Wolt v. Wolt , 930 N.W.2d 589 ( 2019 )

Filed 6/27/19 by Clerk of Supreme Court
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2019 ND 155Kathy Wolt, Plaintiff and Appellee
v.
Steve Wolt, Defendant and Appellant
and
State of North Dakota, Statutory Real Party in
Interest and Appellee
No. 20180304
Appeal from the District Court of Morton County, South Central Judicial
District, the Honorable James S. Hill, Judge.
AFFIRMED.
Opinion of the Court by McEvers, Justice.
Arnold V. Fleck, Bismarck, ND, for defendant and appellant.
Sheila K. Keller, Special Assistant Attorney General, Bismarck, ND, for
statutory real party in interest and appellee.
Wolt v. Wolt
No. 20180304
McEvers, Justice.
[¶1] Steve Wolt appeals from a judgment setting his monthly child support
obligation at $923 and from an order denying his motion for sanctions against the
State and its attorney for allegedly frivolous legal positions posited during the child
support proceedings. We conclude the district court correctly interpreted the Child
Support Guidelines in calculating Steve Wolt’s child support obligation and,
accordingly, we affirm the judgment and the order.
I
[¶2] Steve and Kathy Wolt were divorced in 2009 following contentious divorce
proceedings and Kathy Wolt was granted primary residential responsibility of the
couple’s three children and Steve Wolt was ordered to pay child support in
accordance with the Child Support Guidelines. See Wolt v. Wolt, 2010 ND 26, ¶ 1,
778 N.W.2d 786 (affirming divorce judgment); Wolt v. Wolt, 2011 ND 170, ¶ 1, 803
N.W.2d 534 (affirming denial of motion to award Steve Wolt primary residential
responsibility of the children). After the second oldest child turned 18 years old and
graduated from high school, Steve Wolt moved to modify his child support obligation.
See N.D.C.C. § 14-09-08.2(1). Relying on N.D. Admin. Code § 75-02-04.1-01(10),
which defines “self-employment,” Steve Wolt argued his W-2 wages received from
his Subchapter S corporation constitute self-employment income resulting in a total
net monthly income of $3,612 and a monthly child support obligation of $685. The
State responded that Steve Wolt’s child support obligation should be $923 per month
based on a total net monthly income of $5,054 because under N.D. Admin. Code §
75-02-04.1-05, which governs the determination of self-employment net income, his
W-2 wages cannot be included as net earnings from self-employment but must be
considered separately as regular earnings.
1
[¶3] The district court agreed with the State’s interpretation of the Child Support
Guidelines and ordered Steve Wolt to pay $923 per month in child support for his
remaining minor child. Steve Wolt then moved for an award of sanctions against the
State and its attorney under N.D.R.Civ.P. 11(b)(2) claiming its arguments in the child
support proceedings were not warranted by existing law. The court denied the
motion.
II
[¶4] Steve Wolt argues the district court erred in calculating his child support
obligation.
[¶5] In Knudson v. Knudson, 2018 ND 199, ¶¶ 24-25, 916 N.W.2d 793, we
explained:
Child support determinations involve questions of law subject
to the de novo standard of review, findings of fact subject to the clearly
erroneous standard of review, and may, in some limited areas, be
matters of discretion subject to the abuse of discretion standard of
review. Ferguson v. Wallace-Ferguson, 2018 ND 122, ¶ 21, 911
N.W.2d 324. A court errs as a matter of law if it does not comply with
the requirements of the child support guidelines. Id.The child support guidelines, N.D. Admin. Code ch. 75-02-04.1,
govern child support determinations. The amount of child support
calculated under the guidelines is rebuttably presumed to be the correct
amount of child support. N.D. Admin. Code § 75-02-04.1-13. “A
correct finding of an obligor’s net income is essential to determining
the proper amount of child support.” Thompson v. Johnson, 2018 ND
142, ¶ 9, 912 N.W.2d 315 (quoting Raap v. Lenton, 2016 ND 195, ¶ 5,
885 N.W.2d 777). “Income must be sufficiently documented through
the use of tax returns, current wage statements, and other information
to fully apprise the court of all gross income.” N.D. Admin. Code §
75-02-04.1-02(7). Child support calculations “are ordinarily based
upon recent past circumstances because past circumstances are typically
a reliable indicator of future circumstances, particularly circumstances
concerning income.” N.D. Admin. Code § 75-02-04.1-02(8).
[¶6] Steve Wolt is primarily self-employed by Wolt Transport, Inc., a Subchapter
S corporation of which he is the president and sole shareholder. We explained the
2
attributes of Subchapter S corporations in Gunia v. Gunia, 2009 ND 32, ¶ 14, 763
N.W.2d 455:
A Subchapter S corporation is designed to tax corporate income on a
pass-through basis to shareholders of a small business corporation. I
William H. Painter, Painter on Close Corporations § 1.10.1 (3d ed.
1999). See 26 U.S.C.A. § 1361. “Since . . . a Subchapter S corporation
is not taxed on its earnings, the various income, expense, loss, credit,
and other tax items ‘pass through’ and become tax items of the
individual shareholders in accordance with their pro rata interest in the
corporation . . . and are taxable to or deductible by shareholders in a
manner analogous to that which is applicable to partners.” I Painter,
at § 1.10.3. The income and expenses from [a person’s] solely-owned
Subchapter S corporation are attributable to him. See N.D. Admin.
