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Sunday, September 18, 2005

Subchapter S Income in the Divorce Scenario (Florida)

The Florida Supreme Court recently ruled that “pass-through” income of an S corporation that is not distributed to shareholders does NOT constitutes income within the meaning of chapter 61, Florida Statutes (2004), for purposes of calculating alimony, child support, and attorney's fees.

However, where the undistributed “pass-through” income has been retained for noncorporate purposes, such as to shield income from reach of the other spouse during dissolution, this improper motive for its retention makes it available “income.” When the issue of whether undistributed “pass-through” income was retained for corporate purposes is contested, the shareholder-spouse is given the burden of proving that income was properly retained for corporate purposes rather than impermissibly retained to avoid alimony, child support, or attorney's fees obligations by reducing the shareholder-spouse's amount of available income. In such an inquiry, the factors to be considered include the extent to which the shareholder-spouse has access to or control over the “pass-through” income retained by the corporation, limitations set forth in section 607.06401(3) governing corporate distributions to shareholders, and the purposes for which “pass-through” income has been retained. In this inquiry, the shareholder-spouse's ownership interest should be considered, but is not dispositive, even where the spouse is sole or majority shareholder in corporation and has ability to control the retention and distribution of the corporation's income.

Zold v. Zold, 30 Fla. L. Weekly S626a (Florida Supreme Court 2005)
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