Zold v. Zold

• Decision Date: 15 September 2005
• Docket Number: No. SC04-1858.,SC04-1858.
• Citation: 911 So.2d 1222
• Parties: Sherry Palicte ZOLD, Petitioner, v. John F. ZOLD, Respondent.
• Court: Florida Supreme Court

Page 1222

911 So.2d 1222

Sherry Palicte ZOLD, Petitioner, v. John F. ZOLD, Respondent.

No. SC04-1858.

Supreme Court of Florida.

September 15, 2005.

COPYRIGHT MATERIAL OMITTED

Norman D. Levin and Amy Hamlin of Norman D. Levin, P.A., Longwood, FL, for petitioner.

Charles W. Willits, Orlando, FL, for respondent.

PARIENTE, C.J.

We have for review Zold v. Zold, 880 So.2d 779 (Fla. 5th DCA 2004), which expressly and directly conflicts with Martinez v. Martinez, 761 So.2d 433 (Fla. 3d DCA 2000), Sohacki v. Sohacki, 657 So.2d 41 (Fla. 1st DCA 1995), and Zipperer v. Zipperer, 567 So.2d 916 (Fla. 1st DCA 1990). We have jurisdiction.¹ The conflict issue is whether "pass-through" income² from an S corporation that is not actually distributed to the shareholder-spouse is to be considered income for the purposes of calculating alimony, child support, and attorney's fees.

FACTS AND PROCEDURAL HISTORY

The issue in this case arises from a final judgment of dissolution between John F. Zold (the husband) and Sherry Palicte Zold (the wife). The husband, who was sixty-five years old at the time of the trial, is the chief executive officer of Tri Tech Electronics, Inc., (Tri Tech), a close corporation³ that elected to be taxed pursuant to Subchapter S of the Internal Revenue Code. The wife, who was fifty years old at the time of the trial, was a full-time housewife with one year of college education. The couple's minor child was fifteen years old at the time of the trial. The husband's only marital asset and sole source of income is his interest in Tri Tech. The husband and another shareholder, A.J. Stanton, own all of Tri Tech's capital stock.

The trial court found that the husband owned 57.15428 percent of Tri Tech stock (400 shares), and that his ownership interest was worth $890,000 based on an appraisal report that used the asset-based approach to determine the fair market value of 400 shares of Tri Tech stock. The trial court also found that the husband had income exceeding $245,000 per year as reflected on his individual federal income tax return for 2001. The trial court based its determination of child support and alimony on the fair market value of the husband's interest in Tri Tech stock and the husband's income reported on his individual federal income tax return for 2001. In entering final judgment, the trial court ordered the husband to pay a lump sum amount, permanent periodic alimony, child support, premiums on a life insurance policy, and one-half of the child's expenses. The husband was also required to pay for health and dental insurance for the couple's minor child. Thereafter, the trial court supplemented its previous order and required the husband to contribute to the wife's attorney's fees and costs. The entire amount of the husband's immediate obligations was in excess of $179,406.20.⁴

On appeal to the Fifth District Court of Appeal, the husband argued that the trial court erred in valuing his ownership interest in Tri Tech at $890,000 because he owns only 40 percent of Tri Tech stock, not 57.15428 percent as found by the trial court. The Fifth District concluded that there was competent, substantial evidence to support the trial court's finding concerning the husband's ownership interest.⁵

However, the Fifth District concluded that the trial court erred in considering the husband's entire pro rata share of net income from Tri Tech, both distributed and undistributed, as income available to the husband to satisfy the financial obligations imposed in the final judgment and award of attorney's fees. The Fifth District noted that all of the corporation's net income passes through to the shareholders for income tax purposes under Subchapter S and is therefore taxable to each shareholder in accordance with his or her percentage of stock ownership. The Fifth District reasoned, however, that shareholders do not necessarily receive cash distributions equal to the shareholder's proportionate share of the corporation's net income that is taxed to them because a portion of the corporation's net income may be retained for corporate purposes. The Fifth District stated that "[o]nly that amount of cash is distributed in excess of what must be retained for corporate purposes." Zold, 880 So.2d at 780. The district court explained that the "corporation is not the personal piggy bank for any one shareholder simply because that shareholder may have a controlling interest in the corporation and is also the chief executive officer. Financial responsibilities to creditors and employees must be satisfied before distributions to shareholders take place if a corporation is to remain viable." Id. at 781.

