MODIFICATION OF CHILD SUPPORT FOR
BUSINESS OWNERS AND SELF-EMPLOYED
INDIVIDUALS: BALANCING THE INTERESTS OF
THE CHILD WITH THE MEANS OF THE PARENTS
ABSTRACT
The Michigan Friend of the Court Bureau devoted an entire
subsection of the 2013 Michigan Child Support Formula to assist
trial courts in determining income for business owners and selfemployed individuals. But this subsection merely provides the trial
court with factors to determine when considering income, while
failing to address that business owners have control over, and
incentive to manipulate, their compensation, assets, and business
records. As a result, child-support awards fail to meet the best
interests of our children.
By establishing a five-year income average, requiring a
legitimate business reason for a reduction in income, and
encouraging liberal discovery, Michigan can more effectively strike a
balance between the needs of the child and the actual resources of
the parents. If enacted, these proposals would improve the adequacy
and consistency of child-support awards while furthering the best
interests of our children.
TABLE OF CONTENTS
I. INTRODUCTION .............................................................................. 426 II. BACKGROUND .............................................................................. 428 A. Development of Child-Support Guidelines and
Formulas ............................................................................... 428 1. Federal Legislation ...................................................... 428 2. Michigan’s Response to Federal Legislation .............. 429 B. Modification of Child Support .......................................... 429 C. 2013 Michigan Child Support Formula:
Determining Income .............................................................. 430 1. Income ......................................................................... 430 2. Imputed Income........................................................... 431 3. Determining Income for Business Owners and
Self-Employed Individuals .............................................. 432 D. Michigan’s Scope of Discovery ........................................ 435 426
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III. DEFINING THE PROBLEMS ........................................................... 436 A. The Relative Ease for Business Owners to
Manipulate and Hide Compensation..................................... 436 B. Three-Year Average for Substantial Reduction
Falls Short ............................................................................. 438 C. The Expense of Attorneys, Forensic Accountants,
and Vocational Experts ......................................................... 438 D. The End Result.................................................................. 440 IV. PROPOSED SOLUTIONS ................................................................ 441 A. Implement a Five-Year Income Average .......................... 441 B. Encourage Liberal and Adequate Discovery .................... 442 1. Michigan’s Attempt to Encourage Full Disclosure ..... 443 2. New York’s Attempt to Encourage Adequate
Discovery ........................................................................ 444 3. Applying Case Law to the Michigan Child
Support Formula .............................................................. 445 IV. CONCLUSION .............................................................................. 446 I. INTRODUCTION
Gary Johnson is an electrician and the sole owner of a closely
held corporation. As such, he has complete control over his
compensation and business records. In 2005, Gary and Amanda
Johnson filed a consent judgment of divorce. The judgment stated
that Gary had to pay $2,500 per month in child support for his three
minor children. This amount was based on Amanda’s gross annual
income of $25,000 and Gary’s gross annual income of $150,000 paid
by his corporation. But Gary’s reported income decreased
progressively over the next three years. From 2005 to 2008, Gary
used cash from his corporation to pay his mortgage, car loan, and
miscellaneous expenses. And in 2008, during an economic downturn,
Gary claimed $8,000 as his gross annual income from his
corporation. Not surprisingly, Gary filed a motion to reduce his childsupport obligations.
Gary was easily able to portray that his income decreased during
this time because he had full control over his reported W-2 income.
As a result, the trial court found a change in circumstances
supporting modification of the child-support award. In turn, this
placed a complicated, detailed, and expensive burden on Amanda to
show that Gary was making, or was capable of making, more than he
claimed. Amanda, who was raising their children on her own, was
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forced to use the minimal business records Gary provided in
discovery to meet her evidentiary burden. Making matters worse,
Amanda could not afford an attorney or expert. Ultimately, Gary’s
child-support obligation substantially dropped from $2,500 to $200
per month.
For decades, courts and legislatures have struggled with similar
child-support-modification hearings involving business owners and
self-employed individuals.1 The Michigan Legislature has recognized
that business owners and self-employed individuals can easily control
their income and other forms of compensation.2 Because of this
control, business owners can hide assets, manipulate business
records, and arrange their compensation so that it is less visible to
others.3
This realization has not gone unnoticed by the Michigan Friend
of the Court Bureau (FOCB). The 2013 Michigan Child Support
Formula (the Formula) devotes an entire subsection to assist trial
courts in determining income for business owners and self-employed
individuals.4 But this subsection merely provides the trial court with
factors to consider when determining income. It fails to address that
business owners have control over, and incentive to manipulate, their
compensation, assets, and business records. Unless Michigan
imposes stricter guidelines under the Formula, it will never strike a
balance between “the needs of the child and the actual resources of
each parent.”5
This Comment proposes amending the Formula to improve the
accuracy and adequacy of child-support awards. By establishing a
five-year income average, requiring a legitimate business reason for a
reduction in income, and encouraging liberal discovery, Michigan
1. The terms business owner and self-employed individual are used
interchangeably throughout this Comment. For the purposes of this Comment,
business owner or self-employed individual may also include majority shareholders,
executives, or any person who has control over his or her form of compensation,
company assets, or business documents and records.
2. See e.g., 2013 MICH. CHILD SUPPORT FORMULA MANUAL § 2.01(E)(1)(c)
(Mich. State Court Admin. Office 2013) [hereinafter MCSF], available at
http://courts.mi.gov/Administration/SCAO/Resources/Documents/Publications/Ma
nuals/focb/2013MCS F.pdf.
