Harrison v. Harrison , 28 Neb. Ct. App. 837 ( 2020 )

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HARRISON v. HARRISON
Cite as 28 Neb. Ct. App. 837
Cantrell R. Harrison, appellee, v.
Dennis R. Harrison, appellant.
___ N.W.2d ___
Filed September 15, 2020. No. A-19-440.
1. Rules of the Supreme Court: Appeal and Error. The cross-appeal
section of an appellate brief must set forth a separate title page, a table
of contents, a statement of the case, assigned errors, propositions of law,
and a statement of the facts.
2. ____: ____. Where a party’s brief fails to comply with the mandate of
the appellate rule governing the form and content thereof, an appellate
court may proceed as though the party failed to file a brief or, alterna-
tively, may examine the proceedings for plain error.
3. Divorce: Child Custody: Child Support: Property Division: Alimony:
Attorney Fees: Appeal and Error. In an action for the dissolution of
marriage, an appellate court reviews de novo on the record the trial
court’s determinations of custody, child support, property division,
alimony, and attorney fees; these determinations, however, are initially
entrusted to the trial court’s discretion and will normally be affirmed
absent an abuse of that discretion.
4. Appeal and Error. Plain error is error plainly evident from the record
and of such a nature that to leave it uncorrected would result in damage
to the integrity, reputation, or fairness of the judicial process.
5. ____. To be considered by an appellate court, an alleged error must be
both specifically assigned and specifically argued in the brief of the
party asserting the error.
6. Judgments: Receivers: Appeal and Error. A trial court’s determination
of who should bear the expenses associated with the receivership will
not be disturbed on appeal absent an abuse of discretion.
7. Divorce: Attorney Fees. In awarding attorney fees in a dissolution
action, a court shall consider the nature of the case, the amount involved
in the controversy, the services actually performed, the results obtained,
the length of time required for preparation and presentation of the case,
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Cite as 28 Neb. Ct. App. 837
the novelty and difficulty of the questions raised, and the customary
charges of the bar for similar services.
8. Attorney Fees: Proof: Affidavits: Records: Appeal and Error. The
filing of an affidavit or presentation of other evidence will always be the
preferable way to support the award of attorney fees, but if the contents
of the record show the allowed fee not to be unreasonable, then that fee
would not be untenable or an abuse of discretion.
9. Child Support: Rules of the Supreme Court: Words and Phrases.
The Nebraska Child Support Guidelines provide that in calculating the
amount of support to be paid, a court must consider the total monthly
income, which is defined as the income of both parties derived from
all sources, except all means-tested public assistance benefits which
includes any earned income tax credit and payments received for chil-
dren of prior marriages and includes income that could be acquired by
the parties through reasonable efforts.
10. Child Support: Rules of the Supreme Court. The Nebraska Supreme
Court has not set forth a rigid definition of what constitutes income, but
instead has relied upon a flexible, fact-specific inquiry that recognizes
the wide variety of circumstances that may be present in child sup-
port cases.
11. Child Support: Taxation: Equity: Rules of the Supreme Court.
Income for the purposes of calculating child support is not necessarily
synonymous with taxable income. A flexible approach is taken in deter-
mining a person’s income for purposes of child support, because child
support proceedings are, despite the child support guidelines, equitable
in nature.
12. Taxation: Corporations: Words and Phrases. Subchapter S is a tax
status designed to tax corporate income on a pass-through basis to share-
holders of a small business corporation.
13. Corporations. Although a subchapter S corporation may distribute
income, it is not required to do so.
14. ____. Earnings are owned by the corporation, not by the shareholders.
15. ____. Subchapter S corporations may accumulate profits, referred to as
“retained earnings.”
16. Taxation: Corporations. Since a subchapter S corporation is not taxed
on its earnings, the various income, expense, loss, credit, and other tax
items pass through and are taxable to or deductible by shareholders in a
manner analogous to that which is applicable to partners.
17. Child Support: Corporations: Taxes: Evidence: Proof. Distributions
made to a shareholder of a subchapter S corporation, as reported on a
Schedule K-1, should not be included as income for purposes of cal-
culating child support for those portions of the distribution intended to
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HARRISON v. HARRISON
Cite as 28 Neb. Ct. App. 837
offset the shareholder’s personal tax liability on his or her proportion-
ate share of the S corporation’s pass-through earnings. However, if the
evidence establishes that the total distribution exceeds the shareholder’s
tax liability on his or her proportionate share of the S corporation’s
pass-through earnings, such excess portions of the distribution may be
included as income for child support purposes unless the evidence dem-
onstrates that such excess amounts are reasonably expected to be applied
to future tax liabilities.
18. Child Support: Corporations. A fact-specific inquiry is necessary to
balance considerations that a well-managed corporation may be required
to retain a portion of its earnings to maintain corporate operations and
survive fluctuations in income, but corporate structures should not be
used to shield available income that could and should serve as available
sources of child support funds.
19. ____: ____. Relevant factors to weigh in determining what portion of
undistributed corporate earnings may be available to a shareholder for
child support purposes should include the following considerations: (1)
the shareholder’s level of control over the corporation’s distributions—
as measured by the shareholder’s ownership interest, (2) the legitimate
business interests justifying the retained corporate earnings, and (3) the
corporation’s history of retained earnings and distributions to determine
whether there is any affirmative evidence of an attempt to shield income
by means of retained earnings.
20. Child Support: Corporations: Proof. The key to determining whether
depreciation deductions should be included as income for child support
purposes is to show to the court that the deduction does not represent
artificial treatment of assets for the purpose of avoiding child sup-
port obligations.
21. Child Support: Corporations. When a husband and wife hold an equal
interest and are both active in business entities during the course of their
marriage, the risk of artificial treatment of assets for the purpose of
avoiding child support obligations does not exist.
Appeal from the District Court for Fillmore County: Vicky
L. Johnson, Judge. Affirmed in part, and in part reversed and
remanded with directions.
Erik C. Klutman, of Sipple, Hansen, Emerson, Schumacher,
Klutman & Valorz, for appellant.
Steven B. Fillman, of Fillman Law Offices, L.L.C., and
Joseph H. Murray, of Murray Law, P.C., L.L.O., for appellee.
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HARRISON v. HARRISON
Cite as 28 Neb. Ct. App. 837
Pirtle, Bishop, and Arterburn, Judges.
Bishop, Judge.
I. INTRODUCTION
In this marriage dissolution action, Dennis R. Harrison
appeals the Fillmore County District Court’s calculation of his
child support obligation. He contends that the net profits and
depreciation deductions of the parties’ equally owned busi-
nesses should not have been added to his income when calcu-
lating child support. Dennis also challenges the district court’s
decision to overrule his motion to reopen the case, as well as
the court’s order of temporary alimony, receivership fees, and
temporary attorney fees. Cantrell R. Harrison attempts to cross-
appeal the district court’s calculation of Dennis’ child support
obligation. We affirm in part, and in part reverse and remand
with directions.
II. BACKGROUND
Dennis and Cantrell were married in 2002, and they have
two children—a daughter born in 2003 and a son born in 2005.
During their marriage, Dennis and Cantrell established
Custom Pumping Solutions, L.L.C. (CPS), with each of them
owning 50 percent of the business. CPS pumps lagoon manure
onto farmland for organic fertilizer. Dennis and Cantrell also
each owned a 50-percent interest in C & D Leasing, L.L.C.
(C & D Leasing). C & D Leasing purchases equipment and
then leases it to CPS. Additionally, Dennis owned 50 percent of
another business, S&H Bushwackers; Cantrell’s father owned
the other 50 percent. And Cantrell owns shares of stock in
Stokebrand Seed, Inc. (Stokebrand Seed), a corporation owned
by her family.
Cantrell filed for divorce in December 2016, and she filed
an amended complaint in May 2018. In both pleadings, she
alleged that she was a fit and proper person to have custody
of the children and asked that the district court enter a custody
and parenting time order. She also asked that child support
be awarded in conformity with the Nebraska Child Support
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Guidelines. Cantrell sought an equitable division of the par-
ties’ property and debts and an award of attorney fees. Dennis’
responsive pleading also asked the court to equitably divide
the parties’ assets and debts and enter a custody and parenting
time order.
