common business documents reflect policies unrelated to an
       obligation to support one’s child.

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       (c) Due to the control that business owners or executives exercise over the form
       and manner of their compensation, a parent, or a parent with the cooperation of a
       business owner or executive, may be able to arrange compensation to reduce the
       amount visible to others looking for common forms of income. [2013 MCSF
       2.01(E)(1).]

Given the potential for manipulation, and the close connection between a parent’s finances and
that of a parent’s business, “[i]n order to determine the monies that a parent has available for
support, it may be necessary to examine business tax returns, balance sheets, accounting or
banking records, and other business documents to identify any additional monies a parent has
available for support that were not included as personal income.” 2013 MCSF 2.01(E)(2).

         When undertaking this analysis, which must necessarily be undertaken on a case-by-case
basis, it is apparent from the MCSF that a parent’s historical business practices should be given
considerable weight in assessing the parent’s income from a business. For example, the MCSF
places significant emphasis on the parent’s historical receipt of income and distributions from
business earnings, instructing courts to consider “historical patterns,” as a percentage of gross
profits, when considering whether reduced or deferred income and distributions are available as
“income.” 2013 MCSF 2.01(E)(4)(d). Similarly, the MCSF states that, in determining what
business earnings may be attributed to a parent, “[i]ncome (or losses) from a corporation should
be carefully examined to determine the extent to which they were historically passed on to the
parent or used merely as a tax strategy.” 2013 MCSF 2.01(C)(2)(a) (emphasis added). Such
historical analysis may often make clear whether the parent has used the business in an effort to
shield money from consideration for child support purposes, thereby enabling courts to
determine what income should be available to parents. See 2013 MCSF 2.01(E)(1)(c).

       While providing general directives regarding the consideration of business earnings, the
MCSF does not expressly reference S corporations or provide explicit directions on how
earnings generated by an S corporation, and retained by the corporation or distributed for
payment of taxes, should be considered. Relevant to this analysis, an S corporation is a small
business which has elected, under 26 USC § 1362(a)(1), to be an S corporation for tax purposes.
The effect of such election is that the corporation’s income and losses “pass through to the
individual shareholders as if the income and losses belonged to the members of a partnership.”
Ross v Auto Club Group, 481 Mich. 1, 9; 748 NW2d 552 (2008). See also 26 USC § 1366(b),
(c). The benefit of S corporation election from a tax perspective is that the corporation may
avoid federal taxation at the corporate level. See Chocola v Dep’t of Treasury, 422 Mich. 229,
236; 369 NW2d 843 (1985).

        Although the income of an S corporation is treated, for tax purposes, as belonging to the
shareholders, see 26 USC § 1366, it does not follow that the S corporation must actually
distribute its earnings to the shareholders. See JS v CC, 454 Mass 652, 661 n 10; 912 NE2d 933
(2009); In re Marriage of Brand, 273 Kan 346, 351; 44 P3d 321 (2002). In practice, an S
corporation may retain earnings, but distribute some funds to the individual shareholders to
enable them to meet those tax liabilities attributable to the S corporation’s earnings. See, e.g.,
Tebbe v Tebbe, 815 NE2d 180, 183 (Ind Ct App 2004). While an S Corporation is not required
to disburse income to shareholders, it is notable that a sole shareholder of such a corporation is,
in particular, uniquely situated insofar as he or she possess power over corporate funds not

                                                -6-
enjoyed by an average employee and may, given this power, be especially able to manipulate the
distribution of income, or lack thereof, from the corporation. See JS, 454 Mass at 663; Taylor v
Fezell, 158 S.W.3d 352, 358 (Tenn 2005).

                                         C. ANALYSIS

        Considering the plain language of the MCSF and the manner in which S corporations
function, the question presented in the determination of plaintiff’s income in this case is twofold.
First, we must decide to what extent, if any, undistributed earnings retained by an S corporation
may be included as income to shareholders for purposes of calculating the individual’s income
under the MCSF. To resolve this issue in this case, we specifically consider whether the trial
court erred in relying on Cherfoli’s determination, regarding the portion of “excess working
capital” in the S-Corporation available for distribution, as a basis for attributing additional
income to plaintiff. Second, we must also decide whether money distributed by the S
corporation to individual shareholders to meet the tax burden arising from the S corporation’s
income can be attributed to the individual as income for child support purposes.

