Taylor v. Fezell, No. E2002-02937-SC-R11-CV.
| Court | Supreme Court of Tennessee |
| Writing for the Court | J. "Steve" Daniel, Sp.J. |
| Citation | 158 S.W.3d 352 |
| Docket Number | No. E2002-02937-SC-R11-CV. |
| Decision Date | 14 January 2005 |
| Parties | Angela D. (Fezell) TAYLOR v. Douglas FEZELL. |
v.
Douglas FEZELL.
[158 S.W.3d 354]
John P. Chiles, Kingsport, Tennessee, and Thomas F. Bloom, Nashville, Tennessee, for the appellant, Douglas W. Fezell.
C. Dwaine Evans, Morristown, Tennessee, for the appellee, Angela D. (Fezell) Taylor.
J.S. "STEVE" DANIEL, Sp.J., delivered the opinion of the court, in which FRANK F. DROWOTA, III, C.J., and E. RILEY ANDERSON, JANICE M. HOLDER, and WILLIAM M. BARKER, JJ., joined.
We granted permission to appeal pursuant to Rule 11 of the Tennessee Rules of Appellate Procedure to determine whether the retained earnings of an S corporation should be treated as income to the sole or majority shareholder of the corporation for the purpose of calculating child support in accordance with the Tennessee Child Support Guidelines. We conclude that absent a showing that the retained earnings are excessive or that an obligor is actually manipulating his or her income, the retained earnings of an S corporation should not be imputed as income to the sole or majority shareholder in calculating a child
support obligation. Because there was no showing in this case that the retained earnings were excessive or that the obligor-father manipulated the funds of the S corporation to reduce his child support obligation, we hold that the trial court and the Court of Appeals erred by imputing to him as income the company's retained earnings. Further, we hold that the lower courts erred by failing to include the economic value of the obligor-father's company car in its calculation of income. Finally, we hold that the trial court and the Court of Appeals erred by not granting the obligee-mother's petition to have the obligor pay her attorney's fees in this cause. Based on the foregoing, we reverse the judgment of the Court of Appeals and remand to the trial court for a determination of child support that is consistent with this opinion and for a determination of attorney's fees.
On June 14, 1986, Douglas W. Fezell (Mr. Fezell) and Angela Daniels (Mrs. Fezell)1 were married. The couple had two children: a daughter born on May 30, 1993, and a son born on April 15, 1995. The couple divorced in 1999. In their Marital Dissolution Agreement (MDA), Mrs. Fezell was designated as the primary residential custodian of the two minor children. The MDA also provided that Mr. Fezell was to have visitation time greater than the standard amount contemplated by the Tennessee Child Support Guidelines. In consideration of Mr. Fezell's additional visitation and the establishment of a trust fund for the children, the parties mutually agreed that Mr. Fezell would pay child support in the amount of $1,000.00 per month until July 31, 1999, with an increase to $1,300.00 in August 1999. The MDA also set forth the terms of the trust agreement and provided a method to calculate Mr. Fezell's contribution to the trust.
Pursuant to the Tennessee Child Support Guidelines,2 Mr. Fezell's child support obligation was based, in part, on his income from Professional Vending Services (PVS). At the time of the divorce, Mr. and Mrs. Fezell were the sole shareholders of PVS, each owning a one-half interest. The parties agreed in the MDA that Mr. Fezell would continue to run PVS as the sole shareholder and president and that he would pay Mrs. Fezell $310,000.00 in exchange for her one-half interest in the company. Mr. Fezell completed the purchase of this stock and was the sole shareholder of the corporation at the time of the present litigation.
PVS buys, installs, and services vending machines and auxiliary equipment in various commercial locations. This business is very capital intensive, and to be competitive, PVS must purchase and maintain state-of-the-art vending equipment for its commercial users. PVS, from its inception until 2001, was registered with the State as an S corporation. An S corporation's income passes through that corporate entity to the individual shareholders in proportion to their respective stock ownership. This passing through of income takes place for federal income tax purposes, regardless of whether the earnings of the corporation are retained to enhance the corporation's capital position. Thus, the shareholders of an S corporation are required
to pay taxes on their apportioned shares of the corporation's earnings, regardless of the actual sums they are paid. In 2001, following the divorce, Mr. Fezell changed the corporate status of the company from an S corporation to a C corporation. This change in corporate status resulted in the removal from Mr. Fezell's income for tax purposes of corporate earnings that had been retained by the corporation.
The record also demonstrates that Mr. Fezell has been furnished a leased Lexus automobile by PVS and has retained the full use of the vehicle, both during business and nonbusiness hours. PVS has been paying a monthly lease payment of $1,200.00 for Mr. Fezell's automobile.
On August 1, 2001, Mr. Fezell filed a post-divorce action seeking to increase his parenting time. He also sought a reduction in his child support payments and a determination that the trust agreement in the MDA be declared void. Mrs. Fezell responded with a counter-petition, asserting that Mr. Fezell had willfully failed and refused to fund the trust and that he had failed to pay the proper amount of child support in accordance with the Tennessee Child Support Guidelines. Additionally, Mrs. Fezell requested that Mr. Fezell be ordered to pay her attorney's fees in this cause. The trial court conducted a hearing on the various claims of the parties.