The parties filed a joint temporary stipulation in January
2017. Pursuant to the temporary stipulation, the parties were to
have joint legal custody of their children, with primary physi-
cal custody going to Cantrell, subject to Dennis’ specified par-
enting time. Dennis would also pay child support in the amount
of $600 per month for the two children until further order of
the court. The district court filed a temporary order approving
the parties’ stipulation and ordering the same.
In February 2018, Cantrell filed a motion for temporary
relief, alleging that Dennis was making purchases on behalf of
the parties’ companies without her permission or agreement.
Cantrell alleged that Dennis was “attempting to manipulate
the net worth of the business assets he expects to receive by
intentionally buying assets that depreciate almost instanta-
neously upon purchase.” She was also “concerned” that Dennis
was “depleting the cash assets of the marital estate that could
be used to effectuate a property equalization.” She asked the
district court to enter a temporary order barring the purchase
of assets over $5,000 without the written consent of both par-
ties, as well as an “anti-hypothecating order” barring the sale
of assets, disposal of assets, and dissipation of large amounts of
cash assets of the marital estate without the written consent of
both parties. In its order filed on February 13, the district court
ordered, in part, that during the pendency of the action, busi-
ness purchases over $10,000, with the exception of fuel bills,
shall be agreed upon in writing by both parties.
In May 2018, Cantrell filed a motion for temporary ­spousal
support. Cantrell also filed a motion for appointment of
receiver, for accounting, for other relief, and for attorney fees.
In this second motion, Cantrell alleged that Dennis was using
funds from the parties’ companies for his personal expenses
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and to make a loan to his uncle, all without her authorization;
he was fraudulently diverting revenue and earnings from the
companies; and he was “systematically cutting” her out of CPS
without authority, including changing passwords and emails, as
well as firing her from her duties at CPS.
In a journal entry and order filed on July 10, 2018, the dis-
trict court stated that the parties had reached an agreement on
several issues. As relevant to this appeal, the order states that
Cantrell withdrew her application for temporary spousal sup-
port or alimony in consideration of Dennis’ agreement that she
continue to be paid her salary from CPS; the court considered
the application for temporary spousal support withdrawn and
ordered the continued payment of Cantrell’s salary.
After a hearing on August 16, 2018, the district court filed a
journal entry appointing a receiver for CPS and C & D Leasing;
CPS was to deposit $7,500 with the clerk of the court to
cover the receiver’s expenses. Additionally, the court awarded
Cantrell $5,000 in attorney fees.
On October 31, 2018, the parties entered into a mediated
agreement and reached a settlement on property division issues
and alimony. As relevant to this appeal, Cantrell received all
interest in Stokebrand Seed. Dennis received CPS, C & D
Leasing, and the parties’ marital share of S&H Bushwackers;
he was to pay any indebtedness to any creditor of CPS and
C & D Leasing. As an equalization, Dennis was to pay Cantrell
$100,000 within 60 days of the date of the decree and $456,000
in annual installments of $38,000 each due March 1 of each
year beginning in 2020; one half of the $456,000 ($228,000
total or $19,000 per year) was to be considered alimony, which
would not terminate on the remarriage of Cantrell, but would
terminate on the death of either party. Each party was to pay
the balance of any attorney fees owed to their respective attor-
neys. The parties submitted the mediated agreement to the dis-
trict court for approval; it was approved pursuant to the court’s
journal entry and order dated November 8, 2018, wherein the
parties were ordered and directed to carry out the terms of the
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agreement. The parties did not resolve the issues of child cus-
tody, child support, and related matters. Those issues remained
scheduled for trial at the end of November.
Trial took place on November 30, 2018. The court was
informed that the parties had agreed to joint legal custody of
their children, with physical custody going to Cantrell. The
parties also agreed that Dennis’ parenting time would include
alternating weekends. Additional parenting time issues, includ-
ing summer and holiday parenting time, were still at issue.
Child support and related matters were also at issue. We will
discuss the trial evidence relevant to the errors assigned in our
analysis below.
A partial journal entry and decree of dissolution of mar-
riage was filed on December 21, 2018; some matters remained
under advisement. As relevant to this appeal, the district court
awarded the parties joint legal custody of their children, with
physical custody awarded to Cantrell; parenting time and child
support were taken under advisement, as was any determina-
tion related to the parties’ obligations to provide health insur-
ance for the children. The court ordered that Cantrell was
entitled to claim the parties’ daughter, and Dennis was entitled
to claim the parties’ son, as an exemption on income tax
returns each calendar year; when there was only one exemption
remaining, the parties were to alternate years. A copy of the
parties’ mediated agreement, which was approved by the court
on November 8, was attached and incorporated into the decree,
and the parties were ordered and directed to carry out the terms
of the agreement. Additionally, the court ordered that “[a]ll
unsatisfied temporary orders of this Court entered during the
pendency of this action shall survive the entry of this decree
. . . ,” specifically the obligation for payment of attorney fees
entered on August 16, continuation of Cantrell’s salary entered
on July 10, and payment of the expenses of the receiver entered
on August 16 “shall remain in full force and effect until satis-
fied”; “[i]n the case of the order providing for continuation of
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[Cantrell’s] salary, that shall terminate upon entry of a final
decree herein.”
On January 14, 2019, Dennis filed a motion to reopen the
case “and present evidence as to the sole issue of [straight-line]
depreciation of the equipment” of CPS and C & D Leasing for
purposes of calculating child support. Cantrell filed an objec-
tion to the motion. After a hearing, the district court denied
Dennis’ motion to reopen evidence.
A final journal entry and decree of dissolution of marriage
was filed on April 11, 2019. The district court noted that on
November 5, 2018, it had approved the parties’ mediated agree-
ment resolving all pending issues with respect to property dis-
tribution, debt allocation, equalization, alimony, and attorney
fees and that the terms of such agreement were to be included
in the final decree of dissolution entered herein. The court reit-
erated its award of joint legal custody, with physical custody
awarded to Cantrell. This time, however, the court attached and
incorporated a parenting plan that specified Dennis’ parenting
time and established holiday and summer parenting time.
Additionally, as relevant to this appeal, the district court
ordered Dennis to pay Cantrell child support in the amount
of $2,553 per month for the two children. When determin-
ing Dennis’ income for child support purposes, the district
court included Dennis’ W-2 wages from CPS, CPS’ ordinary
business income with depreciation added back in, and the net
rental income of C & D Leasing with depreciation added back
in. Dennis’ income from the foregoing sources was calculated
for each year from 2015, 2016, and 2017, and the 3-year aver-
age was used to determine Dennis’ total monthly income of
$21,120 per month. The court determined Cantrell’s earning
capacity was $2,080 per month, based on a 40-hour workweek
and a $12 hourly wage. Dennis was ordered to maintain health
insurance for the parties’ children and was given a $300 credit
on the child support calculation worksheet for the health insur-
ance premiums for the children.
Dennis appeals and Cantrell attempts to cross-appeal the
district court’s decree.
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III. ASSIGNMENTS OF ERROR
Dennis assigns, summarized and reordered, that the district
court erred in (1) ordering temporary alimony to continue until
the entry of the April 2019 decree, (2) ordering CPS to deposit
and pay the receivership fees, and (3) ordering Dennis to pay
temporary attorney fees, as well as erred in (4) its calculation
of child support.
[1,2] Although Cantrell assigns error to the district court’s
decree, she failed to comply with the rules regarding cross-
appeals. See Neb. Ct. R. App. P. § 2-109(D)(4) (rev. 2014).
Cantrell designated herself as an appellee and noted the cross-
appeal on the cover of her brief. However, she did not set forth
the cross-appeal in a separate division of the brief as required.
See id. See, also, In re Estate of Graham, 301 Neb. 594, 919
N.W.2d 714 (2018) (cross-appeal section of appellate brief
must set forth separate title page, table of contents, statement
of case, assigned errors, propositions of law, and statement of
facts). Where a party’s brief fails to comply with § 2-109(D),
an appellate court may proceed as though the party failed to
file a brief or, alternatively, may examine the proceedings for
plain error. Estate of Schluntz v. Lower Republican NRD, 300
Neb. 582, 915 N.W.2d 427 (2018).
