Tennessee law case summary on income determination for self-employed obligor in Tennessee divorce and family law from the Tennessee Court of Appeals.
Koch v. Koch – Tennessee Child Support Case Summary – Father’s Claimed Depletion of Capital Account Held Income
Patsy Koch sued her husband Mark Koch for divorce and related relief. Mr. Koch answered the complaint and filed a counter-claim for divorce and related relief. The Kochs were married in September 1977 and had two minor children. The marriage was stormy almost from the beginning—the Kochs were separated four times, including the last separation in March of 1990 that ended up in the divorce. Mrs. Koch filed her complaint in March 1990, at which time she was seven months pregnant with their daughter.
Mr. Koch graduated from college in 1980 with a Bachelors Degree in Engineering Technology, but after graduation he purchased an interest in a small corporation with a $10,000 loan from his mother. Due to financial difficulties, the corporation ceased doing business in December of 1988; at that time Mr. Koch assumed some of the corporation’s liabilities and work in progress, and began doing business as a sole proprietorship under the name of Commercial Painting Company.
A non-jury trial was held in July of 1991 for 13 days, with the trial judge announcing his findings from the bench. Prior to the entry of an order, Mr. Koch filed a Motion for Reconsideration, Clarification, Alteration and/or Amendment of the Court’s Oral Ruling. The trial judge orally announced his ruling on this motion from the bench on July 1, 1992. Subsequently, the trial court entered a decree of divorce with reservation of economic matters, and entered a final decree in January 1993. The decree ordered Mr. Koch to pay child support among other matters.
Mr. Koch appealed, and presented five issues for review, and Mrs. Koch presented an additional five issues for review.
Mr. Koch asserted that his ex-wife’s perjury in the trial of the case was an indication of her moral conduct and character. He argued that the children should not be exposed to such an environment. Mr. Koch also claimed that throughout their separation and this litigation, Mrs. Koch manifested a clear intent to interfere with his visitation rights and parental responsibilities. Mr. Koch further stated that his ex-wife—without any foundation—reported him for child abuse, which, he said was additional evidence of her moral fiber. Mrs. Koch, conversely, argued that his lack of responsibility was evidenced by his failure to deliver and pick up their child at school during visitation periods. She also argued that he cursed the child’s principal in a controversy concerning the child’s school attendance. Finally, Mrs. Koch asserted that he failed to communicate with her regarding the children and in general did not exhibit the attributes of a good father. The record was fraught with bickering, charges and countercharges between the parties, a large part of which related to visitation pending the litigation.
Of significance here was the issue of whether the evidence supported the trial court’s finding as to the value of Mr. Koch’s business. Both parties agreed the business was marital property. The trial court placed a value of $200,000 on the company. The testimony of Mr. Stallings, Mr. Koch’s CPA, covered over 200 pages of transcript. Stallings testified that in his opinion, the value of the business in 1990 was $177,160, and added that this figure did not take into account the tax liability—Mr. Koch’s individual income tax liability.
In this appellate court’s (the Western Section at Jackson) view, the valuation of a sole proprietorship business was analogous to the valuation of a professional practice. In both enterprises, the conduct of the business or profession is dependent upon its owner. The Middle Section of the Tennessee Court of Appeals considered the evaluation of a law practice in one of its decisions, and stated that the physical assets and the accounts receivable (properly weighted) have ascertainable value. In addition, the court was required to consider the question of good will of the business.
In this case, the court of appeals held that there was evidence to establish the value of the business in accordance with the principles set forth in the Middle Section’s decision. In explaining this, the court said that it was difficult to differentiate between the value of the business and the income to the proprietor, and stated that Mr. Koch asserted that at the time of trial he was not taking income from the business but was depleting the working capital. As a result, he argued, the questions presented concerning the valuation of the business as marital property and the determination of his income for purposes of setting his child support obligation were inextricable. The court of appeals reasoned that the valuation of marital property was conducted as close to the date as reasonably possible to the final divorce hearing date. The record showed that the business property consisted of vehicles, painting equipment, inventory, accounts receivable, and certificates of deposit. The monthly balance sheets of the business from December 1990 through May 1991 indicated a net asset value in excess of $300,000. CPA Stallings testified that these statements would require adjustments in order to make them consistent with the financial statement he used to render his opinion regarding value. Stallings underwent a probing cross-examination, some of which produced some rather questionable figures. Mr. Koch testified that the value of the business was $105,000, which the appellate court thought to be conservative in light of the fact that other evidence established that one of the assets of the business was a certificate of deposit in the amount of $150,000. Nonetheless, there was evidence in the record that the value of this marital asset had a range of $105,000 to over $300,000.
Another of both of the Kochs’ issues on appeal was whether the evidence was sufficient for the trial court to find Mr. Koch’s income such that deviation from the Child Support Guidelines was appropriate, considering the time that he had the minor children in his custody. The trial court ordered Mr. Koch to pay child support of $400 per month for each child ($800). That court found that his income was $4,000 per month. Therefore, in accordance with the Guidelines, the presumed proper monthly child support was $1,280. The trial court said that the more expansive visitation schedule warranted a reduction of the presumptive amount of 33%, which amounted to $800 per month in child support. Mr. Koch asserted that the trial court erred as to the determination of his income and also failed to make a proper deviation from the child support guidelines. Mrs. Koch contended that the trial court’s finding as to his income was correct, but that there was no justification for deviation from the child support guidelines. In addition, Mr. Koch claimed that his withdrawals from the business in 1990 for $45,010 were capital withdrawals, not income, in that his 1990 tax return reflected a loss of more than $27,000, and that, in fact, he had no income. Instead, he claimed a monthly deficit. Mr. Koch argued that before the separation, they lived on his withdrawals from his business that totaled $35,000 annually, which he said was the proper amount to use in assessing his income. The record reflected that in a time period prior to trial, Mr. Koch made monthly deposits in his personal bank account in excess of $6,000, and had expenditures in excess of $6,000, yet he argued that he had no income.
Mr. Koch’s 1990 tax return Schedule C showed gross receipts in excess of $790,000, and a gross business income of more than $165,000. The court of appeals added with a touch or sarcasm that it did not go unnoticed by the court that a business producing a gross income in excess of $165,000 per year would provide a nice income to the proprietor. When looking at Mr. Koch’s admitted withdrawal from his business in excess of $45,000 and the other benefits he received from the business, the court of appeals reasoned that the trial court’s finding of $4,000 per month income was not excessive. Further, the appellate court thought that the determination might be low. However, considering the difficulty of establishing income under the circumstances of this case and Mrs. Koch’s agreement that $4,000.00 per month was correct, the court did not find that the evidence supported any modification of the trial court’s findings on income. The judgment of the trial court was affirmed, and the case was remanded for other proceedings.
Koch v. Koch, 874 S.W.2d 571 (Tenn. Ct. App. 1993).
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:
- Tennessee Child Support & Divorce Law Answers to FAQs
- How to Modify Child Support in Tennessee
- Tennessee Child Support Law Video Series
- Tennessee Child Support Resources
- Top 6 Tennessee Child Support Strategies
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