Alexander v. Alexander

IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE
FILED
February 22, 2000

Cecil Crowson, Jr.
Appellate Court Clerk

E1998-00855-COA-R3-CV
DONALD JAMES ALEXANDER, ) C/A NO. 03A01-9812-CV-00401
)
Plaintiff-Appellee, )
)
)
)
v. ) APPEAL AS OF RIGHT FROM THE
) HAMILTON COUNTY CIRCUIT COURT
)
)
)
)
CAROLYN PAXTON ALEXANDER, )
) HONORABLE W. NEIL THOMAS, III,
Defendant-Appellant.) JUDGE

For Appellant For Appellee

GLENNA M. RAMER PHILLIP C. LAWRENCE
Chattanooga, Tennessee Lawrence, Lawrence & Gerbitz, PLLC
Chattanooga, Tennessee

O P I N IO N

REVERSED AND REMANDED Susano, J.

1
 This is a post-divorce case that presents numerous and

difficult questions relating to the interpretation and
application of the Child Support Guidelines (“Guidelines”)
promulgated by the Department of Human Services, Child Support

Services Division, pursuant to the authority of T.C.A. § 36-5-
101(e)(2). The original defendant, Carolyn Paxton Morrow
(“Mother”) -- formerly Alexander -- filed a petition on September

4, 1997, seeking an increase in the general child support
obligation of her former husband, Donald James Alexander
(“Father”). Following a hearing on August 18, 1998, the trial

court filed its “Memorandum and Order” in which it held that
Mother had not demonstrated that there had been a “significant
variance” as defined in the Guidelines to warrant an increase in

child support. Accordingly, it denied Mother’s petition. She
appeals, raising three issues:

1. Does the evidence preponderate against
the trial court’s finding of no significant
variance between the amount of child support
being paid by Father and the amount of child
support that would be due under the
Guidelines as applied to Father’s current
income level?
2. Did the trial court err when it failed to
consider the lifestyle of Father in
determining matters of income?

3. Is Mother entitled to her attorney’s fees
incurred at the trial level and on appeal?

I. Background

The parties’ marriage was dissolved by judgment entered

February 22, 1995. That judgment ended a marriage of

approximately twelve and a half years; it incorporated the

parties’ marital dissolution agreement (“MDA”), pursuant to which

Mother was awarded custody of the parties’ minor children, Justin

2
Travis Alexander (DOB: June 27, 1984) and Liesl Michele Alexander

(DOB: August 28, 1985). By agreement of the parties, Father was
ordered to pay child support of $2,194 per month.

As pertinent here, the MDA, signed by the parties in
February, 1995, provides that Mother had already received, or
would shortly receive, alimony awards as follows:

1. $205,000 alimony in solido to be used by
Mother to purchase a residence in Ooltewah,
Tennessee. According to the MDA, this
obligation had already been satisfied.
2. $136,000 alimony in solido to be used by
Mother as operating capital for two
businesses. This was to be paid by Father
“within five (5) days of approval of the
final divorce decree.”
3. $60,000 “as a lump sum alimony in futuro
payment effective five (5) days after the
final decree of divorce is executed by the
Court.”

Mother, who was not represented in the divorce proceedings, also

received all of the parties’ interest in one of the parties’

businesses -- Liesl’s Garden, Florist and Gift Shop -- and all
but 5% of the parties’ interest in the other business, a

restaurant known as Cirrus Garden Cafe. The MDA awarded Father

the remaining 5% interest in the restaurant. Father was also
awarded the marital residence located on 340 acres in Harrison,

Tennessee. According to Mother, the residence had been built in

the 1987-1988 time frame at a cost of “in excess of a million

dollars.” The MDA contains other provisions that are not

directly relevant to the issues on this appeal.

On June 15, 1995, Mother remarried. In August, 1996,

she and her husband, along with her children, moved to

3
California. Following the move, Mother and her husband both

enrolled in college. Neither was working at the time of the
hearing below, but each was receiving a small stipend from the
State of California for educational and living expenses. When

Mother moved to California, she sold her house in Ooltewah and
closed the businesses that she had received in the divorce. She
bought a new residence in California.