IV. STANDARD OF REVIEW
[3] In an action for the dissolution of marriage, an appellate
court reviews de novo on the record the trial court’s determi-
nations of custody, child support, property division, alimony,
and attorney fees; these determinations, however, are initially
entrusted to the trial court’s discretion and will normally be
affirmed absent an abuse of that discretion. Donald v. Donald,
296 Neb. 123, 892 N.W.2d 100 (2017).
A trial court’s determination of who should bear the expenses
associated with the receivership will not be disturbed on appeal
absent an abuse of discretion. See Sayer v. Bowley, 243 Neb.
801, 503 N.W.2d 166 (1993), disapproved on other grounds,
Weyh v. Gottsch, 303 Neb. 280, 929 N.W.2d 40 (2019).
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[4] Plain error is error plainly evident from the record and
of such a nature that to leave it uncorrected would result in
damage to the integrity, reputation, or fairness of the judicial
process. Estate of Schluntz, supra.
V. ANALYSIS
1. Temporary Alimony
[5] Dennis claims the district court erred in ordering him
to pay temporary alimony to Cantrell until the entry of the
April 2019 decree. However, as noted by Cantrell, the district
court did not order temporary alimony in this case because
Cantrell’s motion for temporary alimony had been withdrawn
in exchange for the parties’ agreement that she would con-
tinue to receive her salary from CPS. To the extent Dennis
takes issue with the continuation of Cantrell’s salary beyond
a certain point in time, he has not specifically assigned or
argued that issue, and we will therefore not consider it. To be
considered by an appellate court, an alleged error must be both
specifically assigned and specifically argued in the brief of the
party asserting the error. Fetherkile v. Fetherkile, 299 Neb. 76,
907 N.W.2d 275 (2018).
2. Receivership Fees
Dennis contends the district court erred in ordering CPS to
deposit and pay $7,500 for receivership fees. He argues that
Cantrell should have been responsible for the receivership fees
because she was the one who requested the receivership and no
evidence of the expected receivership costs was presented.
In May 2018, Cantrell filed a motion for appointment of
receiver and for accounting, alleging that Dennis was using
funds from the parties’ companies for his personal expenses
and to make a loan to his uncle, all without her authorization;
he was fraudulently diverting revenue and earnings from the
companies; and he was “systematically cutting” her out of CPS
without authority, including changing passwords and emails,
and firing her from her duties at CPS.
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After a hearing in June 2018, the district court entered an
order on August 16 appointing a specified person as receiver
of CPS and C & D Leasing:
His primary duties are to supervise the bookkeeper . . . ;
to reconstruct the business expenses for 2017 and 2018
(if not already accomplished through the tax preparation
process), to approve of all expenses, and to assure equal
access to both parties to all business records of the two
[companies]. His authority is not limited to these duties.
[CPS] is ordered to deposit the sum of $7,500.00 . . . with
the clerk of the district court of Fillmore County to cover
[the named receiver’s] expenses. Such will be paid on
application and order.
In an order filed on October 16, 2018, the district court stated
a hearing was held on October 9 that, in part, took up Dennis’
motion to reconsider the receivership and the appointed receiv-
er’s application to require and set bond. The court noted that
affidavits were offered and received into evidence, although
neither the affidavits nor a bill of exceptions from the hear-
ing appears in our record on appeal. The court denied Dennis’
motion to reconsider. It further found that “bond should be
required in the amount of $750,000.00, the premium therefor
taxed to [CPS] as part of the cost herein.”
In its order dated November 8, 2018, the district court
approved the parties’ mediated agreement from October 31 and
discharged the receiver.
[6] Given the reasons Cantrell sought a receivership, the
duties given to the receiver, and the need for bond premiums,
we cannot say that the $7,500 receivership fee was untenable
or unreasonable. And contrary to Dennis’ argument, we cannot
say that the district court abused its discretion by not ordering
Cantrell to be solely responsible for paying the fee. The effect
of the court’s order was to make both parties responsible for
the fee through their company, in which they were equal own-
ers at the time. We cannot say that the district court’s order
was an abuse of discretion. See Sayer v. Bowley, 243 Neb.
801, 503 N.W.2d 166 (1993), disapproved on other grounds,
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Weyh v. Gottsch, 303 Neb. 280, 929 N.W.2d 40 (2019) (trial
court’s determination of who should bear expenses associated
with receivership will not be disturbed on appeal absent abuse
of discretion). Additionally, pursuant to the parties’ medi-
ated agreement, Dennis was awarded CPS and was to pay all
indebtedness due and owing to any creditor of CPS.
3. Temporary Attorney Fees
Dennis claims the district court erred in awarding temporary
attorney fees to Cantrell because she failed to present evidence
as to the services actually performed or the length of time
required for preparation or presentation of the case.
[7] It has been held that in awarding attorney fees in a dis-
solution action, a court shall consider the nature of the case,
the amount involved in the controversy, the services actually
performed, the results obtained, the length of time required for
preparation and presentation of the case, the novelty and dif-
ficulty of the questions raised, and the customary charges of
the bar for similar services. Garza v. Garza, 288 Neb. 213, 846
N.W.2d 626 (2014).
[8] The filing of an affidavit or presentation of other evi-
dence will always be the preferable way to support the award
of attorney fees, but if the contents of the record show the
allowed fee not to be unreasonable, then that fee would not be
untenable or an abuse of discretion. See id. See, also, Boamah-
Wiafe v. Rashleigh, 9 Neb. Ct. App. 503, 614 N.W.2d 778 (2000)
(if contents of record, i.e., pleadings, introduced discovery
documents, time spent in court as shown by court record, and
other items that support award, show allowed fee not unreason-
able, then fee not untenable or abuse of discretion).
When the district court awarded Cantrell temporary attorney
fees of $5,000 in August 2018, the original complaint for dis-
solution had been on file more than 11⁄2 years. During that time,
numerous documents had been filed, including pleadings, pre-
trial conference memorandums, and stipulations; agreements
between the parties were reached; there had been issues involv-
ing the parties’ companies that led Cantrell to file a motion
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to have a receiver appointed; and the parties had appeared in
court. We cannot conclude that the $5,000 temporary award
of attorney fees in this case was unreasonable or an abuse
of discretion.
4. Child Support
Dennis claims the district court erred in its calculation of
child support. When determining Dennis’ income for child sup-
port purposes, the district court included Dennis’ W-2 wages
from CPS, CPS’ ordinary business income with depreciation
added back in, and the net rental income of C & D Leasing
with depreciation added back in. Dennis’ income from the
foregoing sources was calculated for each year from 2015,
2016, and 2017, and the 3-year average was used to determine
Dennis’ total monthly income of $21,120 per month.
Underlying Dennis’ claim are his assertions that the dis-
trict court erred in using the ordinary business income or
retained earnings of the parties’ companies in its determination
of Dennis’ income for child support purposes, in sustaining
Cantrell’s relevance objection as to what the retained earnings
or income would be used for in the following years, and in
overruling his motion to reopen the evidence.
(a) Evidence at Trial
The only two witnesses to testify at trial were Dennis
and Cantrell. Numerous exhibits, including tax returns, were
received into evidence.
According to the evidence, Dennis and Cantrell each owned
50 percent of CPS and received wages and distributions from
CPS. CPS elected to file as an S corporation for the tax years
relevant to this case, and we therefore treat it as an S corpora-
tion in our analysis. Dennis and Cantrell also each owned 50
percent of C & D Leasing. C & D Leasing was a partnership
from which the parties received no wages or distributions.
