may not be cited except as provided by
Minn. Stat § 480A.08, subd. 3 (1996)
STATE OF MINNESOTA
IN COURT OF APPEALS
Lonnie K. Schmidtbauer, f/k/a Lonnie K. Miller,
f/k/a Lonnie K. Meehl, petitioner,
Timothy William Miller,
File No. F695517
Thomas W. Lies, Pennington & Lies, P.A., 1111 North First Street, St. Cloud, MN 56302-1756 (for appellant)
Considered and decided by Klaphake, Presiding Judge, Lansing, Judge, and Norton, Judge.*
On appeal from an order denying modification of his child support obligation, Timothy Miller disputes that the evidence supports the administrative law judge's finding that there has been no substantial change in Miller's income that makes the original child support order unreasonable or unfair. We find no abuse of discretion in the ALJ's decision that although Miller's job duties changed, his income remained essentially the same, and we affirm.
The 1995 judgment and decree dissolving Timothy Miller and Lonnie Schmidtbauer's marriage placed physical custody of their four minor children with Schmidtbauer and required Miller to pay $750 a month for child support and $50 a month for medical insurance. The $750 monthly child support was below the statutory guidelines for four children computed on Miller's $2,250 monthly income. Miller and Schmidtbauer had agreed to a one-year below-guidelines payment in exchange for Miller's promise to construct an addition to Schmidtbauer's homestead and barn. The judgment provided that beginning May 1, 1996, Miller's support payment would revert to the guidelines amount of $858 a month.
In October 1995, Miller injured his hand and did not work for several months. Because of limitations imposed by the injury, Miller could not continue to do construction work, but formed a construction partnership in early 1996, which he incorporated in July 1996.
Miller did not make child support payments after the October 1995 injury and was unable to construct the additions. In March 1996, he brought a motion to reduce his child support. Schmidtbauer counter-moved for an order to enforce the promise to construct the additions and for fees.
After a preliminary hearing in July 1996, the district court scheduled a full evidentiary hearing for October 1996. At the October hearing, the district court found Miller in contempt for failure to pay back child support, set temporary support at $500 a month, and continued the child support reduction motion to allow for review of Miller's 1996 tax return and other financial records.
The evidentiary hearing was held before an ALJ in July 1997. Miller urged the ALJ to find that his current income had been reduced from $2,250 to $895 a month. After reviewing the evidence, the ALJ determined Miller's net monthly income was $2,262--$12 higher than the amount stipulated in the 1995 divorce decree. Accordingly, the ALJ concluded there had not been a substantial change in circumstances that made the original child support amount unreasonable or unfair. The ALJ denied Miller's modification motion and ordered Miller to pay monthly child support of $858 as stated in the original judgment, effective May 1, 1996. Miller's motion for reconsideration was denied, and Miller now appeals.
We apply an abuse of discretion standard to decisions on modification of child support. Hennessy v. Stelton, 302 Minn. 550, 550, 224 N.W.2d 926, 927 (1974). An administrative law judge deciding child support issues has broad discretion to determine whether there has been a substantial change in circumstances that makes a current obligation unreasonable and unfair. See Minn. Stat. §§ 518.64, subd. 2(a) (Supp. 1997) (listing events that constitute a change in circumstances), 518.5511, subd. 4(j) (Supp. 1997) (providing decisions of ALJ are appealable in same manner as decisions of trial court); Lee v. Lee, 459 N.W.2d 365, 368-69 (Minn. App. 1990) (concluding district court standards of review apply to review of ALJ orders), review denied (Minn. Oct. 18, 1990). But see Holmberg v. Holmberg, 578 N.W.2d 817, 824 (Minn. App. 1998) (holding Minnesota's administrative child support process unconstitutional "because it violates the separation of powers required by the Minnesota Constitution"), pet. for review filed (Minn. July 13, 1998).
When a motion for modification is based on a change in obligor's income, the starting point is the obligor's current net income, and findings on net income will be affirmed if the findings have a reasonable basis in fact. See Rutten v. Rutten, 347 N.W.2d 47, 50 (Minn. 1984); Strauch v. Strauch, 401 N.W.2d 444, 448 (Minn. App. 1987). A substantial change in circumstances is presumed and the current order is presumed to be unreasonable and unfair if application of the child support guidelines results in a support award "that is at least 20 percent and at least $50 per month higher or lower than the current order[.]" Minn. Stat. § 518.64, subd. 2 (b)(1) (Supp. 1997).
Miller contends that the ALJ erred as a matter of law in determining his net monthly income. Specifically, Miller asserts that the ALJ failed to take into account: (1) the ongoing need for replacement tools and other equipment with an annual cost of $6,500; (2) expenses for rent paid for storage space; (3) expenses for attorneys' fees; and (4) depreciation related to use of a company vehicle. In addition, Miller contends the district court erred by attributing to him an additional $6,000 in income due to his use of the company vehicle and by miscalculating his annual rent payment. We address the allegations of error separately.
First, the guidelines refer to "ordinary and necessary" expenses in the context of determining income from self-employment, Minn. Stat. § 518.551, subd. 5b(e) (Supp. 1997); they do not expressly refer to deductions for depreciation or other business expenses. While a court may consider depreciation deductions in determining an obligor's net monthly income in certain circumstances, Preussner v. Timmer, 414 N.W.2d 577, 579 (Minn. App. 1987), the decision to credit business expenses or deductions lies within the district court's discretion. See Keil v. Keil, 390 N.W.2d 36, 39 (Minn. App. 1986).
