JAMES B. SNOW v. KIMBERLY R. SNOW
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RENDERED: JULY 14, 2000; 2:00 p.m.
TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1999-CA-000174-MR
JAMES B. SNOW
APPELLANT
APPEAL FROM HENDERSON CIRCUIT COURT
HONORABLE STEPHEN A. HAYDEN, JUDGE
ACTION NO. 95-CI-00249
v.
KIMBERLY R. SNOW
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
HUDDLESTON, JOHNSON, AND KNOPF, JUDGES.
KNOPF, JUDGE:
James Brian Snow (Brian) and Kimberly Snow (now
Kimberly Cantley) were divorced by decree entered June 20, 1995.
The parties were awarded joint custody of their infant son with
Kimberly designated to provide the child’s primary residence and
with Brian ordered to pay child support in the amount of $186.00
per week.
Brian appeals from a December 23, 1998, order of the
Henderson Circuit Court increasing his child support obligation
to $233.60 per week.
Brian maintains that the modified support
order is based on an inaccurate determination of his income.
the following reasons, we disagree and affirm the order of the
For
trial court.
Brian is the sole officer and sole shareholder of a
logging and timber harvesting business, Brian Snow Logging, Inc.
His initial support obligation, calculated in April 1995, was
based on a monthly income from that business of $4,300.00.
His
1995 income-tax return apparently showed a total income of
approximately $53,000.00.
In September 1997, alleging that his income had been
reduced by nearly half, Brian moved to have his support
obligation decreased.
Kimberly countered with a motion to have
Brian’s obligation increased.
The matter was tried before a
domestic relations commissioner in January 1998.
Brian testified
that the logging company had lost money in both 1996 and 1997,
and he claimed that throughout 1997 his only compensation from
the business had been his salary of $500.00 per week.
He
introduced tax returns prepared by his accountant showing the
1996 business deficit and a 1997 year-end balance sheet and
income statement prepared by the logging company showing a
deficit of more than $112,000.00 based on revenues of about
$734,000.00.
The income statement listed an “officer’s salary”
item of $25,500.00.
During her cross examination of Brian, Kimberly
introduced balance and income statements for the logging business
from the end of July 1997 and the end of August 1997.
The July
statements had been prepared by an independent accountant and
were accompanied by a disclaimer to the effect that Brian had not
supplied sufficiently detailed information to permit a full
analysis.
The August 1997 statements, like the year-end
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statements Brian introduced, had been prepared by the logging
company itself.
Both of these statements reflect year-to-date
profits from timber sales.
The July statements show net income
of nearly $72,000.00, based on revenues of nearly $645,000.00,
and a total equity of approximately $166,000.00.
The August
statements show net income of nearly $28,000.00, based on
revenues of about $672,000.00, and a negative total equity of
almost $10,000.00.
The income differences among the three
reports are largely due to the fact that revenues after July were
minimal, whereas labor and other costs continued at previous
levels.
The equity differences are largely attributable to the
inclusion in the August and year-end statements of a much larger
accumulated depreciation allowance than was included in the July
statement.
Unlike the year-end statements Brian introduced, both
the July and August statements report an “officer’s salary” item
of $34,000.00.
The decline in the logging company’s revenues during
the latter portion of 1997 was shown to have been deliberate.
Brian testified that he was in the process of organizing a new
business, a saw mill, to be known as Snow Enterprises, LLC.
He
had borrowed approximately a million dollars to equip the mill,
he said, and had been stockpiling the logging company’s timber in
anticipation of the mill’s becoming operational.
Indeed, the
1997 year-end balance sheet reflected timber inventory of more
than $300,000.00, whereas the August 1997 balance sheet showed
timber inventory of $100,000.00.
Although the mill and the
logging company are technically distinct, the logging company
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bore some of the mill’s start-up expenses, and, as noted, the
logging company’s sales had essentially been suspended until the
mill could serve as its buyer.
No financial statements of Snow
Enterprises, LLC, were introduced.
Kimberly did introduce,
however, one of Brian’s credit applications for the mill project,
from September 1997, on which Brian listed personal assets in
excess of $300,000.00 including equity in the logging company of
$175,000.00.
When confronted with the apparent discrepancy between
the $34,000.00 officer’s salary listed on the July and August
statements and his claim of having been paid only $500.00 per
week, Brian explained that the officer’s salary figure on the
earlier reports mistakenly included the salary paid to his new
wife, who was helping him with the business, as well as the
salary paid to himself.
He insisted that he had received no more
than $26,000.00 for all of 1997 and that the logging company had
operated at a loss.
The reduction in his income entitled him, he
claimed, to have his child-support obligation reduced.
Kimberly claimed, and the commissioner agreed, that the
logging company’s earning potential was more accurately reflected
by the July and August 1997 statements than by the year-end
statement Brian submitted.
She noted that the company’s equity,
as reflected in the July balance statement and on Brian’s
September credit application, had increased significantly since
the divorce and also that Brian had been able to afford the
expensive hobby or side business of competing in rodeos.