Dennis was the president of CPS, and Cantrell was its vice
president, secretary, and treasurer. Dennis did the work in the
field for CPS, and Cantrell did the office work. The parties
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received wages, tips, and other compensation directly from
CPS as follows: in 2015, Dennis received $15,450 and Cantrell
received $40,530; in 2016, Dennis received $31,673 and
Cantrell received $52,390; and in 2017, Dennis and Cantrell
each received $59,600. Dennis agreed that he gave himself
a raise and that his salary for 2018 would be “[s]omewhere
around” $67,000. Schedule K-1’s for Dennis reflect the follow-
ing amounts for his proportionate share of the S corporation’s
pass-through ordinary business income and distributions: 2015
income of $39,442, distribution of $19,874; 2016 income of
$72,588, distribution of $43,007; and 2017 income of $23,904,
distribution of $43,803. Schedule K-1’s for Cantrell for those
years were nearly identical (within $1). Cantrell agreed that
the company’s profits left in the business were for upcoming
expenses and to buy equipment. She also testified that “[i]t
varie[d] year to year why we [took] distributions.” She agreed
that some of the money went to pay taxes. She also testified
that during 1 year some distribution money was used to buy
equipment the parties owned personally. Both parties agreed
that Cantrell would propose the parties’ salaries and distribu-
tions each year, and that Dennis then would agree to the pro-
posal. Dennis was awarded CPS in the divorce as part of the
parties’ mediated agreement.
Cantrell testified that C & D Leasing was set up for account-
ing and tax purposes; it purchases equipment and leases it to
CPS. All of the money in C & D Leasing went to bank loans or
additional purchases of equipment. As noted above, the parties
did not receive wages or distributions from C & D Leasing.
But Dennis’ K-1’s reflect the following amounts for his pro-
portionate share of the partnership’s “other net rental income
(loss)”: $502 in 2015, $107,302 in 2016, and a loss of $6,790
in 2017. Cantrell’s K-1’s for those years were nearly identical
(within $1). Dennis was awarded C & D Leasing in the divorce
as part of the parties’ mediated agreement.
Stokebrand Seed is an S corporation owned by Cantrell’s
family. Cantrell testified that Dennis was paid by Stokebrand
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Seed for farming. And his 2017 tax return reports $26,141 in
wages from Stokebrand Seed. At trial, Dennis testified he had
not received a payment from Stokebrand Seed since the par-
ties’ mediation. Dennis said he did not know if he would be
farming in 2019 because he had not talked to Cantrell’s father
about doing so. Cantrell testified that she owns shares of stock
in Stokebrand Seed that were gifted to her. She was awarded
“all interest” in Stokebrand Seed in the divorce as part of the
parties’ mediated agreement. Cantrell testified that she never
received any actual income or cash from Stokebrand Seed, but
she has to claim “any earnings” “on taxes.”
Additionally, Dennis and Cantrell’s father each owned 50
percent of another business, S&H Bushwackers, a partner-
ship. Dennis was awarded the parties’ marital share of S&H
Bushwackers in the divorce as part of the parties’ medi-
ated agreement.
Cantrell testified that she last attended school in 2001 and
2002 and was one class short of earning an associate’s degree
in business administration. She had been looking for office
work during the pendency of the case and had two interviews,
but had not received job offers at the time of trial. Both of the
jobs she interviewed for paid $10 to $12 per hour.
Dennis and Cantrell testified that they did not have health
insurance. Dennis agreed that he would like to try to find
health insurance for the children.
(b) District Court’s Ruling
The district court ordered Dennis to pay Cantrell child
support in the amount of $2,553 per month for the two
children. When determining Dennis’ income for child sup-
port purposes, the district court included Dennis’ W-2 wages
from CPS, CPS’ ordinary business income with depreciation
added back in, and net rental income of C & D Leasing with
depreciation added back in. In 2017, the last year for which
tax returns were available in the record, the district court
included the following amounts when determining Dennis’
income for child support purposes: Dennis’ CPS wages of
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$59,600, CPS ordinary business income of $23,804, “[a]dd
back CPS [d]epreciation” of $50,463.50, C & D Leasing net
rental income of $6,790.50, and “[a]dd back C & D Leasing
[d]epreciation” of $31,158.50. Thus, the district court deter-
mined that Dennis’ 2017 income was $171,816.50 for the year,
or $14,318.04 per month. However, because there were sub-
stantial fluctuations in Dennis’ annual earnings, income from
the foregoing sources was calculated for each year from 2015
($204,598.50), 2016 ($383,915), and 2017 ($171,816.50),
and the 3-year average was used to determine Dennis’ total
monthly income of $21,120 per month for purposes of child
support. The court noted that Dennis argued that child sup-
port should be based on his actual earnings received from CPS
and C & D Leasing, “namely his W2 income and distributions
from the companies.” Although the district court did include
Dennis’ wages, the court did not include any distributions
Dennis received from CPS. We note here that the court likely
disregarded actual distributions received by Dennis, since the
district court attributed all of the companies’ net profits to
Dennis for the purpose of calculating child support, thus mak-
ing the actual distributions irrelevant.
The district court determined Cantrell’s earning capacity to
be $2,080 per month, based on a 40-hour workweek and a $12
hourly wage; Cantrell’s monthly income for child support pur-
poses is not challenged on appeal.
Dennis was ordered to maintain health insurance for the par-
ties’ children and was given a $300 credit on the child support
calculation worksheet for the health insurance premiums for
the children.
(c) Recent Case Law Addressing Distributions,
Net Profits, and Retained Earnings
[9] The Nebraska Child Support Guidelines provide that
in calculating the amount of support to be paid, a court must
consider the total monthly income. Gangwish v. Gangwish, 267
Neb. 901, 678 N.W.2d 503 (2004). See Neb. Ct. R. § 4-204
(rev. 2020). Total monthly income is defined as the
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income of both parties derived from all sources, except
all means-tested public assistance benefits which includes
any earned income tax credit and payments received for
children of prior marriages. This would include income
that could be acquired by the parties through reasonable
efforts. For instance, a court may consider as income the
retained earnings in a closely-held corporation of which a
party is a shareholder if the earnings appear excessive or
inappropriate.
§ 4-204.
[10,11] The Nebraska Supreme Court has not set forth a
rigid definition of what constitutes income, but instead has
relied upon a flexible, fact-specific inquiry that recognizes
the wide variety of circumstances that may be present in child
support cases. Marshall v. Marshall, 298 Neb. 1, 902 N.W.2d
223 (2017). Thus, income for the purposes of calculating child
support is not necessarily synonymous with taxable income.
Id. We take this flexible approach in determining a person’s
income for purposes of child support, because child support
proceedings are, despite the child support guidelines, equitable
in nature. Marshall, supra.
This court recently released two opinions wherein the undis-
tributed or retained earnings of and distributions from S cor-
porations were at issue in the context of a parties’ income for
purposes of child support. See, Bornhorst v. Bornhorst, ante
p. 182, 941 N.W.2d 769 (2020); Guthard v. Guthard, ante p.
156, 942 N.W.2d 792 (2020). Our holdings in both cases more
fully developed Nebraska case law in this area. Both opinions
discussed the nature of S corporations in general, which we set
forth briefly below.
[12-16] Subchapter S is a tax status designed to tax corpo-
rate income on a pass-through basis to shareholders of a small
business corporation. Guthard, supra. Although a subchap-
ter S corporation may distribute income, it is not required to
do so. Id. Earnings are owned by the corporation, not by the
shareholders. Id. Subchapter S corporations may accumulate
profits, referred to as “retained earnings.” Id. In a subchapter S
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corporation, the income tax is paid by the shareholders rather
than by the corporation itself. Id. The subchapter S corporation
allocates various items of income to shareholders based upon
the shareholders’ proportionate ownership of stock, and the
allocations are itemized on an individual shareholder’s K-1.
See id. Since a subchapter S corporation is not taxed on its
earnings, the various income, expense, loss, credit, and other
tax items pass through and are taxable to or deductible by
shareholders in a manner analogous to that which is applicable
to partners. Id.
In Guthard, supra, we addressed the extent to which undis-
tributed or retained earnings could be deemed available income
to a parent-shareholder for child support purposes. Because
pass-through earnings are owned by the corporation and are
merely allocated to the shareholder for tax purposes, the
pass-through income is essentially phantom income (income
not actually received by the shareholder) that should not be
included as income in child support calculations. However, a
court may consider as income the retained earnings in a closely
held corporation of which a party is a shareholder if the earn-
ings appear excessive or inappropriate. See, id; § 4-204. In
other words, if the S corporation is not distributing the entirety
of its ordinary business income (net profit), then it is retaining
those earnings within the corporation. Such retained earnings
may be reasonable and for legitimate business purposes, and
a significant amount of retained earnings does not by itself
establish an attempt to shield income. See Guthard, supra. A
determination of the amount of net profit being retained by the
corporation can be gleaned from the K-1 by subtracting the
amount of income actually distributed to the shareholder from
the amount of ordinary business income. In this case, for exam-
ple, in 2015, Dennis was required to report and pay taxes on his
50-percent share of CPS’ ordinary business income of $39,442
(plus or minus certain additional earnings or deductions), yet
Dennis received a distribution of only $19,874. What the cor-
poration did not distribute to Dennis was arguably retained
by the corporation, and the question becomes whether such
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retained earnings were excessive or inappropriate and should
be included as income for child support purposes. See § 4-204.
