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Company-paid expenses are ‘income’ for father

Deborah Elkins//June 12, 2015

Company-paid expenses are ‘income’ for father

Deborah Elkins//June 12, 2015//

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House and carA father’s “perks” from a family home-building business – rent-free quarters and a company car – counted as income when calculating support for his three children, a Fairfax Circuit Court decided after a four-day trial that delved into company accounts.

Living rent-free does not automatically count as income in figuring support, under Virginia law.

Because the father in this case received “significant in kind payments from his company that reduce his personal living expenses,” the payments boosted the father’s gross income, said Fairfax Circuit Judge Jane Marum Roush.

The court ordered the father to pay $4,733 per month to support the parties’ three children, but rejected an upward deviation to require the father to pay the lion’s share of a $31,000 annual private school tuition for the couple’s 12-year-old son.

Some “social awkwardness in middle school does not necessitate private school” for a child who is doing well academically in public school, and “has no special emotional or physical needs,” Roush said in Caruthers v. Bean (VLW 015-8-064).

Capital accounts

The father was a partner in Celebrity Homes LLC, owning 35 percent of the company, while his own father owned 65 percent.

When the couple divorced in 2012, the father earned $370,406 per year in the business, buying and tearing down older houses in Arlington and building newer, energy-efficient houses for resale.

The court awarded joint legal custody to both parties, with primary physical custody with the mother. It also ordered the father to pay $7,400 in monthly spousal support and $2,600 in monthly child support, after sale of the marital home.

Each parent became engaged to another person, and the parties agreed the mother’s spousal support would end in April 2015.

When the mother asked for more child support after her spousal support ended, she expected to be earning $40,000 per year as a teacher at her children’s private school. The father said his income had dropped, due to the economic downtown dating from 2010 and increased competition for limited land in Arlington and Falls Church.

According to the father, he did not take a regular salary from the company. Instead, income when a home was sold was credited to each partner’s respective capital account.

He had taken large withdrawals from the company in recent years, including a $240,000 distribution to buy out the mother’s interest in the family business, $230,000 to buy out the mother’s interest in their vacation home and funds for a $50,000 engagement ring for his fiancée, and now had a large negative capital account.

The mother’s expert, certified public accountant William Foote, put the father’s income at $298,000 including the perks, under a “net income per books” approach. Expert testimony valued the fair rental value of the father’s company-owned home at $2,850 per month, and personal use of the company car at $7,500. Applying a “distributions approach,” Foote calculated the father’s average income over the last three years as $420,470, counting perks.

David Claytor, Celebrity Homes’ company accountant, offered two numbers for the father’s income. Using the “net income per books method,” he set the father’s average income for the past three years at $276,161. Based on the father’s tax returns for the last three years, his income was $262,693.

Roush opted for the “net income per books” method, which both experts had used. Many of the father’s distributions were in effect loans from the company, which he would have to restore prior to the sale or liquidation of the company, or face adverse tax consequences, the judge said. She accepted Foote’s figure of $298,000 as the father’s income.

Starting in September 2015, the presumptive figure for the father under the child support guidelines was $4,755.

The mother had decided to send all three children to private school, with a total annual tuition cost of $76,750. She asked for an upward deviation in child support to cover the oldest child’s tuition, as well as additional monies for the children’s medical expenses and activities.

Although the mother said the couple’s 12-year-old child needed to attend private school because he had been socially awkward and had few friends in public school, Roush said the mother had not demonstrated a need for the oldest child to attend private school, as he was doing well academically in public school.

The court ordered the parents to each pay his or her proportionate share of orthodontia, medical expenses and sports activities, as these expenses were incurred.

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