3. MCSF § 2.01(E)(1).
4. MCSF § 2.01(E).
5. MICH. COMP. LAWS ANN. § 552.519(3)(a)(vi) (Westlaw 2013) (stating the
goal of the Michigan Child Support Formula) (emphasis added).
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can more effectively balance the means of the parents with the needs
of their children.
II. BACKGROUND
The United States Congress, Michigan Legislature, and FOCB
have taken drastic leaps to improve the accuracy, consistency, and
adequacy of child-support awards. Federal legislation, state
legislation, the Formula, and Michigan’s open discovery policy have
all played major roles in providing child-support factors that aim to
meet children’s needs with their parents’ actual resources.
A. Development of Child-Support Guidelines and Formulas
1. Federal Legislation
Historically, federal law did not require states to establish childsupport guidelines.6 But Congress passed the Child Support
Enforcement Amendments of 1984 requiring each state to establish
guidelines for child-support-award amounts.7 The Amendments
permitted states to enact these guidelines by judicial or administrative
action or by law.8 However, these were only advisory amendments.9
Therefore, judges and decision makers still had broad discretion in
determining child-support awards.10
Additionally, the Amendments required the Office of Child
Support Enforcement to form a national advisory panel on childsupport guidelines.11 In 1987, this advisory panel recommended the
development of national child-support guidelines, which Congress
relied on to enact the Family Support Act of 1988.12
6. See Mary B. Bader & Leonard J. Sliwoski, Calculation of Child Support
Amounts in North Dakota when Obligors are Business Owners, 75 N.D. L. REV.
275, 276 (1999).
7. Child Support Enforcement Amendments of 1984, Pub. L. No. 98-378, 99
Stat. 1305 (codified at 42 U.S.C.A. § 667(a) (Westlaw 2013)).
8. Id.
9. Child Support Enforcement Program; Implementation of Child Support
Enforcement Amendments of 1984, 50 Fed. Reg.19,608, 19,621 (May 9. 1985)
(amending 45 C.F.R. § 302.56).
10. Id.
11. LAURA W. MORGAN, CHILD SUPPORT GUIDELINES: INTERPRETATION AND
APPLICATION § 1.02 (Aspen Publishers 2013).
12. Id.
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The 1988 legislation required states to establish guidelines that
would create a rebuttable presumption that the amount determined by
application of the guidelines is correct,13 thereby promoting
consistency in child-support awards. Additionally, the Act required
that each state establish criteria to determine if applying the
guidelines would be unjust or inappropriate.14 The Act also mandated
that states not only use the guidelines to determine initial childsupport awards, but also to determine award modification.15 Further,
the Act required states to review their guidelines once every four
years to ensure proper support awards.16 The Act served as a catalyst
in the national overhaul of child-support guidelines.17
2. Michigan’s Response to Federal Legislation
In response to federal legislation, Michigan created the FOCB.18
Under the supervision and direction of the Michigan Supreme Court,
the FOCB developed a set of child-support guidelines, now known as
the Michigan Child Support Formula, which it continually updates.19
Specifically, the FOCB developed a formula to determine and modify
child-support amounts.20 Additionally, the FOCB provided a
minimum threshold for modification of a child-support amount.21
Most importantly, “[t]he formula shall be based upon the needs of the
child and the actual resources of each parent.”22
B. Modification of Child Support
In Michigan, a trial court has discretion to modify a child-support
award.23 After entering a judgment, a trial court can modify an award
13. Family Support Act of 1988, Pub. L. No. 100-485, 102 Stat. 2343 (codified
at 42 U.S.C.A. § 667(b)(2) (Westlaw 2013)).
14. Id.
15. 42 U.S.C.A. § 667(a) (Westlaw 2013).
16. Family Support Act of 1988, Pub. L. No. 100-485, 102 Stat. 2343 (codified
at 42 U.S.C.A. § 667(b)(2) (Westlaw 2013)).
17. ARNOLD H. RUTKIN, FAMILY LAW AND PRACTICE § 33.03 (Matthew Bender
2012).
18. MICH. COMP. LAWS ANN. § 552.519(1), (3)(a)(vi) (Westlaw 2013).
19. See § 552.519(1), (3)(a)(iv).
20. § 552.519(3)(a)(vi).
21. Id.
22. Id. (emphasis added).
23. See Wyzenkiewicz v. Wyzenkiewicz, 194 N.W. 482 (Mich. 1923); Edwards
v. Edwards, 481 N.W.2d 769 (Mich. Ct. App. 1992).
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if there is a change in circumstances.24 Upon the petition of either
parent, a court can revise or alter a child-support judgment “as the
circumstances of the parents and the benefit of the children
require.”25 The party seeking a modification has the burden of
showing a change in circumstances justifying modification.26 The
primary goal of modifying a child-support award is to establish an
award that satisfies the welfare of the child, while remaining within
the financial means of the supporting parent.27
When determining a new child-support amount, the trial court
must apply the Formula.28 If the court deviates from the Formula, it
must show that its application is unjust or inappropriate.29
C. 2013 Michigan Child Support Formula: Determining Income
According to the Formula, most recently updated January 1,
2013, a child-support award includes the “payment for the general
care and needs of a child.”30
1. Income
The first step in any child-support hearing is to determine the
parents’ individual net incomes.31 “The objective of determining net
income is to establish, as accurately as possible, how much money a
parent should have available for support.”32 Accordingly, the court
should consider all relevant aspects of a parent’s financial status.33
24. Lemmen v. Lemmen, 749 N.W.2d 255 (Mich. 2008).
25. § 552.17(1).