II. Operative Facts

At the hearing below, Mother contended that there had
been a “significant variance” between the amount of child support
being paid by Father and the amount of child support calculated

pursuant to the Guidelines based upon Father’s current level of
income. She relied primarily upon Father’s lifestyle and his

federal income tax returns to substantiate her position. As
pertinent here, those tax returns reflect the following:

1995 1996 1997

Wages -- -- $114,423
Interest Income $ 9,891 $ 10,943 2,604
Dividends 51,765 45,065 61,277
Business Income <102,076> <89,102> <103,195>
Capital Gains 974,442 454,057 8,354
Other Income 16,067 24,983 23,149

Adjusted Gross Income $950,089 $445,946 $106,612

Taxable Income $678,410 $310,594 $ 58,039

Federal Income Tax $186,927 $ 83,801 $ 12,641

Father is one of 11 grandchildren of O.D. McKee, the

founder of McKee Baking Company, which is now McKee Foods

Corporation (“McKee”). The company is probably best known for

its product, Little Debbie Snack Cakes. It is headquartered in

Collegedale, Tennessee.

4
 Following his graduation from college in 1982 and a

short stint as a computer salesman, Father worked for McKee from
1983 to 1993. After leaving the company in January, 1993, he was
involved in a number of ventures and self-employment, all of

which he pursued without much financial success. In 1997, Father
was installed as president of Sanda Hosiery Mills (“Sanda”), a
subsidiary of Redwood Annex, a company owned by his parents.

Sanda had been doing poorly before Father became involved and it
continued to decline under his presidency. On May 31, 1997, it
ceased production of its line of baby socks and commenced the

closing down of all operations. Father continued receiving
compensation from Sanda while the company wound up its affairs.
His final paycheck from Sanda was due around the time of the

modification hearing, i.e., August 18, 1998. He testified at the
hearing that he was looking for new employment.

Father travels extensively. He has taken his children
on many of his trips, both in the United States and abroad. At

the time of the hearing below he owned a sailboat that he was

offering for sale for $360,000. He also owned a motor home for
which he had paid some $160,000. He was also the owner of

between 53,000 and 56,000 shares of McKee common stock. An

appraisal done in 1997 at the request of the company indicated
that the stock was then worth $71 per share.

III. Standard of Review

In this non-jury case, our review is de novo upon the
record with a presumption of correctness as to the trial court’s

factual findings, unless the preponderance of the evidence is

otherwise. Rule 13(d), T.R.A.P.; Wright v. City of Knoxville,

5
898 S.W.2d 177, 181 (Tenn. 1995). The trial court’s conclusions

of law, however, are not accorded the same deference. Campbell

v. Florida Steel Corp., 919 S.W.2d 26, 35 (Tenn. 1996); Presley

v. Bennett, 860 S.W.2d 857, 859 (Tenn. 1993).

IV. Significant Variance

The pleadings and proof in this case bring into play

T.C.A. § 36-5-101(a)(1), which reads, in pertinent part, as

follows:

In cases involving child support, upon
application of either party, the court shall
decree an increase or decrease of such
allowance [of child support] when there is
found to be a significant variance, as
defined in the child support guidelines
established by subsection (e), between the
guidelines and the amount of support
currently ordered....

Id. (Emphasis added). A “significant variance,” as pertinent

here, is defined and addressed in the Guidelines as follows:

For the purposes of defining a significant
variance between the guideline amount and the
current support order pursuant to T.C.A. §
36-5-101, a significant variance shall be at
least 15% if the current support is one
hundred dollars ($100.00) or greater per
month....Such variance would justify the
modification of a child support order....Upon
a petition for adjustment by either party,
the court shall increase or decrease the
award amount as appropriate in accordance
with these guidelines....

Tenn.Comp.R. & Regs., ch. 1240-2-4-.02(3). The trial court found

that there had not been a significant variance and denied

Mother’s petition. In order to evaluate the correctness of the

trial court’s judgment, we must analyze the income earned by

6
Father since the divorce judgment was entered on February 22,

1995.

