Roberts v. Wright

• Decision Date: 03 February 1994
• Docket Number: No. 14406,14406
• Citation: 117 N.M. 294,871 P.2d 390,1994 NMCA 22
• Parties: Caroline ROBERTS, f/k/a Caroline Wright, Petitioner-Appellee, v. Randy R. WRIGHT, Respondent-Appellant.
• Court: Court of Appeals of New Mexico

Page 390

871 P.2d 390

117 N.M. 294

Caroline ROBERTS, f/k/a Caroline Wright, Petitioner-Appellee, v. Randy R. WRIGHT, Respondent-Appellant.

No. 14406.

Court of Appeals of New Mexico.

Feb. 3, 1994.

[117 N.M. 296] Barbara L. Shapiro, Albuquerque, for petitioner-appellee.

Elizabeth Losee, Albuquerque, for respondent-appellant.

OPINION

CHAVEZ, Judge.

Father appeals from a trial court order requiring Mother to pay Father $350 per month in child support. We note that Father and Mother entered into a settlement agreement that reflected their binding resolution of all issues other than the determination of child support and attorney fees related to child support. On appeal, Father raises three issues. He argues that the trial court erred in setting the support amount, erred in commencing the support obligation at the date of hearing on support rather than the date of the divorce, and erred in awarding Mother attorney fees. We hold that the trial court properly refused to consider Mother's corporate earnings as part of her gross income in setting the support amount, that the trial court was within its discretion in commencing the support obligation on the date of hearing, and that the trial court failed to make sufficient findings to support its award of attorney fees. Accordingly, we affirm the trial court's judgment as to the first two issues and reverse and remand the issue regarding attorney fees.

I. CHILD SUPPORT

Father makes several challenges to the level of child support the trial court established. The facts related to the child support issue are that the parties separated in January 1991 and have joint legal and physical custody of two children. They share time with the children on a 50/50 basis, and this arrangement has been in effect since their separation. While married, the parties were in business selling computer hardware and software. It is undisputed that the business was Mother's sole and separate property. From 1987 through 1990 the business either lost money or earned very little. However, due to a contract with a large federal entity, the business had gross earnings of $330,750 in 1991.

Mother's 1991 personal income, excluding the 1991 corporate earnings, was over $72,000. This figure included interest and dividend income from sources other than the business. Father does not dispute that the $56,230 Mother paid herself from the business was a reasonable salary for the work she did. Father made just under $31,000 for 1991.

For the purpose of determining child support, the trial court did not include the $330,750 that Mother's business earned in 1991 as part of her income. The court found that the government entity contracting with the business required quick responses on purchase orders, which, in turn, required the business to have the necessary items on hand. Mother dealt with this requirement by purchasing and retaining a large inventory. Finally, there were findings that Mother's business was in a highly competitive market with declining profits and that maintenance of the government contract was essential to the success of the business. If Mother paid herself the $330,750, she would not have been able to maintain the government contract. The trial court found that Mother reinvested the income back into the business by purchasing substantial inventory and that the decision to reinvest that money was based on sound business practice.

A. Inclusion of the 1991 Corporate Earnings

The trial court was bound to apply the child support guidelines in NMSA 1978, Section 40-4-11.1 (Cum.Supp.1992), to determine the presumptive level of support each party would pay. See Perkins v. Rowson, 110 N.M. 671, 674, 798 P.2d 1057, 1060 (Ct.App.), cert. denied, 110 N.M. 641, 798 P.2d 591 (1990). Father's initial argument regarding the trial court's application of Section 40-4-11.1 is that the court erred by refusing to include the 1991 corporate earnings as part of Mother's gross income.

Section 40-4-11.1(B) states in part that the purposes of the child support guidelines are to "(1) establish as state policy an adequate standard of support for children, subject to the ability of parents to pay; [and] (2) make awards more equitable by ensuring more consistent treatment of persons in similar circumstances...." However, "a substantial hardship in the obligor, obligee or subject children may justify a deviation upward or downward from the amount that would otherwise be payable under the guidelines." NMSA 1978, Section 40-4-11.2 (Repl.Pamp.1989). In fulfillment of the purposes of the guidelines, "income" is defined as the "actual gross income of a parent if employed to full capacity or potential income if unemployed or under employed." Section 40-4-11.1(C)(1) (emphasis added). The Legislature has defined the gross income of a closely-held business as the "gross receipts minus ordinary and necessary expenses required to produce such income, but ordinary and necessary expenses do not include expenses determined by the court to be inappropriate for purposes of calculating child support...." Section 40-4-11.1(C)(2)(b). Thus, the question is whether Mother's reinvestment was an ordinary and necessary expense required to produce business income for purposes of Section 40-4-11.1(C). Absent an abuse of discretion, we affirm.