                                   i. RETAINED EARNINGS

        We begin our consideration of earnings retained by the corporation by turning to the
MCSF. Reviewing the list of the various types of income that are specified in the MCSF for
inclusion in a parent’s income, we see no mention of earnings retrained by an S Corporation as a
type of earning that must, in all cases, be included when calculating a parent’s income. For
instance, generally, the MCSF includes within income “earnings generated from a business.”
2013 MCSF 2.01(C)(2). However, when earnings generated by a corporation are at issue, it is
apparent that not all such earnings can categorically be included as income to a parent because
such earnings are not always attributable, or available, to a parent. Corporations, even when
owned by a sole shareholder, are separate entities under the law, see Lakeview Commons v
Empower Yourself, 290 Mich. App. 503, 509; 802 NW2d 712 (2010), and undistributed profits are
said to “belong to the corporation,” see Dodge v Ford Motor Co, 204 Mich. 459, 497; 170 N.W.
668 (1919); In re Marriage of Brand, 273 Kan at 351. Thus, with regard to corporate income,
the MCSF cautions that “income . . . from a corporation should be carefully examined to
determine the extent to which they were historically passed on to the parent.” 2013 MCSF
2.01(C)(2)(a) (emphasis added). This directive makes plain that all corporate earnings cannot be
unconditionally attributable to a parent; rather, there must be some consideration of whether a
parent receives, or has historically received, those funds. In particular, the MCSF clearly
requires inclusion of distributed profits as income to a parent, 2013 MCSF 2.01(E)(4)(a), and it
plainly requires consideration of undistributed profits where there has been a substantial
reduction in the percentage of profits distributed to a parent as compared to historical patterns of
distributions, 2013 MCSF 2.01(E)(4)(d)(i). Nowhere, however, does the MCSF identify
undistributed corporate profits as income to a parent where there is no evidence of a reduction in
distributions compared to historical practices. Given that the MCSF does not expressly include
this class of corporate earnings within a parent’s income, where there is no evidence of a
reduction in distributions compared to historical practices, it would be inappropriate to adopt a
brightline rule including undistributed earnings retained by an S corporation within the
calculation of a parent’s income under the MCSF in all circumstances.

                                                -7-
        Cherfoli’s opinion, on which the trial court relied, appeared to recognize that not all
earnings retained by an S-Corporation may be attributed to shareholders as income in every
circumstance. Cherfoli instead focused his analysis on a subclass of these retained earnings,
which he characterized as “excess working capital.” He judged that, in this case, 60 to 65
percent of this “excess working capital” could be distributed and he thus deemed these amounts
available as income to plaintiff for child support purposes. The broader question presented thus
becomes whether the MCSF requires calculation of a parent’s income as though he or she
operates a business in a particular manner and distributes some specific percentage of “excess”
profits. We see no such requirement in the MCSF.

        Quite simply, nothing in the plain language of the MCSF indicates a parent should be
imputed with income as though he or she runs his or her business in line with industry averages,
or that he or she should be charged with income as though some set percentage of “excess
working capital” had been distributed. Rather, the focus in the MCSF regarding the analysis of
undistributed profits as income centers on the manipulation of income as discerned through
analysis of the historical conduct of the corporation and the parent regarding the distribution of
profits. See 2013 MCSF 2.01(C)(2)(a); 2013 MCSF 2.01(E)(4)(d). Stated differently, while the
MCSF ultimately seeks to discover what monies a parent “has available” and should have
available as income, 2013 MCSF 2.01(B), (E)(2), it does not mandate the pursuit of one
reasonable business model over another, and it does not necessitate the revamping of a parent’s
reasonable and historical business practices in favor of alternative methods in which a
corporation could theoretically be run in order to make additional funds available.

