Tenn. Child Support on Business Owner’s Earnings Less Certain Expenses

Tennessee law case summary on income determination and deductions for income determination of a business owner under Tennessee divorce and family law from the Tennessee Court of Appeals.

Presson v. Presson – Tennessee Child Support Case Summary – forrestry services business

Michael and Joan Presson were married in September of 1974. They had one child.  Mr. Presson sued for divorce in 1991, and the Pressons entered into a Marital Dissolution Agreement (MDA) three days after the divorce complaint was filed.  The MDA set Mr. Presson’s monthly child support obligation at $700.  Mrs. Presson subsequently consulted two attorneys before retaining a third in an attempt to invalidate the MDA.  The parties entered into an Amended and Re-stated MDA in July 1991.  This second Agreement provided that Mr. Presson was to pay monthly child support of $800.

In June 1992, the Mrs. Presson filed a petition to set aside the final decree regarding the child support.  At an evidentiary hearing in the trial court.  Both parties presented expert testimony touching upon Mrs. Presson’s mental and emotional state during the period of negotiations leading up to the execution of the Amended and Restated MDA.  The trial court entered a nine page order on June 18, 1993, in which it denied the Mrs. Presson’s Petition to Set Aside Final Decree, but increased her child support entitlement to $1,000 per month plus $300 per month to be placed in an educational trust fund.

On appeal, Mrs. Presson claimed that the trial court erred in failing to set child support in accordance with the child support guidelines.  The trial court stated that it based the increase on Mr. Presson’s 1992 income, but it did not explain how it determined that $1,300 was the appropriate level of support.  The court of appeals was not satisfied that the modified award complied with the statutes.  It remanded the case  to afford the trial court an opportunity to recalculate the new award of child support in accordance with the court of appeals’ opinion.

The appellate court reasoned that a trial court is permitted to deviate from the scheduled percentages, but only if it makes a written finding that the application of the child support guidelines would be unjust or inappropriate in that particular case, in order to provide for the best interest of the child(ren) or the equity between the parties.  In this case, the trial court did not make any written findings as to its new child support award.  Its order simply recited that the Petition to Modify Child Support was sustained.  In the absence of a written finding that provides justification for a deviation from the scheduled percentages, the court of appeals was required to attempt to determine whether the trial court calculated child support in compliance with the guidelines.

In setting child support in this modification case, the trial court stated that it was basing its new award on Mr. Presson’s 1992 income.  The court of appeals agreed with that premise.  The case was tried on May 11, 1993, and Mr. Presson had already filed his 1992 federal income tax return, with a copy being introduced into evidence in the trial.  The only 1993 financial information submitted at the hearing dealt with the revenues and expenses of Mr. Presson’s business, Timberland Forestry Service (“Timberland”) for the first four months of 1993.  Timberland was a general partnership, and its 1991 partnership return of income reflected that Mr. Presson was a 17.667% partner in 1991.  It also showed that there were 50 other partners in Timberland in that year.  The record did not, however, reflect Mr. Presson’s percentage ownership of the partnership in 1992 or 1993.  Even so, the court of appeals found it clear from the record that his percentage interest in Timberland’s net income varied from year to year.  As a result, revenue and expense figures for the partnership for the first four months of 1993 were of little help in determining Mr. Presson’s true income for 1993.  The task of the appellate court was even more difficult because there were no exhibits or testimony as to the actual income payments made by Timberland to Mr. Presson in 1993.  The appeals court said that a court should base its child support determinations on an individual’s current income or current ability to earn.  In the absence of pay stubs, a record of wages paid, or other current information, however, the court must look to other relevant information.  In this instance, the 1992 tax return filed by Mr. Presson was the correct evidence from which to determine child support.  It reflected that he received income of $186,000 from Timberland in that year.  Also, he received interest income from other sources of $4,000—both of these amounts were considered in determining his gross income.  His IRS Form K-1 from Timberland showed a business deduction of $8,900, and the court found it was reasonable.  As such, Mr. Presson’s gross income for 1992, computed pursuant to the guidelines, should have been determined as follows:

$186,599    (Non-passive income from Timberland)
— $8,933        (Business deduction)
=  $177,666

+  $4,082         (Interest income)
=  $181,748

Mr. Presson’s gross income for 1992 less reasonable [business] expenses necessary to produce that income was $181,748.  The issue was that a monthly net income figure must be calculated, after the fact, from Mr. Presson’s gross income for the year.  Neither the statutes or nor the guidelines specifically addressed how to make this computation—after the fact.  However, the guidelines were sufficiently specific to suggest an approach.  In 1992, the FICA tax rate for self-employed individuals was 15.3% on the first $55,500 of gross self-employment earnings and 2.9% on earnings in excess of $55,500 up to a maximum amount subject to tax of $130,200.  Tennessee law mandated that the court was to use the FICA tax “subsequently set by federal law.”  Since Mr. Presson’s self-employment income exceeded $130,200, he was subject to the maximum tax which was $10,657.  That amount divided by twelve is an average monthly FICA tax of $888.

Withholding under the guidelines was based upon that allowed for a single wage earner claiming one deduction.  In 1992, withholding for such a person was 31% of his or her gross monthly income in excess of $4,433, plus $978.  This calculation was to be applied to the gross monthly income after first deducting the withholding allowance ($2,300 divided by 12 months or $191).

The court of appeals laid out the calculations as to how Mr. Presson’s average monthly net income should have been computed for 1992:

$15,145.66 (Average monthly gross income (yearly gross of $181,748 divided by 12))
— $888.15      (a)  FICA (yearly amount of $10,657.80 divided by 12)
$4,240.07        (b)  Withholding
$10,017.44      Mr. Presson’s average monthly net income for purpose of the guidelines

Withholding was computed by subtracting the monthly withholding allowance of $191 from the gross monthly income of $15,145.  The result was $14,953.99.  On the first $4,433 of this figure, the withholding tax was $978.  On the balance of $10,520.99, the rate was 31%, resulting in a figure of $3,261.51. When these two figures were added together, the monthly withholding was $4,240.  The appellate court next said that it thought that Mr. Presson’s average monthly net income for 1992 computed in accordance with the guidelines was $10,017.44.  The applicable regulations directed to round up to the next dollar, and then apply the applicable percentage.  In this case it was 21% for one child:

 $10,018
X   0.21
=  $2,103.78

The trial court awarded child support of $1,300, an amount that was significantly less than 21%.  This award, the appellate court said, was close to the child support which would be paid for one minor child by a non-custodial parent earning a monthly net income of $6,250—the maximum net income figure mentioned in the guidelines.  However, a supreme court holding made it clear that a trial court should not automatically limit a child to the support which would be paid by an individual earning a net income of $6,250 per month (Emphasis by the court).  The court of appeals went on to say that an automatic limit failed to consider the high standard of living of a parent and failed to reflect one of the primary goals of the guidelines, which was to allow the child of a well-to-do parent to share in that high standard of living.  By the same token, the court reasoned, it was clear that the trial court should not automatically apply 21%, but on the other hand, automatic application of the 21% multiplier to every dollar in excess of $6,250 would be equally unfair.

The appellate court concluded that if the trial court did believe that there were reasons justifying a deviation, it was bound by statute to state those reasons in writing.  The action of the trial court in denying Mr. Presson’s Petition to Set Aside Final Decree was affirmed, but the order setting child support at $1,300 per month was reversed and remanded to the trial court for further proceedings on a recalculation of the appropriate level of child support, and, if appropriate, the division of that support between general child support to Mr. Presson and the amount to be placed in the educational trust fund.  The court of appeals said that the trial court should make specific findings clearly demonstrating its rationale for its award.  Along with the other factors involved, the court was instructed to strive to ensure that to the extent that Mr. Presson enjoyed a higher standard of living, his child was entitled to share in that higher standard.

Presson v. Presson, 1994 WL 446894 (Tenn. Ct. App.1994).

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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