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He had
purchased horses and riding equipment, she pointed out, worth
more than his then current annual support obligation.
The commissioner recommended that Brian’s income be
calculated based on the August 1997 statements as follows:
$27,928.33 net business income per 8 months plus $34,000.00
salary per 8 months equals $61,928.33 total income per 8 months;
$61,928.33 per 8 months yields an average (approximately) of
$7,741.00 per month.
The trial court adopted the commissioner’s
recommendation and based thereon found Brian’s child support
obligation to be $233.60 per week.
Brian does not dispute the
trial court’s application of the child-support guidelines to this
monthly income.
He maintains, however, that, in determining that
income, the commissioner and the trial court miscalculated the
logging company’s income and unfairly disregarded his testimony
concerning the salary paid to his wife.
Child-support awards may be modified only as to
installments accruing after notice of the motion for modification
and then "only upon a showing of a material change in
circumstances that is substantial and continuing."
403.213(1).
KRS
As with the original determination of a child
support award, the decision whether to modify an award in light
of changed circumstances is within the sound discretion of the
trial court.
Price v. Price, Ky., 912 S.W.2d 44 (1995);
Rainwater v. Williams, Ky. App., 930 S.W.2d 405 (1996).
Under
KRS 403.213(2), a change in circumstances is rebuttably presumed
to be substantial if application of the child-support guidelines
(KRS 403.212) to the new circumstances would result in a change
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in the amount of child support of 15% or more.
Given this
standard, there is no dispute that, as determined by the trial
court, the change in Brian’s income was substantial.
The issue is whether the trial court properly
determined Brian’s income, a determination controlled by KRS
403.212(2)(c), which provides in pertinent part as follows:
For income from self-employment, rent,
royalties, proprietorship of a business, or
joint ownership of a partnership or closely
held corporation, “gross income” means gross
receipts minus ordinary and necessary
expenses required for self-employment or
business operation. Straight-line
depreciation, using Internal Revenue Service
(IRS) guidelines, shall be the only allowable
method of calculating depreciation expense in
determining gross income. Specifically
excluded from ordinary and necessary expenses
for purposes of this guideline shall be
investment tax credits or any other business
expenses inappropriate for determining gross
income for purposes of calculating child
support. Income and expenses from selfemployment or operation of a business shall
be carefully reviewed to determine an
appropriate level of gross income available
to the parent to satisfy a child support
obligation. In most cases, this amount will
differ from a determination of business
income for tax purposes. . . .
This statute confronts trial courts with the unenviable
task of distinguishing between a self-employed child-support
obligor’s taxable income and what may be called his or her
disposable income.
1991).
In re Marriage of Gaer, 476 N.W.2d 324 (Iowa
Taxable income commonly serves as the starting point for
determining “gross income” for child support purposes, and
because taxable income frequently provides a good measure of the
income left to a business after the deduction of ordinary and
necessary expenses, deviation from it should not be undertaken
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lightly.
Ogard v. Ogard, 808 P.2d 815 (Alaska 1991); In re
Marriage of Starcevic, 522 N.W.2d 855 (Iowa App. 1994).
Nevertheless, as the statute recognizes, taxation and child
support serve different purposes.
Trial courts establishing
child support thus have the discretion and the duty to scrutinize
taxable income and to deviate from it whenever it seems to have
been manipulated for the sake of avoiding or minimizing a child
support obligation or when deviating from it is clearly in the
best interest of the child.
Rainwater, supra; Downey v. Rogers,
Ky. App., 847 S.W.2d 63 (1993).1
Along with the trial court’s duty to scrutinize taxable
income, of particular concern in this case is the requirement,
noted above, that modifications of child support be based upon a
substantial and continuing change in circumstances.
Where, as
here, the alleged change in circumstances is a change in the
support obligor’s income,
[t]he requirement that the [change] in income
must be "continuing" means that the trial
court must base an increase [or decrease] in
child support only on the payor's current
income. It may not increase a child-support
award to compensate for the payor's higher
income in past years if the payor's current
income is substantially lower. Nevertheless,
the court need not restrict its view of the
evidence to a few isolated months after the
filing of the modification petition in order
to determine a party's current income,
particularly when such income is controlled
by the party himself and is subject to
possible manipulation upon the filing of the
1
See also Gray v. Gray, 994 S.W.2d 506 (Ark. App. 1999);
Klockow v. Klockow, 979 S.W.2d 482 (Mo. App. 1998); Major v.
Major, 952 P.2d 37 (N.M. App. 1997); Roberts v. Wright, 871 P.2d
390 (N.M. App. 1994); Merrill v. Merrill, 587 N.E.2d 188 (Ind.
App. 1992); R.T. v. R.T., Del. Supr., 494 A.2d 150 (1985).
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modification petition. . . . Rather, a court
reasonably may consider evidence of income
prior to the modification petition to assist
in determining the individual's current
income and whether it has "substantially"
changed since the existing child support
award was set. . . . Evidence regarding
current or reasonably-projected income and
also of recent years' past income likewise
may assist the court in determining whether
an increase in income is "continuing." . . .