26. See Aussie v. Aussie, 452 N.W.2d 859 (Mich. Ct. App. 1990).
27. Hakken v. Hakken, 298 N.W.2d 907 (Mich. Ct. App. 1980) (approving an
escalator clause to accommodate the father’s expected increase in income).
28. See § 522.605.
29. Id.
30. 2013 MICH. CHILD SUPPORT FORMULA MANUAL § 1.02(A) (Mich. State
Court Admin. Office 2013) [hereinafter MCSF], available at http://courts.mi.gov/
Administration/SCAO/Resources/Documents/Publications/Manuals/focb/2013MC
S F.pdf.
31. Carlson v. Carlson, 809 N.W.2d 612, 614 (Mich. Ct. App. 2011) (citing
Stallworth v. Stallworth, 738 N.W.2d 264, 265 (Mich. Ct. App. 2007)); see also
MCSF § 2.
32. MCSF § 2.01(B); see MCSF § 2.01(A) (“The term ‘net income’ means all
income minus the deductions and adjustments permitted by this manual. A parent’s
‘net income’ used to calculate support will not be the same as that person’s take
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The Formula lists many sources that are included in income.34
This list includes wages, overtime pay, commissions, bonuses, or
other monies from employers;35 capital gains; money due or owed to
the parent; tips or gratuities; interest; dividends; fees; gambling or
lottery winnings; employer contributions to pension or retirement
plans; distributed profits or payments from annuities, trust funds,
insurance contracts, pension or retirement plans, social security,
unemployment benefits, disability insurance, or workers
compensation; and in-kind perquisites (perks).36
2. Imputed Income
The trial court may impute income if it finds that the parent is
voluntarily unemployed or underemployed, has an unexercised
ability to earn, or voluntarily reduces or eliminates income.37 Before
imputing income, the trial court must first evaluate the factors
provided in the Formula:38
(a)
Prior employment experience and history,
including reasons for any termination or changes in
employment.
(b)
Educational level and any special skills or
training.
(c)
Physical and mental disabilities that may affect
a parent’s ability to obtain or maintain gainful
employment.
(d)
Availability for work (exclude periods when a
parent could not work or seek work, e.g.,
hospitalization, incarceration, debilitating illness,
etc.).
home pay, net taxable income, or similar terms that describe income for other
purposes.”).
33. MCSF § 2.01(B).
34. § 552.602(m); MCSF § 2.01(C).
35. MCSF § 2.01(C)(1) (stating that these forms of income are usually reported
in the Medicare, wages, and tips section of the parent’s W-2).
36. MCSF § 2.01(C).
37. MCSF § 2.01(G); Carlson v. Carlson, 809 N.W.2d 612 (2011) (providing
that a court may impute income to a business owner who voluntarily reduces or
eliminates income).
38. Carlson, 809 N.W.2d 615 (holding that the trial court abused its discretion
when it failed to consider the factors set forth in the 2004 Michigan Child Support
Formula § 2.10(E) before imputing income to the business owner).
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(e)
Availability of opportunities to work in the
local geographical area.
(f)
The prevailing wage rates in the local
geographical area.
(g)
Diligence exercised in seeking appropriate
employment.
(h)
Evidence that the parent in question is able to
earn the imputed income.
(i)
Personal history, including present marital
status and present means of support.
(j)
The presence of the parties’ children in the
parent’s home and its impact on that parent’s earnings.
(k)
Whether there has been a significant reduction
in income compared to the period that preceded the
filing of the initial complaint or the motion for
modification.39
Ultimately, the amount of imputed income should reflect the
amount that the parent would have had if the parent had not
voluntarily reduced his or her income.40 As discussed below,
imputing income is increasingly important in child-support
determinations involving business owners and self-employed
individuals.
3. Determining Income for Business Owners and Self-Employed
Individuals
Among the 2013 updates to the Formula are provisions for
determining the income of business owners, self-employed
individuals, and executives.41 The Formula identifies several issues
when determining a business owner or self-employed individuals’
income:42
(1)
Difficulty in determining income for selfemployed individuals, business owners, and others
occurs for several reasons.
39. MCSF § 2.01(G)(2).
40. MCSF § 2.01(G)(1)(a) (“The amount of potential income imputed (1)
should not exceed the level it would have been if there was no reduction in income,
(2) not be based on more than a 40 hour work week, and (3) not include potential
overtime or shift premiums.”).
41. MCSF § 2.01(E).
42. MCSF § 2.01(E)(1).
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(a)
These individuals often have types of income
and expenses not frequently encountered when
determining income for most people.
(b)
Taxation rules, business records, and forms
associated with business ownership and selfemployment differ from those that apply to
individuals employed by others. Common business
documents reflect policies unrelated to an obligation
to support one’s child.
(c)
Due to the control that[]business owners or
executives exercise over the form and manner of their
compensation, a parent, or a parent with the
cooperation of a business owner or executive, may be
able to arrange compensation to reduce the amount
visible to others looking for common forms of
income.43
In an attempt to alleviate these difficulties, the Formula lists
several forms of compensation for the trial court to consider.44
Additionally, the trial court may consider business tax returns,
balance sheets, accounting or banking records, and other business
documents.45 The trial court should carefully examine these
documents to determine whether the parent has disclosed all
compensation as income.46 Particularly, the Formula directs trial
courts to pay special attention to certain forms of compensation and
situations.47
First, the court may need to examine several forms of
compensation in the business.48 These include distributed profits,
profit sharing, officers’ fees and other compensation, management or
consulting fees, commissions, and bonuses.49
Second, the court should give special consideration to in-kind
perquisites, gifts, and personal use of business property.50 In-kind
perquisites may include room and board; housing, meals, mileage
43. Id.
44. See MCSF § 2.01(E)(4).
45. MCSF § 2.01(E)(2).
46. Id.
47. MCSF § 2.01(E)(4).
48. MCSF § 2.01(E)(4)(a).
49. Id.
50. MCSF § 2.01(E)(4)(b) (stating that the court should apply a fair market
price to in-kind perquisites and income).