        Instead, as a general proposition, the management of a corporation, or any business,
obviously involves some exercise of business judgment, see Churella v Pioneer State Mut Ins
Co, 258 Mich. App. 260, 270; 671 NW2d 125 (2003), and the MCSF gives no indication that it
intended to unilaterally interfere with this business judgment. A corporation is, as noted, a
separate entity under the law, Lakeview Commons, 290 Mich. App. at 509, and its continued
viability depends on both its compliance with corporate law and its maintenance of capitalization
sufficient to meet ordinary expenses and further its business purposes, Taylor, 158 S.W.3d at 358.
A corporate business owner, and in particular a sole shareholder, while able to distribute profits
to himself, nonetheless faces business expenses and concerns, including a financial responsibility
to his creditors and employees, not encountered by most parents. See 2013 MCSF 2.01(E)(1)(a)
(recognizing unique business expenses encountered by business owners); Zold v Zold, 880 So 2d
779, 781 (Fla Dist Ct App 2004), approved 911 So 2d 1222 (2005). In this role, a business
owner must exercise judgment in the determination of what funds are required to maintain the
business over time and what funds are available for distribution to shareholders; and, as a general
matter, funds retained for necessary and legitimate business reasons are not available to the
parent and need not be included as income under the MCSF. See 2013 MCSF 2.01(E)(1)(d)
(considering whether reductions in corporate distributions, i.e., increased retention of profits,
were “unnecessary” or unsupported by a “legitimate reason”). See, e.g., Ewald v Ewald, 292
Mich. App. 706, 722; 810 NW2d 396 (2011) (concluding debt expense to continue father’s
farming operation must be deducted from his gross income to determine his “net income” from
his farming operation). Indeed, nothing in the MCSF can be read to categorically limit the
parent’s freedom to make these business decisions or to require the attribution of greater income
to a parent who makes relatively conservative business decisions. In short, provided that the
operation of a parent’s business is in keeping with historical practices, that those practices can be

                                                -8-
described as the reasonable exercise of business judgment, and that there is no evidence of an
improper effort to make funds unavailable for child support, nothing in the MCSF mandates that
the reality of how a parent operates a business, and has historically operated a business, should
be dismissed in favor of an alternative method in which the business could be conducted.

        Thus, turning to the particular facts of the present case, problematic in Cherfoli’s opinion
is his substitution of his own judgment for that of plaintiff’s in terms of how SGC could be
appropriately managed and, as a related matter, Cherfoli’s general disregard of the corporation’s
historical practices. That is, rather than focus on SGC’s historical business practices and its
historical distribution of profits to plaintiff, which would afford plaintiff continued control in the
management of the corporation while at the same time ascertaining what monies should be
available for child support under the MCSF, Cherfoli focused on how the business could be run
by comparing its practices to that of an industry standard and offering his own personal opinion
regarding what percentage of profit could be distributed under his alternative model. Central to
our decision is the fact that Cherfoli did not opine that plaintiff’s management of his corporation
or his retention of profits in the corporate coffers was outside the range of how business owners
could reasonably be expected to conduct their business.3 Cherfoli did not focus his analysis on
whether the profits retained by SGC were used or intended for unnecessary or illegitimate
business expenses, whether the retention of funds was at odds with plaintiff’s historical
practices,4 or whether plaintiff retained those funds in the corporation in order to avoid child
support. Instead, in substituting his own judgment for that of plaintiff’s, Cherfoli freely
acknowledged that his estimation was his own “personal” opinion, and, beyond his own personal
feelings on the subject, he offered no basis to conclude that 60 to 65 percent of “excess working
capital” was actually available to plaintiff or should be distributed by SGC to plaintiff. See 2013
MCSF 2.01(B), (E)(2). Accordingly, we conclude that the trial court erred by adopting the
opinion of an expert who evaluated plaintiff, not based on how plaintiff historically ran the
business, but based on, in essence, the substitution of his own business judgment for that of
plaintiff’s in terms of how much income the business could relinquish.5