We will address this question as applied here in our discussion
later in this opinion.
Also, in both Bornhorst, supra, and Guthard, supra, we
addressed the extent to which distributions from S corporations
could be deemed available income to a parent-shareholder
for child support purposes. We held that distributions made
to shareholders to cover corporate tax liability should not be
included as income for purposes of calculating child support;
however, the amount of a shareholder’s distribution which
exceeds the correlated tax liability for an S corporation’s pass-
through income may be subject to inclusion as income for child
support purposes. Id.
(i) Wages and Distributions
In determining Dennis’ income for the purpose of calculat-
ing child support, the district court included Dennis’ wage
income, but did not include his K-1 distributions.
a. Wages
It is undisputed that Dennis’ wages constitute income for
child support purposes. In determining Dennis’ total monthly
income, the district court’s 3-year average included Dennis’
CPS wages of $15,450 in 2015, $31,673 in 2016, and $59,600
in 2017 ($35,574 per year average). See, Gress v. Gress, 274
Neb. 686, 743 N.W.2d 67 (2007) (3-year average to be used
when averaging income); Neb. Ct. R. ch. 4, art. 2, worksheet 1,
n.5 (rev. 2016) (income may be averaged in the event of sub-
stantial fluctuations of annual earnings). Given the manner in
which the district court approached Dennis’ income overall, it
is understandable why the court used a 3-year average of these
wages in its determination of Dennis’ total monthly income
for child support purposes. However, as we discuss next, the
court’s use of certain income and depreciation amounts from
the parties’ businesses was in error. This will require a recal-
culation of Dennis’ income for child support purposes, with
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the focus now being placed on wages and distributions paid to
Dennis. In that regard, we address an issue Cantrell attempted
to raise in a cross-appeal.
Cantrell argues that “it was an error for the trial court not
to include all of the salaries, income, and depreciation of
the companies assumed by [Dennis] less the cost of hiring a
replacement bookkeeper rather than only including [Dennis’]
salary and one-half of the business income and depreciation.”
Brief for appellee at 25. Her argument generally suggests
that since Dennis now owns 100 percent of the businesses, a
3-year average should have included all “of the owner salaries,
business income, and added depreciation back in,” subtract-
ing only the $36,000 “market rate for a bookkeeper each year
for the companies.” Id. at 28. By doing this, Cantrell con-
tends the 3-year average to calculate Dennis’ income would
be $477,098 per year or $39,758 per month. She also takes
issue with the district court’s exclusion of Dennis’ income
from Stokebrand Seed farming, which in 2017 amounted to
$26,141 in wages paid to Dennis. As noted earlier, Stokebrand
Seed is an S corporation owned by Cantrell’s family; Dennis
testified that he had not received a payment from Stokebrand
Seed since the parties’ mediation and that he had not talked to
Cantrell’s father about whether he would continue farming for
Stokebrand Seed. We find no plain error in the district court’s
exclusion of Dennis’ 2017 Stokebrand Seed wages under the
circumstances.
When considering the balance of Cantrell’s argument on
this issue under a plain error review, we note that many of
the sources of income Cantrell suggests should be attributed
to Dennis would not be properly included as income for child
support purposes as we discuss in subsequent portions of our
analysis. However, we do find as a matter of plain error the
failure to consider Dennis’ testimony that he had given himself
a raise and that his salary for 2018 would be “[s]omewhere
around” $67,000. In accepting Cantrell’s present income when
calculating child support, consideration should have also been
given to Dennis’ present income. Dennis’ present income of
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$67,000 was a more accurate reflection of wages he could rea-
sonably earn going forward; his prior 3-year income average
for 2015 through 2017 was only $35,574. When recalculating
child support on remand, the district court should attribute a
salary of $67,000 per year to Dennis.
b. Distributions
In determining Dennis’ total monthly income for child sup-
port purposes, the district court did not include any of the
distributions Dennis received from CPS. As mentioned earlier,
the court likely disregarded actual distributions received by
Dennis, since it attributed all of Dennis’ share of the com-
panies’ net profits to Dennis for the purpose of calculating
child support, thus making the actual distributions irrelevant.
Distributions, however, should be addressed separately from
retained earnings, since distributions represent what the share-
holder actually received from the S corporation (as indicated
on a K-1), in addition to any wages received (as indicated on
a W-2).
[17] Although distributions represent cash actually received
by the shareholder, the distribution is also the shareholder’s
source of funds to pay the personal tax liability on his or
her proportionate share of the S corporation’s pass-through
income. Distributions made to shareholders to cover corporate
tax liability should not be included as income for purposes of
calculating child support. See, Bornhorst v. Bornhorst, ante p.
182, 941 N.W.2d 769 (2020); Guthard v. Guthard, ante p. 156,
942 N.W.2d 792 (2020). In Bornhorst, supra, and Guthard,
supra, we held that distributions made to a shareholder of a
subchapter S corporation, as reported on a K-1, should not be
included as income for purposes of calculating child support
for those portions of the distribution intended to offset the
shareholder’s personal tax liability on his or her proportionate
share of the S corporation’s pass-through earnings. However,
if the evidence establishes that the total distribution exceeds
the shareholder’s tax liability on his or her proportionate
share of the S corporation’s pass-through earnings, such excess
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portions of the distribution may be included as income for
child support purposes unless the evidence demonstrates that
such excess amounts are reasonably expected to be applied to
future tax liabilities. Id. We noted that an analysis correlating
a shareholder’s distributions to his or her tax liabilities over a
longer period of time may reveal a regular pattern of excess
distributions which cannot be solely tied to the tax liabilities
associated with the S corporation’s pass-through income. Id.
In such cases, the amount of a shareholder’s distribution which
exceeds the correlated tax liability for an S corporation’s pass-
through income may be subject to inclusion as income for child
support purposes. Id.
The evidence at trial was that Dennis received distributions
from CPS in the amount of $19,874 in 2015, $43,007 in 2016,
and $43,803 in 2017. And Cantrell testified that “[i]t varie[d]
year to year why we [took] distributions.” She agreed that
some of the money went to pay taxes, although she also testi-
fied that during 1 year some distribution money was used to
buy equipment the parties owned personally.
Whether and to what extent any distributions Dennis
received from CPS exceeded the correlated tax liability for
CPS’ pass-through income—and were thus subject to inclu-
sion as income for child support purposes—was a matter to
be considered by the district court. However, neither the dis-
trict court nor the parties had the benefit of our opinions in
Bornhorst, supra, and Guthard, supra, during the trial court
proceedings below, and the parties did not have the benefit of
this court’s recent opinions during the briefing stage of this
appeal. We therefore reverse the district court’s calculation of
child support and remand the issue back to the district court
with directions. On remand, the district court should consider
this court’s recent opinions in Bornhorst, supra, and Guthard,
supra, regarding distributions, and it should determine whether
and to what extent any distributions Dennis received from
CPS should be included as income for purposes of calculating
child support.
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(ii) Net Profits and Retained Earnings
In determining Dennis’ income for the purpose of calculat-
ing child support, the district court included CPS’ ordinary
business income and C & D Leasing’s net rental income (net
profits of both companies), and the court added back in one-
half of the depreciation deductions taken by those two compa-
nies. We will first address the inclusion of the entirety of the
companies’ net profits as income attributable to Dennis and
will separately address the inclusion of depreciation.
In determining Dennis’ total monthly income, the district
court’s 3-year average included CPS’ ordinary business income
of $39,442 in 2015, $72,587.50 in 2016, and $23,804 in
2017; these amounts come from Dennis’ K-1’s and represent
his 50-percent share of CPS’ total ordinary business income.