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reimbursement; personal use of a company vehicle; and other goods
or services.51
Third, the trial court should carefully examine redirected
income.52 In doing so, the court should look for payments made to
the business owner’s friends or relatives. These payments must be
included as income unless the owner can demonstrate that (1) the
payments are the fair market value of work or services; and (2) the
friend or relative actually performed the work or services.53
Additionally, the court should look for redirected income in the form
of personal loans.54 Personal loans from a business are presumed to
be redirected income, unless the business owner overcomes the
presumption.55
Fourth, the Formula directs the trial court to consider tax
deductions.56 For the purposes of determining child support,
deductions are only considered income if they are not consistent with
the nature of the business or occupation.57
Finally, the trial court should look for reduced or deferred
income.58 This is particularly important because business owners
have the ability to hide their income, assets, and manipulate business
51. MCSF § 2.01(E)(4)(b), (D)(1).
52. MCSF § 2.01(E)(4)(c) (defining redirected income as “amounts related by
the business or company as if the redirected amounts were something other than the
parent’s income”).
53. MCSF § 2.01(E)(4)(c)(ii).
54. MCSF § 2.01(E)(4)(c)(i).
55. Id. The presumption is overcome if:
(1) the parent signed a contract or promissory note outlining the
terms of the loan, (2) the business maintains records showing the
loan owed as a receivable, (3) the parent makes installment
payments and the present loan is paid current, and (4) the interest
earned and repayment rate appear to be a reasonable business
practice.
Id. If the presumption is overcome, the parent’s income includes the difference
between the amount of the loan repaid by the parent and a repayment amount for a
similar unsecured personal loan. Id.
56. MCSF § 2.01(E)(4)(e).
57. Id. Deductions to be considered include:
(i) Rent paid by the business to the parent. (ii) Depreciation . . . .
(iii) Home office expenses, including rent, hazard insurance,
utilities, repairs, and maintenance. (iv) Entertainment expenses
spent by the parent . . . . (v) Travel expense reimbursements . . . .
(vi) Personal automobile repair and maintenance expenses.
Id.
58. MCSF § 2.01(E)(4)(d).
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MODIFICATION OF CHILD SUPPORT
435
documents or records.59 Additionally, when a parent’s income is
reduced by 75% or more, the Formula explicitly recognizes a
substantial change in circumstances sufficient to warrant a review of
the support amount.60 The Formula directs the trial court to determine
if there are any reductions in salaries, fees, or distributed profits.61 If
the trial court finds that there is a substantial reduction in distributed
profits, salaries, bonuses, management fees, or any other amounts
paid to a parent, the court can compare these amounts to historical
patterns by using “a three-year income average to determine the
amount to include as a parent’s income.”62
D. Michigan’s Scope of Discovery
According to the Michigan Court Rules, “parties may obtain
discovery regarding any matter . . . involved in the pending action . . .
.”63 The purpose of the discovery process is to simplify and clarify
issues, so the Michigan Supreme Court has repeatedly recognized the
state’s open discovery process.64 This open and broad discovery
process “permits liberal discovery of any matter, not privileged, that
is relevant to the subject matter involved in the pending case.”65
Additionally, the Michigan Court Rules require construction that
secures the just, speedy, and economical determination of every
action.66 The discovery process should not conceal the facts and
circumstances of a controversy.67 Instead, the discovery process
59. See id.
60. 2013 MICH. CHILD SUPPORT FORMULA MANUAL SUPPLEMENT § 3.01(B)(4)
(Mich. State Court Admin. Office 2013), available at http://courts.mi.gov/
Administration/SCAO/Resources/Documents/Publications/Manuals/focb/2013MC
SFSuppl.pdf.
61. MCSF § 2.01(E)(4)(d).
62. MCSF § 2.01(E)(4)(d)(i)–(ii).
63. MICH. CT. R. 2.302(B)(1). But see MICH. CT. R. 3.218; 42 U.S.C.A. §
654(26) (Westlaw 2013).
64. Domako v. Rowe, 475 N.W.2d 30, 35 (Mich. 1991); Reed Dairy Farm v.
Consumers Power Co., 576 N.W.2d 709, 710 (Mich. Ct. App. 1998); see also
Daniels v. Allen Indus., Inc., 216 N.W.2d 762, 764 (Mich. 1974) (“Michigan has a
strong historical commitment to a far-reaching, open and effective discovery
practice.”).
65. E.g., Reed Dairy Farm, 576 N.W.2d at 710; MICH. CT. R. 2.302(B)(1).
66. MICH. CT. R. 1.105; see also Reed Dairy Farm, 576 N.W.2d at 710–11.
67. E.g., Reed Dairy Farm, 576 N.W.2d at 710.
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should facilitate trial preparation, further the ends of justice, and
simplify and clarify the issues of a controversy.68
III. DEFINING THE PROBLEMS
Although the Formula has made substantial progress over the past
three decades, it fails to consider three crucial problems regarding
business owners: (1) the relative ease for business owners to
manipulate and hide compensation; (2) the ability for business
owners to decrease their income over a three-year period in
anticipation of a modification of child-support motion; and (3) the
difficulty for a parent-payee to hire attorneys, vocational experts, and
forensic accountants. As a result, these child-support awards fail to
strike a balance between the parents’ actual incomes and the child’s
needs.
