In re Marriage of Dean – (unpublished opinion filed August 17, 2018/ordered publish) ( 2019 )

No. 118,4061
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
In the Matter of the Marriage of
DENISE DEAN,
Appellant,
and
CHAD DEAN,
Appellee.
SYLLABUS BY THE COURT
1.
The effect of not providing a transcript on appeal is not necessarily preclusive.
Instead, when a party provides no transcript, the appellate court presumes the district
court's factual findings were correct.
2.
An appellate court reviews a district court's interpretation and application of the
Kansas Child Support Guidelines de novo.
3.
The Kansas Child Support Guidelines' definition of income is intentionally broad
and includes every conceivable form of income whether it be in the form of earnings,
royalties, bonuses, dividends, interest, maintenance, or rent.
1
REPORTER'S NOTE: Previously filed as an unpublished opinion, the Supreme
Court granted a motion to publish by an order dated December 28, 2018, under Rule 7.04
(2019 Kan. S. Ct. R. 45). The published version was filed with the Clerk of the Appellate
Courts on February 13, 2019.
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4.
A district court does not have discretion to choose a method of determining
income that varies from the Kansas Child Support Guidelines' definition of gross income.
5.
The Kansas Child Support Guidelines do not grant a district court the discretion to
exclude non-liquid capital gains from rental income received by self-employed persons.
Under the circumstances of this case, the district court erred in determining that rental
income received was not to be counted as income because the recipient had used it to pay
down the principal on loans.
6.
The Kansas Child Support Guidelines do not consider the subsequent availability
or liquidity of income. Thus, the fact that a party chooses to use income to pay for an
asset does not change the character of the money from income to non-income for
purposes of calculating child support under the Guidelines.
7.
A motion for attorney fees must be filed in a non-argued case within 14 days of
the date of the letter assigning the case to a non-argument calendar.
Appeal from Sedgwick District Court; ERIC A. COMMER, judge. Opinion filed August 17, 2018.
Affirmed in part, vacated in part, and remanded with directions.
Stephen M. Turley, of Wagle & Turley, LLC, of Wichita, for appellant.
Michael P. Whalen, of Law Office of Michael P. Whalen, of Wichita, for appellee.
Before ARNOLD-BURGER, C.J., POWELL and GARDNER, JJ.
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GARDNER, J: Chad and Denise Dean married in 2002 and had two children. They
divorced in 2016 and the district court ordered Chad to pay child support. Denise timely
appeals, arguing that the district court erred in not following the definition of income in
the Kansas Child Support Guidelines (Guidelines). Agreeing with Denise, we vacate the
child support order and remand with instructions.
Factual and procedural background
During their marriage, the parties acquired over 50 rental properties and amassed a
joint estate with a net value of more than $1,000,000. Both were self-employed. Denise
worked as a real estate agent. Chad was the sole owner of three real estate management
companies that generated income from purchasing, managing, leasing, and selling real
estate. Chad also held a majority ownership interest in a roofing company.
The evidentiary hearing for the divorce proceedings lasted 10 days. During that
time, the district court heard from different experts about how to calculate Chad's income
for child support purposes. It found that Denise's expert, Dr. Jeff Quirin, provided the
most reliable indication of Chad's income. The parties do not challenge that decision.
Both Quirin and the district court conceded the difficulty of accurately calculating
Chad's income. That difficulty was caused in part by the parties' failures to file true,
complete, and accurate Domestic Relations Affidavits, tax returns, and profit and loss
statements. Quirin examined profit and loss statements and income tax filings to calculate
Chad's income.
Denise challenges only the method that the district court used to determine Chad's
income. Quirin offered two different methods of determining Chad's income: the net
income method and the cash flow method. The net income method deducts depreciation
and interest payments but does not deduct amounts paid to reduce the principal owed on
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mortgages. Under that method, Chad's income from his four businesses was $336,672. In
contrast, the cash flow method does not deduct depreciation but does deduct payments of
principal on the mortgages. Under that method, Chad's income was $233,863, and, after
removing earnings from Denise's real estate sales, was $152,024. The district court used
the cash flow method. Denise contends it should have used the net income method
instead.
Using the cash flow method, the district court excluded "non-liquid capital gains"
from both parties' income. It defined these gains as "the principal reductions that occur by
virtue of monthly, quarterly, or otherwise regular payments of the mortgages . . . [that]
increase[] a party's net worth." The district court granted Chad most of the couple's
properties, transferred 16 properties to Denise, and reasoned that because each party
owned some properties, each could benefit from such capital gains.
