This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. 480A.08, subd. 3 (1998).

STATE OF MINNESOTA

IN COURT OF APPEALS

C4-98-1963

In Re the Marriage of:

Lori Nash-Kadechka, n/k/a Lor Hill, petitioner,

Respondent,

vs.

Raymond E. Kadechka,

Appellant.

Filed June 1, 1999

Affirmed in part, reversed in part, and remanded

Halbrooks, Judge

Ramsey County District Court

File No. DM-F2-90-1291

Stephen M. Lindlof, 2580 White Bear Avenue, St. Paul, MN 55109 (for respondent)

Scott R. Martin, 4856 Banning Avenue, White Bear Lake, MN 55110 (for appellant)

Considered and decided by Halbrooks, Presiding Judge, Davies, Judge, and Peterson, Judge.

U N P U B L I S H E D O P I N I O N

HALBROOKS, Judge

Appellant Raymond E. Kadechka appeals the administrative law judge's order increasing his child support obligation, and granting attorney fees to respondent Lori Nash-Kadechka (n/k/a Lori Hill). Because we find error in two specific areas of the ALJ's calculation of appellant's net income, we reverse on these issues. We affirm on the other calculation issues and the award of attorney fees.

FACTS

Appellant and respondent are the parents of one minor child. The May 31, 1991, judgment and decree dissolving the parties' marriage required appellant to pay child support in the amount of $282 per month. At the time of the decree, appellant was employed as a pressman at Capital Press Printing with a net monthly income of $1,235.10.

In 1992, appellant started his own printing business, Impact Printing. Impact Printing is a limited liability corporation. Appellant owns 99% of the business; appellant's mother owns the other 1%.

In 1996, appellant bought another business, Fast Lane Printing. Fast Lane Printing was formerly Capital Press Printing and was owned by appellant's father. Fast Lane Printing is a limited liability corporation and appellant is a 90% owner of the business. Two other individuals own the remaining 10%. They each receive a guaranteed annual income of $21,300 from Fast Lane Printing.

On May 30, 1997, respondent made a written request to initiate an administrative action for modification of appellant's child support obligation. Appellant did not respond to the notice of review. As a result, respondent's request was denied on July 13, 1997, based on the public authority's inability to determine appellant's income.

On August 13, 1997, respondent filed a motion to modify child support and served appellant with discovery requests. Appellant initially refused to respond to respondent's discovery requests, prompting respondent to bring a motion to compel. The responses ultimately served were characterized by the ALJ as inadequate and incomplete. As a consequence, the modification hearing had to be rescheduled three times. The motion was finally heard by the ALJ on March 3, 1998.

At the hearing, appellant submitted his individual state and federal tax returns for 1996 and 1997 and his state and federal partnership returns for Impact Printing and Fast Lane Printing for 1996 and 1997. Appellant also testified, but did not present any other witnesses.

In 1996, Fast Lane Printing had gross receipts of $195,631 and an ordinary loss of $89,033. In 1997, it had gross receipts of $183,414 and ordinary loss of $94,631. Impact Printing had gross receipts of $760,285 and ordinary income of $116,899 in 1996 and gross receipts of $516,556 and ordinary loss of $963 in 1997. Appellant receives a guaranteed payment of $14,400 per year from Impact Printing. He does not receive a guaranteed payment from Fast Lane Printing. Appellant's individual income tax returns for 1996 and 1997 reflect negative adjusted gross income.

In 1996, the income available to appellant from Impact Printing was $118,808. Appellant took a distribution of $13,971. He left the remaining funds in Impact Printing's capital account. The capital account balance was $231,420 at the beginning of 1996 and $348,645 at the end of 1996.

In 1997, the income available to appellant from Impact Printing was $14,735. Appellant did not take a distribution, and instead left the income in his capital account. Impact Printing's capital account was $348,645 at the beginning of 1997 and $346,483 at the end of the year.

Appellant's individual income tax returns for 1996 and 1997 report $12,000 in rental income from Fast Lane Printing. The 1997 return also lists $1,947 in rental income from Impact Printing. Additionally, appellant's individual tax returns show investment interest income of $6,300 in 1996 and $11,820 in 1997.

Appellant testified he pays the following monthly living expenses: home mortgage, $1,154; a previous child support payment, $250; the child support obligation at issue in this proceeding, $282; life insurance payment, $16; and medical insurance, $188.