3
 Rather than fault plaintiff for making questionable or unprincipled business decisions, Cherfoli
ultimately charged plaintiff with nothing more than the operation of a “conservative” business
model insofar as plaintiff preferred to operate debt free as opposed to pursuing loans to finance
his operations.
4
  The record in fact suggests that plaintiff historically purchased equipment for cash and, for
several years, maintained roughly the same amount of cash on hand in the corporation.
5
  The dissent finds no fault in the trial court’s adherence to Cherfoli’s opinion because, rather
than evaluate a parent’s available income based on an S corporation’s actual distributions and
historical conduct, the dissent proposes the use of a non-exhaustive list of factors described in JS,
454 Mass at 662-663. To adopt these judicially created factors would, however, improperly
supplant the MCSF, which controls the determination of a parent’s “income” for child support
purposes in Michigan. Rather than follow the approach outlined in JS, we are persuaded that a
court evaluating a parent’s income—including cases involving income generated by an S

                                                 -9-
                       ii. DISTRIBUTIONS FOR PAYMENT OF TAXES

        As a related matter, we consider plaintiff’s assertion that the trial court erred by including
within the calculation of his income funds distributed to plaintiff for payment of taxes arising
from SGC’s corporation earnings. As noted, when a corporation elects S corporation status,
income taxes are paid by the shareholders, rather than the corporation; but, the corporation owns
the profits on which the taxes are paid and the corporation is not required to actually distribute
this income to the shareholders. See Ross, 481 Mich. at 9; In re Marriage of Brand, 273 Kan at
351. In many cases, however, the corporation may chose to distribute funds to shareholders for
the payment of the tax liability arising from the corporation’s earnings. See, e.g., Tebbe, 815
NE2d at 183.

        In such circumstances, it is clear that funds distributed for payment of taxes on earnings
retained by the corporation are not an indication of what the parent has, or should have, available
for child support. See 2013 MCSF 2.01(B). That is, the MCSF acknowledges the unique
taxation rules involved with business ownership, 2012 MCSF 2.01(E)(1)(b), and specifically
recognizes that money may be passed on to the parent, not as income, but “as a tax strategy,” see
2013 MCSF 2.01(C)(2)(a). The election of S Corporation status is plainly one such “tax
strategy” and, given the manner in which an S corporation functions, it is readily apparent that
funds distributed under this model for payment of taxes arising from earnings retained by the
corporation are not “available” to the parent for the payment of child support. See 2013 MCSF
2.01(E)(2). Instead, they are a necessary business expense, properly excluded from the parent’s
net income. See, e.g., Ewald, 292 Mich. App. at 722. See also 2013 MCSF 2.07(B) (including
actual taxes paid as items to be deducted from a parent’s income under the MCSF).
Consequently, while money passed as a tax strategy must be carefully examined to ensure it is, in
truth, a tax strategy, see 2013 MCSF 2.01(C)(2)(a), we hold that funds distributed by an S
Corporation to shareholders to actually offset payment of taxes on earnings retained by the
corporation should not be included as income to the shareholder-parent under the MCSF.6

        In this case, Cherfoli conceded in his testimony that some of the funds identified by
plaintiff as funds used for the payment of taxes were included within his calculations of income,
and the FOC referee determined that such funds were properly included as income. The trial
court did not, however, expressly address the matter. Consequently, on remand, the trial court
shall, when assessing plaintiff’s income, determine what corporate distributions to plaintiff, if
any, were used by plaintiff to pay taxes on corporate earnings retained by SGC. Any such

corporation—is presumptively required to apply the relevant provisions of the MCSF to the facts
of the case. See Stallworth, 275 Mich. App. at 284.
6
  Our holding in this regard is consistent with that of other jurisdictions to have recognized that
distributions from an S Corporation to offset a shareholder’s tax liability should not be
considered income to the parent because such funds do not actually increase the shareholder’s
ability to pay child support. See, e.g., In re Marriage of Matthews, 40 Kan App 2d 422, 431; 193
P3d 466 (2008); Walker v Grow, 170 Md App 255, 280; 907 A2d 255 (2006); Tebbe, 815 NE2d
at 184; McHugh v McHugh, 702 So 2d 639, 642 (Fla Dist Ct App 1997).