The district court reasoned that use of the cash flow method would create fewer
opportunities for continued litigation. It highlighted the contentious nature of the case—
the record reflects 135 hearings and 600 entries in the first 3 years. It explained that
including the principal reduction payments in income would require tedious calculations
that would provide fodder for further arguments about the amounts.
Denise appeals but has not included in the record on appeal any transcript from the
10-day trial. Chad contends that this precludes her from prevailing on appeal. But the
effect of not providing a transcript is not necessarily preclusive. Instead, when a party
provides no transcript, we presume the district court's factual findings were correct. King
v. Stephens, 113 Kan. 558, 560, 215 P.311 (1923). Because Denise has provided no
transcript or adequate substitute, we will not review any action of the trial court requiring
us to examine the evidence. First Nat'l Bank & Trust Co. v. Lygrisse, 231 Kan. 595, 603,
647 P.2d 1268 (1982) (citing Osborne v. Fakes, 178 Kan. 373, 376, 286 P.2d 156[1955]).
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Denise does not dispute the district court's factual findings but challenges its
method of deriving a gross income figure for Chad. She styles the sole issue on appeal as
one of law: Did the district court properly exclude "non-liquid capital gains" from Chad's
income for purposes of calculating his child support payment. We restrict our review to
that question.
Standard of review
We review a district court's interpretation and application of the Guidelines de
novo. In re Marriage of Branch, 37 Kan. App. 2d 334, 336, 152 P.3d 1265 (2007).
Because this appeal turns on interpreting "gross income" under the Guidelines, we apply
de novo review.
Analysis
Kansas relies on gross income, not net income, in calculating child support.
Gross income for self-employed parents is defined as "income from self-employment and
all other income including that which is regularly and periodically received from any
source." Kansas Child Support Guidelines §§ II.E.1., II.E.3. (2018 Kan. S. Ct. R. 82). The
Child Support Worksheet (Worksheet) (2018 Kan. S. Ct. R. 112) guides the calculation
of the child support obligation. Self-employment gross income is recorded on Line B.1.
and is then reduced by the "reasonable business expenses" recorded on Line B.2. to yield
the "domestic gross income." This method is much like the net income method described
by the expert and rejected by the district court.
The Worksheet then lists adjustments to the domestic gross income in Section C to
yield the "child support income" amount recorded on Line C.5. The "basic parental child
support obligation" is based on that income and is recorded on Line D.9. A rebuttable
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presumption arises that the amount on Line D.9. is a reasonable amount of child support.
Kansas Child Support Guidelines § I. (2018 Kan. S. Ct. R. 79).
A court may deviate from the Line D.9. child support amount if it finds, from
relevant evidence, that a deviation would serve the best interests of the child, but it must
make written findings explaining the deviation. Kansas Child Support Guidelines § I.
(2018 Kan. S. Ct. R. 79). "Any deviation from the amount of child support determined by
the use of the guidelines must be justified by written findings in the journal entry." In re
Marriage of Thurmond, 265 Kan. 715, 716, 962 P.2d 1064 (1998). Failure to follow the
Guidelines is reversible error. 265 Kan. at 716.
The district court here did not deviate from the Line D.9. amount, but it deviated
from the beginning amount of gross income on Line B.1. Common sense and logic
dictate that "use of the guidelines" includes use of the Guidelines' definition of income.
The Guidelines' definition of income is "intentionally broad to include every conceivable
form of income whether it be in the form of earnings, royalties, bonuses, dividends,
interest, maintenance, rent or whatever." 2 Elrod, Kansas Law and Practice: Kansas
Family Law § 14:10, p. 694 (2017-18 ed.). The district court's decision to exclude some
of Chad's rental income from the gross income figure on Line B.1. does not facially
comply with the Guidelines.
