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Laura W. Morgan
Family Law Consulting

In September 2002, we considered how “retained earnings” of corporations and partnerships were considered “income” for purposes of child support in certain situations. An analogous situation is presented with “capital contributions.”

A “capital contribution” occurs when a shareholder or partner contributes capital equity to the business assets. A capital contribution may be deductible from income when it is a condition of employment, as an attorney’s equity contribution to the partnership. In re Marriage of Panama, 2002 WL 1354407 (Cal. Ct. App. June 20, 2002) (unpublished, noncitable).

In most instances, however, a capital contribution is not a requirement of employment, and is merely a device to increase ownership equity or the net worth of the business. Thus, a capital contribution cannot be considered a deduction from income as a business expense. “[A] parent may not voluntarily divert income to service a debt that results in a deprivation of funds for child support.” In re Marriage of Panama, 2002 WL 1354407, * 9.

Other cases have reached the same result. A capital contribution cannot be considered a legitimate business expense that results in a reduction in income available for support, unless the capital contribution is either a mandatory condition of employment, or is necessary to maintain the business. Sullivan v. Sullivan, 733 N.E.2d 631 (Ohio Ct. App. 1999); Watson-Wojewski v. Watson, 617 So. 2d 666 (S.D. 2000); In re Marriage of Mull, 812 P.2d 125 (Wash. App. 1991).

The same analysis also applies to the payment of business loans that increase value of the company. Generally, the principal portion of the loan payment is not a deduction from income, because it is diverting income into an increase in net worth. See L. Morgan, Child Support Guidelines: Interpretation and Application sec. 2.03[20][ii][B] (Supp. 2003).

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