52 Cal.App.5th 519
Cal. Ct. App.2020Background
- Jessica (mother) sought modification of child support; trial court denied her request and Jessica appealed.
- Martin (father) is sole shareholder and president of two intertwined ranching corporations: Hein Ranch Co. (HRC, C corp) and Martin Hein Ranch Co. (MHRC, S corp).
- The corporations reported substantial depreciation deductions (including a $500,000 Cessna) and other business expenses on their tax returns; corporate assets exceeded $5 million.
- The trial court treated corporate and individual tax returns as presumptively correct, placed the burden on Jessica to rebut them, and allowed depreciation deductions to reduce Martin’s income for child support.
- The Court of Appeal held depreciation deductions (including Section 179 expenses) are not "expenditures required for the operation of the business" under Fam. Code §4058(a)(2) because depreciation is a non–cash accounting entry; those deductions do not reduce funds available for child support.
- The court also held that where a self-employed parent controls wholly owned, intertwined corporations (and significant assets exist), the parent bears the burden to prove business expenses are legitimate; no presumption of correctness attaches to the corporate returns in that situation. The matter was reversed and remanded for recalculation of support.
Issues
| Issue | Plaintiff's Argument (Hein) | Defendant's Argument (Hein) | Held |
|---|---|---|---|
| Whether depreciation (and §179 expense) may be deducted as "expenditures required for the operation of the business" when computing annual gross income for child support | Depreciation and §179 are legitimate business expenditures and should reduce gross income | Depreciation is a non‑cash, tax/accounting deduction that does not reduce cash available for support; trial court can treat it as non‑deductible | Depreciation and §179 deductions do not qualify as "expenditures required for the operation of the business" under §4058(a)(2); they should not reduce income available for child support (extends Rodriguez to equipment/other assets) |
| Whether tax returns (individual and corporate) are presumptively correct and who bears the burden to prove legitimacy of business deductions | Tax returns should be presumed correct; mother (movant) must rebut returns to modify support | Where self‑employed parent controls intertwined, wholly owned corporations and has superior access/knowledge (and large assets), that parent should bear the burden to prove expense legitimacy | No general presumption of correctness applies to the intertwined corporate and individual returns here; burden shifts to Martin to prove gross receipts and that claimed expenses are required for business operation under §4058(a)(2) |
Key Cases Cited
- Asfaw v. Woldberhan, 147 Cal.App.4th 1407 (Cal. Ct. App. 2007) (depreciation of rental property not deductible from income for child support; ‘‘expenditure’’ implies actual outlay of cash)
- In re Marriage of Rodriguez, 23 Cal.App.5th 625 (Cal. Ct. App. 2018) (applies Asfaw reasoning to motor vehicle depreciation; depreciation does not reduce cash available for support)
- In re Marriage of Loh, 93 Cal.App.4th 325 (Cal. Ct. App. 2001) (discusses reliance on tax returns as evidentiary starting point in support proceedings)
- Wolf v. Superior Court, 107 Cal.App.4th 25 (Cal. Ct. App. 2003) (where financial records are in exclusive control of a party who would benefit, public policy supports shifting burden to that party)
- In re Marriage of Prentis-Margulis & Margulis, 198 Cal.App.4th 1252 (Cal. Ct. App. 2011) (shifting burden to managing spouse who had exclusive control/knowledge of community assets)
- In re Marriage of Chakko, 115 Cal.App.4th 104 (Cal. Ct. App. 2004) (recognizes risk that business owners can structure transactions to reduce reported income and the need to scrutinize deductions)