V. Father’s Gross Income

The record before us contains Father’s federal income
tax returns for 1994, 1995, 1996, and 1997. In addition, we have

testimony with respect to his gross income in 1998. Father
contends that we cannot consider income earned prior to September
4, 1997, the date on which Mother filed her petition for

modification. He argues that consideration of pre-September 4,
1997, income would violate the following provision of T.C.A. §
36-5-101(a)(5):

[A] judgment [for child support] shall not be
subject to modification as to any time period
or any amounts due prior to the date that an
action for modification is filed and notice
of the action has been mailed to the last
known address of the opposing parties.

Id. This statutory provision is designed to prohibit the

retroactive modification of child support. Rutledge v. Barrett,

802 S.W.2d 604, 606 (Tenn. 1991). In other words, a court has no
power to alter a child support award as to any period of time

occurring prior to the date on which an obligee spouse files his

or her petition. However, the subject statute does not prevent a
court from factoring into the new-income side of the equation,

pre-filing income earned by an obligor if, in the court’s

discretion, the inclusion of such income is appropriate in order

to accurately calculate an obligor’s new income level.

The Guidelines recognize that a court, in some cases,

will have to average an obligor’s income in order to eventually

7
determine the net income upon which the percentages set forth in

Tenn.Comp.R. & Regs., ch. 1240-2-4-.03(5) should be applied. In
this case, we believe it is appropriate to average Father’s
income for the years 1995-1998 in order to determine if there has

been a “significant variance.” Since these parties were divorced
relatively early in 1995, we believe it is permissible and
appropriate to consider Father’s income in that year. In this

case, given the sources of Father’s income, there is no reason to
believe that his 1995 income was a significant factor in the
parties’ agreement regarding support.

As previously indicated, there is testimony in the
record regarding Father’s income in 1998. That testimony

indicates that his 1998 gross income for purposes of the
Guidelines would be as follows:

8
 Wages and Director’s Fee
(Sanda and its parent company) $ 71,000
Dividend Income, McKee 60,000
Non-McKee Income 5,500
Other Income from McKee 15,000
Gift from Parents 20,000

$171,500

As to the “gift from parents,” the testimony was that for many
years Father’s parents had given him $20,000 per year in cash or
stock, the maximum permissible tax-free gift under the Internal

Revenue Code. While such gifts are not taxable and are not
considered income under generally accepted accounting principles,
they are considered income under the Guidelines. See

Tenn.Comp.R. & Regs., ch. 1240-2-4-.03(3)(a).

Thus, the record reflects gross income since the

parties’ divorce in early 1995 as follows:

1995 $950,089
1996 445,946
1997 106,612
1998 (projected) 171,500

Before discussing the conversion of Father’s gross income to net

income under the Guidelines, we must address some sub-issues

presented by the facts of this case.

VI. Business Losses

Father’s tax returns reflect business losses for each

of the years of 1995 to 1997. The losses in 1996 and 1997 as
well as the bulk of the loss in 1995 relate to Father’s ownership

of a company known as DJA Leasing. The evidence supports the

following facts as taken from Father’s brief:

9
 The...heirs of O.D. McKee...[are] given the
opportunity of owning the rolling stock,
i.e., tractors and trailers and sales
vehicles, used by McKee Foods Corporation.
Schedule C, “Profit or Loss From Business,”
of [Father’s] federal income tax returns for
1995, 1996 and 1997 reflect business activity
of a vehicle leasing business operating under
the business name of DJA Leasing. According
to...[Father’s] accountant, [Father] operates
the leasing company as an unincorporated,
sole proprietorship. Those vehicles are
purchased through a line of credit at Pioneer
Bank, and the lease payments from McKee are
used to pay the following expenses: interest
on the loan, the sales tax on the lease
payments, repairs and maintenance, licenses
and taxes, and the insurance on the vehicles.
From the surplus of the lease payments over
the expenses, the principal payments on the
line of credit are made. [Father] receives
no cash whatever [sic] from the ownership of
this leasing company, and the only financial
advantage to him is a tax loss that he can
claim against his income.

Father’s tax returns indicate the following with respect to DJA

Leasing:

1995 1996 1997

Income less expenses
other than depreciation $189,010 $310,323 $539,829
Less: Depreciation 288,645 399,425 643,024

Net Loss on Tax Return <$ 99,635> <$ 89,102> <$103,195>

Mother contends that we should ignore the depreciation deduction
and include Father’s income before depreciation, in computing

Father’s average gross income and ultimately his average net

income for the period 1995-1998.