The 3-year average also included C & D Leasing’s net rental
income of $502 in 2015, $107,301.50 in 2016, and $6,790.50
in 2017; again, these amounts come from Dennis’ K-1’s.
However, we note that the document relied upon by the dis-
trict court shows that there was actually a net rental loss of
$6,790.50 in 2017.
As evidenced by the tax documents in our record, CPS’ ordi-
nary business income, as reflected on Dennis’ K-1’s, is the cor-
poration’s net income before taking into account “Section 179”
deductions, distributions, and other adjustments not relevant to
our discussion here. As mentioned previously, when the cor-
poration’s ordinary business income (net profit) exceeds that
which is actually paid out in distributions to its shareholders,
then the undistributed profits remain with the corporation and
constitute retained earnings. A corporation’s retained earnings
show its accumulated profits. See Guthard v. Guthard, ante
p. 156, 942 N.W.2d 792 (2020).
[18,19] As set forth in the Nebraska Child Support Guidelines,
“a court may consider as income the retained earnings in a
closely-held corporation of which a party is a shareholder
if the earnings appear excessive or inappropriate.” § 4-204.
In Guthard, supra, we held that whether retained earnings
are excessive or inappropriate necessarily implies that such
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earnings are not being retained for legitimate business pur-
poses and could otherwise reasonably be expected to be dis-
tributed to a parent-shareholder for inclusion as income for
child support purposes. A fact-specific inquiry is necessary to
balance considerations that a well-managed corporation may
be required to retain a portion of its earnings to maintain cor-
porate operations and survive fluctuations in income, but cor-
porate structures should not be used to shield available income
that could and should serve as available sources of child sup-
port funds. Id. Relevant factors to weigh in determining what
portion of undistributed corporate earnings may be available
to a shareholder for child support purposes should include the
following considerations: (1) the shareholder’s level of con-
trol over the corporation’s distributions—as measured by the
shareholder’s ownership interest, (2) the legitimate business
interests justifying the retained corporate earnings, and (3)
the corporation’s history of retained earnings and distributions
to determine whether there is any affirmative evidence of an
attempt to shield income by means of retained earnings. Id.
In this case, Dennis and Cantrell each owned 50 percent
of CPS. Both parties agreed that Cantrell would propose the
parties’ salaries and distributions each year and that Dennis
then would agree to the proposal. Cantrell agreed that CPS’
profits left in the business were for upcoming expenses and to
buy equipment. Additionally, Dennis and Cantrell each owned
50 percent of C & D Leasing. Cantrell testified that all of the
money in C & D Leasing went to bank loans or additional
purchases of equipment. The net rental income from C & D
Leasing was reported on the parties’ K-1’s and individual tax
returns in the same manner that the ordinary business income
from CPS was reported.
Therefore, based on the testimony of both parties, the prof-
its retained by CPS were for upcoming expenses and to buy
equipment and the profits retained by C & D Leasing went to
bank loans or additional equipment purchases. There was no
evidence adduced by either party that the retained earnings
were excessive or inappropriate. In fact, in its final decree, the
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district court stated, “[W]e have little evidence regarding the
excessiveness or appropriateness of the income.” However,
the court noted that Dennis was a very poor historian regard-
ing his business management and the court found that many
of his statements were not credible. The court also noted that
“[i]t was quite clear that Dennis was manipulating income and
deductions to his benefit.”
We are not surprised by the district court’s comment that
Dennis was a “very poor historian regarding his business man-
agement,” since the parties testified that Dennis did the work
in the field and Cantrell did the office work for the companies
during their marriage. Also, in 2015 and 2016, the parties
filed joint tax returns; thus, any “manipulation” of income and
deductions in those 2 years benefited both parties. The ini-
tial divorce pleading was not filed until December 2016, and
Dennis and Cantrell maintained equal ownership of CPS and
C & D Leasing until the court approved their mediated agree-
ment in November 2018.
Notably, neither party challenged the legitimacy of the profits
retained by CPS or C & D Leasing. Also, the district court spe-
cifically found that there was little evidence of the excessive-
ness or the appropriateness of the companies’ income. Without
such evidence, and based on the evidence that was presented,
the retained earnings of CPS and C & D Leasing appeared to
be used to maintain business operations; thus, it cannot be pre-
sumptively concluded that retained earnings should be included
as income. See Guthard, supra (specific inquiry is necessary to
balance considerations that well-­managed corporation may be
required to retain portion of its earnings to maintain corporate
operations and survive fluctuations in income, but corporate
structures should not be used to shield available income that
could and should serve as available sources of child sup-
port funds).
We therefore conclude it was an abuse of discretion for the
district court to attribute 50 percent of each company’s ordi-
nary business income or net profit to Dennis without regard for
the actual distributions he received and without evidence that
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the retained earnings were excessive or inappropriate. When
determining an appropriate income for Dennis for child sup-
port purposes, the reasonableness of the businesses’ retained
earnings was not challenged, and therefore, the court could not
simply attribute to Dennis 50 percent of the ordinary business
income or net rental income of the companies without evidence
of there being excessive or inappropriate retained earnings.
Accordingly, we agree with Dennis that only the wages and
distributions he received were proper sources of income to con-
sider when determining his income for child support purposes.
And as discussed above, there may be limitations on what por-
tion of his distributions should be included as income for child
support purposes; any distribution in excess of his tax liability
on his proportionate share of pass-through income can be con-
sidered as income for child support purposes. See, Bornhorst
v. Bornhorst, ante p. 182, 941 N.W.2d 769 (2020); Guthard v.
Guthard, ante p. 156, 942 N.W.2d 792 (2020).
(d) Depreciation
In determining Dennis’ total monthly income, the district
court’s 3-year average also included “[a]dd back” deprecia-
tion from CPS of $89,397.50 in 2015, $61,881 in 2016, and
$50,463.50 in 2017. The 3-year average also included “[a]dd
back” depreciation from C & D Leasing of $59,807 in 2015,
$110,472 in 2016, and $31,158.50 in 2017. The district court
found these depreciation amounts in each company’s respective
federal tax returns; the depreciation amounts added to Dennis’
income represent one-half the total depreciation deducted on
the business tax returns for those years. Dennis contends that
no depreciation amounts should have been added into his
income for child support purposes and that alternatively, the
district court erred by not sustaining his motion to reopen the
case before entry of a final order to allow him to bring in an
expert to testify about these depreciation deductions. We begin
first by considering the appropriateness of adding back in
depreciation deductions taken by the businesses during years
in which each party was a 50-percent owner, and thus equally
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benefited, and where neither party at trial challenged the depre-
ciation deductions taken on each business’ federal tax return
for 2015, 2016, and 2017.
Section 4-204 of the Nebraska Child Support Guidelines
provides, in relevant part:
(C) Depreciation calculated on the cost of ordinary
and necessary assets may be allowed as a deduction from
income of the business or farm to arrive at an annual-
ized total monthly income. After an asset is shown to be
ordinary and necessary, depreciation, if allowed by the
trial court, shall be calculated by using the “straight-line”
method, which allocates cost of an asset equally over its
useful duration or life. An asset’s life should be deter-
mined with reference to the Class-lives and Recovery
Periods Table created pursuant to 26 CFR § 1.167(a)-11.
A party claiming depreciation shall have the burden of
establishing entitlement to its allowance as a deduction.
(D) . . . Any party claiming an allowance of deprecia-
tion as a deduction from income shall furnish to the court
and the other party copies of a minimum of 5 years’ tax
returns at least 14 days before any hearing pertaining to
the allowance of the deduction.
Notably, the current depreciation rule set forth above first dis-
cusses depreciation as a deduction “from income of the busi-
ness or farm” to arrive at an annualized monthly income for a
parent. § 4-204. As will be discussed below, a prior version of
this rule was applicable to a parent who was “self-employed,”
thus making depreciation deductions a potential issue when
looking at a self-employed parent’s personal income tax
returns. In those situations, a Schedule C (entitled “Profit or
Loss From Business (Sole Proprietorship)”) or Schedule F
(entitled “Profit or Loss From Farming”) would reflect depre-
ciation deductions from a business or farming operation in
a parent’s personal tax return. Further, the depreciation rule
places the burden of proving “entitlement to its allowance as
a deduction” on the “party claiming depreciation.” § 4-204.
