No. 89-550
IN THE SUPREME COURT OF THE STATE OF MONTANA
1990
IN RE THE MARRIAGE OF
GAYLE ANN STEWART,
Petitioner and Respondent,
v.
MICHAEL F. STEWART,
Respondent and Appellant. 8 .
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APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Jeffrey Sherlock, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
J. C. Weingartner, Helena, Montana
For Respondent:
Bard Middleton, Billings, Montana
Submitted on Briefs: April 19, 1990
Decided: May 30, 1990
Filed: *
Clerk
Justice William E. Hunt, Sr. delivered the Opinion of the Court.
The husband, Michael F. Stewart, appeals the judgment of the
District Court of the First Judicial District, Lewis and Clark
County, in which the ~istrict Court chose to disregard the
husband's previous business losses and depreciation losses in its
modification of the husband's child support obligations. We
affirm.
The issues on appeal are:
1) Whether the District Court erred in failing to consider
the husband's 1985 and 1986 business losses in its calculation of
the husband's 1987 disposable income.
2) Whether the District Court erred in failing to consider
the husband's 1987 and 1988 depreciation losses in its calculation
of the husband's disposable income.
The husband is a self-employed log home builder who operates
a sole proprietorship called Mike's Mountain Homes in Lincoln,
Montana. The wife, Gayle Ann Stewart, is an attorney. The parties
were married in 1972. Two children were born of the marriage:
Mandy and Melissa. At the time of the District Court's findings,
Mandy was 11 years old and Melissa was 9 years old. The wife filed
for legal separation on February 18, 1981 and the parties signed
a separation, custody, support and property settlement agreement
on June 12, 1981. The agreement set the husband's child support
obligations at $50.00 per child per month for a total of $100.00
per month. This agreement was incorporated into a decree of legal
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separation on July 22, 1981, which was converted into a decree of
dissolution on May 20, 1982.
On March 16, 1989, the wife filed a motion for modification
of child support. The wife's motion alleged that the husband's
disposable income had increased substantially since the decree of
dissolution and, therefore, the current rate of child support
should also be equitablly raised.
On August 9, 1989, a hearing was held on the wife's motion.
On September 15, 1989, the court issued its findings of fact and
conclusions of law and order. The husband was ordered to pay
$1,200 retroactive child support. Further, these findings,
conclusions, and order declared that there had been a substantial
increase in the husband's disposable income since the original
decree of dissolution was entered. As a result, it was equitable
to raise the husband's monthly child support payments to $582.00,
commencing one year after the date of entry of the order. In the
interim, so that the husband could adjust his finances to meet this
increase, child support was set at $300.00 per month. The court,
in its determination of the husband's disposable income,
disregarded certain business and depreciation losses shown in the
husband's federal income tax returns. The husband appeals the
court's decision to disregard these losses.
A court may modify an existing decree of child support "upon
a showing of changed circumstances so substantial and continuing
as to make the terms unconscionable. Section 40-4-208 (2)(a)(i),
MCA. In this case, the District Court made such a determination
based upon a comparison of the husband's previous child support
obligation and his disposable income for the years 1987 and 1988
as suggested by the Uniform District Court Rule on Child Support
Guidelines. See Uniform District Court Rule on Child Support
Guidelines, 227 Mont. 1, 44 St.Rep. 828 (1987), hereinafter
referred to as Guidelines. The District Court's findings resulting
from this comparison will not be disturbed unless there is a
showing that the District Court clearly abused its discretion. See
In Re the Marriage of Gray, 788 P.2d 909, 47 St.Rep. 552 (Mont.
1990), and cases cited therein.
The first issue on appeal is whether the District Court erred
in failing to consider the husband's 1985 and 1986 business losses
in its calculation of the husband's 1987 disposable income.
The findings of the District Court state that, based upon the
husband's 1987 tax returns, ''Mike [the husband] netted some $40,612
on gross business sales of $143,419.'' In its conclusions, the
court refused to deduct from this net amount some $30,000 of
business losses that accrued in 1985 and 1986. It is with this
conclusion that the husband takes issue.