The Fifth District observed that in this case there was no evidence that the husband had the authority to accumulate the income rather than distribute it. The district court noted that the corporate accountant testified that "distribution of cash to shareholders equal to the total corporate earnings should not be made because cash is required to be retained as working capital to maintain business operations of the corporation and to avoid bankruptcy." Id. The Fifth District stated that the final judgment demonstrates that the trial court believed that Tri Tech's balance sheet reflected income that was available for distribution. Specifically, the final judgment stated that Tri Tech's "available income on its balance sheet increased from $92,853 at year-end 1999 to $196,881 at year-end 2000 to $372,908 at year-end 2001." Id. (emphasis omitted). The Fifth District explained that a balance sheet shows a corporation's assets, liabilities, and owners' equity, but does not represent income that is available for distribution to the corporation's shareholders. Thus, the Fifth District concluded that the "record does not support the trial court's determination that [the amounts on Tri Tech's balance sheet] could be distributed by the corporation to the shareholders without jeopardizing corporate operations." Id.

The Fifth District vacated the portion of the final judgment in which the trial court made findings as to the husband's income and ordered support and equitable distribution based on those findings. The Fifth District also vacated the awards of attorney's fees and costs, and remanded with instructions that the trial court should not consider the undistributed "pass-through" income "unless it can be demonstrated that Tri Tech has delayed distributions of cash for purposes other than corporate requirements." Id. at 782.

ANALYSIS

The issue before the Court is whether "pass-through" income of an S corporation that is not distributed to shareholders constitutes income within the meaning of chapter 61, Florida Statutes (2004), for purposes of calculating alimony, child support, and attorney's fees. Further, we must decide whether the resolution of this issue requires an exclusively legal determination that can be governed by a bright line rule, or whether it also requires factual findings to be made on a case-by-case basis. To place this issue in context, we begin by reviewing the applicable federal and state statutes governing taxation of shareholders of an S corporation. Next, we review the provisions of chapter 61 defining income attributable to a spouse for purposes of determining alimony, child support, and attorney's fees. We then review cases addressing the issue of whether business income that has been reported on a spouse's individual federal income tax return but not received by the spouse constitutes income under chapter 61. Further, we analyze whether and under what circumstances undistributed "pass-through" income that has been retained by a corporation for corporate purposes constitutes income within the meaning of chapter 61. Finally, we review the Fifth District's decision in the present case.

I. Subchapter S Revision Act of 1982 and Section 607.06401, Florida Statutes (2004)

The Subchapter S Revision Act of 1982 (the "Act") allows a small business corporation to elect to have all of the corporation's income, deductions, losses, and credits pass through to the shareholders of the corporation for income tax purposes in accordance with each shareholder's pro rata share of ownership in the corporation. See 26 U.S.C.A. § 1366 (West Supp.2005).⁶ This "pass-through" income is then taxed to the shareholders directly on the shareholders' individual federal income tax returns. See 26 U.S.C.A. § 1363 (West Supp.2005). Corporations are generally treated as separate legal entities from their shareholders for tax purposes. See S.Rep. No. 97-640, at 5, reprinted in 1982 U.S.C.C.A.N. 3253, 3257. Without an election to be treated as an S corporation, income earned by the corporation is taxed to the corporation and distributions from the corporation are taxed separately to the shareholders. See id. The Subchapter S Revision Act of 1982 was enacted to prevent double income taxation at the corporate and shareholder levels for small business corporations. See id.

Although an S corporation's net income is taxed directly to the shareholders under the Act, the shareholders do not necessarily receive distributions in an amount equivalent to what is taxed pursuant to the Subchapter S election. In Florida, an S corporation's authority to make distributions to shareholders is limited by the corporation's articles of incorporation and section 607.06401, Florida Statutes (2004). Section 607.06401 prohibits a corporation from making distributions in certain circumstances and provides in pertinent part that

(3) No distribution may be made if, after giving it effect:

(a) The corporation would not be able to pay its debts as they become due in the usual course of business; or (b) The corporation's total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to...