A. The Relative Ease for Business Owners to Manipulate and Hide
Compensation
Measuring a parent’s income or ability to pay child support is
relatively simple when the parent is an employee.69 But it becomes
much more complicated when the parent is a business owner.70 It is
not uncommon for a business to coincidentally experience an
economic downturn before or during a child-support modification
hearing.71 As stated in the 2013 Formula, it is difficult to determine
income for business owners because they control the form and
manner of their compensation.72 This allows business owners to
easily hide assets and compensation, and manipulate business
documents and records.73
68. See id.
69. Bader & Sliwoski, supra note 6, at 289 (discussing the simplicity in
measuring the ability of an employed parent to pay child support).
70. Id. (noting the differences in the North Dakota child-support guidelines for
determining a business owner’s and an employee’s ability to pay child support).
71. Tracy Coenen, Finding Hidden Income in a Divorce or Child Support Case,
FRAUD FILES BLOG (June 8, 2011), http://www.sequenceinc.com/fraudfiles/
2011/06/finding-hidden-income-in-a-divorce-or-child-support-case/.
72. 2013 MICH. CHILD SUPPORT FORMULA MANUAL § 2.01(E)(1)(c) (Mich.
State Court Admin. Office 2013) [hereinafter MCSF], available at
http://courts.mi.gov/Administration/SCAO/Resources/Documents/Publications/Ma
nuals/focb/2013MCS F.pdf.
73. See id.
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MODIFICATION OF CHILD SUPPORT
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This problem is exacerbated when the parent owns a business
routinely paid in cash.74 In this situation, the business owner can
easily hide cash from sales or services.75 As a result, the business’s
reported income may only reveal a small portion of its true sales and
profits.76
In nearly any closely held business, there are several ways to hide
income.77 The following hypotheticals provide just a few examples of
how business owners and self-employed individuals can manipulate
income:
(1)
A surveyor could decrease compensation over
a three-year period in anticipation of a child-supportmodification hearing, thus ensuring that the court’s
three-year income average is lower than his actual
income.
(2)
A doctor filing for modification of child
support could stop taking a paycheck and claim no
earnings from the practice.78
(3)
A barber could stop reporting income from
cash receipts, while pocketing the cash and claiming
less revenue.79
(4)
A contractor or construction worker could
offer a discount to customers if they pay with cash and
do not request a receipt.80
As illustrated in the introduction, a business owner seeking a
reduction in a child-support obligation can easily manipulate records
to create an impression that the business has lost profits as a result of
a bad economy.81 In turn, the business owner can easily demonstrate
74. Can Tennessee Cash Business Owners Hide Income to Lower Child
Support?, MEMPHIS DIVORCE, http://memphisdivorce.com/can-tennessee-cashbusiness-owners-hide-income-to-lower-child-support/ (last visited Sept. 15, 2013)
[hereinafter Cash Business Owners] (explaining that hiding cash from a business is
less frequent in the modern economy, but the problem still exists).
75. Id.
76. Coenen, supra note 71.
77. See id.
78. See id.
79. See id.
80. See id.
81. See Practical Law: Genesee Friend of the Court (Bloomfield Community
Television broadcast Jan. 29, 2013), available at http://www.bloomfieldtwp.org/
Services/cable/Videos/PracticalLaw.asp.
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a change in financial conditions.82 The burden then shifts to the payee
to prove that there is no legitimate reason for the reduction in
income, that the business owner has an unexercised ability to earn or
is hiding income, or that the individual is living outside of his or her
means.83
B. Three-Year Average for Substantial Reduction Falls Short
Admittedly, the 2013 Formula has taken steps to address
substantial reductions in income for business owners.84 Under the
Formula, a trial court can use a three-year average of the business
owner’s salary, bonuses, management fees, or other amounts paid to
the business owner if a legitimate reason for a substantial reduction is
not shown.85 While this may be a significant step, the three-year
average still falls short. In light of this historical average, a business
owner could easily decrease the amount of visible income over a
three-year period, therefore negating the Formula’s attempt to solve
the problem. This is especially true when the parties have a young
child. Because the Formula requires parents to pay child support until
a child is at least 18 years old, the business owner has a strong
incentive to have the child-support award reduced to avoid paying a
higher net amount.86
C. The Expense of Attorneys, Forensic Accountants, and Vocational
Experts
One way a payee can reveal a payor’s hidden income is through a
lifestyle analysis.87 The goal of a lifestyle analysis is to determine if
the business owner’s lifestyle could be supported by his or her
reported income.88 This complicated procedure usually requires the
payee to acquire a forensic accountant.89 In most circumstances, the
82. See id.
83. See id.
84. See generally 2013 MICH. CHILD SUPPORT FORMULA MANUAL § 2.01(E)
(Mich. State Court Admin. Office 2013) [hereinafter MCSF], available at
http://courts.mi.gov/Administration/SCAO/Resources/Documents/Publications/Ma
nuals/focb/20 13MCSF.pdf.
