Tennessee Child Support Income Not to Include Corp’s Retained Earnings

Tennessee law case summary on reasonable retained earnings not included in income for child support in Tennessee divorce and family law from the Tennessee Court of Appeals.

Piper v. Andrews, 1997 WL 772127 (Tenn.Ct. App., 1997).

Barbara Andrews Piper and Donald Andrews divorced in 1989.  Mrs. Andrews was awarded custody of the couple’s two minor children.  Mr. Andrews was ordered to pay $600 a month in child support.  Mr. Andrews now lives in Texas, and Mrs. Andrews lives in Tennessee.  Mrs. Andrews sought an increase in child support based on her ex-husband’s income from a closely-held corporation of which he was the sole shareholder.  In addition, Mr. Andrews’s visitation was less than the standard under the child support guidelines.

Since the divorce, Mr. Andrews had become the sole shareholder of a closely held corporation.  Mrs. Andrews argued that because all of the corporation’s income would inevitably go to Mr. Andrews, the trial court should set child support based on his increased salary and compensation package, as well as the corporation’s annual income.  The trial court held a hearing on the petition. It heard testimony regarding Mr. Andrews’s income from both parties as well as expert testimony from CPAs for both parties.  The trial court granted Mrs. Andrews increase in an amount of child support, but it was less than the she was seeking.

It was undisputed that since 1985, Mr. Andrews was employed by Mobile Sports Medicine Systems, Inc., a Texas company.  In 1993, when he became the sole shareholder of the corporation, he received a salary of $45,000 and a bonus of $15,000.  When added to his other benefits, his total compensation for that year was $80,650.  In 1994, Mr. Andrews received a salary of $48,000 and a bonus of $12,000.  Combined with other benefits, his total compensation for 1994 was $72,000.  In 1995, the year Mrs. Andrews filed her claim for additional child support, Mr. Andrews received a salary of $48,000 and a bonus of $1,000. His total compensation for 1995 was $59,800.

At trial, both parties presented expert testimony on the issue of the corporation’s retained earnings.  Mrs. Andrews’s expert, Robert Jennings, testified that the corporation’s retained earnings benefited the sole shareholder, Mr. Andrews, by reducing his overall tax burden.  Jennings compared his circumstances to those of a sole proprietor, and noted that the use of the corporate entity in this situation reduced his tax burden, because there were two taxable entities, each in a lower tax bracket. Jennings acknowledged that, in reviewing the corporation’s financial documents, he found nothing improper or unusual, and admitted that the corporation’s cash reserves were not excessive.

The corporation’s accountant, Barbara May, testified on behalf of Mr. Andrews. May testified that the corporation’s retained earnings were reasonable and consistent with prudent business practice.  She stated that Mr. Andrews had never requested her to manipulate the corporation’s finances to decrease his income.  She acknowledged that the retained earnings benefitted the sole shareholder, Mr. Andrews.

After the hearing, the trial court issued an oral ruling.  The judge increased the child support to $1,133 per month based on the increase in Mr. Andrews’s salary.  The trial court did not include the corporation’s retained earnings in its calculation of Mr. Andrews’s income, and stated that the company was not a sole proprietorship, but rather a corporate entity.  There was an employer/employee relationship.  The trial court said that Mr. Andrews was an employee of the corporation, and that if it were a sole proprietorship, the company would have a different management structure.  Even in a sole proprietorship, the trial judge said, the child support was not based upon the gross income of the sole proprietorship.  Instead, the trial court said it would consider the expenses of doing business.  In this case, the trial court did not find that the corporation was merely a sham or a shield or that the sole shareholder reached into the corporation for payment of personal expenses, which would have been income to Mr. Andrews.  As a result, the trial court could see no reason to disregard the corporate entity.

On appeal, the court of appeals examined the calculations of Mr. Andrews’s income.  The child support award was calculated by the trial court based on an income of $59,800, which was Mr. Andrews’s total income for 1995.  The trial court, the appellate court thought, did not consider Mr. Andrews’s bonus history in its calculations.  Nor did it indicate a reason for declining to deviate upward on the child support in light of the less-than-standard overnight visitation exercised by Mr. Andrews.