The Guidelines provide that depreciation “should not be
considered [a] reasonable expense[]” when a court is attempting

to ascertain “[i]ncome from self-employment includ[ing] income

from business operations and rental properties, etc., less

10
reasonable expenses necessary to produce such income.”

Tenn.Comp.R. & Regs., ch. 1240-2-4-.03(3)(a). See Burchfield v.

Nave, C/A No. 03A01-9308-JV-00271, 1994 WL 13374 at *3-4

(Tenn.Ct.App. E.S., filed January 21, 1994). The trial court

expressed doubt regarding the logic and fairness of a literal

reading and application of this rule, noting that “[i]n the

operation of a truck line, or any other business for that matter,

depreciation is a very real expense.”

Depreciation, as an accounting concept, spreads the

cost of a capital asset over its presumed useful life. While it

cannot be “considered” a reasonable expense under the Guidelines,

this does not mean that the real cost of a capital asset cannot

be considered in determining income from self-employment. In our

unreported case of Kimble v. Kimble, C/A No. 02A01-9503-CV-00049,

1996 WL 445272 (Tenn.Ct.App. W.S., filed August 8, 1996), we
opined as follows:

As our own state legislature has not seen fit
to either expressly exclude or authorize a
deduction for capital expenditures, we
believe it within the sound discretion of the
trial court to determine when and if
expenditures of this type are “reasonable.”

Id. at *5. We agree with our colleagues in the Western Section.

In the instant case, it is clear that expenditures for
rolling stock -- without which there would be no leasing business

and hence no leasing income -- are reasonable expenses. We agree
with the trial court that deductions for a portion of the

purchase price of the vehicles of DJA Leasing in the three years

under consideration represent a reasonable expense of that

company.

11
 By the same token, we also agree with the trial court

that the net losses from DJA Leasing should not be utilized to
reduce Father’s other sources of income in determining his net
income under the Guidelines. There is no proof in the record

that Father was required to “go into his pocket” to cover these
losses. They are paper losses only -- losses that enabled Father
to shelter other sources of income from federal income tax.

Accordingly, Father’s net “losses” from the operation of DJA
Leasing cannot be considered in determining his net income to set
child support.

VII. Capital Gains

Father sold shares of the common stock of McKee in 1995
and 1996. The stock was sold to the General Conference

Corporation of Seventh-Day Adventists (“the Conference”). We
again refer to Father’s brief for an explanation of these sales:

Ownership of McKee stock is restricted to
family members only and must be sold either
back to [McKee], to other McKee family
members, or to [the Conference]. If sold to
[the Conference], “bargain sale” rules apply
whereby the stock is discounted to eighty
percent of its appraised value, and the
difference between the full value and the
discounted value is treated as a charitable
contribution.

The evidence preponderates in favor of the correctness of these

statements.

The figures shown on Father’s 1995 and 1996 federal

income tax returns reflect his receipt of 80% of the stock’s

value pursuant to the bargain sale rules. The following is a

detailed analysis of these sales:

12
 1995

01/06/95 sale of 21,930 shares
of McKee stock valued at
$1,250,000 for $1,000,008
Less: Cost basis (acquired
01/01/92) 25,566

Capital Gain $ 974,442

1996

01/02/96 sale of 9,375 shares
of McKee stock valued at
$562,500 for $ 450,000
Less: Cost basis (acquired
12/31/89) 756

Capital Gain $ 449,244

The trial court stated in its memorandum opinion that “[Father]
received his McKee Foods stock in 1972 when the other

grandchildren of O.D. and Ruth McKee received their stock.”

Accordingly, the trial court prorated the gains over 23 and 24

years respectively and held that only $42,367 of the 1995 gain

and only $18,919 of the 1996 gain1 should be considered. The
evidence preponderates against the trial court’s determination

that the stock sold in 1995 and 1996 was acquired in 1972.

We start by noting that capital gains are included

within the definition of gross income in the Guidelines.

Tenn.Comp.R. & Reg., ch. 1240-2-4-.03(3)(a). See also Brooks v.