                                                -10-
distributions, used merely to offset plaintiff’s tax liability attributable to SGC, shall not be
included in the determination of plaintiff’s income.

                                          III. CUSTODY

         On appeal, plaintiff also challenges the trial court’s custody and parenting time
determinations. In particular, plaintiff argues that the trial court erred by ostensibly awarded
joint custody, but then only providing plaintiff with parenting time comparable to that of a non-
custodial parent. Plaintiff maintains that 122 days parenting time is insufficient to allow him to
foster a relationship with the children, and he asserts that this case “cries out for true joint
custody.” He also expresses concern that defendant, who is not a United States citizen, may
remove the children to the Philippines. In plaintiff’s view, the trial court also should not have
relied on defendant’s testimony when deciding the issue of custody because she was not a
credible witness. Apart from these more general criticisms of the trial court’s rulings, plaintiff
challenges the trial court’s findings regarding several best interests factors, specifically, factors
(b), (d), (f), (h), and (l).

        On appeal, pursuant to MCL 722.28, in child custody disputes, “all orders and judgments
of the circuit court shall be affirmed . . . unless the trial judge made findings of fact against the
great weight of the evidence or committed a palpable abuse of discretion or a clear legal error on
a major issue.” Dailey v Kloenhamer, 291 Mich. App. 660, 664; 811 NW2d 501 (2011). Thus,
we review the trial court’s findings of fact, including its findings related to the best interest
factors, under the great weight of the evidence standard. Fletcher v Fletcher, 447 Mich. 871,
877-879; 526 NW2d 889 (1994). Discretionary rulings, including the ultimate award of custody
and the award of parenting time, are reviewed for an abuse of discretion. Id. at 879; Shade v
Wright, 291 Mich. App. 17, 20; 805 NW2d 1 (2010). An abuse of discretion occurs “only in
extreme cases in which the result is so palpably and grossly violative of fact and logic that it
evidences a perversity of will or the exercise of passion or bias.” Brown v Loveman, 260 Mich
App 576, 600-601; 680 NW2d 432 (2004). In comparison, “clear legal error” occurs when the
trial court chooses, interprets, or applies the law incorrectly. Fletcher, 447 Mich. at 881.

       Plaintiff primarily argues on appeal that the trial court abused its discretion by failing to
award the parents equal parenting time.7 In awarding parenting time, it is the best interests of the
children that control the determination of a parenting time schedule. Berger v Berger, 277 Mich
App 700, 716; 747 NW2d 336 (2008). See also Harvey v Harvey, 470 Mich. 186, 187 n 2; 680

7
  Early in the litigation, plaintiff sought sole physical and legal custody of the children.
However, at the time the trial court made the final custody determination in this case, plaintiff
sought and received joint custody. On appeal, he similarly claims that joint custody was
appropriate. At points, however, plaintiff asserts that the trial court should have granted him sole
custody. This unpreserved claim lacks merit given that plaintiff concedes that an established
custodial environment exists with both parents and he did not present clear and convincing
evidence that a change in custody was in the best interests of the children. MCL 722.27(1)(c);
Thompson v Thompson, 261 Mich. App. 353, 362; 683 NW2d 250 (2004). Consequently, we
discern no abuse of discretion in the trial court’s award of joint custody.

                                                -11-
NW2d 835, 837 (2004) (“[T]he statutory ‘best interests’ factors control whenever a court enters
an order affecting child custody.”). “Both the statutory best interest factors in the Child Custody
Act, MCL 722.23, and the factors listed in the parenting time statute, MCL 722.27a(6), are
relevant to parenting time decisions.” Shade, 291 Mich. App. at 31. While custody decisions
require findings under all the best interest factors, where parenting time is at issue, the trial court
need only make findings on contested issues. Id. at 31-32.

