Roberts v. Roberts, 22440.

• Court: Supreme Court of South Dakota
• Writing for the Court: LOVRIEN, Circuit.
• Citation: 2003 SD 75,666 N.W.2d 477
• Parties: Jill Marie ROBERTS, Plaintiff and Appellee, v. Bart J. ROBERTS, Defendant and Appellant.
• Docket Number: No. 22440.,22440.
• Decision Date: 02 July 2003

666 N.W.2d 477
2003 SD 75

Jill Marie ROBERTS, Plaintiff and Appellee,
v.
Bart J. ROBERTS, Defendant and Appellant

No. 22440.

Supreme Court of South Dakota.

Considered on Briefs January 15, 2003.

Decided July 2, 2003.

666 N.W.2d 478

Sabrina Meierhenry and Jason M. Harris of Danforth, Meierhenry & Meierhenry, Sioux Falls, South Dakota, Attorneys for plaintiff and appellee

Shelley R. Wieck of Burd & Wieck, Sioux Falls, South Dakota, Attorneys for defendant and appellant.

LOVRIEN, Circuit Judge.

[¶ 1.] Bart Roberts (Bart) appeals a circuit court decision adopting a report by a child support referee recommending an increase in Bart's child support obligation. In calculating the increase, the referee included "pass-through income" from a subchapter S corporation in Bart's income and extrapolated his support to a level above the child support guidelines based upon the pass-through income. We reverse and remand.

FACTS AND PROCEDURAL HISTORY

[¶ 2.] Bart and Jill Roberts (Jill) were divorced in October 1995. The divorce decree incorporated a stipulation and agreement establishing child support and custody. After the divorce, Bart's child support obligation was modified by the parties on numerous occasions.

[¶ 3.] In July 2001, Jill petitioned the court for a modification of Bart's child support. A hearing was held before a child support referee on August 6, 2001.¹ At the time of the hearing, Jill was employed by U.S. Bank as an administrative assistant at a net monthly salary of $1,652 ($22,760 a year). Bart was employed by, and was a minority shareholder in, several corporations.

[¶ 4.] Bart received a monthly salary of $2,935 ($71,762 a year) as an employee of a corporation named Sioux Falls Towers.

666 N.W.2d 479

In addition, as a minority shareholder in several subchapter S corporations, Bart reported corporate income of $163,471 on his federal income tax return. Included in this amount was money Bart received from the subchapter S corporations in order to meet his federal income tax liability on the pass-through corporate income

[¶ 5.] Bart, as a shareholder in Sioux Falls Towers, had an ownership interest of 24 percent in the corporation.² His accountant testified that Bart received numerous distributions from his corporate holdings for the sole purpose of paying his federal income tax liability.³ Further, the accountant acknowledged that, since these corporations were relatively new, they could not continue to operate if they distributed any income other than what was necessary for shareholders to meet federal income tax liability. Thus, while Bart had to report this corporate income on his federal income tax return, he did not actually receive the income and could not use it for his own support.⁴ However, in calculating Bart's income, the referee included Bart's salary, all of the pass-through income from the subchapter S corporations and the distributions made by the corporations to cover the tax liability on the pass-through income.

[¶ 6.] The referee calculated Bart's monthly income at $18,441.⁵ Because Bart and Jill's combined monthly income exceeded the amounts provided for in the child support guidelines, the referee recommended that, in order to provide for the children's actual needs and standards of living, Bart's monthly child support obligation should be extrapolated to $1000 above the maximum amount provided for by the guidelines. Accordingly, the referee recommended that Bart pay $3,083 per month in child support.

ISSUES

[¶ 7.] We identify three issues.⁶

Should pass-through corporate income from a subchapter S corporation included

666 N.W.2d 480

on a parent's federal income tax return be included in calculating gross income for child support purposes when the parent does not actually receive the income and has no control over its distribution?