85. MCSF § 2.01(E)(4)(d).
86. MICH. COMP. LAW ANN. § 552.6056(2) (Westlaw 2013).
87. Coenen, supra note 71.
88. Id.
89. Cash Business Owners, supra note 74 (“As expert witnesses, forensic
accountants are experienced with many methodologies, techniques, and law
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forensic accountant examines the business owner’s expenses and
compares them to reported income.90 Expenses include mortgage
payments, utilities, car payments, groceries, dining out, vacations,
and any other expense of the business owner.91 Once the forensic
accountant calculates the total expenses, the next step is to determine
if the business owner’s reported income is sufficient to pay those
expenses.92 If the reported income is insufficient, there is possibly an
unknown source of income.93
Moreover, a payee may hire a vocational expert to aid in
imputing income in situations where the business owner is
voluntarily unemployed or underemployed.94 The vocational expert
may provide evidence of currently available positions in the business
owner’s field and the average salaries of similar positions, attest to
the owner’s employability or capability to earn more income, and
provide an opinion as to the business owner’s potential salary range
if he or she was not voluntarily unemployed or underemployed.95
This evidence can give the court a reliable basis for imputing income
to the business owner.96
In addition to hiring forensic accountants and vocational experts,
it may be necessary to hire an experienced attorney.97
There is no doubt that a payee’s best option to prove a business
owner is hiding or manipulating compensation is to hire a forensic
accountant, vocational expert, or experienced attorney. But for a
payee who is relying on child-support payments for rent, food, and
other expenses for the children, these are unreasonable solutions.
concerning catching the cash business owner who underreports income or seeks to
conceal or hide income.”).
90. Coenen, supra note 71.
91. See id.
92. Id.
93. Id.
94. What is a Vocational Expert? Why would I need to hire one for my case?,
DADS DIVORCE (Oct. 29, 2007 1:00 PM), http://www.dadsdivorce.com/component/
content/article/29-finance/133-what-is-a-vocational-expert-why-would-i-need-tohire-one-for-my-case.
95. Id.
96. Id.
97. Practical Law: Genesee Friend of the Court, supra note 81 (discussing the
importance of having experienced attorneys in child-support-modification cases
involving business owners).
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Forensic accountants charge anywhere from $300 to $500 per hour.98
And the average hourly rate for attorneys in a major metropolitan
area can range from $100 to $400 per hour.99 Not to mention, childsupport-modification cases can last for months.100 This expensive and
often complex litigation makes it difficult for a payee raising children
on a limited income to ensure that a proper child-support award is
granted.
D. The End Result
The 2013 Formula discusses what the court must consider when
determining the income of business owners and self-employed
individuals.101 But realistically, some parties will still be untruthful or
easily hide their compensation.102 Additionally, the Formula does
little to remedy the problem.103 Although the Underground Economy
Task Force made specific recommendations in 2010, the FOCB
included very few of these recommendations in the 2013 Formula.104
And even if they were adopted, many of the suggestions are
unreasonable at best. Even the Underground Economy Task Force
recognizes that several of its recommendations will “languish for
lack of funding” or “become subjects of vigorous debates.”105 If
business owners cannot demonstrate a legitimate reason for income
reduction, they can defeat the Formula’s intent by merely reducing
98. How Much Does a Forensic Accountant Cost?, HOWMUCHISIT.ORG,
http://www.howmuchisit.org/forensic-accountant-cost/ (last visited Sept. 15, 2013).
99. Legal Representation: What will it Cost?, NORTHWEST MICHIGAN LEGAL
DIRECTORY, http://www.miseasons.com/legal/articles/costs.html (last visited Sept.
15, 2013).
100. Henry S. Gornbein, Ten Child Support Issues in 2010, FAMILY LAW OF
MICHIGAN.COM, http://www.familylawofmichigan.com/child-custody-and-support/
ten-child-support-issues-in-2010 (last visited Sept. 15, 2013).
101. 2013 MICH. CHILD SUPPORT FORMULA MANUAL § 2.01(E) (Mich. State
Court Admin. Office 2013) [hereinafter MCSF], available at http://courts.mi.gov/
Administration/SCAO/Resources/Documents/Publications/Manuals/focb/2013MC
SF.pdf.
102. MORGAN, supra note 11, at § 6.01.
103. See generally MCSF § 2.01(E).
104. See generally, MICH. UNDERGROUND ECON. TASK FORCE, MICH. SUP. CT.,
UNDERGROUND ECONOMY (June 2010), available at http://courts.mi.gov/
Administration/SCAO/Resources/Documents/Publications/Reports/UETF2010.pdf. ; see MCSF § 2.01(E).
105. MICH. UNDERGROUND ECON. TASK FORCE, MICH. SUP. CT., UNDERGROUND
ECONOMY 29 (June 2010), available at http://courts.mi.gov/Administration/SCAO/
Resources/Documents/Publications/Reports/UETF-2010.pdf.
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their income for three years. The end result is a child-support
obligation that fails to meet “the needs of the child and the actual
resources of each parent.”106
IV. PROPOSED SOLUTIONS
The FOCB can increase the adequacy of child-supportmodification awards by amending the Formula to implement a fiveyear income average and encouraging business owners to fully
disclose accurate accounts of their financial status.
A. Implement a Five-Year Income Average
As discussed above, the three-year income average fails to
recognize that business owners may reduce their income in
preparation for a child-support modification. Therefore, the FOCB
should amend § 2.01(E)(4)(d) of the Formula to include a five-year
income average instead of a three-year income average.
