Gislason & Hunter Law Blog

In the case of Haefele v. Haefele, filed on May 7, 2012, the Minnesota Court of Appeals made two important determinations concerning S Corporation distributions and calculation of income for child support and spousal maintenance purposes.   

The Court of Appeals held that distributions made by an S Corporation to a shareholder, specifically for the shareholder to serve as a conduit to relay the funds to another business entity for the S Corporation’s legitimate business purposes are not the shareholder’s income for calculating child support and spousal maintenance.  Courts must look at the corporate motive for paying out retained earnings—if there is a legitimate business purpose and the transfer is not found to have been made to avoid paying spousal support or maintenance, then the court should not include the distribution as income.  The Court of Appeals noted that this was a close question of first impression in Minnesota.

Also, distributions from an S Corporation to a shareholder solely for the shareholder to pay his or her share of the S Corporation’s tax liability on retained earnings are ordinary and necessary business expenses, rather than the shareholder’s income for calculating child support and spousal maintenance.  The court of appeals found that because tax expenses are both ordinary and necessary expenses for operating a business, a portion of distributions to an S Corporation shareholder made to cover taxes on his or her share of the S Corporation’s retained earnings is an ordinary and necessary expense required for “self-employment or operation of a business.” As such, reimbursing or paying an S Corporation shareholder for the tax liability associated with the shareholder’s share of corporate income for taxation purposes does not reduce the shareholder’s “personal living expenses” and is not therefore a reimbursement or in-kind payment which should be counted as income under Minnesota statutes.

As a result of the Minnesota Court of Appeals’ legal analysis, it reversed the District Court’s determination and remanded the case for determination of the proper child support payment.  It is unknown at present whether this case will be reviewed by the Supreme Court.  [ed. update:  On July 17, 2012, the Minnesota Supreme Court granted Mr. Haefele’s petition for further review.]

Andrew M. Tatge is a business and family law attorney with Gislason & Hunter LLP (www.gislason.com) and can be reached at atatge@gislason.com or (507) 387-1115. This information is general in nature and should not be construed as tax or legal advice.

One of the most difficult areas of Minnesota family law (for both lawyers and clients) is spousal maintenance, otherwise known as alimony.  Unlike child support, there is no formula that you can plug numbers into and come away with a good answer. 

Instead, awards of spousal maintenance are based on social norms and public policy—therefore, not entirely consistent, and subject to significant change over time.  In the end, whether or not spousal maintenance is granted may come down simply to what one person thinks is “fair”—and what is fair to one person, is not always fair to another, especially the person ordered to pay.

That said, there are some criteria that the court must take into account when determining whether spousal maintenance should be awarded and, if so, how much. 

Some of those criteria include:

• Does the party seeking spousal maintenance have sufficient assets to support herself?  The court only considers income from the assets awarded, and not an invasion of the asset itself.  So, consider awarding the spouse who might receive spousal maintenance assets capable of producing income (i.e., rental properties, dividend-paying stock, etc.).
• Is the spouse seeking spousal maintenance “self-supporting?”  The court will consider if the spouse seeking spousal maintenance is appropriately employed.  
• What standard of living did the parties have during the marriage?  A higher standard of living during the marriage may show that spousal maintenance is appropriate. 
• Do the children have specific needs which require a parent to stay home or some other reason to justify one parent continuing to be a stay-at-home parent?
• If spousal maintenance is needed, how much? 
• Can education or training allow a party to become self-supporting at some point?
• What is the financial ability of the paying party?
• How old are the parties?
• What is the physical and emotional condition of the party seeking spousal maintenance?
• How long should a party receive spousal maintenance?

In many cases, it is possible to secure a waiver of spousal maintenance as part of an agreement to settle property issues, and sometimes even in exchange for parenting time or custody.

Spousal maintenance is also, generally, taxable income to the recipient and tax deductible for the paying spouse. 

Cases involving spousal maintenance deserve and require a significant conversation with your lawyer about your particular circumstances.  Skilled lawyers, accountants and financial planners can assist in creating a settlement or a court strategy that maximizes the net result to their clients. 

Andrew M. Tatge is a business and family law attorney with Gislason & Hunter LLP (www.gislason.com) and can be reached at atatge@gislason.com or (507) 387-1115.  This information is general in nature and should not be construed as tax or legal advice.