Should money a parent receives from a corporation to meet the parent's tax liability on pass-through income from the corporation be included in calculating the parent's gross income for child support purposes?

Did the circuit court err by increasing the child support obligation to $1000 above the child support guidelines?

ANALYSIS AND DECISION

[¶ 8.] The standard of review in a child support case is well-settled:

Findings of fact are reviewed under the clearly erroneous standard. This Court must be left with a definite and firm conviction that a mistake has been made to overturn a circuit court's findings. Watson-Wojewski v. Wojewski, 2000 SD 132, ¶ 13, 617 N.W.2d 666, 669-670 (citing Billion v. Billion, 1996 SD 101, ¶ 13, 553 N.W.2d 226, 230). Questions of law are reviewed de novo. Hendricksen v. Harris, 1999 SD 130, ¶ 7, 600 N.W.2d 180, 181.

An award of child support will not be disturbed unless the trial court clearly abused its discretion. Watson-Wojewski, 2000 SD 132 at ¶ 14, 617 N.W.2d at 670 (citing Steffens v. Peterson, 503 N.W.2d 254, 257 (S.D.1993)). Abuse of discretion is defined as "a discretion exercised to an end or purpose not justified by, and clearly against, reason and evidence." Billion, 1996 SD 101 at ¶ 14, 553 N.W.2d at 230. The question is not would this Court have made the same decision, but "whether a judicial mind, in view of the law and circumstances of the particular case, could reasonably have reached such a conclusion." Id. (citing Nelson v. Nelson, 454 N.W.2d 533, 534 (S.D.1990)).

Laird v. Laird, 2002 SD 99, ¶¶ 13-14, 650 N.W.2d 296, 299.

ISSUE ONE

[¶ 9.] Should pass-through corporate income from a subchapter S corporation included on a parent's federal income tax return be included in calculating gross income for child support purposes when the parent does not actually receive the income and has no control over its distribution?

[¶ 10.] We hold that, under the facts of this case, this income should not have been included in calculating gross income for child support purposes.

[¶ 11.] We begin with the basic premise that a parent's obligation to provide necessary support must be in accordance with the means of the parent. See SDCL 25-7-6.1.⁷ The "means" of a parent include his income, if that income is sufficient to meet the child's needs, or his income and assets if income alone is not sufficient. SDCL 25-7-6.5. A parent's monthly net income is determined as follows:

The monthly net income of each parent shall be determined by the parent's gross income less allowable deductions, as set forth herein. The monthly gross income of each parent includes amounts received from the following sources:

(1) Compensation paid to an employee for personal services, whether salary,

666 N.W.2d 481

wages, commissions, bonus, or otherwise designated;

(2) Self-employment income including gain, profit, or loss from a business, farm, or profession;

(3) Periodic payments from pensions or retirement programs, including social security or veteran's benefits, disability payments or insurance contracts;

(4) Interest, dividends, rentals, royalties, or other gain derived from investment of capital assets;

(5) Gain or loss from the sale, trade, or conversion of capital assets;

(6) Unemployment insurance benefits;

(7) Workers' compensation benefits; and

(8) Benefits in lieu of compensation including military pay allowances.

If the income of the parents is derived from seasonal employment, or received in payments other than regular, recurring payments, such income shall be annualized to determine a monthly average income.

SDCL 25-7-6.3.

[¶ 12.] We note that, under SDCL 25-7-6.3, in order for an amount to be included in a parent's monthly net income, the amount must first be included in the parent's monthly gross income. For an amount to be included in the parent's monthly gross income, the amount must first be received by the parent. SDCL 25-7-6.3. The requirement that a parent receive an amount before it is included in the parent's monthly gross income is consistent with other provisions of the child support statutes.

[¶ 13.] SDCL 25-7-6.6 allows the court to ignore deductions on a parent's federal income tax return which do not require the expenditure of cash and, thus, increase a parent's disposable income beyond what is shown on the tax return. This statute favors substance rather than form when viewing a parent's federal...