Published On: Fri, Aug 6th, 2010

Florida court unclear on use of Sub-chapter S corporate cash for alimony

Q: I am a forensic accountant, and recently met with a local divorce lawyer and his client to prepare to file a case against her husband.  He and his brother own several franchises in a popular chain of restaurants.  I explained that their corporation was registered as a Sub-chapter S corporation with the IRS.

For income tax purposes, all of the net income of their business is considered personal income, whether or not it is all taken out of the company at the end of the year.  Both men own 50 percent of the stock in the corporation, so half of the income winds up in their individual tax returns.

According to the corporation’s tax return, until two years ago the corporation paid the two brothers almost all of the net profit as distributions.  The last two years, however, they kept most of the profits in the corporation, as retained earnings.

This means they paid income tax on money they had not personally received, lowering money they had available as personal income, in two ways, as they had to pay income tax on money they never received.

The parties have been married for 18 years, and the wife is a good candidate for permanent alimony. There is a 13-year-old son and an 11-year-old daughter to be supported.  The wife’s attorney tells me that it is unclear whether a Florida Court can count the income retained in the corporation as the husband’s for alimony and child support.

He is of the opinion that the husband and his brother may have been doing some divorce planning, as the brother-in-law is also going through a divorce.  Is there any Florida law on this specific subject?

A: Yes, but as usual, the bottom line is, “It depends.”  A few years ago, the Florida Supreme Court was faced with the same question.  It ruled that the money kept in a Sub-S corporation may or may not be counted as increasing ability to pay alimony and child support, depending on whether there was a legitimate business reason to retain the earnings in the corporation.

If the money was kept in the corporation for the purpose of defeating alimony and child support, and not for a legitimate business purpose, it can be considered.

The Court also ruled that the “burden of proof” was on the person in charge of the corporation to prove that he, or she, kept the money in the corporation for legitimate business purposes, and not to harm the spouse.

In this case, history might help your client, if as you say; the retained earnings were greatly increased only when the two stockholders were contemplating divorce.  On the other hand, if there was a plan to use the retained earnings to open more franchises that a judge might consider that as proof of good motive.

If you testify that there was no good business reason to retain the amount of money kept in the corporation, you can bet that the husband’s forensic accountant will disagree with you.  If the case goes to trial, the judge will have to decide between your two positions.

Michael H. Gora has been certified by the Board of Specialization of The Florida Bar as a specialist in family and matrimonial law, and is a partner with Shapiro Blasi Wasserman & Gora P.A. in Boca Raton.  Mr. Gora may be reached by e-mail at mhgora@sbwlawfirm.com.

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