Tennessee law case summary on income determination for self-employed parents in Tennessee divorce and family law from the Tennessee Court of Appeals.
Norton v. Norton – Tennessee Child Support Case Summary – Income determination for self-employed child support obligors
Note: Although the Tennessee child support guidelines are significantly different today than at the time this case was issued, the discussion regarding income determination is a very helpful example of the types of issues that arise when dealing with self-employed business owners.
Lisa Norton appealed the trial court’s judgment increasing the child support obligation of Max Norton from $400 per month to $1,200 per month; ordering Mr. Norton to contribute $300 per month to an educational trust fund for the Nortons’ minor child. In considering Mrs. Norton’s petition to modify child support, the trial court found that Mr. Norton’s financial condition changed very little since 1988 when they agreed to a Marital Dissolution Agreement (MDA). However, based primarily on Mr. Norton’s agreement to pay more child support, the trial court increased his monthly child support obligation to $1,200. The Tennessee Court of Appeals vacated the trial court’s decision based on its conclusion that the trial court used the incorrect test for determining whether Mrs. Norton was entitled to the relief sought in her petition for modification.
When the Nortons divorced in February 1988, Mr. Norton agreed to pay $400 per month to the Mrs. Norton for the support of their 10-month-old son. In January 1998, about ten years later, Mrs. Norton petitioned the trial court to modify Mr. Norton’s child support obligation. She alleged that a significant variance had occurred in Mr. Norton’s income to the extent that the child support should be increased consistent with the guidelines in effect at that time in the state.
The majority of the evidence at trial focused on Mr. Norton’s income from self-employment for the tax years 1996 and 1997. In 1997, he reported $56,700 in gross income, as his laundry and car wash business generated gross receipts of $177,000. After business deductions, however, including over $93,000 for depreciation, $40,775 for interest payments, and $3,500 for car expenses, Mr. Norton reported a net business loss of $73,000. Mr. Norton also earned income from the rental of commercial and residential real estate, and reported gross rental receipts of nearly $272,000. After taking various deductions, however, including $38,500 for depreciation, almost $96,000 for interest payments, and $3,500 for car expenses, Mr. Norton reported a net rental income of $72,000. The remainder of his income included $12,000 from insurance sales, $900 in interest, and $21,000 in capital gains. At trial, Mr. Norton conceded that—for purposes of the proceedings—the capital gain should be included in the gross income used to determine his child support obligation. The Child Support Guidelines specifically defined gross income to include capital gains.
In 1996, Mr. Norton reported a gross income of only $5,200. Mr. Norton’s laundry and car wash business grossed $181,000 in receipts that year. After deductions, including $114,000 for depreciation, $19,000 for interest payments, and nearly $4,000 for car expenses, he reported a net business loss of approximately $55,000. Mr. Norton reported gross rental receipts of $246,000 and a net rental income of $58,000. Again, he took substantial business deductions that included $36,500 for depreciation, $93,000 for interest payments, and $3800 for car expenses. Mr. Norton also earned $1,500 in interest in 1996.
Mr. Norton testified that, in addition to his $400 monthly child support obligation, he currently was paying $400 per month in private school tuition so that the Nortons’ son could attend the University School of Jackson (USJ). Mr. Norton offered to pay $800 per month in child support, plus $200 per month for one-half of the son’s USJ tuition, for a total monthly obligation of $1,000. He also testified that he had established a college fund for his son and that he contributed $100 per month to that fund. However, Mr. Norton was of the notion that his ex-wife was not entitled to an additional increase in child support payments because of the fact that his financial circumstances had not changed substantially since they divorced in 1988. Since the divorce, Mr. Norton remarried, and in addition to the Nortons’ son, he had two younger sons by his second marriage. Mr. Norton acknowledged that in an October 1997 financial statement he reported a net worth of $4.1 million. This included assets of $5.7 million and liabilities of $1.6 million. He also acknowledged that he made significant monthly expenditures to support his current lifestyle, which included a house payment of about $1,700, car payments totaling around $1,550, and a boat payment totaling $750 per month. Mr. Norton also had recently installed an in-ground swimming pool at his home at a cost of $18,000 and took all of his sons to Disney World.
