Diez v. Davey
307 Mich. App. 366
| Mich. Ct. App. | 2014Background
- Robert Diez, sole shareholder and president of Supreme Gear Company (SGC), an S corporation, sought sole custody of three children after a long-term relationship with Maria-Jesusa Cloma Davey; the trial court awarded joint legal and joint physical custody with ~122 overnights/year to Diez.
- A Friend of the Court referee and the trial court relied on CPA Justin Cherfoli to calculate Diez’s income for child support, attributing corporate distributions, perks, and a portion of SGC’s “excess working capital” to Diez and using a three-year average to reach a gross annual figure used in the Michigan Child Support Formula (MCSF).
- The trial court set child support at $7,062/month and awarded Davey $118,000 in attorney fees after finding she could not afford counsel while Diez could.
- On appeal Diez challenged (1) the inclusion of SGC’s retained earnings/excess working capital as imputed income, and (2) the inclusion of corporate distributions used to pay SGC-related taxes; he also challenged custody and the attorney-fee award.
- The Court of Appeals affirmed custody and the fee award but vacated the child-support order and remanded so the trial court could recalculate Diez’s income consistent with the MCSF, directing that (a) expert substitution of business judgment for the corporation’s historical practices is improper, and (b) distributions actually made solely to pay S-corp tax liabilities should not be included as the shareholder’s income.
Issues
| Issue | Diez's Argument | Davey’s Argument | Held |
|---|---|---|---|
| Whether undistributed S‑corp earnings (excess working capital) may be imputed as shareholder income under the MCSF | Cherfoli improperly imputed a percentage of "excess working capital"; Diez argued retained corporate earnings are not automatically his income | Court should impute available corporate funds when business records show distributions or evidence of shielding income | Reverse — trial court erred: MCSF does not permit imputing retained S‑corp earnings based on an expert’s alternative business model; focus must be on historical distribution practices and legitimate business needs |
| Whether distributions from SGC used to pay S‑corp–related taxes should be included as Diez’s income | Such tax‑offset distributions should not be included; they are a corporate tax strategy and do not increase Diez’s ability to pay child support | Referee/trial court treated those distributions as part of gross income | Affirmed in part — distributions made only to offset S‑corp tax liabilities should be excluded from shareholder’s income; trial court must identify and exclude them on remand |
| Whether the custody and parenting‑time award (joint custody; ~122 overnights/year for Diez) was an abuse of discretion | Diez argued schedule insufficient for "true" joint custody and attacked witness credibility | Davey argued schedule was in children’s best interests, reflecting her historical primary caregiver role | Affirmed — court’s best‑interest findings were not against the great weight of evidence; joint custody does not require 50/50 time division |
| Whether awarding Davey $118,000 in attorney fees was improper | Diez contended Davey could repay via funds from his father and questioned necessity/duplication of fees | Davey showed annual income <$8,000 and inability to pay; Diez is sole shareholder with access to corporate funds | Affirmed — trial court did not abuse discretion under MCR 3.206(C); evidence supported inability to pay and Diez’s ability to pay |
Key Cases Cited
- Malone v. Malone, 279 Mich. App. 280 (standard of review for child support)
- Ross v. Auto Club Group, 481 Mich. 1 (S‑corporation passthrough tax treatment)
- Ewald v. Ewald, 292 Mich. App. 706 (deducting business debt/expenses in income calculation)
- Loutts v. Loutts, 298 Mich. App. 21 (attorney‑fee award review and inability‑to‑pay rule)
- Dodge v. Ford Motor Co., 204 Mich. 459 (corporate earnings belong to the corporation)