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STATE OF MINNESOTA IN COURT OF APPEALS A11-1225 In re the Marriage of: Kathy Lynn Haefele, petitioner, Appellant, vs. Douglas Alan Haefele, Respondent. Filed May 7, 2012 Reversed and remanded Ross, Judge Hennepin County District Court File No. 27-FA-000254592 Alan C. Eidsness, Melissa J. Nilsson, Henson & Efron, P.A., Minneapolis, Minnesota (for appellant) Kay Nord Hunt, Diane M. Odeen, Lommen, Abdo, Cole, King & Stageberg, P.A., Minneapolis, Minnesota, and Vija L. Brookshire, Messerli & Kramer, P.A., Minneapolis, Minnesota (for respondent)

Considered and decided by Ross, Presiding Judge; Hudson, Judge; and Halbrooks, Judge. SYLLABUS Distributions from a Subchapter S corporation to a shareholder, to be transferred by the shareholder to another business entity, are not the shareholder's income for child support purposes when the distributions and transfer occurred to further the corporation's legitimate business purposes and were not to be used by the shareholder. Similarly,

distributions made to a shareholder by a Subchapter S corporation solely to cover the shareholder's share of the tax liability on the corporation's retained earnings are business expenses that should not be included as gross income when calculating the shareholder's child support. OPINION ROSS, Judge Douglas Haefele moved the district court to modify child support he paid to his former spouse, Kathy Haefele, to align his obligation with the 2007 amendments to Minnesota's child-support law. When the district court calculated Kathy's gross income, it included certain distributions made to her as a shareholder by Dura-Supreme, a Subchapter S corporation. We hold that distributions made by an S corporation to a shareholder specifically for the shareholder to serve as a conduit to relay the funds to another business entity for the corporation's legitimate business purposes are not the shareholder's income for calculating child support. Similarly, distributions from an S corporation to a shareholder solely for the shareholder to pay her share of the corporation's tax liability on retained earnings are ordinary and necessary business expenses rather than the shareholder's income for calculating child support. We therefore reverse the district court's order, and we remand for a recalculation of child support. FACTS Douglas and Kathy Haefele were married in November 1990 and had three children before they divorced in December 2000. Under the terms of a marital termination agreement, Kathy was granted sole physical custody of the children, with 2

parenting time for Douglas. To determine child support under the arrangement, the parties assumed Douglas had a gross annual income of $108,000 plus bonuses. Kathy was not employed but received distributions from her interest in two nonmarital assets; she owned 20% of Dura-Supreme, Inc. and 33 1/3% of Howard Lake Properties, LLC. The termination agreement estimated Kathy's distributions in excess of the amount she would pay for the businesses' taxes to be $48,000 yearly. The district court incorporated these calculations from the termination agreement into its judgment and ordered Douglas to pay $1,794 in monthly child support, plus a portion of any bonus received. In September 2010 Douglas filed a motion to modify his child support obligation. The parties agreed that his request was warranted due to the 2007 amendments to Minnesota's child-support law with its new guidelines. Before 2007, child support was calculated based on a percentage of the obligor's net income. See Minn. Stat.

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Minnesota Law