Earnings in a Sub-S

Retained Earnings in a Sub-S Corporation.  The treatment of Sub-S retained earnings that pass-through to the parent-shareholder’s tax return has long vexed mediators and lawyers in support cases.  When calculating support, do we include the income which is taxable to the recipient but undistributed to him?   In a case of first impression, the Supreme Judicial Court has weighed in with some useful guidance.  Courts must now determine, on a case-by-case basis, “what portion (if any) of that pass-through income realistically and fairly is or should be deemed available to the shareholder for purposes of paying child support.”  Courts must (1) consider “a shareholder’s level of corporate distributions;” (2) “evaluate the legitimate business interests justifying retaining corporate earnings;” (3) “weigh affirmative evidence of attempts to shield income by means of retained earnings . . . In that regard, the corporation’s history of retained earnings and distributions may be relevant.”  J.S. v. C.C., 454 Mass. 652 (9/10/09)