Under the Guidelines, the primary focus for determining
available income for paying child support is based upon a parent's
disposable income rather than their taxable income. I1[I]t is the
disposable income of the parent, and not their income tax returns
alone, which must be considered by the Court.'' Gray, 788 P.2d at
912, 47 St.Rep at 555, citing In Re the Marriage of Mitchell, 229
Mont. 242, 746 P.2d 598 (1987). As a result, only a minimum
number of exclusions are allowed from a parent's gross income.
Guidelines, 227 Mont. at 7, 44 St.Rep. at 834. Included within
this list of exclusions are legitimate business expenses.
Guidelines, 227 Mont. at 7, 44 St.Rep. at 834. However, legitimate
business expenses do not include those losses that exist primarily
on paper and have little effect upon a parent's disposable income.
See generally Schelmeske v. Veit, 390 N.W. 2d 309 (Minn. App. 1986);
Vitalis v. vitalis, 363 N.W.2d 57 (Minn. Ct. App. 1985).
In this case, it is evident that the husband's claimed 1985
and 1986 business losses were merely paper losses. The record
indicates that the husband's gross income has greatly increased
from the time of dissolution. The husband's business generated
gross sales of $143,419.00 in 1987 and $118,729.00 in 1988. His
net profit for each of these years, before deductions, was
$40,612.00 and $6,425.00 respectively. Additionally, the husband
testified that his monthly expenses were about $2,900.00 per month
but that he and his wife only earned approximately $845.00 per
month which resulted in a difference of over $2,000.00 per month.
Notwithstanding this shortfall, the husband testified that all debt
payments were current. Such a situation indicates that the husband
has more disposable income than appears from his tax returns.
There is no indication that the District Court abused its
discretion in not allowing the paper loss from previous years to
be considered in the calculation of the husband's 1987 disposable
income.
The second issue on appeal is whether the ~istrictCourt erred
in failing to consider the husband's 1987 and 1988 depreciation
losses in its calculation of the husband's disposable income.
his Court has previously decided that accelerated
depreciation deductions are not an acceptable exclusion in the
calculation of a parent's disposable income. Mitchell, 229 Mont.
at 247, 746 P.2d at 602. Our decision in Mitchell was based upon
the Colorado child support statute upon which our own Guidelines
are based. Mitchell, 229 Mont. at 247, 746 P.2d at 602. The
Colorado statute specifically states that 'ordinary and necessary
expenses1 does not include amounts allowable by the internal
revenue service for the accelerated component of depreciation
expenses. .. Mitchell, 229 Mont. at 247, 746 P.2d at 602, citing
Section 14-10-115 (7)(a) (11)(B), Colo. Rev. Stat.
In addition to the support found in the Colorado statute, an
analysis of the purpose of depreciation further supports the
premise that depreciation is not an acceptable exclusion in
calculating disposable income. Two types of depreciation are
generally allowed by the Internal Revenue Service in the
calculation of taxable income. These two types are straight line
depreciation and accelerated depreciation. See Title 26, Section
167 (b), (1)(2) USCA. Both types of depreciation are permitted as
a tax deduction to allow individuals to reqain their business
expenditures. "There shall be allowed as a depreciation deduction
a reasonable allowance for the exhaustion, wear and tear. . . (1)
of property used in trade or business, or, (2) of property held for
the production of income." Title 26, Section 167(a), USCA.
Since the purpose of depreciation is to assist a person in
resainins their expenditures, it does not follow that depreciation
is a business expense for the calculation of disposable income
under the Guidelines. Therefore, we uphold our previous decision
in Mitchell and, in this case, conclude that the District Court did
not abuse its discretion in disregarding the 1987 and 1988
depreciation deductions claimed by the husband when calculating the
husband's disposable income.
Affirmed.
Justice
We Concur:
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Chief Justice//
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Justices