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COURT OF
APPEALS DECISION DATED AND
RELEASED May
2, 1996 |
NOTICE |
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A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats. |
This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports. |
No. 94-1290
STATE OF WISCONSIN IN
COURT OF APPEALS
DISTRICT IV
IN RE
THE MARRIAGE OF:
CANDACE
M. SORENSON,
Petitioner-Appellant,
v.
HOWARD
E. SORENSON,
Respondent-Respondent.
APPEAL
from a judgment of the circuit court for La Crosse County: MICHAEL J. MULROY, Judge. Affirmed in part; reversed in part and cause
remanded.
Before
Eich, C.J., Gartzke, P.J., and Vergeront, J.
GARTZKE,
P.J. Candace M. Sorenson appeals from
those parts of the divorce judgment ordering Howard E. Sorenson to pay support
for their two minor children equal to twenty-five percent of his gross income
and twenty-five percent of the distributions paid to him by Houvies, Inc. of La
Crosse (Houvies), as and when received by him, and providing that neither party
shall pay the other maintenance.
The
issues are whether the trial court erred, as a matter of law, by not ordering
Howard to pay child support based upon his share of the undistributed profits
of Houvies, a Subchapter S corporation, and whether the court erroneously
exercised its discretion when it denied maintenance to Candace. We hold that the court did not err when it
failed to order Howard to pay support based on the undistributed profits but we
direct the court to reconsider its denial of maintenance to Candace. We therefore affirm in part and reverse in
part.
We
review issues of law de novo. Support
and maintenance are left to a trial court's discretion. When we review a trial court's discretionary
ruling, we do so to determine whether that discretion was in fact exercised and
not whether we would reach the same result. To confer discretion upon a trial court means that rulings may
vary from court to court. A
discretionary ruling must be reasonable but it may be one another judge might
not reach. Hartung v. Hartung,
102 Wis.2d 58, 66, 306 N.W.2d 16, 20-21 (1981). We need not agree with a discretionary ruling, so long as the
trial court exercises its discretion on the basis of facts of record without
violating the law and employs a logical rationale. Id.
The
parties married in June 1976 and divorced almost eighteen years later. At the time of their divorce, Candace was
forty years old and Howard was forty-one years old. They have two minor children.
When they married, Candace had already earned her bachelor's degree in
physical education and biology, and Howard had a bachelor's degree in business
administration. Neither has obtained
additional degrees since their marriage but Candace has earned approximately
nineteen credits to maintain her teaching license in Wisconsin.
After
Candace obtained her degree, she taught at the Richland Center High School from
1974 to 1975, and after becoming engaged to Howard she sought employment closer
to where he worked for Heileman's brewery in La Crosse. She found a position at the West Salem High
School where she worked from 1975 to 1977.
In that year his employer transferred Howard to St. Louis, Missouri,
where the family stayed until 1984. She
taught in a St. Louis high school. In
1984 Candace left her teaching position because Howard was transferred back to
La Crosse. She was unable to locate a
teaching position in La Crosse. To make
payments on their home in Missouri, she sought other employment and she has not
taught since 1984. In October 1984 she
began work at a full-time position at the La Crosse Dayton's department store. Since 1984 she has worked for Dayton's in La
Crosse or at St. Paul, Minnesota, where Howard was transferred in 1987. In June 1990 Howard lost his job with
Heileman's, and the family returned to La Crosse in October of that year. Due to their tight finances, Candace then
worked full-time at Dayton's in La Crosse.
The
trial court found that at the time of trial Howard and Candace had monthly
incomes of $4,333.00 and $1,011.36, respectively. The court made no finding of fact as to their incomes from 1988
to 1990. However, the record shows that
from 1988 to 1990 Candace's annual average income was $10,812. The parties disagree regarding Howard's
income at Heileman's. Candace argues
that his average income was $81,925 from 1988 to 1990, but we believe that the
average is inflated because it includes roughly $30,000 received in 1988 for
reimbursed moving expenses. Howard
contends that his salary was $64,824 in 1988 and $67,756 in 1989.
In
1990, Howard and his brother, Roger Sorenson, purchased a laundry and dry
cleaning business in La Crosse and incorporated it as Houvies, Inc. of La
Crosse. In the spring of 1991 Dayton's
went through a cut back on hours, and Candace was forced into a twenty-four
hour per week position which she has held ever since. She is currently paid $9.80 per hour at Dayton's plus benefits
including partially paid health and dental coverage, life insurance and a
retirement plan. Other facts will be
stated when pertinent throughout this opinion.
