TN Considers Deductions for Captial Expenses for Self-Employed Obligor

Tennessee law case summary on child support in Tennessee divorce and family law from the Tennessee Court of Appeals dealing with deductions from income for captial expenses and depreciation for self-employed business owners.

Tennessee considers deductions from income for captial expenses and depreciation for self-employed business owners.

Tennessee considers deductions from income for captial expenses and depreciation for self-employed business owners.

Kimble v. Kimble – Tennessee child support laws

Nina and Michael Kimble were married in 1985 and divorced in 1992.  When they married, Mrs. Kimble had a son from a previous marriage, and Mr. Kimble had a daughter.  Mr. Kimble adopted the son, but his ex-wife did not adopt the daughter.  The divorce decree incorporated the terms of a marital dissolution agreement (MDA) which provided that Mr. Kimble would pay child support of $250 monthly for 24 months.  At the end of that time, the trial court stated that it would not be necessary for Mrs. Kimble to show a material change of circumstances when petitioning for an increase in child support, because Mr. Kimble had begun a new business and his income was uncertain at the time of the decree.

Mrs. Kimble petitioned the trial court for an increase in child support, and the matter was referred to a referee, who ruled that the child support should be increased to $637 per month.  The referee cited an adjustment for self-employment tax, Mr. Kimble’s failure to visit, and $37 for her cost of health insurance on child.  Subsequently, the trial court modified the referee’s ruling and ordered that Mr. Kimble pay $348 per month, and deviating from the guidelines by allowing him credit of 21% of his net income, or $441, for expenditures for his daughter.  The court ordered Mr. Kimble to pay an additional $225 per month as child support due to his non-visitation and for her health insurance, totaling $610 per month.

The trial court stated that an additional $225 was awarded due to the fact that Mr. Kimble had no visitation with his adopted son and, according to his testimony, had virtually no contact with the child whatsoever.  Mr. Kimble argued that this was error on the part of the trial court because Mrs. Kimble did not present any evidence of the child’s expenses.  She argued that the additional amount of $225 per month for non-visitation is proper, and relied upon the regulations which provide for an up-ward deviation if the child is not staying overnight with the obligor for the average visitation period of every other weekend from Friday evening until Sunday morning, two weeks during the summer and two weeks during holiday periods throughout the year.

The court of appeals found an Ohio Supreme Court case that it thought relevant to this issue.  In that case, the court recognized that regulations constructed and interpreted in such a way could result in a financial advantage to the obligor parent—that would allow him or her to reduce his or her income for purposes of setting child support by:  (i) accumulating assets; (ii) taking a tax deduction for those assets; and (iii) having his or her child support lowered.  The Ohio Supreme Court explained that a parent acting in this way could continue the process by depreciating the assets and/or replacing them.  To protect against this possibility of inequitable results, the Ohio Supreme Court held that allowance of a deduction for acquisition of a capital asset by a self-employed, child-support obligor parent against his or her gross receipts could be grounds for deviation from the child-support guidelines.  The factors it said could be included in a court’s consideration of whether deviation is proper were:

  1. the cost of the capital asset compared to the parent obligor’s gross income;
  2. the cost of the capital asset compared to the net worth of the obligor’s business;
  3. the existence of a past pattern of acquisition of capital assets as deductions against gross income for child support calculations;
  4. the proximity in time of the acquisition of the capital asset to the date of termination of the child support obligation;
  5. analysis of the necessity of the capital asset to maintain or increase past or current levels of income as opposed to unnecessary, punitive or overly aggressive expansion of business; and
  6. whether the asset is acquired from the current year’s income or out of past years’ savings.

The Tennessee Court of Appeals also looked an Indiana appellate case dealing with a similar issue.  In that case the question was whether the trial court had erred in disallowing certain business expenses in calculating the obligor’s available income for child support. One of the business expenses was for office equipment.  Stating that these types of income and expenses from self-employment or operation of a business should be carefully reviewed, that court held that even though purchases of business equipment may properly be considered ‘reasonable and necessary’ expenditures in child support computations, a deduction from gross income is not mandatory.  As a result, the Indiana appellate court concluded that the trial court had not abused its discretion when labeling these particular expenditures as investments benefiting the obligor rather than expenses.

The Tennessee child support guidelines provided only that self-employment income for purposes of calculating child support includes income from business operations minus any reasonable expenses to produce such that income.  In addition, the guidelines stated that depreciation allowances are not considered reasonable expenses.  Comparing the guidelines with Indiana and Ohio, the court explained that Indiana allowed for the deduction of out-of-pocket capital expenditures from an obligor’s gross income, if those expenditures are determined reasonable and necessary after careful review by the trial court.  However, in Ohio that deduction is expressly mandated by the state legislature, and the potential for abuse was judicially limited by the state supreme court when permitting a deviation from the child support guidelines in the event this deduction is taken.

In light of this, the court of appeals pondered the fact that the trial record was not clear as to the formula used by the court in arriving at the figure of $225.  Citing one its earlier decisions, the appellate court said that there could be an upward or downward deviation when certain assumptions are not present that the Department of Health and Safety used in drafting the regulations.  In the event of non-visitation, the court wrote, a trial judge is tasked with increasing the amount of support from the guidelines minimum to an amount that would approximate the expenses incurred by the custodial parent that he or she would not otherwise have incurred if the obligor parent had exercised his or her visitation. (Emphasis added by the court.)  The court of appeals decided that this issue should be reconsidered by the trial court necessary with instructions to examine evidence that related to the amount of actual expenses incurred by Mrs. Kimble on the son’s behalf, due to Mr. Kimble’s non-visitation.

After sorting through the calculations and the deviations, the judgment of the trial court that allowed Mr. Kimble a 21% credit for the expenses incurred for his daughter was affirmed, but the trial court judgment in other respects was reversed.

Kimble v. Kimble, 1996 WL 445272 (Tenn. Ct. App. 1996).

See original opinion for exact language.  Legal citations omitted.

For more information, see Self-employed Parent’s Income Determination in Tennessee Child Support.

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:

A Memphis child support attorney from the Miles Mason Family Law Group can help you with Tennessee child support issues including setting or modifying child support. Contact the Miles Mason Family Law Group, PLC at 901-683-1850.

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