Since a sole proprietor is able to control purchases made for
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his or her business, it is reasonable to place the burden on the
sole proprietor parent to prove whether the depreciation deduc-
tion for such purchases, as reflected on his or her personal tax
return, is appropriate. Interestingly, however, the depreciation
rule language is broad enough to place a burden on a parent to
prove the appropriateness of a depreciation deduction taken on
a business entity’s federal tax return regardless of whether the
parent has control over such matters, such as a minority share-
holder of an S corporation.
Finally, § 4-204 further provides that “[a]ny party claiming
an allowance of depreciation as a deduction from income . . . ”
must furnish a minimum of 5 years’ tax returns. In an S cor-
poration situation, the shareholder parent is not claiming an
allowance of depreciation as a deduction from his or her per-
sonal income in most instances; rather, the depreciation deduc-
tion has already been taken by the corporation before deter-
mining the ordinary business income or net profit that will be
passed through for tax purposes to the parent shareholder. The
income attributable to the parent shareholder, as previously
discussed, is focused more on what wages and distributions
were actually received by the parent from the S corporation,
and whether the S corporation’s retention of some of its net
profits were excessive or inappropriate and could have oth-
erwise been distributed to shareholders. We also note that
the depreciation rule does not distinguish between personal
income tax returns and other business entity income tax
returns, such as those filed by an S corporation or partnership
as in the present case.
The depreciation rule is easily applied when dealing with a
sole proprietorship business or farming operation in which the
taxpayer parent would include in his or her personal federal
income tax return a Schedule C or Schedule F, with either form
itemizing the business’ or farm operation’s expenses, deduc-
tions, and depreciation. In the past, when factoring in deprecia-
tion in cases of self-employment, the depreciation rule required
adding back depreciation to the sole proprietor’s income for
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the purpose of calculating child support. We find it helpful to
consider the prior version of the depreciation rule when con-
sidering the current rule and its apparent broader application to
depreciation that is not claimed on a parent’s personal income
tax return, but is instead claimed on a separate business entity’s
federal income tax return.
(i) Depreciation Rule Prior to
September 2002 Amendment
Prior to the amendment of § 4-204 in September 2002, the
rule related to depreciation was generally applied to cases
involving a self-employed parent, and depreciation was added
back to that parent’s income when determining child support.
See Gammel v. Gammel, 259 Neb. 738, 741, 612 N.W.2d 207,
211 (2000) (“paragraph D of the Nebraska Child Support
Guidelines . . . provides that where a party is self-employed,
depreciation claimed on tax returns should be added back to
income”). Notably, in situations of self-employment in a busi-
ness or farming operation, a party’s personal federal income
tax return would include a Schedule C for a sole proprietorship
or a Schedule F for a farming operation. Therefore, a divorcing
party’s personal tax return would contain the details regard-
ing what expenses or deductions, including depreciation, were
being claimed to reduce the taxable income of that party, and
thus also reducing the amount of income to be attributed to
that party for child support purposes. See Rhoades v. Rhoades,
258 Neb. 721, 605 N.W.2d 454 (2000) (as general rule, income
of self-employed person can be determined from his or her
income tax return). The depreciation rule required adding back
in depreciation to a party’s income for child support purposes
if that party was self-employed. See Rauch v. Rauch, 256 Neb.
257, 263, 590 N.W.2d 170, 175 (1999) (when considering
income of self-employed farmer, Supreme Court noted that
paragraph D of guidelines “provides that if a party is self-
employed, depreciation claimed on income tax returns should
be added back to income or loss from the business or farm to
arrive at an annualized total monthly income”).
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Additionally, the depreciation to be added back to the self-
employed parent’s income included “Section 179” deductions.
In Gammel, supra, a district court added “Section 179 deduc-
tions as well as Schedule C depreciation back to the total
income reported” on a father’s tax returns. Gammel, 259 Neb.
at 741, 612 N.W.2d at 211. The father did not challenge the
addition of depreciation to his income, but he did take issue
with adding to his income “the deductions he had taken under
Section 179.” Gammel, 259 Neb. at 741, 612 N.W.2d at 211.
The Nebraska Supreme Court noted that “[t]he Nebraska Child
Support Guidelines require that depreciation be added back to
income whether such depreciation is taken in the year the par-
ent makes a cash expenditure to purchase property or whether
it is taken in a subsequent year when no cash expenditure has
been made.” 259 Neb. at 743, 612 N.W.2d at 211. Further,
“[a] Section 179 deduction is, in effect, accelerated deprecia-
tion taken in the year property is placed in service. See, gener-
ally, I.R.C. §§ 167 and 168, referring to deductions taken in
the first year as ‘depreciation.’” Gammel, 259 Neb. at 743, 612
N.W.2d at 211.
Another case further developed the law in the area of
depreciation prior to the 2002 amendment to the depreciation
rule. In Gase v. Gase, 266 Neb. 975, 671 N.W.2d 223 (2003),
the mother was an attorney and sole shareholder of several
subchapter S corporations. In a child support modification
action, the father claimed the trial court abused its discre-
tion by failing to add depreciation claimed on the mother’s
federal income tax returns back to her income for purposes
of calculating child support. The mother conceded that any
depreciation associated with rental properties owned by her
personally should be added back to her income, but that the
depreciation reported on her federal income tax returns related
to her wholly owned S corporations should not be added back
to her income because there was no evidence that she was self-
employed. The mother argued that the depreciation “belongs
to the corporations and not to her,” and as such, the corporate
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depreciation could not be added back to her personal income
“without first piercing the corporate veil.” Id. at 983, 671
N.W.2d at 230. The Nebraska Supreme Court found it unneces-
sary to pierce the corporate veil and concluded that “the owner
of a wholly owned S corporation is self-employed within the
meaning of the guidelines.” Id. at 985, 671 N.W.2d at 231. The
Supreme Court directed that all depreciation reported on the
mother’s income tax returns for the 3 years provided and all
depreciation from the mother’s wholly owned S corporations
“must be added back to her income in those respective years.
This includes any deductions reported in those years pursuant
to § 179.” Gase, 266 Neb. at 985, 671 N.W.2d at 231. See,
also, Grams v. Grams, 9 Neb. Ct. App. 994, 624 N.W.2d 42 (2001)
(depreciation should be included from father’s wholly owned
S corporation for purposes of calculating child support).
In summary, prior to the depreciation rule being amended
in 2002, it was well established that depreciation, including
“Section 179” deductions, should be added back into a parent’s
income if that parent was self-employed, which was construed
to include an owner of a wholly owned S corporation.
(ii) Depreciation Rule After
September 2002 Amendment
When § 4-204, the depreciation rule, was amended in
September 2002, it no longer contained the reference to a par-
ent being “self-employed.” Instead, the rule stated in part that
“[d]epreciation calculated on the cost of ordinary and neces-
sary assets may be allowed as a deduction from income of the
business or farm to arrive at an annualized monthly income.”
§ 4-204(C). With this amendment, the depreciation rule grew
broader in application—it was no longer limited to the “self-
employed,” and it became more flexible in that it now provided
an opportunity for a party to establish that depreciation should
be allowed as a deduction when determining a party’s income
for child support purposes.
The Nebraska Supreme Court’s first opportunity to review a
case involving the proper treatment of depreciation deductions
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under the amended rule was in Gress v. Gress, 271 Neb. 122,
710 N.W.2d 318 (2006), a marriage dissolution case involv-
ing a father who was a self-employed farmer. We note that
at the time of the Gress opinion, the language in § 4-204(C)
was found in paragraph D of the Nebraska Child Support
Guidelines; the Nebraska Child Support Guidelines were later
renumbered and codified into its current form in 2008, but
the above language from § 4-204 remains the same as it did
in Gress.
