STATE OF MICHIGAN
COURT OF APPEALS
ROBERT A. DIEZ, FOR PUBLICATION
October 23, 2014
Plaintiff/Counter-Defendant-
Appellant,
v No. 318910
Macomb Circuit Court
Family Division
MARIE-JESUSA CLOMA DAVEY, LC No. 2010-002362-DC
Defendant/Counter-Plaintiff-
Appellee.
Before: HOEKSTRA, P.J., and WILDER and FORT HOOD, JJ.
Fort Hood, J. (concurring in part and dissenting in part).
I respectfully dissent from the majority’s opinion regarding child support. I concur in
regard to the child custody and parenting time issues. Accordingly, I would affirm the trial court
decision in its entirety.
The majority decides two issues relating to child support. The first issue relates to
undistributed income from an S Corporation. The majority holds that undistributed earnings
retained by an S Corporation cannot be included within the calculation of a parent’s income
under the Michigan Child Support Formula (MCSF) unless there is evidence of a reduction in
distributions compared to historical practices. In so holding, the majority overlooks other
relevant factors that should be considered when considering undistributed income in an S
Corporation and limits the purpose of the MCSF, which is not to protect business owners, but to
determine the amount of income available for child support. 2013 MCSF 2.01(B).
I would adopt a case-by-case, fact-specific inquiry that is not limited to situations where
there is evidence of reduction in distributions compared to historical practices. Other
jurisdictions have adopted similar approaches. Recently, the Supreme Court of Connecticut held
that, when determining the income of an S corporation’s shareholder for child support purposes,
a case-by-case, fact-specific inquiry must be undertaken to determine how much of an S
corporation’s retained earnings should be imputed to the shareholder. Tuckman v Tuckman, 308
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Conn 194, 210; 61 A3d 449 (2013).1 The Tuckman court found that this was necessary to
balance the needs of the corporation to retain earnings for its ongoing operations against the
concern that the corporation could be used to shield income in a child support dispute. Id. at
210-211.
The Tuckman court relied heavily on the Massachusetts Supreme Judicial Court’s
analysis in JS v CC, 454 Mass 652, 912 NE2d 933 (2009). Tuckman, 308 Conn at 210-212. In
JS, the court first noted that the Massachusetts Child Support Guidelines applicable to the case
included “income derived from business/partnerships.” JS, 454 Mass at 661 (quotation marks
and citation omitted).2 The court agreed that a case-by-case, fact-specific inquiry was necessary.
Id. at 662-663. To provide guidance, the court provided a non-exhaustive list of considerations.
Id. at 663. First, the court directed lower courts to consider the amount of control the parent had
over the corporation, noting that minority shareholders were less likely to have access to retained
earnings, while majority shareholders, and to an even greater extent, sole shareholders, had the
ability to access funds and manipulate income. Id. Second, the court directed lower courts to
look at the legitimate business interests justifying the retention of earnings, but noting that “the
business judgment rule cannot shield the shareholder from the factual inquiry” described. Id. at
663-664. Third, the court directed lower courts to “weigh affirmative evidence of an attempt to
shield income by means of retained earnings.” Id. at 664. Finally, the court considered the
allocation of the burden of proof. Id. 3
I agree with the analysis directed by Tuckman and JS. The MCSF requires that “earnings
generated from a business” be included when determining a parent’s gross income. 2013 MCSF
2.01(C)(2). The MCSF also directs courts to closely examine income from a corporation “to
determine the extent to which [it was] historically passed on to the parent or used merely as a tax
strategy[,]” indicating that not all of a corporation’s earnings are to be considered income. 2013
MCSF 2.01(C)(2)(a). Thus, it would seem that the guidelines would not require that all of a
corporation’s earnings be imputed to a parent. However, I do not agree, as the majority holds,
that an S Corporation should be treated the same as a corporation pursuant to the MCSF. Due to
the unique tax treatment of S corporations, all of an S corporation’s earnings are reported by the
corporation’s shareholders, even though some of these earnings are never actually disbursed. It
is clear that, particularly where a parent is the sole owner of an S corporation, a parent has
complete control to determine their own salary, when to take distributions, and how much money
1
“Legal authority from other jurisdictions is not binding in Michigan, but [this Court] may
review and rely on it if [it] find[s] its reasoning persuasive.” In re Estate of Herbert Trust, 303
Mich App 456, 464; 844 NW2d 163 (2013).
2
While not identical, this definition closely resembles the MCSF’s definition of income, which
includes “earnings generated from a business . . . .” 2013 MCSF 2.01(C)(2).
3
Other jurisdictions have reached similar conclusions regarding the treatment of undistributed
income of an S Corporation. See, e.g., Hubbard Co Health and Human Servs v Zacher, 742
NW2d 223, 227 (Minn App 2007); Walker v Grow, 170 Md App 255, 281; 907 A2d 255 (2006);
Taylor v Fezell, 158 SW3d 352 (Tenn 2005).
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to leave in the corporation. To ignore this fact would allow a sole shareholder, such as plaintiff,
to determine his own income for child support purposes, and avoid the MCSF’s inclusion of
“earnings generated from a business” entirely. 2013 MCSF 2.01(C)(2). Thus, a case-by-case,
factual inquiry is required to determine what portion of an S corporation’s profits are necessary
to fund the corporation, and what portion may be considered income under the MCSF. See
Tuckman, 308 Conn at 210; JS, 454 Mass at 662-633. This analysis would also comport with the
MCSF’s direction to trial courts “to identify any additional monies a parent has available for
support that were not included as personal income.” 2013 MCSF 2.01(E)(2). Further, I would
place the burden of demonstrating that earnings are necessarily retained in the corporation on
plaintiff in this case.
It is my opinion that, in this case, the trial court undertook the type of analysis discussed
in Tuckman and JS, and I would affirm. The second issue addressed by the majority is whether
the trial court erred by including within the calculation of plaintiff’s income funds distributed to
plaintiff for payment of taxes arising from SGC’s corporate earnings. Plaintiff stipulated to the
inclusion of these funds in the calculation of his income, and, thus, I would hold that plaintiff is
precluded from raising this argument. See Holmes v Holmes, 281 Mich App 575, 587-588; 760
NW2d 300 (2008).
For the reasons stated, I would affirm the trial court’s orders in full.
/s/ Karen M. Fort Hood
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