SUPREME COURT OF ARKANSAS
No.
06-1143
Opinion Delivered January 18,
RANDY TUCKER,
2007
APPELLANT,
VS.
OFFICE OF CHILD SUPPORT
E N F O R CE M E N T and R E G INA L.
TUCKER,
APPELLEES,
APPEAL FROM THE POPE COUNTY
CIRCUIT COURT,
NO. E-97-25,
HON. GORDON WILLIAM MCCAIN, JR,
JUDGE,
AFFIRMED ON DIRECT APPEAL;
REVERSED AND REMANDED ON
CROSS-APPEAL; COURT OF APPEALS
AFFIRMED.
JIM HANNAH, Chief Justice
Appellant Randy Tucker appeals from an order of the Pope County Circuit Court that
increased his child-support obligation from $45 per week to $1,809.92 per month, based on
a net-worth approach.
Appellees Regina Tucker and the Office of Child Support
Enforcement (collectively referred to as OCSE) cross-appeal from the circuit court’s refusal
to make the modification retroactive to the date of the filing of the petition for modification.
Randy originally appealed to the court of appeals. The court of appeals affirmed the
increase in child support on direct appeal, and reversed the order on cross-appeal, making
the increase retroactive to the date of the filing of the motion for modification. See Tucker
v. Tucker, ___ Ark. App. ___, ___ S.W.3d ___ (Sept. 20, 2006). Randy petitioned this court
for review, which we granted pursuant to Ark. Sup. Ct. R. 2-4. Upon the grant of a petition
for review, we consider the case as though it had been originally filed in this court.
Rodriguez v. Ark. Dep’t of Human Servs., 360 Ark. 180, 200 S.W.3d 431 (2004). We affirm
on direct appeal, and we reverse and remand on cross-appeal.
Facts
Randy and Regina were divorced by decree of the circuit court on April 30, 1997.
The decree awarded Regina custody of the parties’ minor child and ordered Randy to pay
child support of $45 per week.
On October 2, 2003, OCSE intervened and filed a motion to modify Randy’s childsupport obligation. The motion alleged that, since the entry of the decree in 1997, Randy’s
income had increased by more than twenty percent or by more than $100 per month, thereby
constituting a material change in circumstances.
A hearing on the motion was held on March 16, 2005. William Lawton, a certified
public accountant, testified that he reviewed Randy’s tax returns and other information as
requested by OCSE. From that information, he prepared a worksheet showing Randy’s
monthly expenses to be $8,084. He also stated that Randy’s 2003 Schedule C appeared
reasonable, but that it could be used to hide income. Lawton said that it was reasonable to
believe that Randy paid his personal living expenses out of his business accounts. He also
testified that Randy may be living on borrowed money because his liabilities, such as loans
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and lines of credit, had increased dramatically over the past five years.
Randy testified that he was a self-employed contractor, that he had been in the
business since 1997, and that his financial situation had “substantially changed” since that
time. Randy stated that he paid all of his bills, both business and personal, at the end of the
month and that, if he needed money to make the payments, he drew from one of three bank
loans or two lines of credit for his business. Randy testified that he had three credit cards
that he used for both business and personal expenses. He said that he submitted updated
financial statements to the banks at the beginning of every year and periodically throughout
the year. Further, he testified that the banks had a lot of faith in his ability to repay debt.
The record shows that Randy listed his family’s monthly expenses as $4,101, and that
after his current wife’s contributions, he needed to contribute $576.67 per week to meet the
monthly expenses. He testified that he tithed approximately $20,000 per year to his church,
which was more than ten percent of his income. In response to interrogatories, Randy listed
seven vehicles he owned, including two tractors and two all-terrain vehicles. He also
testified that he owned two boats, purchased on the lines of credit. Randy stated that, aside
from taking his kids to Branson each year to purchase school clothes, he had only been on
one vacation in the past four years.
Ricky Taylor, Randy’s certified public accountant, testified that he generated a
worksheet showing Randy’s 2003 net income as $509.46 per week, not including losses
from Randy’s farming operation. He said that the calculation of Randy’s expenses was
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based on averages of what he spent each month, as well as tax returns. Taylor confirmed that
Randy paid all of his bills, business and personal, once a month, from one of his lines of
credit. Further, Taylor stated that, based on his discussions with Randy and a review of the
financial documents, he did not believe that Randy made as much money as he spent.