Father does not express it as such, but his analysis imports federal tax principles into the child support guidelines. Father's interpretation of what are ordinary and necessary expenses is a technical one used in connection with figuring deductions from federal corporate income tax. He, in effect, urges us to consider Mother's reinvestment to be a capital cost, instead of an ordinary and necessary expense because it is not so ordinary. See generally Commissioner of Internal Revenue v. Lincoln Sav. & Loan Ass'n, 403 U.S. 345, 353-54, 91 S.Ct. 1893, 1898-99, 29 L.Ed.2d 519 (1971) (explaining the difference between ordinary and necessary expenses, which are deductible from income for federal tax purposes, and capital costs, which are not deductible).

While the trial court may consider the tax treatment of expenses claimed by a parent as "ordinary and necessary," the trial court is not limited to the tax treatment of a particular expense. In re Marriage of Sullivan, 243 Mont. 292, 794 P.2d 687, 689 (1990); Nelson v. Nelson, 454 N.W.2d 533, 535 (S.D.1990). The parent claiming a business expense must show not only that it is ordinary and necessary to the business, but also that it is irrelevant to calculating support obligations. Rimkus v. Rimkus, 199 Ill.App.3d 903, 145 Ill.Dec. 868, 873, 557 N.E.2d 638, 643 (1990); Helen Donigan, Calculating and Documenting Child Support Awards Under Washington Law, 26 Gonz.L.Rev. 13, 37 (1991). For example, business expenses that are valid for accounting or tax purposes may not affect a parent's actual cash flow, so they would normally not be considered ordinary and necessary for purposes of calculating support. See, e.g., In re Marriage of Lefler, 185 Ill.App.3d 677, 134 Ill.Dec. 1, 5, 542 N.E.2d 1, 5 (1988); Stewart v. Stewart, 243 Mont. 180, 793 P.2d 813, 815 (1990). The statutory language, then, grants the trial court some discretion in allowing a deduction for ordinary and necessary business expenses. Cf. Kennedy v. Kennedy, 107 N.C.App. 695, 421 S.E.2d 795, 798 (1992) (guidelines vest trial court with discretion to disallow deduction of business expenses inappropriate for the purpose of calculating child support).

The evidence was that the purchase of inventory was reasonably necessary to sustain the one contract that made Mother's business successful. Also, the evidence was that the purchase, though unprecedented in the history of Mother's business, was in furtherance of the central objective of the business, i.e., the continuing profitable sale of computer hardware and software. Thus, the findings support the judgment and are not an abuse of discretion.

Father next argues that the trial court's reading of the term "ordinary and necessary expenses," would effectively require him to demonstrate fraud. He states this holding inappropriately adds a requirement onto existing legislation. See State ex rel. Barela v. New Mexico State Bd. of Educ., 80 N.M. 220, 222, 453 P.2d 583, 585 (1969). He also argues the requirement of showing fraud would be contrary to the support guidelines policy of promoting efficient establishment of support levels. See Sec. 40-4-11.1(B)(3). We disagree.

When the trial court interpreted the support guidelines as requiring Father to show fraud, the court erred. However, on the evidence produced, the error was not reversible. As we have stated, if there is a disagreement about the appropriateness of the deduction, then the deduction must be justified by the party claiming the expense. Donigan, supra at 37; Coffey v. Coffey, 394 Pa.Super. 194, 575 A.2d 587, 590 (1990). An expense can be found inappropriate without making the specific findings necessary to support a fraud claim. Cf. In re Marriage of Dwan, 108 Ill.App.3d 808, 64 Ill.Dec. 340, 343-44, 439 N.E.2d 1005, 1008-09 (1982) (denial of "business" travel and roommate's living expenses). The 1991 corporate earnings were necessary to maintain Mother's business. Consequently, Mother justified the appropriateness of excluding her 1991 corporate earnings.

To the extent Father makes a substantial evidence challenge to the trial court's calculations, the challenge must fail. The trial court used these figures to explore the reasonableness of various support amounts. Other findings of ultimate fact support the trial court's judgment. For instance, the court found facts related to the amount of time each party would have custody of the children and the basis of the Mother's corporate earnings. Yet, aside from the argument that we resolved above regarding inclusion of corporate earnings, Father does not directly challenge the ultimate findings supporting the judgment. We accept...