The trial court upheld the validity of the trust established for the minor children, found that Mr. Fezell had failed to properly calculate the trust contributions, and entered a judgment for those past-due contributions. The trial court denied Mr. Fezell's request for additional parenting time and Mrs. Fezell's request for attorney's fees. Further, the trial court increased Mr. Fezell's child support payment to $1,576.58 per month.
In calculating Mr. Fezell's child support obligation, the trial court first determined his income. In so doing, the trial court imputed to Mr. Fezell PVS's retained earnings as an S corporation. Although the court acknowledged that PVS was a capital-intensive business, it concluded that Mr. Fezell "maintain[ed] the ability and authority to control his annual salary, with the potential to manipulate his income by allowing the company to accumulate profits through retained earnings." The trial court also found that Mr. Fezell converted PVS from an S corporation to a C corporation for legitimate business purposes and on the advice of his accountant.
The trial court then averaged Mr. Fezell's income for the three years prior to trial, using Mr. Fezell's 1999, 2000, and 2001 individual federal income tax returns. The 1999 and 2000 returns showed the pass-through income of PVS which had been attributable to Mr. Fezell as sole shareholder of an S corporation. The 2001 tax return reflected wages paid to Mr. Fezell by the corporation as a C corporation as shown by a W-2 form. Having totaled these three incomes, the court divided the total sum by three, resulting in an average income of $107,433.00 per year for the purpose of the Child Support Guidelines. Applying the respective percentage of 32% to that obligation, the trial court arrived at a child support amount of $2,012.00 per month. See Tenn. Comp. R. & Regs. 1240-2-4-.03(5) (1994). Thereafter, the trial court reduced this sum to reflect the excess visitation exercised by Mr. Fezell and concluded that the appropriate child support after a credit of $435.42 was $1,576.58 per month. The trial court did not consider the economic benefit of Mr. Fezell's personal use of a company car in its child support calculation.
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Diez v. Davey, Docket No. 318910.
...the distribution of income, or lack thereof, from the corporation. See J.S., 454 Mass. at 663, 912 N.E.2d 933; Taylor v. Fezell, 158 S.W.3d 352, 358 (Tenn., 2005).C. ANALYSISConsidering the plain language of the MCSF and the manner in which S corporations function, the question presented in......
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Lingham Rawlings, LLC v. Gaudiano (In re Lingham Rawlings, LLC), Case No. 10-32769
...some other recognized exception to the American rule applies, allowing for recovery of such fees in a particular case. Taylor v. Fezell, 158 S.W.3d 352, 359 (Tenn. 2005); John Kohl, 977 S.W.2d at 534. Tennessee's adherence to the American rule is based on several public policy consideration......
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Smith v. Morse (In re Morse), No. 1:13–bk–13188–SDR
...some other recognized exception to the American rule applies, allowing for recovery of such fees in a particular case. Taylor v. Fezell, 158 S.W.3d 352, 359 (Tenn.2005) ; John Kohl, 977 S.W.2d at 534.House v. Estate of Edmondson, 245 S.W.3d 372, 377 (Tenn.2008) (citations omitted). In this ......
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Nye v. Bayer Cropscience, Inc., No. E2008-01596-COA-R3-CV (Tenn. App. 10/14/2009), No. E2008-01596-COA-R3-CV.
...The Trial Court's conclusions of law are reviewed under a purely de novo standard with no presumption of correctness. Taylor v. Fezell, 158 S.W.3d 352, 357 (Tenn. 2005), Union Carbide Corp. v. Huddleston 854 S.W.2d 87, 91 (Tenn. 1993). The determination of whether jury instructions are prop......
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Diez v. Davey, Docket No. 318910.
...the distribution of income, or lack thereof, from the corporation. See J.S., 454 Mass. at 663, 912 N.E.2d 933; Taylor v. Fezell, 158 S.W.3d 352, 358 (Tenn., 2005).C. ANALYSISConsidering the plain language of the MCSF and the manner in which S corporations function, the question presented in......
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Lingham Rawlings, LLC v. Gaudiano (In re Lingham Rawlings, LLC), Case No. 10-32769
...some other recognized exception to the American rule applies, allowing for recovery of such fees in a particular case. Taylor v. Fezell, 158 S.W.3d 352, 359 (Tenn. 2005); John Kohl, 977 S.W.2d at 534. Tennessee's adherence to the American rule is based on several public policy consideration......
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Smith v. Morse (In re Morse), No. 1:13–bk–13188–SDR
...some other recognized exception to the American rule applies, allowing for recovery of such fees in a particular case. Taylor v. Fezell, 158 S.W.3d 352, 359 (Tenn.2005) ; John Kohl, 977 S.W.2d at 534.House v. Estate of Edmondson, 245 S.W.3d 372, 377 (Tenn.2008) (citations omitted). In this ......
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Nye v. Bayer Cropscience, Inc., No. E2008-01596-COA-R3-CV (Tenn. App. 10/14/2009), No. E2008-01596-COA-R3-CV.
...The Trial Court's conclusions of law are reviewed under a purely de novo standard with no presumption of correctness. Taylor v. Fezell, 158 S.W.3d 352, 357 (Tenn. 2005), Union Carbide Corp. v. Huddleston 854 S.W.2d 87, 91 (Tenn. 1993). The determination of whether jury instructions are prop......