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"S" Corporation Earnings and How They Effect Massachusetts Child Support Orders

Written by: Calvin Heinle

Reputation Level 6

Posted over 2 years ago. Applies to Massachusetts, 1 helpful vote, 0 comments

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The new case of JS v. CC - Element One

The court referred to the following 3 elements as "some relevant factors that the judge should weigh in determining what portion of undistributed corporate earnings may be available to a shareholder for a child support obligation," but stated that it would not "undertak[e] to provide an exhaustive list." Query what other elements the court may someday add to the following: 1. A shareholder's level of control over corporate distributions - as measured by the shareholder's ownership interest - is a factor of substantial importance.

Element 2

2. The judge should evaluate the legitimate business interests justifying retained corporate earnings. Although the business judgment rule cannot shield the shareholder from the factual inquiry we describe here, even majority shareholders in a close corporation may be constrained by their duty of utmost good faith and loyalty to the minority shareholders.

Element 3

3. The judge should weigh affirmative evidence of an attempt to shield income by means of retained earnings. In that regard, the corporation's history of retained earnings and distributions may be relevant.

Who Has the Burden?

Finally, the court noted that the shareholder should bear the burden of presenting evidence that she does not have access to retained income ... regardless of whether their percentage ownership in the corporation. The court indicated that this is the preferred choice for burden placement as the shareholder is "likely to have greater access to relevant information about the corporation than a party who is not connected to it" regardless of percentage ownership interest. In the current economy, with businesses both large and small changing the way they do business and struggling to get by, this decision will likely have a large impact on business owners in the Probate and Family Court.