Accordingly, we conclude that the ALJ did not abuse its discretion by refusing to allow Miller's business deductions for replacement tools, rent, and attorneys' fees. In addition, the ALJ noted that Miller's claim of a depreciation deduction of $6,500 for replacement tools and other equipment was not supported by his testimony. When questioned about capital investments, the need to depreciate, and the actual costs associated with depreciation, Miller was "uncertain of his answers, avoiding specifics." Miller contests this determination because he testified to depreciation for a high forklift and a computer. The fact that Miller could name two items subject to depreciation deductions does not establish that the ALJ was obligated to allow the deduction, particularly when Miller's answers to a series of questions on the need for a depreciation deduction were vague and uncertain. See Minn. R. Civ. P. 52.01 ("findings of fact * * * shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of witnesses"); Sefkow v. Sefkow, 427 N.W.2d 203, 210 (Minn. 1988) (appellate courts defer to district court's credibility determinations).
Second, the record supports the ALJ's decision to disallow Miller's claimed deduction for rent paid to his current spouse for business space. We agree with the ALJ's conclusion that the amounts paid were excessive. The payments were made to Miller's current spouse, who receives one-half the corporation's income for performing secretarial work, bidding, billing, and advertising responsibilities. Miller testified that she performed these duties on a nearly full-time basis, despite the fact she also provides licensed day-care services in her home. Payments to a spouse which have the effect of decreasing income without clear proof of the validity of the payments are subject to disallowance. Third, the record supports the ALJ's decision to disallow Miller's deductions for attorneys' fees because Miller could not explain "how his lawyer's bill is related to his business enterprises."
Fourth, Miller takes issue with the ALJ's failure to allow claimed depreciation for a company-owned truck and the decision to attribute an additional $6,000 in income for Miller's use of the vehicle. But when asked about the Section 179 expense deduction on his partnership tax return during his direct examination, Miller explained that he had purchased a high forklift and a computer. On re-direct, when asked to give an example of ongoing expenses for the purchase of tools in his business, Miller said:
One would be a new vehicle. We have ongoing purchases of compressors, all types of different equipment. Anytime you're on a job this is--and what equipment is needed.
During further re-direct, the ALJ asked Miller if he used the corporation's $28,000 truck for personal use. Miller responded, "I can." The ALJ then asked, "Do you?" Miller replied, "Or if I do, I have to put my own gas in it."
Although Miller contends the truck is "necessary income-generating equipment" for his construction business and that his current spouse owns another vehicle for personal use, the ALJ acted within the permissible range of discretion in imputing value for personal use. Miller's testimony supported the finding on his personal use of the truck and did not demonstrate the validity of a depreciation deduction.
Finally, Miller correctly notes that the ALJ erred in calculating the amount of his claimed deduction for rent, adding $8,800 to his ordinary income instead of $7,800. This mistake does not, however, require recalculation because Miller's child support obligation of $858 a month is still slightly lower than the guidelines amount for Miller's corrected net monthly income. See Minn. R. Civ. P. 61 (harmless error to be ignored).
The ALJ did not err as a matter of law in disallowing Miller's claimed business expenses and deductions in calculating Miller's net monthly income. The net monthly amount calculated by the ALJ is only $12 higher than the net monthly amount determined and agreed upon during the parties' July 1995 divorce. Miller has not shown that he has met the threshold test for modification based on a change of circumstances, and his motion to reduce his child support payments was properly denied.
KLAPHAKE, Judge (dissenting)
Because I believe that Timothy Miller has established a substantial decrease in his income, I respectfully dissent and would reverse and remand for recalculation of his child support obligation.
First, it is undisputed that the ALJ erred in calculating the amount of Miller's claimed deduction for rent, by adding $8,800 to Miller's ordinary income instead of $7,800. Correction of that mistake reduces Miller's gross annual income by $1,000.
Second, although not required to credit the entire $6,500 depreciation deduction claimed by Miller, the ALJ should have allowed some fair depreciation deduction for the replacement tools which were identified by Miller, the high forklift and a computer. Partial disallowance of an obligor's claimed deduction as "paper losses" may be proper, but the ALJ should determine and allow the deduction of reasonable business expenses incurred to generate income. See, e.g., Freking v. Freking, 479 N.W.2d 736, 740 (Minn. App. 1992) (trial court has discretion to disregard accelerated depreciation and deduct only "actual" depreciation of equipment); Preussner v. Timmer, 414 N.W.2d 577, 579-80 (Minn. App. 1987) (error to disallow all claimed depreciation deductions, without considering whether those deductions were connected to legitimate business enterprise); Stevens County Soc. Serv. Dep't v. Banken, 403 N.W.2d 693, 697 (Minn. App. 1987) (obligor entitled to depreciation deduction on machinery he will have to replace periodically and total disregard of those deductions is error).
Finally, the ALJ erred by attributing an additional $6,000 in income for Miller's personal use of a company-owned truck. An obligor is not entitled to claim business deductions for expenses that are personal in nature, and a court may consider the possibility of an overlap between such expenses and an obligor's basic living needs. See Martin v. Martin, 364 N.W.2d 475, 478 (Minn. App. 1985) (recognizing that some duplication of business expenses and basic living needs of obligor may exist). Although Miller testified that he "could" use the truck for personal use, he did not testify that he did so and there is little need for him to do so because his current spouse owns another vehicle for personal use. Moreover, there is no record basis for the $6,000 figure, which appears unreasonable when such a vehicle would probably rent for less than $500 per month, and when the attribution of this amount essentially cancels out any company use.
I would therefore reverse the ALJ's determination of Miller's net income and remand for recalculation of that income and modification of his child support obligation.
*Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. Art. VI, § 10.