Hein v. Hein (In re Hein)
| Decision Date | 21 July 2020 |
| Docket Number | F076581 |
| Court | California Court of Appeals Court of Appeals |
| Parties | IN RE the MARRIAGE OF Jessica R. and Martin H. HEIN. Jessica R. Hein, Appellant, v. Martin H. Hein, Respondent. |
Certified for Partial Publication.*
Law Offices of Ira L. Stoker and Ira L. Stoker, Bakersfield, for Appellant.
Ribet & Silver, Claudia Ribet, Beverly Hills, Elizabeth Skorcz; Edward J. Thomas, Bakersfield, and Jeffrey A. Travis, Huntington Beach, for Respondent.
This appeal raises issues about a self-employed parent's annual gross income for purposes of determining child support under the statewide guideline. The mother contends the trial court did not properly determine the father's annual gross income under Family Code section 40581 and, thus, erred in calculating the amount of child support owed. First, the trial court allowed the depreciation deductions claimed on the federal income tax returns of the father and his corporations to reduce his income available for child support. Second, the court presumed the income and expenses reported on the father's individual and corporate tax returns were correct and, thus, assigned the mother the burden of proving the reported amounts were incorrect.
After the trial court issued its decision, we decided the question of statutory construction involving depreciation. ( In re Marriage of Rodriguez (2018) 23 Cal.App.5th 625, 635, 233 Cal.Rptr.3d 187 ( Rodriguez ).) We concluded a self-employed parent's depreciation deductions for motor vehicles did not constitute "expenditures required for the operation of the business" for purposes of section 4058, subdivision (a)(2). We now extend that statutory interpretation from motor vehicles to depreciation deductions for equipment and other assets used in the self-employed parent's businesses. The term "expenditure" describes an actual outlay of cash. Claiming a depreciation deduction on an income tax return does not require an outlay of cash and, thus, does not reduce the funds available for child support.2
On the question of the burden of proof and the rebuttable presumption that the gross income stated on a parent's tax returns is correct, we conclude such a presumption, if it exists, does not extend to the tax returns in this case. Here, the self-employed father's businesses are organized into two wholly owned corporations (one taxpaying entity and one flow-through entity), the corporations' operations are intertwined, and their total assets exceed $5 million. In such circumstances, we conclude the burden of proving that the expenses claimed on the tax returns constitute "expenditures required for the operation of the business[es]" is properly allocated to the self-employed parent who controls the corporations.
We therefore reverse the trial court's order denying the request to modify child support and remand for further proceedings to determine the father's income available for child support.
Appellant Jessica Hein, now known as Jessica Llach (Jessica), filed a petition for dissolution of her marriage with respondent Martin Hein (Martin) in May 2003. A judgment of dissolution of marriage was filed in November 2004. At the time, both of their daughters were minors. Initially, physical and legal custody of their daughters was divided equally among the parties and neither parent paid child support. The youngest daughter was born in the spring of 1999. As a result, both daughters were adults when the notice of appeal in this case was filed in October 2017.
Jessica has a Ph.D. in physical therapy and, at the time relevant to this proceeding, worked as a self-employed physical therapist three days a week. The parties stipulated that Jessica's income was $9,086 per month, which included $7,172 per month in wages and salary and $1,914 in self-employment income.
Martin is a self-employed farm owner and manager and has been licensed as a commercial pilot for over 20 years. He is the sole shareholder and president of Hein Ranch Company (HRC) and Martin Hein Ranch Company (MHRC). The parties stipulated that Martin's average wages and salary for 2013 and 2014, as reflected on his personal income tax returns, was $7,760 per month, not including any contributions to a pension plan or employee benefits. The parties disagreed about the amount of additional income that should be included in his net disposable income for purposes of calculating child support.
Through HRC, Martin owns four ranches, which total 110 acres. Martin testified that HRC did not have any employees that he was aware of, other than himself.