Code § 75-02-04.1-01(10) (self-employment means employment
income from organization that obligor directly or indirectly controls).
[¶7] Here, the average of the most recent five-year period of Steve Wolt’s self-
employment activity based on his personal tax returns was used to calculate his child
support obligation. See N.D. Admin. Code §§ 75-02-04.1-02(7) and 75-02-04.1-
05(4); Thompson v. Johnson, 2019 ND 111, ¶ 9. Steve Wolt does not challenge the
district court’s averaging of the most recent five-year period based on his tax returns.
Rather, he challenges the court’s treatment of his W-2 wages on his tax returns as
regular earnings rather than self-employment income.
[¶8] The parties’ arguments focus on two provisions of the Child Support
Guidelines, N.D. Admin. Code §§ 75-02-04.1-01(10) and 75-02-04.1-05(1)(a)(1).
Self-employment is defined in N.D. Admin. Code § 75-02-04.1-01(10):
“Self-employment” means employment that results in an obligor
earning income from any business organization or entity which the
obligor is, to a significant extent, able to directly or indirectly control.
For purposes of this chapter, it also includes any activity that generates
income from rental property, royalties, business gains, partnerships,
trusts, corporations, and any other organization or entity regardless of
form and regardless of whether such activity would be considered self-
employment activity under the Internal Revenue Code.
[¶9] The determination of net income from self-employment is set forth in part in
N.D. Admin. Code § 75-02-04.1-05(1)(a)(1), which provides:
3
1. Net income from self-employment means total income, for
internal revenue service purposes, of the obligor:
a. Reduced by that amount, if any, of:
(1) That total income that is not the obligor’s income
or that is otherwise included in gross income.
[¶10] Steve Wolt argues he fits within the definition of self-employment under N.D.
Admin. Code § 75-02-04.1-01(10) and, therefore, his W-2 wages received from his
Subchapter S corporation constitute self-employment income under N.D. Admin.
Code § 75-02-04.1-05(1). The State does not dispute that Wolt Transport, Inc., is a
self-employment activity under N.D. Admin. Code § 75-02-04.1-01(10). The State
argues this definition section applies only to determinations whether income-
generating activity is self-employment for purposes of child support but does not
control how the self-employment income is calculated. The State argues that the child
support calculation starts with the obligor’s total income for Internal Revenue Service
purposes which is then reduced under N.D. Admin. Code § 75-02-04.1-05(1)(a)(1)
by the total income “that is not the obligor’s income or that is otherwise included in
gross income.” The State contends that Wolt’s W-2 wages from his Subchapter S
corporation are in addition to the income reported as being generated by the
corporation and qualify as income “that is otherwise included in gross income.”
According to the State, using the W-2 wages before the net income from self-
employment has been calculated results in an improper child support obligation
because there would be no corresponding recalculation of the corporation’s expenses,
such as the deduction for his wages and the corporation’s contributions for his Social
Security and Medicare taxes and unemployment and workers compensation
premiums.
[¶11] We agree with the State and the district court that Steve Wolt’s W-2 wages are
not self-employment income. Although N.D. Admin. Code § 75-02-04.1-01(10)
describes activities that are considered self-employment, the “[d]etermination of a
self-employed individual’s income for the purpose of calculating a child support
obligation is governed, at least initially, by N.D. Admin. Code § 75-02-04.1-05.”
4
Thompson, 2019 ND 111, ¶ 9. “Net income from self-employment means total
income, for internal revenue service purposes, of the obligor.” N.D. Admin. Code §
75-02-04.1-05(1). Under the Internal Revenue Code, 26 U.S.C. § 1402(b)(1), “[t]he
term ‘self-employment income’ means the net earnings from self-employment derived
by an individual . . . during any taxable year,” but does not include “the amount of the
wages paid to such individual during such taxable years.” Examples of “gross
income” listed in N.D. Admin. Code § 75-02-04.1-01(4)(b) also differentiate between
“wages” and “net income from self-employment.” Steve Wolt’s W-2 wage income
must be added after the net income from self-employment has been calculated. See
Halberg v. Halberg, 2010 ND 20, ¶ 17, 777 N.W.2d 872 (“All other types of income,
including in-kind income, must be added to the net income from self-employment to
calculate the obligor’s gross income.”). Consequently, because Steve Wolt’s W-2
wages are not included in net earnings from self-employment, the W-2 wages must
be treated separately as regular wages under the broad definition of “gross income”
found in N.D. Admin. Code § 75-02-04.1-01(4)(b). See Knudson, 2018 ND 199, ¶
26, 916 N.W.2d 793.
[¶12] We conclude the district court did not err in calculating Steve Wolt’s child
support obligation.
III
[¶13] Steve Wolt’s arguments that the district court erred in failing to impose
sanctions on the State and its attorney and that the judge should be removed from
hearing this matter for agreeing with the State’s position are without merit. We affirm
the judgment and the order.
[¶14] Lisa Fair McEvers
Daniel J. Crothers
Jerod E. Tufte
Jon J. Jensen
Gerald W. VandeWalle, C.J.
5