This proposed amendment would make it more difficult to reduce
income in preparation for a modification hearing.107 All child-support
cases are eligible for Friend of the Court review every 36 months; by
requiring the court to use a five-year historic income average, the
Formula would force business owners to independently move to
modify support at the very least.108 Additionally, many business
owners may not have the time to intentionally reduce income or want
to wait an extended five-year period before attempting to reduce
support obligations. In return, a substantial amount of child-support
awards are more likely to reflect the business owner’s true income.
Business owners may argue that this amendment could result in
an unfair outcome during challenging economic situations. But a
business owner can avoid the five-year average by showing the trial
court that a legitimate business reason existed for the reduction in
income.109
Amending §2.01(E)(4)(d) of the 2013 Formula does not
completely solve the central issue.110 But it provides a viable fix by
106. See MICH. COMP. LAWS ANN. § 552.519(3)(a)(vi) (Westlaw 2013)
(emphasis added).
107. See MCSF § 2.01(E)(4)(d).
108. See MICH. COMP. LAWS ANN. § 552.517 (Westlaw 2013).
109. The legitimate business reason test also promotes full disclosure of business
records and documents.
110. See supra part III.
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forcing business owners to reduce income for an additional two
years.
B. Encourage Liberal and Adequate Discovery
The need for liberal discovery and disclosure is especially
important in several factual scenarios involving child-support
awards.111 First, extensive discovery is necessary to test the accuracy
of the alleged change in circumstances during a modification
proceeding.112 Second, liberal discovery is necessary to compare a
parent’s lifestyle with his or her reported income.113 Third, liberal
discovery is necessary for a court to properly impute income.114
Finally, liberal and adequate discovery is necessary when a business
owner has control over his or her income because business records
and documents are essential for the court to determine the business’s
income and economic status. 115 It is also imperative for the court and
opposing party to have liberal discovery when the business’s revenue
is usually in cash.116
During a child-support proceeding, the court has a duty to protect
the best interests of the child.117 This means that formal discovery
rules are relaxed in favor of allowing each party to rely on the other
party’s disclosures.118 But in McDowell v. McDowell, the Michigan
Court of Appeals expressed how difficult it can be to determine
income when there is insufficient disclosure by the business
owner.119 The court stated:
It was difficult in this case to arrive at an income for
the calculation of child support, and the reason for
said difficulty was not that Plaintiff was unreasonably
fishing for income as was argued by Defendant. Mr.
McDowell and his wife gave every appearance of not
being forthcoming with information, and being totally
uncooperative with Plaintiff and her attorney when it
came to discovery. Notwithstanding the difficulties,
111.
112.
113.
114.
115.
116.
117.
118.
119.
MORGAN, supra note 11, at § 6.01.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
See No. 273807, 2008 WL 2151372, at *9 (Mich. Ct. App. May 22, 2008).
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Plaintiff tried valiantly to persuade this Court of
hidden income. That persuasion, unfortunately for
Plaintiff, did not happen . . . .120
Because the trial court struggled with determining the business
owner’s income, the payee was forced to seek relief from the Court
of Appeals—a costly endeavor.
1. Michigan’s Attempt to Encourage Full Disclosure
One Michigan court has attempted to solve this problem. In
Cymbal v. Cymbal, the Michigan Court of Appeals held that a
business owner did not prove a change in circumstances because he
failed to produce his entire financial status.121 The business owner
argued for a reduction in child support because his income had
substantially dropped.122
The court held that the business owner did not prove a change in
circumstances.123 The court reasoned that the record only showed a
potential decrease in the business owner’s income.124 The court noted
that in some cases, a reduction in income would justify
modification.125 But the business owner in Cymbal had substantial
assets and deliberately hid a portion of those assets. 126 So the
business owner failed to meet his burden. Failing to consider a
defendant’s complete financial status is therefore clear error.127
This decision should encourage business owners to provide a
complete financial disclosure. If a business owner knows that a
complete disclosure of financial records is required to demonstrate a
change in circumstances, there will be a strong incentive to fully
disclose all of the documents. But the approach taken in Cymbal falls
short in one critical aspect—the ruling fails to address that a business
owner can hide assets, manipulate business records or documents,
and rearrange compensation.
120.
121.
122.
123.
124.
125.
126.
127.
Id.
204 N.W.2d 235, 236–37 (Mich. Ct. App. 1972).
Id. at 236.
Id. at 237.
Id. at 236.
Id.
Id.
Id.
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2. New York’s Attempt to Encourage Adequate Discovery
Recently, a string of New York cases applied a relatively new
rule to child-support cases involving business owners.128 In New
York, a court can impute income if it is determined that a parent’s
account of his or her finances is not credible or is suspect.129 In these
situations, New York family courts now impute income to a parent
based on past income and future potential earnings.130
In the leading case on the issue, Sena v. Sena, the court
established that “[a] Support Magistrate may properly impute income
in calculating a support obligation where he or she finds that a party’s
account of his or her finances is not credible or is suspect.”131 In
Sena, an independent contractor provided the court with inconsistent
evidence about his salary, business expenses, and federal income tax
returns.132 Under these circumstances, the family court did not err in
imputing income to the independent contractor.133
Since Sena, many New York courts have imputed income to
business owners whose financial disclosures were not credible.134 In
Rohme v. Burns, the court found that the father’s reported income
was not credible.135 The father owned an investment company that
held rights to securities software.136 In his testimony, the father stated
that he only made $26,000 the previous year, but the court found that
the father’s testimony was vague and contradictory.137 Thus, the
court imputed income of $100,000 to the father.138
128. See Sena v. Sena, 885 N.Y.S.2d 738, 739 (N.Y. App. Div. 2009) (imputing
income where a business owner’s financial disclosure was not credible or suspect);
see also Oshodi v. Olouwo, 941 N.Y.S.2d 858, 859 (N.Y. App. Div. 2012)
(imputing income where a taxi-cab driver’s finances were inconsistent with his
mortgage payments); Rohme v. Burns, 939 N.Y.S.2d 532, 533 (N.Y. App. Div.