HRC is a C corporation with a fiscal year ending June 30th. As a C corporation, HRC pays income tax. HRC's federal income tax returns on Form 1120 (U.S. Corporation Income Tax Return) for 2010 through 2013 were introduced into evidence. HRC's gross receipts or sales for fiscal years 2011 through 2013 were reported as $4.18 million, $4.14 million, and $4.34 million. For those fiscal years, the total depreciation claimed by HRC on line 20 of its Form 1120 was $971,894, $747,193, and $701,870. The taxable income HRC reported on Line 30 for those years was a loss of $47,658, $0, and a gain of $152,678.3 At the end of HRC's 2013 fiscal year (i.e., June 30, 2014), its total assets were $3,387,982 and its retained earnings were $1,736,522. HRC had no loans from its shareholder, Martin.
MHRC is a subchapter S corporation4 formed on October 31, 2008. MHRC provides farm management services for the ranches owned by HRC and for properties owned by third parties. Martin estimated that MHRC manages more than 6,000 acres of trees and vines. MHRC does not handle annual row crops. The services provided include planting, pruning, irrigation, fertilizing, pest control, and harvesting. Martin described the services provided as everything required from farm to table. MHRC's employees include 22 general labor workers and four office staff. It also obtains workers through labor contractors.
The workers are paid by HRC, which bills MHRC for the cost. MHRC reimburses HRC and charges the labor costs to the accounts of its clients. Money from the client accounts goes to MHRC, reimbursing it for the cost of the labor.
MHRC's income is reported by Martin by attaching Schedule E to his federal income tax return on Form 1040. For the years 2011 through 2013, Martin reported S corporation income from MHRC of $20,758, $122,268 and $178,846. For those years, MHRC took depreciation deductions of $58,769, $6,037, and $265,922.5 At the end of 2013, MHRC's total assets were $2,137,227, its retained earnings were $491,500, and its liabilities included loans from Martin totaling $424,349.6
Martin owns interests in other companies and real estate. The details of those companies and properties is not essential to the resolution of the legal issues presented in this appeal and, therefore, those details are omitted from this opinion. In addition, specific information about various expenses that provided a personal benefit to Martin or one of the daughters, such as flying lessons for the daughter, vacations, and trips need not be described because those details are not relevant to determining whether the legal issues relating to the burden of proof and the application of subdivision (a)(3) of section 4058 to those benefits.
On February 28, 2014, Jessica filed a request for order for modification of child custody, child support and for attorney fees and costs.
The trial on the child support issue was held in August (four days), September (one day), and December (3 days) of 2016. In January 2017, Jessica filed her written closing argument. Martin's response and Jessica's reply were filed in February.
On May 18, 2017, the trial court issued a 16-page written ruling on Jessica's request for an order modifying child support.7 The court determined the depreciation deductions taken by HRC and MHRC were an appropriate offset to gross income. The court also determined the federal income tax returns of Martin and his corporations were presumed correct and Jessica bore the burden of proving the tax returns were incorrect. The court concluded Jessica failed to carry that burden on many of her challenges to business expenses reported on the tax returns. Based on its determination of Martin's income, the court determined the guideline child support Martin was required to pay for three periods8 from March 1, 2014, until the youngest daughter reached the age of majority. That date had passed by the time the court issued its statement of decision.
The statement of decision addressed and rejected Jessica's request for attorney fees. Based on its determination of Martin's and Jessica's income for purposes of child support, the court found "there is not a disparity in income that would justify the award of attorney's fees." Lastly, the statement of decision directed Jessica "to prepare an order for signature by the Court."
On September 29, 2017, the trial court filed "Findings and Order After Hearing" on Judicial Council form FL-340, which attached the DissoMaster reports and a two-page summary of the rulings on child support and attorney fees. The findings and order after hearing was signed pursuant to Code of Civil Procedure section 635 by a judge who did not issue the statement of decision. Jessica filed a timely notice of appeal.
Child support awards in California are governed by the legislation that established a statewide uniform child support guideline. (See §§ 4050–4076.) "The court shall adhere to the statewide uniform guideline and may depart from the guideline only in the special circumstances" identified in the statute. (§ 4052.) The child support guideline is an algebraic formula set forth in section 4055. The amount generated by the formula "is intended to be presumptively correct...
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