The district court acknowledged that "the Child Support Guidelines provide that
the calculation of income is to include income from all sources." But it found the
Guidelines required it to consider all relevant evidence presented and that the Line D.9.
figure was a rebuttable presumption of a reasonable child support order. The court
explained in detail why it decided to exclude non-liquid capital gains from Chad's
income:
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"[T]he non-liquid capital gains are not being included as income in the calculation of
child support for this case for the following reasons: '[1] both parties have the potential
to benefit from such gains on the properties they each own; [2] that determining these
non-liquid capital gains would require tedious calculations throughout the remainder of
the children's lives during minority; [3] that these parties' case history indicates that if
these gains were included in the calculation of each party's income for child support
purposes, these parties would be arguing incessantly from year-to-year about the accurate
calculation of those gains; [4] because the Court has evidence of other income of the
parties that would sufficiently provide for the calculation of child support of the children;
[5] the Court is seeking to limit or reduce the waste of the parties assets through unending
litigation expenses to dispute what those non-liquid capital gains are.' And this Court
finds that such waste of the parties' assets and parental energy and the continuing conflict
between the parents is not in the children's best interests."
Chad argues that these detailed findings justify the district court's deviation from
the Guidelines' definition of gross income, citing In re Marriage of Skoczek, 51 Kan.
App. 2d 606, 608, 351 P.3d 1287 (2015). We disagree. In that case, the district court used
true gross income and followed the Worksheet through Line C.5. to calculate "child
support income" but then applied a formula other than the equal parenting time formula.
We found that the court's written findings justified its choice of a formula other than the
equal parenting time formula, but only because the relevant Guideline explicitly granted
it discretion. As Guidelines § III.B.7.b. (2013 Kan. Ct. R. Annot. 131) provided: "'The
Equal Parenting Time Formula is discretionary with the court and may be used to set
child support when the district court makes the required affirmative findings.'" 51 Kan.
App. 2d at 611.
Similarly, the Guidelines grant the district court discretion to determine whether to
include depreciation as income. In re Marriage of Wiese, 41 Kan. App. 2d 553, 554, 203
P.3d 59 (2009). The Guidelines expressly recognize that depreciation should not
categorically be deducted as a business expense or treated as income; rather, its inclusion,
if any, should depend on the particular circumstances of each case. Kansas Child Support
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Guidelines § II.E.2. (2018 Kan. S. Ct. R. 82). A court may include depreciation as a
business expense only if it is reasonably necessary to produce income. A district court
has discretion to choose which accounting method to use for depreciation because the
Guidelines grant it discretion to determine whether to include depreciation. In re
Marriage of Wiese, 41 Kan. App. 2d at 554 (finding no abuse of discretion by a district
court's use of straight-line depreciation instead of accelerated depreciation to calculate
child support income).
Skoczek and Wiese do not suggest that making written findings empowers a district
court to substitute its own definition for a Guidelines' line item. See In re Marriage of
Leoni, 39 Kan. App. 2d 312, 317, 180 P.3d 1060 (2007) (affirming award because it
followed sound accounting practices and was legal and lawful under the Guidelines). The
district court did not have discretion to choose an accounting method that varied from the
Guidelines' definition of gross income.
We have also recognized that the district court has discretion to include or exclude
an individual's share of a Subchapter S corporation's income as income for purposes of
calculating child support. This is because determining an individual's share of a
Subchapter S corporation's income received for purposes of calculating child support is
highly fact specific. In re Marriage of Brand, 273 Kan. 346, 356, 44 P.3d 321 (2002).
"Even in those states with particularized formulas for determining the income available to
self-employed payors, the calculation of income is highly fact specific. Glass v. Oeder,
716 N.E.2d 413, 416-17 (Ind. 1999).
There is no presumption that an individual's share of a Subchapter S corporation's
income should be included as income for purposes of calculating child support.
Individual inquiry on a case-by-case basis is necessary to ensure that the appropriate
amount of income is considered 'received' when determining 'Domestic Gross Income' for
the self-employed." Brand, 273 Kan. at 356.
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But here, the parties do not dispute whether Chad received the income from his rental
properties. The sole issue is whether the district court erred in deducting certain amounts
from that income.
Brand considered the same underlying policy concern that Denise raises here—
that excluding an increase in equity from income permits the payor to build up equity at
the expense of the child because the payor can defer income until the child reaches the
age of majority. 273 Kan. at 356-57. Because of that potential for abuse, courts avoid a
blanket rule and handle the matter case-by-case. In Brand, the Supreme Court upheld the
district court's decision not to include the distributions from a Subchapter S corporation
in the father's income for child support purposes because the mother had not shown that
the father, as a minority shareholder, had "manipulated corporate assets, decreased the
amount of his salary to increase retained earnings, or acted in any way to shield income."
