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Retained Earnings

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When are Retained Earnings Available for Support? The treatment of retained earnings in an S corporation for purposes of support has long vexed practitioners.  When calculating support, do we include the income that is taxable to the recipient but undistributed to him?  In this case of first impression, the Supreme Judicial Court instructs that trial judges 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.” Notably, the SJC points out, even if retained earnings are found to be a legitimate business interest, this does not necessarily justify excluding them from income.  The Court continued to explain that there are two legitimate reasons a corporation may reasonably choose to retain income.  The first is to maintain the current business – these earnings should not be included in income.  The second is to expand the current business.  These earnings have the potential of increasing the business’s value and the owner’s net worth, and might properly be viewed as income available for child support — just as a distribution invested in another corporation would be. Again, although the extent to which retained earnings are included in income for support is a fact-sensitive inquiry, the Court sets forth in this case useful guidance for judges, would-be litigants, and practitioners to consider.  J.S. v. C.C., 454 Mass. 652 (2009)