On appeal, the court of appeals considered whether the trial court erred in finding that a significant variance did not exist. The Child Support Guidelines defined a significant variance as 15% or $15.00, depending on the amount of the current support order, and a significant variance was at least 15% if the current support was $100 or greater per month and at least $15.00 if the current support is less than $100 per month. The court of appeals noted that to a large extent, the “significant variance” test replaced the “material change of circumstances” test. If the trial court finds a significant variance between the guidelines support amount and the current support amount, the court generally is required to modify the existing child support award by ordering the obligor parent to pay the guidelines amount. Once the trial court determines the guidelines amount (based upon the obligor’s salary), a presumption arises that this amount is the correct amount to be awarded. If there is evidence to sufficiently rebut that presumption, the trial court has the authority to decline to award the guidelines amount. In those instances, however, the court is required to make a written or specific finding that the application of the guidelines would be unjust or inappropriate in that particular case. Moreover, the court’s findings must state the amount that would have been required under the guidelines and must include a reason for deviation from the guidelines that takes into account the child’s best interests. The trial court also may decline to modify the amount of child support, even with the existence of a significant variance, provided the variance resulted from a previously court-ordered deviation from the guidelines, and the circumstances that caused the deviation are not changed.
The court of appeals concluded that the trial court erred in failing to apply the significant variance test. In its order, the trial court found that Mr. Norton ‘s financial condition changed very little since the parties entered into their MDA. Such a finding suggested that the trial court applied the “material change of circumstances” test rather than the “significant variance” test. Although the trial court modified Mr. Norton’s child support obligation, it apparently did so based largely upon his agreement to increase his obligation. The court of appeals also concluded that, if the trial court had properly applied the significant variance test, it would have found that a significant variance existed between the guidelines amount and Mr. Norton’s then current support obligation. At the time of the modification hearing, Mr. Norton’s support obligation was only $400 per month per their MDA.
The appellate court determined that Mr. Norton’s gross monthly income was $14,000. Under the guidelines table in effect at the time of the modification hearing, that gross monthly income figure translated into a monthly child support obligation that was approximately five times the amount of his $400 support obligation. Inasmuch as the variance between the guidelines amount and Mr. Norton’s $400 support obligation exceeded 15%, the trial court should have granted Mrs. Norton’s modification petition by ordering Mr. Norton to pay at least the guidelines amount. Accordingly, the court of appeals vacated the trial court’s judgment and remanded the case for the trial court to determine Mr. Norton’s modified child support obligation under the guidelines using the gross monthly income figure of $14,000.
The court of appeals concluded that the trial court was not required to disallow the deductions for car expenses claimed by Mr. Norton on his tax returns. At trial, Mrs. Norton presented the testimony of a CPA who questioned why Mr. Norton needed to use three vehicles for a business that had no employees. Other than the question raised by the CPA, however, the record contained no evidence that Mr. Norton’s use of several vehicles in his businesses was unreasonable or that the car expenses he deducted were excessive. Since the only evidence on the issue consisted of the uncontested explanations of Mr. Norton and his CPA, the appellate concluded that he met his burden of proving that the challenged expenses were reasonable.
The court of appeals also decided that the trial court was not required to disallow Mr. Norton’s deductions for interest payments made to banks. In 1996 he deducted interest payments totaling almost $113,000, and in 1997 he deducted approximately $136,000. On appeal, Mrs. Norton argued that these deductions should have been disallowed because the allowance or a deduction of investment interest would benefit Mr. Norton now by reducing his net income for the purposes of calculating support while building his future wealth that will become a debt-free asset when he was no longer paying support. If Mr. Norton was allowed to deduct his investment interest, it would significantly reduce his obligation to his child and continue to build future wealth and assets for him that might not ever benefit the minor child. The court disagreed with Mrs. Norton, explaining that interest payments should be distinguished from their associated capital expenditures.
The appellate court agreed with Mrs. Norton that the trial court should not have allowed deductions for depreciation, as the guidelines expressly provided that depreciation was not a reasonable expense. In computing Mr. Norton’s gross income, the trial court was therefore required to disallow any deductions for depreciation. If the deductions for depreciation were disallowed, Mr. Norton’s gross income for 1996 was actually approximately $156,000, and his gross income for 1997 was $189,000. That was an average annual income of nearly $172,000. As a result, the trial court should have used a gross monthly income figure of $14,000 to compute the amount of Mr. Norton’s child support obligation.
The trial court’s judgment was vacated, and the case was remanded to the trial court to determine Mr. Norton’s child support obligation using his average gross monthly income of $14,000.
Norton v. Norton, 2000 WL 52819 (Tenn. Ct. App. 2000).
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
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.