273 Kan. at 355. Similarly, in In re Marriage of Unruh, 32 Kan. App. 2d 770, 774-75, 88
P.3d 1241 (2004), we found nothing to show that the father was somehow manipulating
the Subchapter S corporation for his own benefit and to the detriment of his minor
children. We affirmed the district court's decision not to count 100% of the earnings or
distributions attributable to the father as self-employment domestic income.
But this is not a Subchapter S case. It may well be that the district courts should
have discretion to determine from the facts of each case whether non-liquid capital gains
should be excluded from rental income received by self-employed persons. But the
Guidelines do not grant a court discretion to do so.
Our conclusion is consistent with our decision in In re Marriage of Matthews, 40
Kan. App. 2d 422, 193 P.3d 466 (2008). There, we held that what a parent chooses to do
with his or her income after receiving it is not relevant to calculating the amount of
income for child support purposes. The father in Matthews had received income as
dividends. After divorce proceedings began, he pledged 80% of those dividends to
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purchase shares according to a stock-purchase agreement. We found that the dividends
distributed to the father fit within the definition of income for purposes of child support.
We reasoned that the Guidelines did not consider the "subsequent availability" of the
income. "Thus, the fact that [Father] chose to use his income to pay for an asset he
purchased does not change the character of the money from 'income' to 'non-income' for
purposes of calculating child support under the Guidelines." 40 Kan. App. 2d at 429. That
rule applies here as well.
We illustrated that holding in Matthews with an analogy remarkably similar to the
facts here:
"[W]e would reject an argument that rental income received by [Father] was not income
. . . simply because [Father] was utilizing the rental income received from his tenant to
pay back the bank loan. This is because the bank loan, as it is paid back over years,
increases [Father's] net worth in the rental home. By the time his children are at the age
of majority, [Father] would be the owner of valuable real estate debt free and at the direct
expense of his children." 40 Kan. App. 2d at 430.
Here, in contradiction to the example in Matthews, the district court determined that
rental income Chad had received was not to be counted as income because he used it to
pay down the principal on his loans.
Chad concedes that "Matthews stands for the proposition that income pledged to a
debt should still be counted as income for the purpose of child support calculation." But
he contends Matthews does not apply solely because that case, unlike this one, involved
only one self-employed parent. Nothing in Matthews suggests that this distinction makes
any difference, however. We reject Chad's argument because our interpretation of "gross
income" does not depend on the facts of the case. Indeed, the policy concern noted in
Brand and Matthews is implicated more when both parents are self-employed, because
both could reduce their incomes to undercut the amount of child support owed.
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The underlying policy concern of shielding income is evident here. The expert
noted that Chad made "enormous pay downs of principal on mortgages" totaling about
$210,000 in the 12-month period right after Denise filed for divorce. Those pay downs
resulted in "incredibly rapid equity build-up." The expert also testified that Chad's 2014
income tax return showing a deduction of $211,000 for depreciation of real estate was
unrealistic because real estate does not typically decrease in value. Taken together, these
facts raise a concern that Chad may have been seeking to reduce his income for child
support purposes while growing his net worth.
We commend the district court for its thorough decision, and we appreciate its
desire to prevent ongoing battles about the amount of child support. But the district court
had no authority to effect that goal by excluding the non-liquid capital gains from the
rental income Chad received. As a result, we must vacate and remand for calculation of
each parent's "domestic gross income" and "child support income" in accordance with the
Guidelines. We urge the parents to cooperate with one another and with the court in
setting a reasonable amount of child support.
Attorney fees
Chad seeks attorney fees under Kansas Supreme Court Rule 7.07(c) (2018 Kan. S.
Ct. R. 50), arguing that this appeal is frivolous. He contends Denise's failure to order
transcripts from the 10-day trial prevents us from making meaningful review.
We deny the motion because it was untimely filed. Supreme Court Rule 7.07(b)
requires that motions for attorney fees be filed within 14 days of the date of the letter
assigning the case to a non-argument calendar. (2018 Kan. S. Ct. R. 50.) That letter was
dated March 8, 2018, but Chad's motion was not filed until April 30, 2018.
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We would have denied the motion on its merits as well. We were able to review
the district court's decision without having transcripts because the issue on appeal was
purely a legal one. We also found that the district court committed reversible error—
necessarily, then, the appeal was not frivolous. See In re Marriage of Knoll, 52 Kan.
App. 2d 930, 942, 381 P.3d 490 (2016).
We vacate the child support order and remand with instructions. We deny Chad's
motion for attorney fees.
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