The case involves a post-divorce dispute regarding child support between Donald James Alexander (Father) and Carolyn Paxton Alexander (Mother). The Mother filed a petition on September 4, 1997, seeking an increase in child support based on a claimed significant variance from the Child Support Guidelines. The trial court denied her petition, concluding that no significant variance existed between the current support payments and the amount dictated by the Guidelines, considering the Father's income level.
The Mother raised three appellate issues: (1) whether the evidence supported the trial court's finding of no significant variance; (2) whether the trial court erred by not considering the Father's lifestyle in income assessments; and (3) whether the Mother is entitled to attorney's fees for the trial and appeal.
The parties’ marriage ended on February 22, 1995, after approximately 12.5 years, with the Mother receiving custody of their two children and a monthly child support award of $2,194. The marital dissolution agreement (MDA) included substantial alimony payments, which the Father was to fulfill, and awarded the Mother interests in two businesses and the marital residence. After remarrying in June 1995, the Mother relocated to California in August 1996, where she and her new husband attended college without employment but received state stipends. She sold her prior residence and closed her businesses following the move. The appellate court ultimately reversed and remanded the trial court's decision.
Mother asserted that there was a substantial discrepancy between the child support Father was paying and the amount calculated according to the Guidelines based on his current income. She presented evidence from Father's lifestyle and his federal income tax returns for the years 1995, 1996, and 1997. The returns indicated significant income figures, including wages, interest, dividends, business losses, capital gains, adjusted gross income, taxable income, and federal taxes paid.
Father, a grandson of the founder of McKee Foods Corporation, had a varied employment history, including a period at McKee from 1983 to 1993, followed by unsuccessful self-employment ventures. In 1997, he became president of Sanda Hosiery Mills, which continued to decline under his leadership and ceased operations shortly thereafter. Despite the company's closure, Father received compensation during its winding down and testified he was seeking new employment at the time of the hearing.
Father maintained an affluent lifestyle, owning a sailboat valued at $360,000, a motor home worth $160,000, and between 53,000 and 56,000 shares of McKee stock, appraised at $71 per share in 1997.
The standard of review for this non-jury case is de novo, with factual findings from the trial court presumed correct unless the evidence suggests otherwise. However, legal conclusions by the trial court do not receive the same deference.
T.C.A. 36-5-101(a)(1) mandates the court to adjust child support amounts upon finding a "significant variance" of at least 15% between the guideline amount and the current support order, applicable when the current support exceeds $100 per month. The trial court denied Mother's petition for modification, determining no significant variance existed. To assess this ruling, the court examined Father's income since the divorce on February 22, 1995. Father objected to considering income earned before September 4, 1997, the filing date of Mother's modification petition, citing T.C.A. 36-5-101(a)(5), which prohibits retroactive modification of child support. However, the statute allows for the inclusion of pre-filing income to accurately calculate an obligor's new income level if deemed appropriate by the court. The Guidelines endorse averaging an obligor's income to ascertain net income for support calculations. The court concluded it was appropriate to average Father's income from 1995 to 1998 to evaluate the presence of a significant variance, noting that considering his 1995 income was permissible and did not significantly influence the support agreement.
Father's gross income for 1998, as per testimony, totals $171,500, broken down into wages and director's fees ($71,000), dividend income from McKee ($60,000), non-McKee income ($5,500), other income from McKee ($15,000), and a gift from his parents ($20,000). The annual gift of $20,000 from his parents, while non-taxable and not classified as income under standard accounting principles, is considered income under the Guidelines. The gross income since the divorce in 1995 is detailed as follows: 1995: $950,089; 1996: $445,946; 1997: $106,612; 1998 (projected): $171,500.
Father’s tax returns from 1995 to 1997 indicate business losses primarily linked to his ownership of DJA Leasing. The losses in 1996 and 1997, along with the majority of the 1995 loss, are attributed to this vehicle leasing business, which operates as a sole proprietorship. The income and expenses reported for DJA Leasing show significant losses: for 1995, income less expenses was $189,010, leading to a net loss of $99,635 after depreciation; for 1996, income less expenses was $310,323 with a net loss of $89,102; and for 1997, income less expenses was $539,829, resulting in a net loss of $103,195. Father does not receive cash from DJA Leasing; instead, he utilizes the tax losses against his overall income.
Mother argues for excluding the depreciation deduction when calculating Father's average gross and net income for 1995-1998, asserting that Father's income before depreciation should be considered. The Guidelines specify that depreciation is not a reasonable expense in determining self-employment income. The trial court questioned the fairness of strictly applying this rule, acknowledging depreciation as a legitimate business expense. While the Guidelines do not allow depreciation as a reasonable expense, they do not preclude considering the actual cost of capital assets in income determination.