Appellant also testified that his girlfriend, who resides with him and is employed as appellant's office manager, pays all the other living expenses. Appellant's girlfriend is paid a gross annual salary of $31,000.

Respondent is employed full-time at Deluxe Corporation. She earns $13.42 per hour. Her net monthly income is $1,804.

The ALJ's determination of appellant's net monthly income was calculated as follows:

1996 M-1 Income from Impact Printing (includes guaranteed payments to partner) $118,808
1996 Investment interest 6,300
1996 Rent received from Fast Lane Printing 12,000
1996 Self-employment taxes (2,169)
1997 M-1 Income from Impact Printing (includes guaranteed payments to partner) 14,735
1997 Investment interest 11,820
1997 Rent received from Fast Lane Printing 12,000
1997 Rent received from Impact Printing 1,947
Mortgage interest (1,562)
Real estate taxes (952)
1997 Tax refund 439
TOTAL: $173,366
   
Average net annual income $86,683
Average net monthly income 7,224

Pursuant to the child support guidelines, in an order dated April 20, 1998, the ALJ determined appellant's child support obligation would be $1,008 per month and awarded respondent $2,000 in attorney fees. Both parties submitted motions for amended findings on the ground that the determination of child support was incorrect. After review of the evidence, the ALJ issued an order dated September 22, 1998, amending the prior order and requiring appellant to pay a monthly total of $1,605 for child support, childcare expenses, and a portion of the medical and dental insurance.

On appeal, appellant contends: (1) the Minnesota Supreme Court's decision in Holmberg v. Holmberg, 588 N.W.2d 720 (Minn. 1999), requires this court to reverse the ALJ's decision and remand the present case to the district court; (2) the ALJ erred by: (a) imputing the net income from Impact Printing to appellant and failing to consider the losses from Fast Lane Printing; (b) determining the rental income received from Fast Lane Printing by Impact Printing should be attributed to appellant as income, and not offset by a business debt; (c) finding the interest income from Impact Printing should be attributed to appellant as income; (d) double-counting the interest income; and (e) failing to consider the depreciation deduction on the building housing Fast Lane Printing; and (3) the ALJ abused her discretion in awarding the respondent attorney fees.

D E C I S I O N

1. Effect of the Holmberg decision

Appellant argues that child support modification issues were not properly before the ALJ because this court's decision in Holmberg v. Holmberg, 578 N.W.2d 817 (Minn. App. 1998), aff'd, 588 N.W.2d 720 (Minn. 1999), found the administrative process for child support violated Minnesota's constitutional requirement for the separation of powers under Minn. Const. art. III, 1. But this court stated its decision would not become final until the period for a petition for review to the supreme court had passed or "any proceedings therein have been resolved." Holmberg, 578 N.W.2d at 824.

A petition for review was granted and the supreme court affirmed this court's decision. Holmberg v. Holmberg, 588 N.W.2d 720 (Minn. 1999). The supreme court made its ruling prospective as to all parties and cases other than the litigants before it and stayed its judgment until July 1, 1999, in order to allow the legislature time to amend the laws accordingly. Id. at 727. Thus, the Holmberg decision is not applicable to appellant and we will review the ALJ's order as provided by Minn. Stat. 518.5511, subd. 4(j) (1998).

2. Modification of child support obligation

Modification of child support is within the district court's discretion and will not be reversed absent an abuse of discretion. Kuronen v. Kuronen, 499 N.W.2d 51, 53 (Minn. App. 1993), review denied (Minn. June 22, 1993). This standard applies to the review of an ALJ's child support decision as well. Lee v. Lee, 459 N.W.2d 365, 369 (Minn. App. 1990), review denied (Minn. Oct. 18, 1990); see Minn. Stat. 518.5511, subd. 4(j) (decision of an ALJ is "appealable to the court of appeals in the same manner as a decision of the district court").

a. Imputing net income of Impact Printing

The obligation to pay child support is based upon the obligor's ability to pay. Schneider v. Schneider, 473 N.W.2d 329, 332 (Minn. App. 1991). The obligor's ability to pay and the resulting child support payment is determined using the obligor's net income. Rouland v. Thorson, 542 N.W.2d 681, 685 (Minn. App. 1996).

