Roberts v. Roberts, 22440.
Decision Date | 02 July 2003 |
Docket Number | No. 22440.,22440. |
Citation | 2003 SD 75,666 N.W.2d 477 |
Parties | Jill Marie ROBERTS, Plaintiff and Appellee, v. Bart J. ROBERTS, Defendant and Appellant. |
Court | South Dakota Supreme Court |
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.
[¶ 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.
[¶ 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. 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.
[¶ 7.] We identify three issues.6
[¶ 8.] The standard of review in a child support case is well-settled:
[¶ 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:
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 income tax return. If a deduction on a parent's federal income tax return is, in fact, money available to a parent to support himself, then that amount can be considered in deciding the extent to which the parent should support his child.
[¶ 14.] We also note the provisions of SDCL 25-7-6.7. Child support is based upon monthly net income which is determined by making certain deductions from a parent's monthly gross income.8 By allowing for these deductions, the legislature has attempted to guarantee that the monthly net income on which child support is based reflects a parent's actual ability to support himself and, thus, his child.
[¶ 15.] In reviewing the various provisions in the child support statutes, we conclude that the statutory scheme is based upon the general principle that the amount of income a parent has to support his child (i.e., the "means" of the parent) is the amount of income the parent has received to support himself.9 This principle is consistent with the approach urged by the South Dakota Commission on Child Support in both its 1985 and 1988 reports to the governor. In its reports, the Commission stressed the importance of establishing guidelines that reflected the parents' ability to pay.10
[¶ 16.] With this general principle in mind, we now examine the specific provisions of SDCL 25-7-6.6 at issue here. Did the fact that Sioux Falls Towers' subchapter S income was reported on Bart's federal income tax return mean that, under SDCL 25-7-6.6, that income had to be included in Bart's gross income? We conclude that it did not.
[¶ 17.] We begin by noting that a parent's monthly gross income must be received from those sources identified by SDCL 25-7-6.3. If one of the sources of monthly gross income is income from a business, profession or...
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