TN Trucking Co Owner Denied Deduction Buying Trucks for Child Support

Tennessee law case summary on income determination and deductions for depreciation for capital expenditures in Tennessee divorce and family law from the Tennessee Court of Appeals.

Ely v. Ely – Tennessee Child Support Case Summary – Trucking Company Owner

Suzanne  and Kenneth Ely were divorced in 1988. They entered into a marital dissolution agreement (MDA) which provided that Mr. Ely would purchase the wife’s interest in a trucking business they jointly owned and operated.

After the divorce, Mrs. Ely filed contempt proceedings on three separate occasions against Mr. Ely for failure to comply with the MDA.  Each of the three petitions alleged Mr. Ely had failed to pay his share of the medical expenses for the children, but the third petition also alleged that there had been a material and substantial change in circumstances since the divorce which justified an increase in Mr. Ely’s child support.  Mrs. Ely claimed that he was self-employed at the time of the divorce as the sole owner of Ely Trucking Company.  His business and income increased since that time. Mrs. Ely alleged she was entitled to an increase over and above the guidelines due to the fact that Mr. Ely had vested with the parties’ children less than the amount provided by either the guidelines or the final decree of divorce.

The trial court said that Mrs. Ely was entitled to a continuance to allow time for discovery of Mr. Ely’s financial information.  That referee also directed Mr. Ely to provide his 1099’s from tax years 1994 and 1995 to show his gross income, as well as an itemization and documentation of all expenses and adjustments.  Mr. Ely failed to furnish his 1099’s for 1994 and 1995.  As a result, the court found that Mrs. Ely’s petition for contempt and for modification of child support were well-founded.  The best evidence of Mr. Ely’s income was his loan documentation for 1994 which indicated that his gross income was $160,000 per year.  Hence, the trial court found Mr. Ely’s monthly payments should be $2,094.

Mr. Ely appealed and stated that the trial court required him to pay $25,164 in annual child support.  He went on to say that the only proof entered at trial were his tax record that showed his income for 1995 was negative $18,426.  As such, Mr. Ely claimed that his ex-wife had failed to meet the burden of proof necessary to show a material change in circumstances which would justify a change in child support.  The court of appeals examined Mr. Ely’s tax records and found that his 1040 tax form for 1995 showed that he had a total income in 1995 of $732,022, but that his expenses of doing business and claimed deductions for tax purposes exceeded his income by $18,426.  This resulted in no taxable income, and a paper loss of $18,426; however, included in these expenses and deductions was a claim of depreciation for the year of $132,064.

The chancellor at the trial level “very reluctantly” held that the applicable regulations mandated the addition of the full amount of the expenses claimed as “depreciation” on Mr. Ely’s tax return to his gross income.  In effect the chancellor took Mr. Ely’s tax return, added back in the depreciation, and then set the support in accordance with the statutory guidelines.  He added, “I don’t like to have to enforce unfair, grossly unfair laws like this.”

Mr. Ely argued that a substantial amount of the total he claimed as “depreciation” on his federal tax return was actually the capital expense of purchasing trucks for his business. According to Mrs. Ely, the IRS did not allow him to deduct as an expense the cost of purchasing a truck in one lump sum; rather, he was required to spread out the cost of the truck over its useful life — the expense of which was classified as “depreciation” for income tax purposes.  Mr. Ely argued that it was unfair to not allow him to deduct a substantial capital expense of his business (the purchase of trucks, necessary for the operation of a trucking business), only because he was required to classify this capital expense as “depreciation” for income tax purposes.  To do so, Mr. Ely claimed, resulted in the inequitable result which required him to pay child support based on a calculation of “gross income” which he did not actually possess.  Mr. Ely also stated in his brief that neither the state legislature nor the Child Support Guidelines did not exclude or authorize a deduction for capital expenditures; and that the standard followed by the court of appeals here had been to leave it to the discretion of the trial court to determine when and if the expenditures were reasonable.

The Tennessee Court of Appeals in its opinion said that it recognized the equitable principles in Mr. Ely ‘s argument, and that it was apparent from the transcript of the record before the chancellor that he agreed with the argument in principle.  Nonetheless, he had no alternative under the provisions of the child support guidelines or the evidence in the record.  In light of these arguments, the appellate court held that the issue of whether or not the trial court should have considered depreciation claimed for tax purposes as a reasonable and necessary expenditure was not an issue on the trial of the case and was raised for the first time on appeal.  Because the issue was not appealable from the trial court record, Mr. Ely was barred from raising it.  The decision of the chancellor was affirmed, and the appeal was dismissed.

Ely v. Ely, 1998 WL 2510 (Tenn.Ct. App. 1998).

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. See our Consultation and Fees page and call 901-683-1850.

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