Guthard v. Guthard

• Decision Date: 14 April 2020
• Docket Number: No. A-18-498.,A-18-498.
• Citation: 942 N.W.2d 792,28 Neb.App. 156
• Parties: Joel GUTHARD , appellee, v. Jennifer GUTHARD , appellant.
• Court: Nebraska Court of Appeals

28 Neb.App. 156

942 N.W.2d 792

Joel GUTHARD , appellee,

v. Jennifer GUTHARD , appellant.

No. A-18-498.

Court of Appeals of Nebraska.

Filed April 14, 2020.

Nathan P. Husak and Loralea L. Frank, of Bruner Frank, L.L.C., for appellant.

Elizabeth J. Klingelhoefer, of Jacobsen, Orr, Lindstrom & Holbrook, P.C., L.L.O., Kearney, for appellee.

Moore , Chief Judge, and Pirtle and Bisho p, Judges.

Bishop , Judge.

Jennifer Guthard appeals from the decision of the Buffalo County District Court denying her request for an upward modification of Joel Guthard’s child support obligation. To determine Joel’s income for child support purposes, Jennifer sought inclusion of his salary; nonpassive income, distributions, and "in-kind" benefits from Joel’s 50-percent ownership in an S corporation; and rental income from another business. Limited by the evidence presented to it, the district court declined to include income beyond Joel’s salary for child support purposes. Finding no abuse of discretion, we affirm.

BACKGROUND

Jennifer and Joel were divorced in December 2004. Pursuant to the decree, Jennifer was awarded custody of the parties’ two children, born in 2002 and 2004, subject to Joel’s specified parenting time. Joel was ordered to pay child support in the amount of $1,137 per month; this was based on his earning capacity of $69,000 per year and Jennifer’s earning capacity of $19,968 per year.

Joel filed a complaint to modify in March 2016 and, subsequently, an amended complaint in May, seeking to modify his parenting time schedule and establish a procedure for reimbursement of noncovered medical expenses. Jennifer filed a "counter complaint" alleging that Joel’s income had increased, thus warranting an upward modification of his child support obligation.

At the modification trial in March 2018, the district court was informed that the parties had, for the most part, agreed on a modification of the parenting plan. The only issue addressed at trial which is relevant to this appeal is the modification of child support. Jennifer asked the court to include Joel’s 2016 schedule K-1 (K-1) of "approximately $300,000" from his 50-percent ownership in a corporation when determining his income for purposes of child support. Joel and the accountant who prepared his personal tax returns testified, and numerous exhibits, including Joel’s tax returns and K-1’s, were also received into evidence.

Joel testified that he and Brad Snyder are each 50-percent owners of GAS Electrical Services, Inc. (GAS Electrical), which is a subchapter S corporation. The corporation was originally started by Snyder in 2005. GAS Electrical is an industrial electrical contractor that works on ethanol plants; the corporation is based out of Iowa and "would be an Iowa corporation with a Nebraska corporation, along with being licensed in South Dakota, Kansas, Missouri, [and] Colorado." Joel said that Snyder is "the paperwork guy" for the corporation and that Joel is "the work guy." Joel said that he is "more a field guy going from job site to job site" and that he is "on the road more often than not" because "everything is on the road." Joel does "all the electrical aspects in the field" and supervises employees. At the time of trial, the corporation had 9 to 12 employees, but has had up to 32 employees.

Joel denied that he kept track of the business and its finances. When asked if he reviewed business expenses and financial statements, Joel responded, "We go through [sic] maybe once every year." When asked if he had any control in deciding when assets are bought or sold by GAS Electrical, Joel said "my co-partner buys his parts, I buy my parts and things on that order"; he agreed he had a 50-percent say in the assets of the company. Joel also agreed that he and Snyder decide together how income is going to be distributed and how much money is going to be retained in the business. They also determine the compensation of all employees of GAS Electrical, including their own; Joel and Snyder get the same salary. Joel’s salary was $50,000 in 2015 and was $65,000 in 2016 and 2017 (he did not give himself a raise in 2017 despite stating that 2016 was an "exceptional year" for the business). Joel said that the business pays a percentage of insurance premiums, he drives a company-owned vehicle (the company pays for the fuel, tires, and all vehicle expenses), he has a company credit card ("[f]or road expenses on fuel only and whatever material [he] might have to do"), and the company pays for his cell phone. And as will be explained below, Joel also receives distributions from GAS Electrical to pay his personal income taxes.

