Haefele v. Haefele: Distributions from a corporation to a shareholder cannot be construed as a shareholder’s income for child support purposes.
By Laura Morgan, Family Lawyer Magazine
Distributions from a Subchapter S corporation to a shareholder, to be transferred by the shareholder to another business entity, are not the shareholder’s income for child support purposes when the distributions and transfer occurred to further the corporation’s legitimate business purposes and were not to be used by the shareholder. Thus, distributions from an S corporation to a shareholder solely for the shareholder to pay her share of the corporation’s tax liability on retained earnings are ordinary and necessary business expenses rather than the shareholder’s income for calculating child support; paying an S corporation’s shareholder for the tax liability associated with that shareholder’s share of corporate income for taxation purposes does not reduce the shareholder’s personal living expenses.
Laura Morgan is a Family Law Consultant. Laura is available for consultation, brief writing and research on family law issues throughout the country. She can be reached through her Web site.
The non-W-2 income that is actually distributed by a Subchapter S business is available to be consumed by the parties and can also be used to pay the increased tax obligations incurred as a result of the K-1 allocations issued by the business. Important to this analysis, the non-W-2 income distributions from a Subchapter S business that exceed the amount necessary to pay corporate business expenses or the shareholder spouses tax obligations are considered income for purposes of calculating family support obligations.
One of the goals of a mediator is to help parents keep the children’s best interests in mind when making decisions. One of the biggest decisions that affect the children in a divorce is the amount of child support that must be paid. The laws in the state of Illinois, for instance, calculate child support according to a straight percentage of the spouse’s “true net” income. The percentage increases depending on the number of children that are involved. However, each state has its own methods for deciding how child support is calculated.