        To the extent plaintiff challenges the trial court’s award of parenting time as a deviation
of what it means to have “joint custody,” he is mistaken in his understanding of “joint custody.”
Joint custody does not necessitate a 50/50 split of the children’s time between each parent.
Rather, pursuant to MCL 722.26a(7)(a), “joint custody,” in terms of physical custody, is defined
as an order of the court in which it is specified that “the child shall reside alternately for specific
periods with each of the parents.” No specific schedule is required; instead, the focus is on the
best interest of the children, and parenting time must be granted “in a frequency, duration, and
type reasonably calculated to promote a strong relationship between the child and the parent
granted parenting time.” MCL 722.27a. The Michigan Parenting Time Guideline recognizes
that there are myriad parenting time arrangements available depending on what will serve the
bests interests of the children. See Friend of the Court Bureau, Mich. Supreme Court, Michigan
Parenting Time Guideline (Lansing: State Court Admin. Office), p. 7-9, 12.

        In this case, the parenting schedule, pursuant to which the children reside alternatively for
specific periods with each of the parents, plainly constituted an award of joint custody of the type
contemplated by our Legislature. See MCL 722.26a(7)(a). Contrary to plaintiff’s arguments, the
schedule—which afforded him 122 days, or roughly a third of each year—provided ample time
for him to “promote a strong relationship” with his children, see MCL 722.27a, and it was in fact
not a significant deviation from the 140 days parenting time to which he had previously agreed,
cf. Shade, 291 Mich. App. at 32. The schedule affords defendant the bulk of the school year and
plaintiff time when the children are not in school, a schedule which was not an abuse of
discretion given evidence that defendant has historically been responsible for the children’s day-
to-day care and educational needs, while plaintiff’s Holly home is a 45-minute drive from the
children’s school. In short, the trial court was not required to provide a perfect division of
parenting time, and the trial court did not abuse its discretion in adopting the schedule at issue.

        Insofar as plaintiff specifically challenges the trial court’s assessment of the children’s
best interests as described in the best interest factors, MCL 722.23, he has not shown the trial
court’s findings were against the great weight of the evidence. First, to the extent plaintiff
challenges the trial court’s consideration of factor (b), this factor involves the capacity and
disposition of the parties involved to give the child love, affection, and guidance and to continue
the education and raising of the child in his or her religion or creed, if any. MCL 722.23(b). The
trial court determined that this factor favored defendant because she was the children’s stay-at-
home caretaker, and in this role she was responsible for the children’s daily care, medical
decisions, discipline in the form of “time outs”, and school related matters such as attendance at

                                                 -12-
parent-teacher conferences. These findings were supported by defendant’s testimony8 regarding
her role with the children, testimony from an FOC investigator who interviewed the parties, and
by testimony from defendant’s adult daughter from another relationship who lived with the
family when the children were younger. While plaintiff argues on appeal that he has been long-
involved in the children’s upbringing and more “proactive” than defendant in the children’s
development, such arguments are merely an attack on the trial court’s credibility determinations
and not an indication that the trial court’s findings were against the great weight of the evidence.
Berger, 277 Mich. App. at 711. On the whole, the trial court’s conclusion that factor (b) favored
defendant was supported by the evidence.

        Regarding factor (d), “[t]he length of time the child has lived in a stable, satisfactory
environment, and the desirability of maintaining continuity,” the trial courts findings were
similarly not against the great weight of the evidence. The trial court concluded that this factor
was neutral because both parties shared joint physical custody and there existed a shared
custodial environment—facts which plaintiff concedes on appeal. Contrary to plaintiff’s
contention that defendant disturbed the continuity of the children’s environment by removing the
children from the Shelby home in contravention of a court order, the trial court found no
evidence or testimony to support this assertion, and nothing in the record establishes that the trial
court’s determinations regarding factor (d) were against the great weight of the evidence.