In Gress, the father’s personal tax returns showed that his
taxable income was determined after deducting a depreciation
of farm machinery and equipment; the father’s tax preparer
testified that the deductions were for ordinary and necessary
assets in farm operations. The district court determined the
father met his burden and established he was entitled to a
depreciation deduction under the rule; however, the district
court expressed uncertainty about allowing the father the full
amount of the depreciation as it might not be in the children’s
best interests. The district court then used the mother’s pro-
posed calculations of the father’s income, which averaged
his income over a 3-year period after adding one-half the
depreciation deductions for each year back to the correspond-
ing year’s taxable income. The father claimed the reduced
depreciation deduction was in error, and the Nebraska Supreme
Court agreed, explaining:
Depreciation as set out in paragraph D is a matter of
proving the ordinary and necessary expenses of doing
business. Part of that burden is showing the court that the
deduction does not represent artificial treatment of assets
for the purpose of avoiding child support obligations.
Once the burden is met, the appropriate procedure is for a
court to use the straight-line depreciation method in cal-
culating the parent’s monthly income. Because a monthly
income calculation under paragraph D is mathematical
in nature, the effect of a depreciation deduction on child
support is not a proper question under paragraph D.
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Gress, 271 Neb. at 128, 710 N.W.2d at 326. The Supreme
Court concluded that after the district court found the father
met his burden and established that he was entitled to a depre-
ciation deduction, the district court was then required to cal-
culate the father’s income “using the straight-line method of
depreciation without any manipulation of the figures.” Id. at
129, 710 N.W.2d at 326. The Supreme Court pointed out:
Although what effect depreciation has on child sup-
port is not a proper question under paragraph D, once a
potential child support obligation has been determined
based upon the calculations under paragraph D, paragraph
C permits a deviation from the guidelines “whenever the
application of the guidelines in an individual case would
be unjust or inappropriate.”
Gress, 271 Neb. at 129, 710 N.W.2d at 326. The issue of child
support was reversed and remanded back to the district court
for further proceedings.
The Nebraska Supreme Court recently addressed deprecia-
tion deductions in a child support modification action involv-
ing an S corporation in Hotz v. Hotz, 301 Neb. 102, 917
N.W.2d 467 (2018). In that case, the father argued the dis-
trict court erred in not deducting depreciation from his total
monthly income because he submitted his 2016 personal and
corporate tax returns into evidence and both included claimed
depreciations. On appeal, the Nebraska Supreme Court stated,
“While the [Nebraska Child Support Guidelines] do[] permit
for an allowance of depreciation as a deduction from total
monthly income, it also provides specific instructions for prov-
ing an entitlement to the deduction and how the deduction
should be calculated.” Hotz, 301 Neb. at 112, 917 N.W.2d at
476. It noted § 4-204 requires that a minimum of 5 years’ tax
returns be furnished, a depreciated asset must be shown to be
ordinary and necessary, and depreciation must be calculated
by using the straight-line method. The Supreme Court found
the district court did not abuse its discretion by not deducting
the father’s claimed depreciations from his monthly income.
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See, also, Fichtl v. Fichtl, ante p. 380, 944 N.W.2d 516 (2020)
(in child support modification, district court erred in awarding
husband depreciation deductions in calculation of husband’s
monthly income when he did not meet burden of showing
he was entitled to depreciation deduction; husband, who was
50-percent owner of construction business, did not provide 5
years’ tax returns, did not prove business assets were ordinary
and necessary, and did not prove depreciation was calculated
by using straight-line method).
In this case, the district court found that Dennis failed to
adduce any evidence regarding asset depreciation at trial, and
then, he asked for leave to reopen the case to put on such
evidence, which the court denied. The court suggested that
“Dennis was manipulating income and deductions to his ben-
efit.” Therefore, when calculating Dennis’ income for child
support purposes, the court included the depreciation figures
contained on the business income tax returns for CPS and
C & D Leasing for 2015, 2016, and 2017.
However, unlike the self-employment situations and the
more recent child support modification cases just summarized,
the case before us is an initial divorce action involving pass-
through income business entities, and during the tax years at
issue—2015 through 2017—the parties were each 50 percent
owners of those businesses. The parties were therefore equally
responsible for the businesses’ purchases and the proper report-
ing of depreciation deductions, and they both equally received
the benefit of such deductions during those tax years. Cantrell
did not challenge their claimed depreciation deductions for
those tax years for either business, which is not surprising,
since she was substantially involved in the financial dealings of
the businesses, including determining how much they would be
paid in salaries and distributions. Thus, as we pointed out ear-
lier, at least for 2015 and 2016 when the parties filed joint tax
returns, any “manipulation” of income and deductions in those
2 years was agreed to by both parties and benefited both par-
ties. Further, although the parties did not file a joint personal
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tax return in 2017, there is nothing to suggest the 2017 depre-
ciation amounts contained on the businesses’ tax returns for
that year should be treated any differently, since the businesses
remained jointly owned until the district court approved the
parties’ mediated agreement in November 2018.
[20,21] The key to determining whether depreciation deduc-
tions should be included as income for child support purposes
is to show to the court that “the deduction does not represent
artificial treatment of assets for the purpose of avoiding child
support obligations.” Gress v. Gress, 271 Neb. 122, 128, 710
N.W.2d 318, 326 (2006). When a husband and wife hold an
equal interest and are both active in business entities during
the course of their marriage, the risk of artificial treatment of
assets for the purpose of avoiding child support obligations
does not exist. In this case, the 2015, 2016, and 2017 business
income tax returns were submitted when the parties were equal
owners of CPS and C & D Leasing. Thus, unless one equal
owner of a business affirmatively claims inappropriate, fraudu-
lent, or “artificial” deductions contained on a business’ income
tax return, the other equal owner should not be required to
affirmatively prove the validity of depreciation claimed on a
corporation’s or partnership’s federal income tax return. This
is especially true here, where both parties had equal authority
and equal opportunity to ensure the accuracy of their busi-
ness income tax returns for the tax years at issue, and neither
party challenged the legitimacy of the depreciation deductions
at trial.
We therefore conclude that the district court abused its dis-
cretion by including the depreciation deductions taken by CPS
and C & D Leasing when determining Dennis’ income for the
purpose of calculating child support. We note, however, that
consideration of depreciation deductions, as well as the appro-
priateness of retained earnings for CPS and C & D Leasing,
will certainly be relevant in any future child support modifica-
tion action involving these parties, since in the future, all such
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depreciation and retained earnings will be subject to Dennis’
sole ownership and control.
(e) Reverse and Remand
We therefore reverse the district court’s calculation of child
support and remand the issue back to the district court with
directions to recalculate Dennis’ child support obligation to
include his annual wage of $67,000 from CPS and any por-
tion of his distributions in excess of the amounts needed to
cover his personal tax liability on the businesses’ pass-through
income as discussed above and in Bornhorst v. Bornhorst, ante
p. 182, 941 N.W.2d 769 (2020), and Guthard v. Guthard, ante
p. 156, 942 N.W.2d 792 (2020).
5. Remaining Issues
Dennis argues that the district court erred in sustaining
relevance objections related to retained earnings and in over-
ruling his motion to reopen the evidence as to depreciation
expenses for the parties’ companies. Because our analysis of
retained earnings and depreciation resulted in a favorable out-
come for Dennis with regard to these matters, it is not neces-
sary to address these assigned errors. An appellate court is
not obligated to engage in an analysis that is not necessary to
adjudicate the case and controversy before it. Seldin v. Estate of
Silverman, 305 Neb. 185, 939 N.W.2d 768 (2020).
6. Credit for Health Insurance
Cantrell also attempts to cross-appeal the district court’s
decision to give Dennis a $300 credit for health insurance pre-
miums for the children despite a lack of evidence supporting
such a credit, but as previously noted, she failed to comply with
the rules regarding cross-appeals. Although Cantrell claims a
lack of evidence, we note that the district court received into
evidence each party’s proposed child support calculation, and
Dennis’ calculation included a $300 credit for the health insur-
ance premium for the children. Having reviewed the record for
plain error, we find none.
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VI. CONCLUSION
For the reasons stated above, we reverse the district court’s
calculation of child support and remand the issue back to the
district court with directions to recalculate Dennis’ child sup-
port obligation using his wage income as set forth above and
any appropriate portion of his distribution income as discussed
above. We affirm the remainder of the decree.
Affirmed in part, and in part reversed
and remanded with directions.