The circuit court issued a letter opinion on July 15, 2005, in which it found that the
OCSE had met its burden of proving that there was a material change of circumstances since
the entry of the child-support order in 1997. Further, the circuit court found that Randy was
self-employed and that his tax returns were unreliable for the purpose of determining his
income upon which a modification of child support could be based. The circuit court then
proceeded to use the net-worth approach found in Holland v. United States, 348 U.S. 121
(1954). In using this approach, the circuit court relied on three financial statements, dated
August 2003, April 15, 2004, and January 19, 2005, that Randy issued to banks in the
ordinary course of business. The circuit court found that Randy’s net worth had increased
by $214,000 over that period and calculated Randy’s average monthly income, after
excluding income from Randy’s current wife, to be $12,066.11. Because Randy’s income
exceeded the child-support chart levels, the court applied the child-support guidelines’
percentage for one child, 15%, to arrive at a monthly obligation of $1,809.92. The circuit
court made the modification retroactive to January 19, 2005, instead of October 3, 2003, as
sought by OCSE, finding that there was no proof offered to enable the court to conduct a
net-worth analysis for the two-year period prior to the petition’s filing. This resulted in an
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arrearage judgment of $9,689.52, which Randy was ordered to pay at the rate of $200 per
month.
On appeal, Randy argues: (1) that the circuit court erred in disregarding his tax
returns and applying the Internal Revenue Code standards and procedures in determining
his disposable income for child support; (2) that if the court follows the net-worth method
of determining child support, then it should clarify or modify the method used by the circuit
court because it did not present the entire picture and because the standards and procedures
used produced erroneous and unreliable results; and (3) that the circuit court erred in
awarding an increase in support because such a ruling is clearly contrary to the
preponderance of the evidence and creates an undue hardship on Randy. On cross-appeal,
OCSE argues that the circuit court erred in not making modification retroactive to October
3, 2003.
Standard of Review
Recently, in Hill v. Kelly, ___ Ark. ___, ___ , ___ S.W.3d ___, ___ (Nov. 30,
2006), we stated:
Our standard of review for an appeal from a child-support order is de novo on
the record, and we will not reverse a finding of fact by the circuit court unless
it is clearly erroneous. Ward v. Doss, 361 Ark. 153, ___ S.W.3d ___ (2005).
A finding is clearly erroneous when the reviewing court, on the entire
evidence, is left with a definite and firm conviction that a mistake has been
made. Matthews v. Matthews, ___ Ark. ___, ___ S.W.3d ___ (Sept. 21.
2006). We give due deference to the trial court’s superior position to
determine the credibility of the witnesses and the weight to be given their
testimony. Id. In a child-support determination, the amount of child support
lies within the sound discretion of the trial court, and the lower court’s
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findings will not be reversed absent an abuse of discretion. Id. However, a
trial court’s conclusions of law are given no deference on appeal. Id.
Net-Worth Approach
Randy first argues that the circuit court erred in disregarding his tax returns and
applying the IRS Code standards and procedures in determining his disposable income for
child support. Administrative Order No. 10 sets forth the guidelines for determining child
support. At issue in this case is Section III(c) of Administrative Order No. 10, which
provides in relevant part:
For self-employed payors, support shall be calculated based on the last two
years’ federal and state income tax returns and the quarterly estimates for the
current year. A self-employed payor’s income should include contributions
made to retirement plans, alimony paid, and self-employed health insurance
paid; this figure appears on line 22 of the current federal income tax form.
Depreciation should be allowed as a deduction only to the extent that it
reflects actual decrease in value of an asset. Also, the court shall consider the
amount the payor is capable of earning or a net worth approach based on
property, life-style, etc.
(Emphasis added.)
Randy argues that, because his tax returns were available, the circuit court clearly
erred in relying on net-worth figures alone. The letter opinion reflects that the circuit court
began its analysis by considering Randy’s tax returns. The circuit court found:
Defendant’s 2003 tax return indicates a loss of $11,423 on the first page line
#34. However, Schedule A of said return reflects expenditures of $34,275 as
itemized deductions. Mr. Rick Taylor, testifying on behalf of the Defendant,
stated that based on the 2003 tax return the Defendant receives from his
construction business a net weekly income of $509.46. Defendant testified
that he contributes $400 per week to his church. [OCSE] asserts that, in
addition to this inconsistency which demonstrates Defendant’s true income
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cannot be evaluated by reference to his tax returns, there is commingling of
income/expense information between his personal and business standing.
Indicative of [OCSE’s] position is the Defendant’s use of the 2003 Chevrolet
pickup. In Defendant’s answer to Interrogatory #4 the Defendant stated that
of the vehicles owned, only the 2004 Jeep is driven by his wife, and he instead
drives the 2003 Chevrolet pickup for both business and personal use.
However, the 2003 tax return at page 20 of the Exhibit the Defendant claims
the 2003 Chevrolet is used 100% of the time for business purpose[s].