Mrs. Andrews argued that the trial court erred in failing to consider the retained earnings of her ex-husband’s closely-held corporation, his entire compensation package, and his bonus compensation in his total income figure.  Mrs. Andrews also maintained that the trial court erred by failing to deviate upward from the child support guidelines because her ex-husband exercised less-than-standard visitation rights.  Mrs. Andrews emphasized the undisputed testimony at trial that retaining earnings in the corporation benefited the sole shareholder and reduced his tax burden. She argued that Mr. Andrews was in sole control of whether corporate earnings were retained or paid as profits.

In effect, Mrs. Andrews sought to “pierce the corporate veil”—to treat the corporation as the same entity as her ex-husband—and allocate the corporation’s income to him.  The appeals court said that the separate identity of a corporation may be disregarded if the evidence shows that it is a sham or where necessary to accomplish justice.  The decision must turn, in part, on the trial court’s perception of the witnesses’ candor and truthfulness.

In this case, the trial court observed the testimony of Mrs. Andrews, Mr. Andrews, and their accountants, and assessed their credibility.  Viewing the record as a whole, the court of appeals did not find that the evidence weighed against the trial court’s decision not to include the corporation’s retained earnings in the determination of Mr. Andrew’s income.

Mrs. Andrews also argued that the trial court erred in failing to consider Mr. Andrews’s bonus history in its determination of the amount of child support.  She contended that the testimony established that he controlled the size of his yearly bonus and that he dramatically reduced the amount of his 1995 bonus from that of previous years in order to lower his income.  This was, in Mrs. Andrews’s view, an attempt to minimize the amount of child support he might have to pay. She maintained that the corporate minutes establish that the 1995 bonus was determined after she filed her petition to increase child support. Consequently, she argued that the trial court should have at least considered his bonus history in its calculations.  The court of appeals said that there was some evidence in the record from which the trial court could have concluded that Mr. Andrews’s bonus history should not be considered. It cited the example of Mr. Andrews testifying that the higher bonus in 1993 was a “one time pay back” for his initial investment.  However, the trial court failed to state in the record its reasons for declining to consider Mr. Andrews’s bonus history in its calculation of child support.  As a result, on this issue, the decision of the trial court was reversed and remanded to either include Mr. Andrews’s bonus history in its calculation of the award of child support, or state in the record the amount that would be required under the guidelines, as well as its reasons for determining that inclusion of his bonus history would be unjust or inappropriate.

Mrs. Andrews finally asserted that the trial court erred in failing to deviate upward from the child support guidelines, based on the less-than-standard overnight visitation exercised by Mr. Andrews.  Mr. Andrews lived and worked in Fort Worth, Texas.  He testified that, although he spends as much time with his daughters as he can, it was financially and physically impractical for the children to spend the standard visitation of at least 80 nights a year with him.  Mr. Andrews testified that, at most, he had 24 overnight visitations with the children a year.  The appellate court stated that there was evidence in the record which could support a conclusion that a deviation upward was inappropriate, as both parties acknowledged that Mr. Andrews pays all of the children’s transportation costs for visitation.  However, in light of the trial court’s failure to make the required written findings, the court of appeals reversed the trial court’s decision on this issue. The cause was remanded for the trial court to either deviate upward in setting the amount of child support, in view of Mr. Andrews’s less-than-standard visitation, or to make a written finding of the amount that would have been required under the guidelines and the reasons why application of the guidelines in this case would be unjust or inappropriate.

Piper v. Andrews, 1997 WL 772127 (Tenn. Ct. App., 1997).

See original opinion for exact language.  Legal citations omitted.

Memphis divorce attorney, Miles Mason, Sr., JD, CPA, practices family law exclusively with the Miles Mason Family Law Group, PLC. To learn more about Tennessee child support laws and guidelines, read and view:


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