Income from self employment is equal to gross receipts minus ordinary and necessary expenses. Ordinary and necessary expenses do not include * * * other business expenses determined by the court to be inappropriate for determining income for purposes of child support. The person seeking to deduct an expense, including depreciation, has the burden of proving, if challenged, the expense is ordinary and necessary. Net income under this section may be different from taxable income.

Minn. Stat. 518.551, subd. 5b(f) (1998).

When the obligor is the sole shareholder of a corporation and the corporation is his only source of income, the district court may impute the income of the corporation, less reasonable sums for business capital purposes, to the obligor. Roth v. Roth, 406 N.W.2d 77, 79 (Minn. App. 1987); Isanti County v. Formhals, 358 N.W.2d 703, 706 (Minn. App. 1984). Also,"[t]he assets and resources of a sole business owner may properly be considered if the figures offered do not comport with evidence of that person's lifestyle." Marx v. Marx, 409 N.W.2d 526, 529 (Minn. App. 1987). Further, the court can consider "cash flow" in addition to "paper income." Coady v. Jurek, 366 N.W.2d 715, 718 (Minn. App. 1985), review denied (Minn. June 27, 1985).

The ALJ found it was appropriate to average the 1996 and 1997 income information from Impact Printing because appellant is self-employed and the gross receipts, expenses, and deductions of the company fluctuate from year to year. Appellant contends the ALJ erred in imputing the entire amount of income from Impact Printing to him because the income was retained in the business capital account and invested in Fast Lane Printing.

Appellant is correct that the amount of net income to be retained for business capital purposes is a factor district courts must consider in determining the amount of income reasonably available to an obligor. Hertz v. Hertz, 304 Minn. 144, 147-48, 229 N.W.2d 42, 45 (1975). However, an obligor who asserts income should be retained in the corporation for business capital purposes must demonstrate what future retention of funds is necessary. Id.

[A] parent may not increase his or her capital net worth and at the same time avoid child support because less cash is available on a monthly basis.

Larson v. Larson, 370 N.W.2d 40, 43 (Minn. App. 1985).

In the present case, appellant presented no specific evidence supporting his contention. He did not call any witnesses or submit any evidence other than his 1996 and 1997 individual and partnership tax returns. He merely argued that because Fast Lane is a fledgling company it is necessary to infuse it with as much capital as possible.

We conclude the ALJ's decision to look beyond the negative adjusted gross income reported on appellant's individual income tax forms and to impute Impact Printing's net income to appellant is not an abuse of discretion. See Hertz, 304 Minn. at 147, 229 N.W.2d at 45 (upholding a trial court's decision imputing the entire net income of a corporation to an obligor where the obligor failed to offer evidence demonstrating the necessity of retaining funds in the capital account).

Appellant also argues the ALJ erred by failing to consider Fast Lane Printing's losses in 1996 and 1997 when determining his net income. He argues it is inequitable for the ALJ to impute Impact Printing's net income to him without also imputing Fast Lane Printing's losses.

"Legitimate business expenses must be considered by the trial court in determining an obligor's net income." County of Nicollet v. Haakenson, 497 N.W.2d 611, 615 (Minn. App. 1993); see Preussner v. Timmer, 414 N.W.2d 577, 580 (Minn. App. 1987) (holding when record contains evidence of legitimate depreciation deductions court should consider those deductions in determining obligor's net income). But the decision to credit such expenses or deductions is within the discretion of the district court. Keil v. Keil, 390 N.W.2d 36, 39 (Minn. App. 1986).

In the present case, the ALJ acknowledged appellant had earned no income from Fast Lane Printing. There is no indication in the record, however, that the ALJ evaluated Fast Lane Printing's business deductions and determined whether or not they were legitimate. We, therefore, remand this issue to the ALJ for further factual findings regarding the legitimacy of Fast Lane Printing's business deductions and resulting K-1 losses in 1996 and 1997. We remind appellant that he bears the burden of proof on this issue and must present adequate evidence and witnesses to support his claims.

b. Rental income from printing companies

Appellant contends the ALJ erred in attributing rental income from Fast Lane Printing to him as income. He asserts the $12,000 rental income paid by Fast Lane Printing is actually a pass-through paid directly to his father for the purchase of the building in which Fast Lane is housed. To support his claim regarding the $12,000 rental income, appellant provided copies of four $1,000 checks payable to his father.