Taking the income tax records for the past two years and their comparison
with the testimony of the Defendant, this Court finds that the inconsistencies
render the tax records unreliable for the purpose of determining the
Defendant’s child support obligation, and therefore, this Court determines that
deviation from Administrative Order No. 10 with regard to calculation of
support being based on the last two years’ federal and state income tax returns
is necessary, and support shall be determined utilizing the “net worth approach
based on property, life-style, etc.” as said phrase is found in Administrative
Order No. 10. It should also be noted that the Defendant’s testimony with
regard to his attempts to convince the Court of his dire financial situation,
inability to afford additional child support, and attempt to explain the
inconsistencies in his tax returns, that his testimony and demeanor on the
stand was unconvincing and the Court found his statements in that regard less
than credible.
Randy suggests in his brief on appeal that the circuit court wholly disregarded his tax
returns. That is not the case. Rather, the circuit court first considered Randy’s tax returns,
and it was only after finding the tax returns unreliable that the circuit court proceeded to the
net-worth approach, as allowed by Administrative Order No. 10. Further, to the extent that
Randy is suggesting that the mere availability of the tax returns should require only their use
in determining child support, we disagree. Available tax returns are of no use if they are
unreliable. Here, after reviewing tax returns and hearing witness testimony, the circuit court
found the returns to be unreliable. Inconsistencies arising from a comparison of tax returns
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and witness testimony are matters for the circuit court to resolve. It is well settled that we
give due deference to the circuit court’s superior position to determine the credibility of the
witnesses and the weight to be given to their testimony. See, e.g., Akins v. Mofield, 355 Ark.
215, 132 S.W.3d 760 (2003). We cannot say that the circuit court’s finding that the tax
records were unreliable is clearly erroneous.
Randy next argues that, because the Holland Court recognized that the net-worth
method was fraught with dangers, that method should not be used in calculating income for
child-support purposes. We disagree. The Holland case involved an appeal of a tax-evasion
conviction. In discussing the net-worth approach in criminal cases, the Supreme Court
stated:
One basic assumption in establishing guilt by this method is that most assets
derive from a taxable source, and that when this is not true the taxpayer is in
a position to explain the discrepancy. The application of such an assumption
raises serious legal problems in the administration of the criminal law. Unlike
civil actions for the recovery of deficiencies, where the determinations of the
Commissioner have prima facie validity, the prosecution must always prove
the criminal charge beyond a reasonable doubt. This has led many of our
courts to be disturbed by the use of the net worth method, particularly in its
scope and the latitude which it allows prosecutors.
Holland, 348 U.S. at 126. Thus, the Holland Court warned of problems that might arise in
criminal cases; the Court did not indicate any inherent flaws in the net-worth approach itself.
In his second point on appeal, Randy contends that, if the net-worth method is used
in determining child support, this court should clarify or modify the method used by the
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circuit court because it did not present the entire picture and because the standards and
procedures it used produced erroneous and unreliable results. As set forth in Holland, the
net-worth method involves establishing a beginning net worth at the start of the relevant
period and an ending net worth at the end of the period and considers living expenses and
allowed deductions for the same period. Id. at 125. Randy fails to explain why the same
method cannot be used to establish the expendable income of a child-support payor and,
further, he fails to point to any specific errors in the use of that method.
Still, Randy contends that, in determining the amount of child support, the circuit
court failed to take into account certain items such as depreciation and the fact that he is
living on borrowed money. However, these items are considered in the net-worth approach.
Any depreciation to vehicles or equipment is taken into account over time as the value of the
assets declines. In addition, the use of loans and other forms of credit is also considered in
a net-worth approach because the amount of loan indebtedness, along with all other
liabilities, is deducted from the value of Randy’s assets in arriving at his net worth. In this
case, we cannot say that the circuit court’s use of the net-worth approach in determining
Randy’s disposable income is clearly erroneous.
Financial Hardship
Finally, Randy argues that the circuit court erred in awarding an increase in child
support because the ruling is contrary to the preponderance of the evidence and creates an
undue hardship on him. As to Randy’s argument concerning the preponderance of the
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evidence, he is simply rearguing his earlier points that the net-worth method used by the
circuit court ignored the tax returns and did not consider certain deductions. We need not
address this argument again. In support of his argument that the increase in child support
will create an undue hardship on him, Randy cites Howard v. Wisemon, 38 Ark. App. 27,
826 S.W.2d 314 (1992), and contends that the amount of the increase in child support is
“devastating” to his family and his business. However, the record reveals that Randy did not
make this argument below. Randy’s argument before the circuit court addressed what effect
a retroactive judgment would have on him and his family; whereas on appeal, Randy argues
that the increase in child support “by more than nine times the amount he was previously
ordered to pay” is devastating to his family. It is well settled that an appellant may not
change the grounds for objection on appeal but is limited by the scope and nature of his
objections and arguments presented at trial. See, e.g., City of Benton v. Ark. Soil & Water
Comm’n, 345 Ark. 249, 45 S.W.3d 805 (2001). For the foregoing reasons, we affirm on
direct appeal.
