Retained Earnings in SubS Corporation May be Considered in Calculating Net Resources for Child Support
Retained Earnings in SubS Corporation May be Considered in Calculating Net Resources for Child Support
Husband was the sole shareholder and officer in a subchapter S corporation that held $55,000 in retained earnings. In their divorce trial, the judge considered the retained earnings to be part of Husband’s net resources for purposes of calculating child support.
Retained earnings of a Subchapter S corporation are taxable as personal income remain assets of the corporation, not the shareholder. They are not subject to division of property in a divorce case. Husband therefore argued that his SubS corporation’s retained earnings were not his and could not be considered as part of his net resources to calculate his child support.
The appellate court noted that no Texas cases addressed the issue of whether SubS corporation retained earnings could be considered when calculating child support. However, other state courts concluded that a blanket rule prohibiting that consideration would encourage shareholders to retain earnings for their own financial interest without regard for the need to support their children. These policy considerations of abuse, inequity, and manipulation by a parent have led to a general rule that recognizes the potential of including retained earnings of a business when setting child support. Factors to consider in each case include: the extent of the parent’s ownership interest in the business, the parent’s ability to decide whether to retain or distribute income, the corporate history regarding retaining or distributing income, the financial and operational needs of the company and the relationship of the retention to those needs, and evidence that the parent has engaged in actual manipulation of retained earnings.
The appellate court concluded that the corporate fiction should not be available as a guise for parent to artificially reduce net resources when it comes time to calculate the parent’s support obligation. A court may consider the parent’s earning potential if the parent is intentionally unemployed or underemployed. Texas’s policy both “require[es] parents to support their children and prohibit[s] them from engaging in means to shirk that obligation.” But here, the appellate court found that the trial court did not have sufficient evidence of the SubS corporation’s financial needs, historical distributions, manipulation, etc. So the appellate court remanded the case to the trial court for further proceedings to address these issues.
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