In a previous article, I discussed the difference between a noncustodial parent who was self-employed and one who just receives a normal paystub. Here, I will discuss the argument of “retained earnings” when dealing with a self-employed noncustodial parent.
So you have gone through discovery, gotten income tax records of the noncustodial parent and realized just how much he makes each year according to the IRS. The problem is that the noncustodial parent is now claiming that the numbers on the tax return are not a true indication of his current income. The company “retained” the earnings and the money was never actually paid out to the noncustodial parent. Due to the nature of an LLC or Subchapter S Corporation, every amount of net income is treated as personal income to the members or shareholders. The noncustodial parent is arguing that the net income was actually left in the company’s bank account and the noncustodial parent never saw a dime of it.
Luckily for you, Arkansas law favors the custodial parent when dealing with the “retained earnings” arguments. First, Administrative Order No. 10 allows the Court to consider the lifestyle of the noncustodial parent to determine their actual income. If the noncustodial parent is not actually paying themselves out of their business account but has managed to buy themselves several new vehicles, boats and other toys, the Court can consider this evidence when setting a child support number. Second, and most important, Arkansas Courts have decided that retained earnings are attributed as income to the noncustodial parent. However, the noncustodial parent can rebut the presumption that part or all of the retained earnings are income. The burden is on the noncustodial parent to show which part of attributed income is not, in fact, income.
Due to the nature of retained earnings and the ability of the noncustodial parent to confuse the issue at trial, you need an attorney with a strong grasp of how income is supposed to be calculated. Once again, a forensic accountant paired with a knowledgeable attorney can mean the difference in thousands of dollars of child support.
Nathan B. Lewis
Attorney at Law
Bowman & Lewis, PLLC
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