Although we find no reversible error on direct appeal in the instant case, we do
recognize that a clarification of the procedure for determining child support by using the networth method will provide guidance to the bench and bar in future cases. Pursuant to
Administrative Order No. 10, Section III(c), for self-employed payors, the circuit court
should first consider the last two years’ federal and state income tax returns and the quarterly
estimates for the current year. A self-employed payor’s income should include contributions
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made to retirement plans, alimony paid, and self-employed insurance paid. Id. Depreciation
should be allowed only to the extent that it reflects actual decrease in value of an asset. Id.
If the circuit court determines that the tax returns are unreliable, then it shall make
specific findings explaining the basis of it determination. The circuit court shall then
proceed using the net-worth method. The circuit court shall establish a beginning net worth
at the start of the relevant period and an ending net worth at the end of the period,
considering living expenses and allowable deductions for the same period. See Holland, 348
U.S. at 125. Additionally, the circuit court shall consider the following factors: (1) the
impact of inflation or deflation on the payor’s net worth; (2) liquidity of the payor’s assets;
(3) the payor’s cash flow; (4) the payor’s current and long-term financial obligations; (5) the
payor’s lifestyle; and (6) any other relevant factors.
After determining the payor’s
disposable income, the circuit court shall calculate child support in accordance with the
child-support guidelines.
Cross-Appeal: Effective Date of Modification
On cross-appeal, OCSE argues that the circuit court erred in making the modification
effective January 19, 2005, instead of October 3, 2003, the date of the filing of the motion
to modify.1 Pursuant to Ark. Code Ann. § 9-14-107(d) (Supp. 2005), “[a]ny modification
of a child support order that is based on a change in gross income of the noncustodial parent
1
OCSE filed the motion on October 2, not on October 3; however, it requested that the
modification be effective on October 3, the date of the next weekly payment after the filing of
that motion. Accordingly, we refer to the filing date as October 3.
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shall be effective as of the date of filing a motion for increase or decrease in child support
unless otherwise ordered by the court.” The circuit court’s decision regarding the effective
date of modified child support is reviewed for abuse of discretion. See, e.g., McWhorter v.
McWhorter, 346 Ark. 475, 58 S.W.3d 840 (2001).
In its letter opinion, the circuit court stated:
As set out above, in applying the net worth approach to determine the increase
in Defendant’s child support obligation, this Court utilized financial
statements for a period from August 1, 2003, to January 19, 2005. The net
worth approach in this case, and by the very nature of the calculation, looks
to an incremental increase in the Defendant’s net worth in this case
concluding with the January 15, 2005, financial statement. To accept
[OCSE’s] position would result in a child support obligation on October 3,
2003, which would be based on a net worth that did not exist in its entirety
until some sixteen months later. It is apparent from the documents presented
and relied upon by this Court that an increase in net worth occurred. It is clear
that the total amount of increase relied upon by this Court for setting the
increase in support was not in existence on October 3, 2003. It is certain that
the net worth relied upon by this Court was in place on January 19, 2005.
Because [OCSE] provided no information which would support an analysis
of increase in net worth for a two-year period prior to the filing of the Petition
for Modification any retroactive application prior to the 19th day of January,
2005, would be done so without any reasonable degree of certainty, and
therefore, is denied. The increase in support awarded hereon shall be
retroactive to the date of January 19, 2005.
OCSE argues that the circuit court clearly erred in finding that there was no evidence
that enabled it to calculate Randy’s income for the two-year period prior to the filing of the
petition for modification. We agree. The record reveals that there was evidence of the
change in Randy’s income that predated the filing of the petition in the form of financial
statements from January 2003, August 2002, March 2002, and August 2000; however, that
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evidence was not necessary to perform a net-worth analysis. We agree with the following
analysis by the court of appeals:
[T]he trial court’s reasoning that the net worth was not established until
January 19, 2005, is inconsistent with using each month within the relevant
period to determine the average increase in net worth. It is true that [Randy’s]
full increase in net worth was not “realized” on his financial records until
January 19, 2005, but he presumably enjoyed the benefits of the
incremental increases in his income during the months in which they arose.
Thus, logic dictates that the averaging of the increased net worth over the
entire calculation period must mean that the average increase applied to each
month within the calculation period. To hold otherwise would penalize the
child by denying increased support for a period of time in which [Randy]
actually enjoyed the benefits of his increased net worth, even if that increase
did not materialize “on the books” until a later date.
Tucker, ___ Ark. App. at ___, ___ S.W.3d at ___.
We hold that the circuit court abused
its discretion in making the child support increase retroactive to January 19, 2005.
Therefore, we reverse the circuit court’s decision concerning the effective date of the
modification and remand the case to the circuit court with instructions to the circuit court
to enter an order making the modification retroactive to October 3, 2003.
Affirmed on direct appeal; reversed and remanded on cross-appeal.
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