Howard
and his brother, Roger, are Houvies's only shareholders. Because it is a Subchapter S corporation,
Howard and Roger report their shares of the undistributed profits on their
income tax returns. Thus, Howard's
share is taxed to him even when he and his brother choose not to pay out all of
Houvies's profits.
A
Subchapter S corporation is not taxed on its income. Its profits pass through and are taxed to the shareholders. For that reason, Candace asserts that the
undistributed as well as the distributed earnings of a Subchapter S corporation
should be taken into account when applying the percentage standards established
by the department of health and social services in Wis. Adm. Code § HSS 80, Child Support Percentage of
Income Standard.[1]
The
child support obligation for two children is twenty-five percent of the support
payer's "base." Wisconsin Adm. Code § HSS
80.03(1)(b). The "base" is
calculated by adding together the payer's gross income adjusted for child
support and the payer's imputed income for child support and dividing it by
twelve. Id. Wisconsin
Adm. Code § HSS 80.02(12) defines "gross income" as
all income as defined under 26 CFR 1.61-1 that is
derived from any source and realized in any form, whether money, property or
services, and whether reported as total income on the payer's federal tax
return or exempt from being taxed under federal law.
26
C.F.R. 1.61-1 provides, "Gross income includes income realized in any
form, whether in money, property or services." Candace concludes that Wis.
Adm. Code § HSS 80.02(3) requires that all undistributed profits
are to be characterized as income for purposes of Wis. Adm. Code § HSS 80 just as they are for federal tax
purposes. We disagree.
Wisconsin Adm. Code § HSS 80.02(12) shows on its face that it applies
to income "derived from any source and realized in any form
...." (Emphasis added.) "Realize" means "to convert
into actual money (realized assets)."
Webster's Third New International
Dictionary 1890 (1993). As long
as the undistributed profits are left in a Subchapter S corporation, they are
not "realized." They remain
subject to the claims of the corporation's creditors, for example. They have not been reduced to cash and they
are not in the hands of the shareholders.
Consequently, no error of law occurred when the trial court failed to
order Howard to pay a percentage based on his undistributed share of Houvies's
profits.
However,
courts are alert to the possibility that shareholders of closely-held or family
corporations can manipulate the business to cheat their children out of
support. In Lendman v. Lendman,
157 Wis.2d 606, 460 N.W.2d 781 (Ct. App. 1990), we said of a non-Subchapter S
corporation:
We
acknowledge that automatic exclusion of corporate income from the court's
consideration for purposes of determining maintenance would encourage obligors
to hide behind a corporate shield to avoid the payment of maintenance. We further acknowledge that just because the
corporation's income is not taxed to the obligor, that fact does not end the
inquiry. The term "retained
earnings" is, after all, another name for "earned surplus" which
is defined as that resulting from the profitable operations of the company ....
We do not agree,
however, that in every case where there are retained earnings income is always
available for maintenance. Retained
profit must sometimes necessarily remain with the corporation instead of being
immediately distributed .... Depending
on the individual case, retained earnings might be a necessary adjunct of a
well-managed corporation or a pretext for a one-man band shareholder to keep
profits from being considered by the family court for maintenance. We decline to write a bright-line rule
regarding retained earnings in favor of a case-by-case analysis to be conducted
by the trial court in its discretion.
Id. at 614-15, 460 N.W.2d at 784-85.
In
Evjen v. Evjen, 171 Wis.2d 677, 685, 492 N.W.2d 361, 364 (Ct.
App. 1992), we said:
[A] family court is authorized to pierce the corporate
shield if it is convinced that the obligor's intent is to avoid financial
obligations arising from the dissolution of the marital relationship. Depending upon the case, it is the
obligation of the family court to determine if corporate income or profits are
a necessary part of a well-managed corporation or an excuse for the sole
shareholder to keep income or profits from being considered when the family
court is setting financial obligations.
We added that "when obligors have manipulated the
corporate structure to camouflage or bury the obligors' true income status ...
we have urged the family court to `utilize its creative talents to monitor and
control such deceptive tactics.'" Id.,
quoting Schinner v. Schinner, 143 Wis.2d 81, 105, 420
N.W.2d 381, 390 (Ct. App. 1988).
For
purposes of determining child support under Wis.
Adm. Code § HSS 80, it is therefore within the discretion of the
trial court to decide whether to order a payer obligor to pay a percentage of
retained profit in the obligor's Subchapter S corporation. When determining whether a trial court has
erroneously exercised its discretion, we look for evidence in the record that
it employed a logical rationale based on facts of record without making an
error of law. Hartung,
102 Wis.2d at 66, 306 N.W.2d at 20.
Here
the trial court's ruling was largely dependent upon its choice between the
conflicting testimony by accountants regarding the necessity for maintaining a
financial "cushion" in Houvies.