Brooks, 992 S.W.2d 403, 407 (Tenn. 1999) (“Generally, capital

gains are included in the definition of gross income.”) Father

argues that “there is no indication that the term ‘capital gains’

[as used in the Guidelines] is analogous to the term used in the

Internal Revenue Code.” While this correlation is not expressly

1
In making the computation with respect to 1996, the trial court
apparently used the total capital gains figure of $454,057 rather than the
capital gain of $449,244 on the McKee stock.

13
stated in the Guidelines, we find and hold that it is logical to

equate these two concepts. Speaking rhetorically, if we cannot
use the definition of a capital gain adapted by the Internal
Revenue Service, to what source should we resort? Father does

not suggest an alternative definition.

While it is true that Father started receiving McKee

stock in 1972, it is likewise clear from the evidence that this
was only the beginning point of his receipt of stock in that
company. In fact, the tax returns clearly reflect that the McKee

stock sold in 1995 was acquired on January 1, 1992, while the
stock sold in 1996 was acquired on December 31, 1989. Therefore,
it is appropriate to prorate the 1995 capital gain over three

years and the 1996 capital gain over six years. We note that
proration over the period of time that a stock is held is

consistent with earlier decisions of this Court. See, e.g.,
Smith v. Smith, C/A No. 01A01-9705-CH-00216, 1996 WL 672646 at *3

(Tenn.Ct.App. M.S., filed October 29, 1997).

As a general proposition, Father contends that we

should not consider any of the capital gains on the McKee stock
sales. He argues that since he has no present intention of
selling any more of this stock, it would be inappropriate to

consider it in determining his present level of income. We
reject this argument. The proof indicates that Father’s sale of
McKee stock to supplement his income has been a part of his life

going back many years. He himself testified that he had sold
stock in the past “[a]s needs pressed, once in a while I had to.”
This is borne out in the record. For example, there is proof

that he sold McKee stock at some time in the 1990's to purchase a
sailboat for approximately $290,000. He also sold McKee stock to

14
finance the building of a million-dollar home in 1987-1988.

There is no reason to exclude these capital gains in toto. To do
so would be inconsistent with one of “[t]he major goals in the
development of [the] guidelines,” see Tenn.Comp.R. & Regs., ch.

1240-2-4-.02(2):

To ensure...to the extent that either parent
enjoys a higher standard of living, the
child[ren] share[s] in that higher standard.

Tenn.Comp.R. & Regs., Ch. 1240-2-4-.02(2)(e).

Father makes an additional argument as to why the sales
of his McKee stock in 1995 and 1996 should be totally ignored.

He contends that he sold his McKee stock in 1995 and 1996 in
order to satisfy obligations to Mother under the parties’ MDA.

He relies upon the case of Hall v. Hall, C/A No. 03A01-9701-GS-

00030, 1997 WL 404258 (Tenn.Ct.App. E.S., filed July 21, 1997) to

support his argument that a capital gain resulting from a sale
necessitated by a division of property settlement or decree
should not be considered for the purpose of calculating child

support. While we agree that Hall appears to stand for this

proposition, we find that the evidence only partially supports
Father’s contention.

The parties’ MDA was finally agreed to on February 22,
1995. It reflects that Mother had already received, prior to

that date, some $205,000 as alimony in solido in connection with

the purchase of her residence in Ooltewah. That house was

purchased in October, 1994. Mother testified that she received

the money for the house at that time. This unrefuted testimony

is not consistent with Father’s basic argument to the extent that

15
his argument, by implication, includes a claim that his sales of

McKee stock on January 6, 1995, and January 2, 1996, were in some
way necessitated by his need for cash to fund the $205,000
obligation to Mother under the MDA. It is more logical to

believe that the $205,000 payment to Mother came from a sale of
McKee stock by Father on July 1, 1994. That sale occurred
shortly before the parties separated on July 18, 1994. The

proceeds from that sale amounted to $499,997. The evidence
preponderates in favor of a finding that it was the 1994 stock
sale -- rather than either the 1995 stock sale or the 1996 stock

sale -- that funded the $205,000 payment to Mother.