Joel testified that he and Snyder also formed SnyGut LLC in 2016 or 2017; they are each 50-percent owners. SnyGut owns a bar, which the company leases out to another individual for $1,200 per month. Joel acknowledged that his annual percentage of the rental income is $7,200, "[m]inus whatever maintenance and all that [sic] other fees would be." However, on cross-examination, he said that the rent is paid to SnyGut and that the $7,200 was not paid to him.

Errol Coslor, a certified public accountant, testified that he has prepared individual tax returns for Joel since 2005; Coslor is not the accountant for GAS Electrical. Coslor explained that the election to be taxed as an S corporation is basically an election to have the shareholders pay the income tax, rather than having the corporation pay the income tax. He also explained that a K-1 is issued by an S corporation showing income items and deductions that are to be included on the individual shareholder’s tax return. Joel agreed that the business income reported on his K-1 represents half of the business income for that year; he also believed that amount was after his salary and taxes were paid. Further, Coslor indicated that the K-1 does not need to be attached to the tax return, but, rather, the income just needs to be reported. When asked if there was a common practice year after year to estimate how much K-1 income there would be from the corporation, followed by a real distribution of funds to make the estimated tax payments, Coslor responded, "I believe so, yes." Joel testified that in 2017, he prepaid $108,000 for taxes to the federal government and $12,000 for taxes to Nebraska; when asked how he could make those payments when he takes a $65,000 salary, Joel responded that the money for the tax payments comes from distributions from the business. He acknowledged that the distributions are based on the estimated taxes and that the company has "never" hit it right on the exact number of the actual tax liability; for example in 2016, he received distributions of $137,625 to pay taxes of $133,143.

While Coslor was being questioned about Joel’s 2016 personal tax return, it was pointed out by Jennifer’s counsel that on the schedule E tax form there was a box that said nonpassive income from the K-1; counsel asked Coslor what the difference was between passive income and nonpassive income. Coslor responded that "nonpassive income means that the individual’s active in the business, passive means that he’s not active in the business." When asked if he knew for sure how much Joel actually received in distributions in 2016, Coslor stated, "The K-1 should be a good indication of how much he received ...."

Coslor explained that, with respect to non-S corporations, the Internal Revenue Service (IRS) has rules that allow it to assess a tax if the retained earnings exceed a certain amount. If a corporation’s retained earnings exceed $250,000, the IRS can assess an additional tax, or penalty, for excessive earnings, but there are several exceptions (e.g., if the corporation needs to accumulate earnings for expansion, purchases of buildings, purchases of land, or a potential downturn in its cyclical business). Coslor confirmed that those rules do not apply to a corporation that has made a subchapter S election.

According to the evidence, Joel received wages, tips, and other compensation directly from GAS Electrical as follows: $75,000.11 in 2011, $46,250.12 in 2012, $50,000.09 in 2013, $50,961.62 in 2014, $50,000.07 in 2015, and $65,000.04 in 2016. Joel also testified that his salary did not increase from 2016 to 2017.

Joel’s K-1’s reflect the following amounts of his proportionate share of the S corporation’s pass-through ordinary business income and distributions: 2011 income of $21,723, distribution of $13,150; 2012 income of $15,936, distribution of $46,633; 2013 income of $114,362, distribution of $61,375; and 2016 income of $399,649, distribution of $137,625. There were no K-1’s offered or received with regard to 2014 or 2015, but Joel’s schedule E shows $96,256 in nonpassive income (and "Section 179" expense of $2,350) from GAS Electrical in 2014 and $195,902 in nonpassive income (and "Section 179" expense of $6,300) in 2015.

No corporate tax returns or financial statements of GAS Electrical were offered by either party.

In its order filed on April 20, 2018, and as relevant to this appeal, the district court had to determine what should be attributed to Joel as income for child support purposes. The court found that Jennifer did not meet her burden to prove that the retained earnings in GAS Electrical were "excessive or inappropriate" so as to be considered income for purposes of child support. The court stated, "Without evidence to what was reasonable for a Sub S corporation such [as] GAS Electrical ... to retain under the circumstances, it is extremely difficult for the Court to determine that any earnings retained were excessive or inappropriate." The court noted case law that concluded it was appropriate to include in the obligor parent’s income the distributions made to the parent to assist the parent in making estimated income tax payments; however, the district court presumed that was to allow averaging of income for a 3-year period, and in the instant case, there were no K-1’s received into...