Roger Sorenson, a certified public accountant, testified that when he
and Howard formed the corporation, the original plan was five years would pass
before they as shareholders would receive a distribution. He testified that Houvies has working
capital of approximately $17,000.[2] A second accountant testified that it was
prudent not to distribute retained earnings to avoid causing
undercapitalization. A third
accountant, testifying for Candace, disputed the conclusions of Howard's
accountants.
The
trial court chose to accept the testimony of Roger Sorenson and the accountant
who testified for Howard because, the court said, their testimony was
"more compelling" than that of Candace's witness, and it appeared to
the court that Howard's experts based their opinions on "hard facts"
while Candace's expert did not. The
court added that at arriving at its conclusion, it took into account Roger's
testimony that he has had no return on his investment, that there are
unexpected and significant costs in the form of replacement and repair of
equipment and a need for upgrading equipment for pollution control purposes, a
substantial debt is still owed to the previous owner and a $37,500 corporate
note will be payable to Candace on demand as part of the property division.
The
credibility of witnesses is of course within the sole province of the trial
court. Cogswell v. Robertshaw
Controls Co., 87 Wis.2d 243, 250, 274 N.W.2d 647, 650 (1979). However, the trial court explained why it
accepted the testimony of Howard's accountants rather than Candace's. We will not overturn the court's choice, and
because it is the basis for the trial court's ruling regarding access to
Houvies' undistributed profits when fixing support, we accept the ruling as a
proper exercise of judicial discretion.
Candace
nevertheless contends that unless all of the undistributed Subchapter S profits
are available for support, she and the children are left to the mercy of Howard
and his brother, since they have absolute power to decide if, when, and how
much of Houvies' profits will be distributed to Howard. Candace asserts that "the simple
solution" to the dilemma is to include all of the income Howard reports on
his tax return as income for child support purposes.
The
trial court did not completely leave Candace and the children to the mercy of
Howard and his brother. The judgment
provides that as long as an obligation exists to pay child support, Howard and
Candace shall exchange personal income tax returns and Howard shall provide her
with a copy of his business tax return by April 20 of each year. Subchapter S corporate tax returns disclose
distributed and undistributed profits.
Houvies's total distributions made to Howard can be determined by
reviewing Houvies's and his tax returns.
Candace
asserts that it is difficult to determine from the tax returns when profits are
actually paid out. But except to
advocate that all undistributed income taxable to Howard be used to determine
child support, Candace offers no other suggestion.
When
we adjured the trial courts to utilize their "creative talents to monitor
and control" tactics available to parties to a divorce having interests in
small corporations, Schinner, 143 Wis.2d at 105, 420 N.W.2d at
390, we expected the parties themselves to assist the court. The parties are better able than the court
to ferret out unfair tactics and to suggest solutions to the court. If the parties and their experts are unable
to make such suggestions, the courts cannot be criticized for failing to invent
ingenious solutions.
Candace's
proposal that the trial court adopt the "simple solution" of
requiring all of Howard's share of undistributed profits to be taken into
account when determining child support is no suggestion for an ingenious
arrangement. On the contrary, the
import of Howard's experts' testimony is that to take twenty-five percent of
Howard's share of undistributed profits may endanger the corporation's
financial "cushion" or "shock absorber" which the court
came to believe Houvies needs.
Candace
asserts that the trial court failed to give proper consideration to the support
and fairness objectives when it denied her any maintenance. As Candace points out, when reviewing a
maintenance award, the "touchstone of analysis" is the statutory
factors enumerated in § 767.26, Stats. Kennedy v. Kennedy, 145 Wis.2d
219, 222, 426 N.W.2d 85, 86 (Ct. App. 1988), citing LaRocque v. LaRocque,
139 Wis.2d 23, 32, 406 N.W.2d 736, 740 (1987).
The LaRocque court stressed that the statutory factors are
designed to further two objectives:
"to support the recipient spouse in accordance with the needs and
earning capacities of the parties (the support objective) and to ensure a fair
and equitable financial agreement between the parties in each individual case
(the fairness objective)." Hefty
v. Hefty, 172 Wis.2d 124, 135-36, 493 N.W.2d 33, 37 (1992), quoting
LaRocque, 139 Wis.2d at 33, 406 N.W.2d at 740.
We
reject Candace's contention that the trial court did little more than to state
that it was "aware" of the factors listed in § 767.26, Stats.