The ALJ specifically found appellant's testimony regarding his rental income was not credible, there was a lack of evidence supporting appellant's claims, and the close familial relationship raised questions as to whether the business transactions and financial arrangements were at arm's length. Thus, the ALJ concluded whatever debt was incurred in the purchase of Fast Lane Printing was incurred individually by appellant and should not be offset as a business debt.

We conclude the ALJ's decision to include rental income in appellant's income is not clearly erroneous. This court defers to the ALJ's determinations regarding witness credibility, Korf v. Korf, 553 N.W.2d 706, 712 (Minn. App. 1996), and there is evidence in the record from which the ALJ could have reasonably concluded appellant's testimony was not credible. Accordingly, the ALJ's determination regarding the rental income is affirmed.

c. Interest income from Impact Printing

Appellant argues the $6,300 in interest income generated from the loan made by Impact Printing to Fast Lane Printing in 1996 and the $11,820 in interest income in 1997 should not be considered in calculating his net income because Impact Printing operates under an accrual method of accounting. Therefore, the interest income reported on his individual return is a pass-through reporting of income, but is not actually received by him.

The ALJ recognized that appellant's businesses operate under an accrual method of accounting. But the ALJ concluded Impact Printing must have actually received the $6,300 interest payment in 1997 because Impact Printing's 1997 tax return lists the $6,300 interest receivable at the beginning of the tax year, but does not list the interest as an asset at the end of the tax year.

Similarly, the ALJ found the $11,820 was actually received by Impact Printing. The ALJ noted Impact Printing's 1997 U.S. partnership tax return lists $11,820 as income, not as a receivable. Also, Fast Lane Printing's 1997 tax return lists an interest payable liability of $11,797, and a deduction for interest paid of $15,954.

Based on the information provided to the ALJ, her conclusion that the income was received is not an abuse of discretion. On their face, appellant's tax returns do not appear to support his claim, and the ALJ specifically found appellant's testimony on this issue was not credible.

Appellant also argues the ALJ counted the interest income twice in determining his net income. We agree. The ALJ determined appellant's share of the income from Impact Printing was $118,808 in 1996 and $14,735 in 1997. She appears to have utilized the following figures reported in Schedules K and K-1 of appellant's 1996 and 1997 U.S. partnership income tax returns to arrive at his income from Impact Printing. The income from these schedules corresponds with appellant's share of the income on schedule M-1 of the partnership tax returns.

1996  
Ordinary income from business activities $115,730
Interest Income 6,300
Guaranteed Payments to Partner 14,400
  $136,430
Charitable contributions (297)
Section 179 expense deduction (17,325)
Appellant's share of income $118,808
1997  
Ordinary income from business activities ($953)
Interest Income 11,820
Guaranteed Payments to Partner 14,400
  $25,267
Charitable contributions (1,127)
Section 179 expense deduction (9,405)
Appellant's share of income $14,735

After calculating appellant's K-1 income from Impact Printing, the ALJ added another $6,300 of investment interest for 1996 and $11,820 for 1997 to the calculation of appellant's net income. This appears to be duplication of the interest income. We therefore remand for a recalculation of appellant's net income without double-counting the investment interest income for 1996 and 1997. d. Depreciation

Appellant argues the ALJ erred in failing to allow a depreciation expense of $2,564 for the building housing Fast Lane Printing. When the record contains evidence of legitimate depreciation deductions, district courts should consider those deductions in determining an obligor's net income. Preussner, 414 N.W.2d at 580.

Upon our review of the record, we conclude the ALJ considered the depreciation when she calculated appellant's share of the income from Impact Printing ($118,808). One of the components of the $118,808 figure is ordinary income from Impact Printing's business activities and depreciation is factored into the calculation of ordinary income.

3. Attorney fees

Appellant appeals the ALJ's award of attorney fees pursuant to Minn. Stat. 518.14, subd. 1 (1998). The allowance of attorney fees in family law cases is almost entirely within the discretion of the district court, and this court rarely reverses that decision. Maeder v. Maeder, 480 N.W.2d 677, 680 (Minn. App. 1992), review denied (Minn. Mar. 19, 1992).

In the present case, the ALJ specifically found the appellant's behavior had contributed to the length and expense of the proceeding. We conclude these findings are supported by the record, and the ALJ did not abuse her discretion in awarding attorney fees to respondent. See Minn. Stat. 518.14, subd. 1 (1998) (courts have discretion to award fees "against a party who unreasonably contributes to the length or expense of the proceeding").

Affirmed in part, reversed in part, and remanded.