As to the remaining alimony payments to Mother --

$136,000 and $60,000 -- the timing of the 1995 sale of McKee
stock2 is consistent with a finding that this sale was made, at
least in part, to fund Mother’s alimony payments that totaled
$196,000. Since 97.44% of the 1995 sale of McKee stock was a
capital gain, we believe that 97.44% of the alimony payments

totalling $196,000 should be excluded from the 1995 capital gain

in determining Father’s gross income for 1995. We agree with
Father that a capital gain resulting from a sale of an asset to

fund a division of property in a divorce should not be considered

in calculating child support. Such a rule prevents “double-
dipping.”

Our analysis persuades us that the following is a

correct determination of the capital gain from the sale of McKee

stock in 1995 that should be considered as part of Father’s gross
income:

2
The stock was sold on January 6, 1995, shortly before the divorce on
February 22, 1995.

16
 1995

Capital gain from sale
of McKee stock $974,442
Less: Portion of gain
applicable to $196,000
paid to Mother
(97.44% of $196,000) 190,982

Capital gain excluding
portion applicable to
payments to Mother $783,460

As previously indicated, we believe the 1995 capital gain should

be prorated over three years, the period of time during which
Father owned the stock that he sold in 1995. Hence, one-third of
$783,460, or $261,153 should be treated as his capital gain from

the sale of McKee stock for the year 1995.

There is no credible evidence that any portion of the

1996 capital gain on the sale of the McKee stock was related to

the parties’ divorce settlement. It results that the full gain

of $449,244 is spread over the six years that the stock was owned

by Father. The per-year allocation of the gain is $74,874, i.e.,
$449,244 divided by six years. It results that $74,874 is

allocated to each of the years of 1995 and 1996.

VIII. Conclusion

A.

We find and hold that the evidence preponderates in

favor of the following findings with respect to Father’s gross
income for the years 1995-1998 pursuant to the definitions and

directives of the Guidelines:

1995 1996 1997 1998

Salary from Employment

17
 and Director’s Fees -- -- $114,423 $ 71,000
Interest Income $ 9,891 $ 10,943 2,604 --
Dividends from McKee 51,639 42,213 59,451 60,000
Non-McKee Dividends 126 2,852 1,826 5,500
Capital Gains
--McKee Stock
--1995 Sale 261,153
--1996 Sale 74,874 74,874
Capital Gains--Other -- 4,813 8,354 --
Other Income
--McKee 20,375 24,983 23,149 15,000
--Others <4,308> -- -- --
Gift from Parents 20,000 20,000 20,000 20,000

$433,750 $180,678 $229,807 $171,500

Over the four-year period, Father’s average gross income per year

was $253,934. While child support under the Guidelines is based
on net income rather than gross income, Father’s average annual
gross income during the period under review is sufficiently large

enough to clearly indicate that the evidence preponderates
against the trial court’s determination that Mother failed to

prove a significant variance “between the guidelines and the
amount of support currently ordered.” T.C.A. § 36-5-101(a)(1).
Since Father’s current child support obligation of $2,194 per

month was based on a net income of $6,856.75 per month3 -- which
extrapolates to a monthly gross of $9,900 under the Guidelines in
effect at the time of the divorce -- and since Father’s average

gross income over the four years under discussion is

substantially in excess of $118,800 ($9,900 per month x 12
months), it is clear that “[a] modification must be made” of the

existing support obligation. See Turner v. Turner, 919 S.W.2d

340, 344 (Tenn.Ct.App. 1995).

B.

3
This is based on the chart dated July 8, 1994, issued in connection
with the Guidelines in effect at the time of the divorce.

18
 This Court has labored long and hard to convert

Father’s gross income to net income in order to determine the new
amount of support due under the Guidelines; we have been
unsuccessful in this endeavor. We have finally concluded that

the record before us is not complete enough to make the necessary
calculations. For this reason, we find it necessary to remand
this case to the trial court for further proceedings in

connection with Mother’s petition to modify.

We would make some instructive comments to guide the

trial court in the task that lies ahead.

We find and hold that the trial court erred in

approaching this case as if it were one dealing with self-
employment income. There is no self-employment income at issue

in this litigation. Therefore, the trial court was not correct
in using the approach to self-employment income found at
Tenn.Comp.R. & Regs., ch. 1240-2-4-.03(4). It should be noted

that Father’s self-employment, DJA Leasing, resulted in net

losses rather than net income. None of the income earned by
Father from 1995 through 1997 was treated as self-employment

income on his tax returns. This can be seen from the fact that

his Form 1040 for each of the years of 1995, 1996, and 1997 does
not reflect any self-employment tax. See line 47 on Father’s

1995 and 1997 tax returns and line 45 on his 1996 tax return.