We are not critical of the court for having stated it was "aware of
the statutory factors which must be considered" when determining whether
maintenance should be awarded, and, if so, for how long. The court need not tick off each factor so
long as it shows that it took the relevant factors into account. Trattles v. Trattles, 126
Wis.2d 219, 229, 376 N.W.2d 379, 384 (Ct. App. 1985).
Regarding
the support factor, the trial court relied upon Howard's expert witness who
testified in his opinion Candace could be re-employed as a teacher in the same
geographical area within a couple of years.
At that point she could expect to earn approximately $24,000 per year
and then, in the view of the trial court, be able to maintain herself at a
standard reasonably comparable to that maintained during the marriage. The court believed that her $4,307 monthly
budget is inflated, and a 1993 tax analysis showed that Howard's disposable
income was $1,927 per month. The trial
court concluded that even without maintenance, and assuming that she works only
twenty-four hours per week at Dayton's, Candace's spendable monthly income
(including support) will exceed Howard's.
Candace
argues the trial court failed to consider her nonmonetary contributions to the
marriage and Howard's career. She
asserts that during their seventeen-year marriage, she moved four times to
accommodate his career, and she maintained the household and provided child
care.
To
achieve fairness, maintenance may be used to compensate a spouse who has
subordinated his or her education or career to devote time and energy to the
welfare, career or education of the other spouse, or to manage the affairs of
the marital partnership. LaRocque
v. LaRocque, 139 Wis.2d at 37, 406 N.W.2d at 741-42. The trial court's decision is silent with
respect to Candace's nonmonetary contributions to the marriage. Instead, the court cites Gerth v.
Gerth, 159 Wis.2d 678, 683, 465 N.W.2d 507, 510 (Ct. App. 1990), that
it is not fair to require a party to pay maintenance to the other when the
first party's income barely covers that party's own expenses and the second
party has sufficient resources to meet his or her needs. The court concluded that under the
circumstances it is not fair that Howard be required to work sixty-five to
seventy hours per week and to pay Candace maintenance when she is required only
to work twenty-four hours a week. In Gerth,
however, the trial court found that the wife had suffered no loss of earnings
or earning capacity due to the marriage. 159 Wis.2d at 682, 465 N.W.2d at 509. Here, Candace has sustained at least a reduced earning capacity
as a teacher.
The
trial court properly took into account Howard's workload. While trial courts may not speculate on the
future workload of a spouse when making an initial award of maintenance, Hubert
v. Hubert, 159 Wis.2d 803, 822, 465 N.W.2d 252, 259 (Ct. App. 1990), a
trial court may consider the spouse's present workload. See Gerth, 159 Wis.2d
at 682-83, 465 N.W.2d at 509-10, (courts must view fairness in light of both
payor and payee; parties may have different income levels if those levels were
unaffected by the marriage and obtained through their own natural abilities and
hard work). The trial court erred, not
because it considered Howard's workload, but because it did so without also
considering Candace's noneconomic contributions to the marriage. As in Hubert, 159 Wis.2d at
822, 461 N.W.2d at 259, in trying to be fair to Roger, the court failed to be
fair to Candace. On remand, the court
shall reconsider her noneconomic contributions.
Moreover,
the trial court, by taking into account child support and assuming that Candace
works only twenty-four hours per week at Dayton's, concluded that even without
maintenance her spendable monthly income will exceed Howard's. Support is paid for the benefit of the
children, not the custodial parent, and the percentage support standards, Wis. Adm. Code § HSS 80, assume
that the custodial parent is supporting the children in the same amount the
payor spouse must pay. Kjelstrup
v. Kjelstrup, 181 Wis.2d 973, 976-77, 512 N.W.2d 264, 266 (Ct. App.
1994). Remand is necessary for the
trial court to review its conclusions regarding Candace's spendable monthly
income without child support.
Finally,
while we give deference to the highly discretionary decision whether to grant
maintenance, since a remand is necessary for a review of Candace's spendable
income, we direct the court to review her predicted ability to obtain a
teaching position. While Howard's
expert testified that in his opinion Candace could be re-employed as a teacher
in the same geographical area within a couple of years and could then earn
approximately $24,000 per year, Candace understandably views those predictions
with some skepticism, considering her age and past unsuccessful efforts to
obtain a new teaching position.
Howard's expert was unable to testify to how many school systems within
the La Crosse area are offering jobs in physical education or life sciences and
whether the La Crosse School District or any nearby school district had hired
teachers during the year of the trial.
Maintenance is determined on the basis of the facts as of the date of
trial, but events since the trial may bear on the accuracy of the predictions
made at that time.
By
the Court.—Judgment affirmed
in part, reversed in part and cause remanded with directions.
Not
recommended for publication in the official reports.