2012) (imputing income where a business owner’s testimony was vague and
contradictory); Huddleston v. Rufrano, 951 N.Y.S.2d 179, 180–81 (N.Y. App. Div.
2012) (imputing income where finances were not credible).
129. Sena, 885 N.Y.S.2d at 739.
130. Huddleston, 951 N.Y.S.2d at 181.
131. 885 N.Y.S.2d at 739.
132. Id. at 740.
133. Id.
134. See supra note 128 and accompanying text.
135. See 939 N.Y.S.2d 532, 534 (N.Y. App. Div. 2012).
136. Id. at 533.
137. Id. at 534.
138. Id.
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Additionally, in Oshodi v. Olouwa, the court found that a taxi-cab
owner and operator’s financial disclosure was not credible because
he failed to explain how he could afford a $3,000 per month
mortgage on a salary of $300 per week and his wife’s disability
payments of $600 per month.139 Based on the standard established in
Sena, the court determined that the taxi-cab owner’s financial
disclosure was suspect, and it imputed income of $500 per week to
him.140
3. Applying Case Law to the Michigan Child Support Formula
Like the court in Cymbal,141 the Formula should explicitly
provide that if business owners fail to fully disclose their financial
status, they cannot prove a change in circumstances. Additionally, the
Michigan Child Support Formula should adopt a guideline similar to
the rule in Sena.142 Specifically, if a trial court has a reasonable belief
that a business owner’s disclosure is suspect or not credible, the trial
court can directly impute income to the business owner. In
determining the proper amount of income to impute, the trial court
should consider the business owner’s past income and the factors in §
2.01(G)(2) of the 2013 Formula.143
To improve the adequacy of child-support obligations, the
Formula must provide a strong incentive for business owners to fully
disclose accurate business documents and records during the
discovery process. The Cymbal and Sena approaches do just that.
Taken together, these approaches encourage a business owner to fully
disclose all business records, assets, and compensation. Moreover,
the changes create a penalty for inaccurate records. Business owners
will have a greater incentive to accurately disclose information if
they know that failure to do so will result in direct imputation of
income or dismissal of their motion to modify child support.
Ultimately, these changes will help protect the best interests of the
child by establishing child-support awards that more accurately
reflect the means of the parent.
139. 941 N.Y.S.2d 858, 859 (N.Y. App. Div. 2012).
140. Id.
141. See supra text accompanying notes 121–27.
142. See supra text accompanying notes 128–33.
143. See 2013 MICH. CHILD SUPPORT FORMULA MANUAL § 2.01(G)(2) (Mich.
State Court Admin. Office 2013) [hereinafter MCSF], available at
http://courts.mi.gov/Administration/SCAO/Resources/Documents/Publications/Ma
nuals/focb/2013MCS F.pdf; see supra II.C.2.
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By applying these proposals to the problem set forth in the
introduction of this Comment, it is clear that these results will help
improve the adequacy of awards in child-support modification cases.
Unless Gary Johnson can show the trial court a legitimate business
reason for a substantial reduction in income, his income over the past
five years will be averaged to determine his current income.
Therefore, the $150,000 that Gary claimed for his 2005 salary would
be used by the court to determine his current income. Not only does
this produce a more accurate income figure, but it forces Gary to wait
an additional two years if he plans to “cheat” the system.
Alternatively, if the trial court believes that Gary’s W-2, business
records, or any other depiction of his financial status is suspect or not
credible, the court can dismiss his case or directly impute income to
Gary. Additionally, Amanda Johnson is not faced with the nearly
impossible task of retaining attorneys and experts with a limited
income. This results in a more adequate determination of income for
child-support awards, which will more adequately provide for the
children.
IV. CONCLUSION
If enacted, these proposals would improve the adequacy and
consistency of child-support awards, while furthering the best
interests of the child. But these proposals only begin to address the
problems when determining income for business owners in childsupport-modification cases. Business owners and self-employed
individuals will always have control over their compensation, assets,
and business records. But this does not mean that judicial and
statutory remedies should remain dormant on the issue while
innocent children fall victim to their parents’ personal agendas.
Instead, the legal system must look for solutions to protect our
children and their future. As Frederick Douglass said, “It is easier to
build strong children than to repair broken men.”144
STEPHEN MADEJ*
144. Pete McCormack, Frederick Douglass on Power and Free Speech,
PETEMCCORMACK.COM, http://www.petemccormack.com/blog/?p=7689 (last
visited Sept. 15, 2013) (quoting Frederick Douglass).
* Stephen Madej is a student at Thomas M. Cooley Law School, where he
serves on the Thomas M. Cooley Law Review Board of Editors. Before entering
Thomas M. Cooley Law School, he received his bachelor’s degree from The
University of Michigan—Dearborn College of Business. The author would like to
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thank Professor Ashley Lowe, Professor Derek Howard, Erin Flynn, and Audrey
Marshall for their help with this Comment. The views expressed in this Comment
are solely the author’s and do not necessarily represent the views of any other
persons.