In a related case, the court affirmed that trial courts have discretion in determining the reasonableness of capital expenditures. The trial court concluded that costs associated with rolling stock are reasonable expenses necessary for generating leasing income and upheld that the net losses from DJA Leasing should not offset Father's other income for child support calculations, as there was no evidence that Father incurred personal expenses to cover these losses; they were merely paper losses used for tax sheltering.
Regarding capital gains, Father sold McKee stock in 1995 and 1996 under specific bargain sale rules, receiving 80% of its appraised value, with the remainder treated as a charitable contribution. The analysis of these transactions revealed significant capital gains from both years, with 1995 showing a gain of $974,442 and 1996 a gain of $449,244 after accounting for the cost basis.
Father received his McKee Foods stock in 1972, coinciding with the distribution to other grandchildren. The trial court prorated the capital gains from stock sales in 1995 and 1996, determining that only $42,367 and $18,919, respectively, should be considered. However, evidence contradicts the court's assertion that the stock sold was acquired in 1972. Capital gains are defined as gross income under Tennessee Guidelines, and while Father argues against equating the Guidelines with the Internal Revenue Code, the court finds this correlation logical. Evidence reveals that the McKee stock sold in 1995 was acquired in 1992, and the 1996 stock was acquired in 1989, warranting prorating the gains over three and six years, respectively. Father's claim to exclude these capital gains based on his lack of intention to sell further stock is rejected, as historical sales indicate a pattern of using stock sales to supplement income. Notably, he sold stock to finance both a sailboat and a luxury home, supporting the argument that excluding these gains would contradict the purpose of the guidelines, which aim to ensure that children benefit from a parent's higher standard of living.
Father argues that the sales of his McKee stock in 1995 and 1996 should be disregarded for child support calculations, claiming they were necessary to fulfill obligations under the parties' marital dissolution agreement (MDA). He cites Hall v. Hall to support the position that capital gains from asset sales tied to property settlements should not contribute to gross income for child support purposes. However, the evidence only partially supports his claim. The MDA was finalized on February 22, 1995, but Mother had already received $205,000 as alimony for her house purchased in October 1994, suggesting that the funds for this payment likely came from a stock sale in July 1994, rather than from the 1995 or 1996 sales.
The 1995 McKee stock sale yielded a capital gain of $974,442. Since 97.44% of this gain is linked to alimony payments totaling $196,000, this portion ($190,982) is excluded from Father's gross income calculation for 1995. Consequently, the net capital gain for 1995 is determined to be $783,460, which is then prorated over three years of ownership, resulting in a capital gain allocation of $261,153 for 1995.
The 1996 capital gain of $449,244 is deemed unrelated to the divorce settlement, thus allocated over the six years of ownership, equating to $74,874 per year for both 1995 and 1996.
The findings regarding Father's gross income for 1995-1998 indicate significant earnings, totaling $433,750 in 1995, $180,678 in 1996, $229,807 in 1997, and $171,500 in 1998, yielding an average annual gross income of $253,934. Despite child support being calculated based on net income, the evidence suggests that Father's gross income exceeds $118,800, indicating that a modification of the current child support obligation of $2,194 per month is warranted. The trial court's determination that Mother failed to demonstrate a significant variance from the guidelines was incorrect. The existing support obligation was based on a net income of $6,856.75 per month, which translates to a monthly gross of $9,900 at the time of divorce.
The court struggled to convert Father's gross income to net income for recalculating support but found the record insufficient for necessary calculations. Consequently, the case is remanded for further proceedings on Mother's modification petition. The court emphasized that the trial court incorrectly treated this case as involving self-employment income, which was not applicable, as Father's income from DJA Leasing resulted in net losses, and his tax returns for 1995-1997 did not reflect self-employment income or taxes.
The Guidelines stipulate limited tax deductions from gross income for calculating child support, primarily for employment-related income. They lack a clear method for converting non-employment gross income into net income, but suggest reducing gross income by withholding and payroll taxes rather than actual taxes paid, as various factors influence tax liabilities. Father's gross income is categorized into salary and director's fees, interest and dividends, capital gains, and gifts. The net income from salary can be calculated as per specific regulations, while withholding tax for interest and capital gains can be referenced from IRS materials. Gifts are included directly as net income. The trial court may appoint a special master to assist in determining the conversion of Father's income. Once the average net income for 1995-1998 is established, child support calculations will follow, effective from the date of Mother's modification petition.
Mother claims the trial court ignored Father's lavish lifestyle, citing regulations that allow for imputing income based on valuable assets. However, the court found no inconsistency between Father's lifestyle and income, asserting that his wealth is apparent and does not warrant imputing income. Lastly, the court agrees that Mother is entitled to recover legal fees and expenses from Father, directing the trial court to award reasonable fees incurred at trial and on appeal. The trial court's judgment is reversed, and the case is remanded for further proceedings. Costs on appeal are assigned to the appellee.
