RI Supreme Court Clarifies Treatment of Distributions to “S” Corporation Shareholders For Child Support Calculations

In general, child support obligations are determined by applying the parties’ respective gross monthly income, less certain mandatory deductions, into a formula and guidelines adopted pursuant to administrative order. However, what on its face appears to be a matter of straightforward arithmetic often devolves into a fiercely litigated issue. One such area of frequent litigation concerns the calculation of the parties’ gross monthly income, especially when one or both of the parties are shareholders of subchapter “S” corporations.

Definition of Income

Administrative Order #12-05 sets forth the extremely broad definition of income the court utilizes for child support calculations.  Specifically, gross income includes “salaries, wages, commissions, bonuses … and all other forms of earned/unearned income.”

In Trojan v. Trojan, the family court was tasked, in pertinent part, with determining whether “S” corporation distributions to a sole shareholder, or any portion thereof, should be included when calculating the payor spouse’s gross monthly income.  At trial, the court heard testimony described as “contradicted,” “very informative and quite credible” from the accountant for the parties and corporation at issue.  The court found that the corporation’s retention of millions of dollars was done for legitimate business purposes; therefore, it should not be included in the husband’s income for child support purposes.  Upon review, the Supreme Court upheld the decision of the family court.

In addition, the court reviewed certain distributions that were made to husband by the corporation.  First, the court reviewed the distributions made to husband to allow him to make tax payments.  The Supreme Court upheld the decision of the family court and indicated these distributions should not be included for child support purposes.  Second, the Supreme Court reviewed distributions to the husband that were used for personal obligations of the husband to purchase sole ownership of the corporation.  Importantly, the Supreme Court held that these distributions should have been included in husband’s gross monthly income.  Similarly, the Supreme Court held that distributions used to pay for the husband’s personal life insurance policy should have been included in husband’s gross monthly income.

Impact of Trojan v. Trojan

The Supreme Court’s decision is important for a number of reasons:

  • Reiterated trial court’s discretion to deviate from child support worksheet guidelines in situations where recommended child support order would be inequitable to child or either parent;
  • A careful review of corporate retained earnings in necessary to determine whether they are retained for legitimate business purposes or not; and,
  • Distributions for personal matters or obligations such as payment of personal debt to acquire an interest in the corporation at issue is includable for child support purposes.

For more information

If you are paying or receiving child support, or expect to do so in the future, or to specifically determine how the Trojan v. Trojan decision might impact your child support, please contact:

Gregory N. Hoffman | ghoffman@bglaw.com | 888.273.9903

Gregory N. Hoffman is an accomplished litigator in the courts of Rhode Island and Massachusetts in the areas of domestic relations, personal injury and criminal defense.  Greg relies upon his extensive experience in the Rhode Island Family Courts as well as the Probate and Family Courts in Massachusetts to provide skilled representation in the areas of divorce, child custody, child support, restraining orders and domestic abuse.  Greg also devotes a significant amount of time developing comprehensive and cost-effective solutions in the drafting of a variety of domestic relations agreements such as Separation Agreements, Marital Settlement Agreements and Antenuptial Agreements.

Rui P. Alves | ralves@bglaw.com | 888.273.9903

Rui P. Alves is an experienced Rhode Island and Massachusetts litigator and advocate in family law, criminal law and government relations matters in both state and federal court. Rui concentrates his practice on helping individuals and corporations craft solutions for complex issues related to domestic relations, criminal defense and government affairs.