Indeed, if the court finds that "earnings are
reduced as a matter of choice and not for
reasonable cause, the court may attribute
income to a parent up to his or her earning
capacity." . . . Certainly, evidence of prior
years' earnings is relevant to determining
"earning capacity."
Pearson v. Pearson, 946 P.2d 1291, 1296 (Ariz. App. 1997)
(citations omitted).
The trial court concluded that the final months of
1997, during which the logging company’s income was virtually
suspended as Brian made the transition from timber production to
lumber production, did not present circumstances likely to be
continuing and thus that they should not bear on the
determination of Brian’s income.
Brian himself estimated that
the mill would eventually generate net income in the neighborhood
of $200,000.00 per year, and the indication was that the logging
company, too, would resume sales once the mill became a customer.
In these circumstances, we cannot say that the trial court abused
its discretion by basing its “gross income” determination on
something other than Brian’s 1997 taxable income.
Brian’s
substantial deferral of business income at the end of 1997, which
led directly to his year-end losses, cannot be a lasting
circumstance, and thus it does not provide a proper basis for
reducing Brian’s child-support obligation.
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Furthermore, the court’s determination that Brian’s
income had increased as of the end of August 1997, when the
transition to the mill began, is substantiated by the July and
August financial statements, by Brian’s rodeo participation, and
by the logging company’s success, a success reflected in the
company’s increased equity (despite the claimed loss in 1996) and
in the significant expansion of the enterprise to include the
milling operation.
While it is true that the new venture has yet
to prove itself, the presumption is that Brian’s assets will
continue to generate at least the income of which they have been
shown to be capable.
S.W.2d 566 (1992).
Keplinger v. Keplinger, Ky. App., 839
If this proves not to be the case, if the
mill struggles, then Brian may again ask the court to reconsider
his support obligation.
Any such request, however, should be
based on a full disclosure of financial records.
Brian also raises more specific objections to the trial
court’s order, but they are not well founded.
He complains that
the trial court erred by attributing to him a $34,000.00 salary
through the end of August 1997.
The record includes substantial
evidence in support of that finding--the logging company’s own
August 31 income statement--and therefore the finding is not to
be disturbed on appeal absent some other indication that it was
clearly erroneous.
CR 52.01; Spurlin v. Spurlin, Ky., 456 S.W.2d
683 (1970); Rife v. Fleming, Ky., 339 S.W.2d 650 (1960).
Brian
claims that he was paid only $500.00 per week and that the
$34,000.00 entry on the income statement mistakenly includes
payments to his wife, but his testimony to that effect was not so
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compelling as to render the trial court’s finding clearly
erroneous.
In particular, although Brian presumably had access
to company ledgers and other records that could have corroborated
his explanation of the $34,000.00 “officer’s salary” entry, no
such evidence was proffered.
There was testimony, furthermore,
that on prior income statements the “officer’s salary” item
referred to Brian’s salary alone.
The trial court did not
clearly err by finding that the “officer’s salary” reference in
the August 1997 statement did the same.
Brian’s other objections seem premised on
misunderstandings of the trial court’s order.
He objects, for
instance, to the trial court’s purported refusal to allow him to
deduct depreciation expenses from his 1997 income.
The August
1997 income statement, however, on which the commissioner and
trial court relied, includes the year-to-date deduction for
depreciation that Brian claimed.
The court’s refusal to allow
any deductions, including depreciation, for the final four months
of that year had nothing to do with depreciation as such, but
stemmed rather from the court’s conclusion that the income from
which those deductions should be made had been deferred.
Similarly, Brian contends that even if his income was
$61,928.33 ($34,000.00 plus $27,928.33), as the trial court
determined, an annual income of that amount would not be a
substantial change from his annual income at the time of the
original support order and thus would not justify the
modification of his support obligation.
As explained above,
however, the trial court determined that Brian’s income was
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$61,928.33 for eight months of 1997, not for the entire year, and
calculated Brian’s monthly income accordingly.
Brian does not
dispute that, given the monthly income determined by the trial
court, which we have found to have been within the court’s
discretion, the modification of his support obligation was
appropriate.
In sum, Brian’s motion to modify his child-support
obligation coincided with an unusual period for his logging and
milling businesses when their expenses had increased but their
incomes either had not yet begun or had been put on hold.
The
trial court did not abuse its discretion by refusing to lower
Brian’s support obligation on the basis of those unusual
circumstances.
Nor did the trial court err by finding that,
immediately prior to the transitional phase of Brian’s business,
his income had increased enough to warrant a modification of the
1995 support order.
Business records compiled before the
litigation and for other purposes support that finding
notwithstanding Brian’s denials.
For these reasons, we affirm
the December 23, 1998, order of the Henderson Circuit Court.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Harry L. Mathison
King, Deep and Branaman
Henderson, Kentucky
William F. Polk, Jr.
Polk & Polk
Henderson, Kentucky
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