        The trial court also reasonably concluded that factor (f), the moral fitness of the parties
involved, was a neutral factor based on evidence to suggest that both parents had moral failings
which, in essence, offset the other. Although plaintiff contests on appeal whether he abuses
alcohol, and whether this may be equated with defendant’s gambling and financial wrongdoings,
we cannot see that the trial court’s findings were against the great weight of the evidence. To the
extent plaintiff casts additional slurs on defendant’s character, those issues were presented to the
trial court and the trial court was not required to specifically comment on every piece of evidence
or argument.9 McIntosh, 282 Mich. App. at 474-475. Given the evidence demonstrating that both
parties have moral failings, the trial court’s finding that factor (f) was neutral was not against the
great weight of the evidence.

8
  In general, plaintiff urges this Court to disregard many of the trial court’s findings of fact
because they relied on defendant’s testimony, which plaintiff describes as not credible.
However, plaintiff’s attacks on defendant’s credibility ignore the deference due to the trial court
in making such determinations, and such arguments do not demonstrate that the trial court’s
finding were against the great weight of the evidence. See Berger, 277 Mich. App. at 708, 711.
9
  One of plaintiff’s specific accusations raised in relation to defendant’s character is that she may
take the children to the Philippines as she did her children from a previous relationship. These
fears appear unfounded as there is no indication that defendant has any interest in returning to the
Philippines with the children or that she has threatened to do so without plaintiff’s permission.
See MCL 722.27a(6)(h). In any event, contrary to plaintiff’s representations on appeal, the trial
court addressed plaintiff’s concerns, specifically ordering that neither party shall take the
children to a country which is not a party to the Hague Convention on the Civil Aspects of
International Child Abduction without signed consent from the other party.

                                                -13-
        Relating to factor (h), the home, school, and community record of the child, the trial court
reasonably concluded that this factor favored defendant given that she has the primary
responsibility for the children’s education. While plaintiff disagrees with this assertion on appeal
and endeavors to establish he was “proactive” in the children’s development, by his own
admissions in the trial court he was not as “active” in the children’s preschool and he did not
frequently attend parent-teacher conferences. On the evidence presented, the trial court’s finding
that factor (h) weighed in defendant’s favor was not against the great weight of the evidence.

        Under factor (l), which involves “any other factor considered by the court to be relevant
to a particular child custody dispute,” the trial court considered plaintiff’s attempts to financially
manipulate defendant over the course of the proceedings. Specifically, defendant testified that
plaintiff forced her out of the Shelby home on multiple occasions, and plaintiff’s father testified
that plaintiff took defendant’s credit cards and stopped paying her when she was an SGC
employee. Plaintiff’s treatment of defendant was a relevant factor for the trial court to consider
when evaluating the children’s best interests, and, on the record presented, the court’s findings
relating to factor (l) were not against the great weight of the evidence.

        On the whole, after reviewing the record, we find the trial court’s findings were not
against the great weight of the evidence, the court did not commit clear legal error on a major
issue, and the trial court did not abuse its discretion in awarding joint custody and adopting a
parenting schedule affording plaintiff 122 overnights per year. Consequently, we affirm the trial
court’s custody and parenting time determinations. See MCL 722.28.

                                      IV. ATTORNEY FEES

        Lastly, plaintiff also challenges the trial court’s award of attorney fees to defendant.
Specifically, plaintiff argues that defendant can afford to pay her fees, in large part because
plaintiff’s father has paid defendant’s legal fees and that such payment was, contrary to
defendant’s representations to the trial court, not a loan. Further, plaintiff challenges his own
ability to pay the fees and contests the necessity of some of the fees, arguing that defendant’s
counsel conducted “unnecessary, improper duplications of discussions” with defendant and
plaintiff’s father and stepmother.

        As noted, the trial court awarded defendant $118,000 in fees, finding she was unable to
pay these expenses while plaintiff could afford the cost of her attorney fees. On appeal, we
review a trial court’s decision whether to award attorney fees for an abuse of discretion. Loutts v
Loutts, 298 Mich. App. 21, 24; 826 NW2d 152 (2012). We review the trial court’s findings of
fact for clear error, and any questions of law de novo. Id.

