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July 26, 2018

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Retained Earnings of Closely Held Corporations and Income Determination for Child Support Purposes, Troutman v. Troutman, 2017 Ark. 139.

May 12, 2017

Pursuant to Arkansas Child Support Guidelines, income for child support purposes means any form of payment, periodic or otherwise, due to an individual, regardless of source, including wages, salaries, commissions, bonuses, workers’ compensation, disability, payments pursuant to a pension or retirement program, and interest. Ark. Admin. Order No. 10, Section II. The definition of income is “intentionally broad and designed to encompass the widest range or sources.” Evans v. Tillery, 361 Ark. 63, 204 S.W.3d 547 (2005). Once the court makes an income determination, it can apply that income to the Family Child Support Chart to determine a payor's child support obligation.

 

For self-employed payors, the Child Support Guidelines set out a specific manner in which courts should determine income for purposes of setting a child support obligation. According to the guidelines, support should be calculated based on the last two years’ federal and state income tax returns and the quarterly estimates for the current year. Ark. Admin. Order No. 10, Section III, (c). Additionally, the guidelines advise the court to consider any contributions made to retirement plans, alimony paid, and self-employed health insurance paid. Id. Furthermore, the guidelines only allow a self-payor to deduct depreciation to the extent that it reflects actual depreciation in value of an asset. Id. Last, the guidelines instruct the courts to consider the amount the payor is capable of earning or a net worth approach based on property, life-style, etc. Id.

 

In a recent Arkansas Supreme Court case, the Court held that a lower court’s determination of a self-employed payor’s income did not properly account for the corporation’s retained earnings. Troutman v. Troutman, 2017 Ark. 139. In this case, the Appellee had petitioned the lower court to reduce his $6,005.00 monthly child support payment he was paying the Appellant for the benefit of the party’s only child.

 

At a hearing on the matter, the Appellant’s Certified Public Account testified that the Appellee, based on his 2013 tax returns, had made at least $705,245.00 in income. Id. at 5. The CPA further testified that this income was consistent between 2012 and 2013. Id. On cross-examination, however, the CPA admitted that the Appellee’s corporation saw a cash reserves decline of nearly $650,000.00. Id. Nevertheless, there was evidence the Appellee had withdrawn as much as $554,000.00 that was not counted as “income” on his tax returns, and that based on his calculation, $295,000.00 of that went towards child support and taxes, leaving an excess of $200,000.00 available for the Appellee to live on. Id.

 

The Appellee’s CPA took the stand in rebuttal, testifying that the corporation’s retained earnings should not be considered as income and claimed that the Appellee will not escape paying taxes on past distributions. Id.

 

The Arkansas Supreme Court found that “Administrative Order Number 10 contemplates a more expansive definition of income, that requires the circuit court to consider the retained earnings of a closely held corporation.” Troutman v. Troutman, 2017 Ark. 139, at 9. Assessing the retained earnings as income available to support a child, the Court argued, “prevents a payor from using the tax code to legally manipulate the amount of income to be considered for child-support purposes.” Id. at 9-10.

 

Justice Shawn A. Womack began his dissent with the following quote from Benjamin Franklin, “[O]ur new Constitution is now established, and has an appearance that promises permanency; but in the world nothing can be said to be certain, except death and taxes.” According to Justice Womack, the majority’s ruling brings “death” upon both Administrative Order Number 10’s definition of income for self-payors and the application of “plain, clear, and concise instructional language” set out by orders of the Court. Id. at 12. Justice Womack asserts that considering a corporation’s retained earnings as income for child support purposes makes more sense in cases where the circuit court finds “bad-faith manipulation” of a party’s tax returns. Id. at 17. For instance, Justice Womack cites to Pannell v. Pannell, a case in which a trial court considered a corporation’s retained earnings as income where the payor was requesting a lower amount of child support be set by the trial court, but was purchasing nice cars, racehorses, and airplanes for personal use with company funds. Id. (see also Pannell v. Pannell, 64 Ark. App. 262, 265, 981 S.W.2d 531, 532 (1998)).

 

All in all, the Court’s holding indicates that income determination for self-payor’s may be decided on a case-by-case basis. It appears self-payors, like the Appellee in Troutman, would likely benefit by focusing their arguments regarding their child support obligation on the amount that would provide for the child or children’s needs, which is, after all, the purpose of child support. In addition, self-payors should cite to any applicable deviation factors—payment of school tuition, health insurance, medical bills, food, clothing, transportation, and other necessities set out in the Child Support Guidelines—that may result in a reduced amount of child support being set. As the Troutman Court stated in its opinion this was “not a deviation case, but rather one in which the trial court improperly calculated Troutman’s income for child-support purposes.” Troutman v. Troutman, 2017 Ark. 139, at 2, fn. 1. It is important to remember that it is a rebuttable presumption that the amount of child support calculated based on a payor’s income is the amount of child support to be awarded. Ark. Admin. Order No. 10, Section I.

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