The Guidelines permit only limited tax deductions from

gross income in arriving at net income for the purpose of
calculating child support. The Guidelines are relatively easy to

apply with respect to wages from employment and income from self-

employment. Unfortunately, the Guidelines do not expressly

19
provide a mechanism for converting gross income from non-

employment sources, such as the ones in this case, into net
income. However, the approach taken by the Guidelines in
connection with employment-related income suggests that the gross

income-to-net income conversion of Father’s non-employment gross
income should be accomplished by reducing his gross income by an
appropriate amount of withholding tax4 and, where applicable,

payroll taxes as opposed to a reduction based on actual taxes
ultimately paid on such income. This is because the tax due upon
the filing of the return is impacted by many things -- e.g.,

deductions, tax credits, and other considerations -- that have
nothing to do with the concept of net income envisioned by the
Guidelines.

The gross income in this case for the purposes of the

guidelines can be broken down into four categories:

1. Salary from employment and the director’s
fee from Redwood Annex
2. Interest income, dividends, other income

3. Capital gains5
4. Gifts from parents

The net income from the first category can be computed pursuant

to the provisions of Tenn.Comp.R. & Regs., ch. 1240-2-4-.03(4).

Withholding tax on the gross income in the second and third

categories can be computed from the Internal Revenue Service’s
Circular E, Employer’s Tax Guide and/or other relevant IRS

4
The Court recognizes that taxes are not generally withheld on non-
employment income; but it is necessary in this case to make a withholding tax
computation in order to establish child support under the Guidelines.

5
Generally speaking, capital gains in the years 1995-1997 were subject
to a maximum tax of 28%. The Court is not aware of how, if at all, this
affects withholding taxes on these capital gains.

20
material for each of the pertinent years. The fourth category --

not being subject to tax -- can be transferred directly to the
net income line.

In its discretion, the trial court may want to consider
the appointment of a special master6 -- possibly someone well-
versed in the tax field -- whose task it will be to determine how

to convert Father’s gross income to net income under the
Guidelines. Once the trial court has determined Father’s average
net income for the period 1995-1998 based upon the gross income

figures found by this Court in Section VIII(A) of this opinion,
it will then proceed to determine the amount of child support due
under the Guidelines. In this case, we find and hold that any

child support due Mother based upon the trial court’s
determinations and calculations should be effective back to

September 4, 1997, the date on which Mother filed her petition
for modification.

C.

Mother argues in her brief that the trial court erred
in failing to consider Father’s opulent lifestyle. She

apparently relies upon Tenn.Comp.R. & Regs., ch. 1240-2-4-

.04(1)(f), which provides as follows:

Valuable assets and resources (expensive home
or automobile which seem inappropriate for
the income claimed by the obligor) of the
obligor should be considered for the purpose
of imputing income and increasing the support
award in any case if the court finds that
equity requires it.

6
The court emphasizes that this is a suggestion only.

21
That provision is not implicated by the facts of this case.

Father’s lifestyle is not inconsistent with his income, when
viewed in the context of his net worth and station in life. This
is not a case where a court is required to impute income to an

obligor. There is no secret wealth in this case. Father’s
wealth is very evident. He lives the way he does because he is
relatively wealthy and can afford to live that way. We agree

with the trial court that his lifestyle has absolutely nothing to
do with the setting of child support in this case.

D.

Finally, Mother argues that she is entitled to recover
fees and expenses against Father for her counsel’s trial and

appellate work. We agree. See T.C.A. § 36-5-103(c)(Supp. 1999).
On remand, the trial court will award Mother her reasonable fees

and expenses incurred at the trial level and on appeal.

E.

The judgment of the trial court is reversed and this

cause is remanded to the court below for further proceedings
consistent with this opinion. Costs on appeal are taxed to the

appellee.

__________________________
Charles D. Susano, Jr., J.
CONCUR:

________________________
Houston M. Goddard, P.J.

________________________
William H. Inman, Sr.J.

22