The Pennsylvania Superior Court, in the matter of Sichelstiel v. Sichelstiel, 2022 Pa. Super. 48, has clarified how so-called “pass-through income” from a party’s businesses is to be considered in a child support matter.
In Sichelstiel the father appealed from a trial court decision that included his pass-through income from his business ventures as part of his net income for the purpose of calculating child support. While he had multiple sources of income, the father only appealed the inclusion of the pass-through income as part of his net income for the purposes of calculating child support.
Over the course of the litigation of this matter, it was revealed that the father owns a minority interest in at least nine different businesses. His pass-through income amounted to approximately $155,000 per year.
In order to avoid corporate tax liability, the various businesses of which the father is minority owner required their individual owners to report their income on the owners’ personal income tax returns. This type of corporate tax avoidance has been dubbed “flow through” or “pass-through” income due to the fact that the income passes through the corporation to the individual tax payer (i.e., in this case, the father).
When examined, the father testified that he used virtually all of the pass-through income to pay the tax liability he incurred due to his receipt of the pass-through income. Consequently, the father argued on appeal that as virtually none of the pass-through income was available for his personal use, it should not be considered when calculating child support.
In its analysis of this matter, the Superior Court first noted that the definition of “income” under the Pennsylvania Child Support statutes includes “income derived from business … and … distributive share of partnership gross income” (See 23 Pa.C.S.S.A 4302). Furthermore, the court acknowledged the well-established case law that “all benefits flowing from corporate ownership must be considered in determining income available to calculate a support obligation.” In saying this, however, the court also acknowledged that it cannot attribute funds “not actually available [as income] or received by the party” as income for the purposes of calculating child support. The court further clarified that there is no “presumption that corporate retained earnings per se are to be excluded from available income for purposes of support calculations.”
The critical issue when it comes to pass-through income is whether someone “is able to control the retention or disbursement of funds by the corporation.” If one has no such control, it is likely not attributable as income. If someone does have such control, then he has to demonstrate that such actions (i.e., the choice to utilize pass-through income) is “necessary to maintain or preserve the business.” The burden to prove whether one has control, and whether there is a business necessity, is on the person claiming he does have such control. The court limited its ruling by clarifying that pass-through income through corporate distribution can be attributable as income.
Of course, when determining whether a burden of proof is met, a fact finder (e.g., a child support hearing officer) often makes credibility determinations; however, the court made it clear that if the fact-finder does not make a finding on a specific point (e.g., credibility), it should not be assumed that the issue was resolved in favor if the prevailing party. In other words, just because someone wins, it does mean a credibility determination was made in his favor or, to the contrary, if someone loses, it does not mean that person is not credible.
To that end, therefore, in the instant matter, when making his determinations, the child support hearing officer did not make any factual findings, much less credibility determinations. As a result, the trial court erred when it found that the father lacked credibility upon its review of the hearing officer’s decision. The father’s testimony regarding the nature of the pass-through income was not contested by the mother at the hearing, and not investigated by the child support hearing officer. By contrast, the father was able to corroborate his testimony regarding the nature of his income through testimony and presenting various K-1 Schedules for the businesses at issue.
In its analysis of the record, the court found that it contained only the father’s testimony and evidence. As his testimony and evidence was uncontested, the court found that he met his burden of proof. Further, the hearing officer made no finding that the father tried to shield his income to avoid paying support. Instead, the father provided testimony and evidence as to what the pass-through income was, where it came from, and how he used it to satisfy his tax liability. No inquiry was made of the father as to his ability to control the aforesaid businesses’ distributions or whether those businesses had a standard practice to retain earnings, and nothing in the record suggests otherwise. As he had no such control, he had no burden to prove that the retention of these earnings were necessary to maintain or preserve the business, and the court found that the father proved that he did not have any control over whether corporate earnings were distributed or retained. As a result, the pass-through should not have been attributable to the father as income for the purpose of calculating child support.
Finally, the trial court indicated that even if the pass-through income is not attributable to the father as income, it still could have deviated from the child support guidelines on the grounds that the father does not have substantial child custody, which would have led to a similar support order regardless. The Superior Court refused to comment on this as it does not believe its role is to speculate as about possible decisions or abstract legal issues. It can only rule on the facts and law before it, and the actual decisions made.
Thanks to Sichelstiel, practitioners can now have much more clarity as to when, whether, and how to consider corporate pass-through income for the purposes of calculating a child support obligation.
Published on June 23, 2022 in The Legal Intelligencer and can be found here.
James W. Cushing is senior associate at the Law Office of Faye Riva Cohen and managing attorney for Legal Research Inc., and sits on the executive committee of the family law section of the Philadelphia Bar Association.
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