       Requests for attorney fees in child custody disputes are governed by MCR 3.206.
Pursuant to MCR 3.206(C)(1), “A party may, at any time, request that the court order the other
party to pay all or part of the attorney fees and expenses related to the action or a specific
proceeding, including a post-judgment proceeding.” A party who requests attorney fees and
expenses must allege facts sufficient to show that:

       (a) the party is unable to bear the expense of the action, and that the other party is
       able to pay, or

                                                -14-
       (b) the attorney fees and expenses were incurred because the other party refused
       to comply with a previous court order, despite having the ability to comply.
       [MCR 3.206(C)(2).]

Typically, this rule has been interpreted to require an award of attorney fees to the extent
“necessary to enable a party to prosecute or defend a suit.” Myland v Myland, 290 Mich. App.
691, 702; 804 NW2d 124 (2010). “ ‘[A] party sufficiently demonstrates an inability to pay
attorney fees when that party’s yearly income is less than the amount owed in attorney fees.’ ”
Loutts, 298 Mich. App. at 24 (quotation omitted).

         In this case, plaintiff argues that defendant did not have an inability to pay her attorney
fees. Such an argument has no basis in the evidence given that defendant had an annual income
of less than $8,000 per year while she incurred legal fees in excess of $118,000 during the course
of the litigation. In such circumstances, the trial court did not clearly err in finding defendant
could not afford her attorney fees. See id. In comparison, contrary to plaintiff’s claim that he
cannot afford to meet defendant’s attorney fees, the evidence shows that he is the sole
shareholder of a profitable corporation. Even if his actual annual income is not as extensive as
that calculated by the trial court, plaintiff makes, by his own admission, a salary of upwards of
$183,000 per year, he has funds in savings, and he could, as he did to purchase the Holly home,
withdraw funds from SGC. On the facts of this case, the trial court did not abuse its discretion in
awarding defendant attorney fees pursuant to MCR 3.206.

         Nevertheless, on appeal, despite defendant’s low salary in comparison to her extensive
bills, plaintiff maintains that defendant could pay her fees because plaintiff’s father had provided
her the money. Contrary to plaintiff’s arguments, the evidence presented shows that defendant
had agreed to repay plaintiff’s father for those fees he paid on her behalf. If anything, the fact
that defendant had to borrow money to pay her fees only underscores her inability to pay the
expenses, further justifying an award under MCR 3.206(C)(2)(a). Lastly, insofar as plaintiff
challenges the necessity of some of the expenses, there is no evidence to support his allegations
regarding the duplicative nature of the conversations he challenges, and we see nothing improper
in defendant’s attorney meeting with plaintiff’s father and stepmother, both of whom lived with
defendant and were relevant witnesses, or potential witnesses, in this child custody dispute.
Plaintiff has not shown the trial court’s award of attorney fees was an abuse of discretion.

                                       V. CONCLUSION

        In sum, the trial court did not abuse its discretion, either in awarding custody and
parenting time, or in awarding defendant attorney fees pursuant to MCR 3.206. However, the
trial court’s calculation of plaintiff’s income was an error of law insofar as it focused on an
expert’s business judgment of how SGC could be run, rather than the historical practices of the
business and plaintiff’s efforts, if any, to shield income in the corporation. We hold also that
funds, if any, which were distributed to plaintiff for the payment of SGC’s taxes should not have
been used in the calculation of his income. Consequently, we vacate the trial court’s award of
child support and remand for a recalculation of plaintiff’s income.

                                               -15-
        Affirmed in part, vacated in part, and remanded for reconsideration of plaintiff’s income
for purposes of child support under the MCSF consistent with this opinion. We do not retain
jurisdiction. No costs, as neither party prevailed in full. MCR 7.219.

                                                           /s/ Joel P. Hoekstra
                                                           /s/ Kurtis T. Wilder

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