Court of Appeals of Illinois, First District, Fifth Division
In re MARRIAGE OF DEEPALAKSHMI MOORTHY, Petitioner-Appellant, and CHANNA MALLIK ARJUNA, Respondent-Appellee
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Appeal from the Circuit Court of Cook County. No. 02D13868. The Honorable Naomi H. Schuster, Judge, presiding.
For Appellant: August, Staas, Chicago.
For Appellee: Annette Fernholz, Annette Fernholz, P.C.; Nicole McKinnon, of counsel, Badesch Abramovitch, Chicago.
PRESIDING JUSTICE PALMER delivered the judgment of the court, with opinion. Justices Gordon and Reyes concurred in the judgment and opinion.
[¶1] In June 2003, the trial court entered a judgment dissolving the marriage of petitioner, Deepalakshmi Moorthy, and respondent, Channa Mallik Arjuna. In May 2011, Moorthy filed a petition to modify the amount of child support Arjuna paid for their daughter. Following an evidentiary hearing, the trial court entered an order on May 29, 2013, in which it increased the amount of child support based on Arjuna's current yearly salary, but the trial court held that Arjuna's proportionate share of the retained earnings from his majority-owned subchapter S corporation should not be imputed to him for purposes of calculating his child support obligation. Moorthy appeals that order, contending that the proportionate share of the retained corporate earnings should be included in Arjuna's net income in calculating Arjuna's child support obligation. We affirm.
[¶2] I. BACKGROUND
[¶3] The parties married in December 2000 and, as noted, had one child, Seema Lakshmi Arjuna, born in March 2002. Moorthy filed a petition for dissolution of marriage on August 27, 2002. The parties do not dispute that the trial court entered a default judgment for dissolution of marriage on June 5, 2003. It awarded sole custody of the minor to Moorthy and ordered Arjuna to pay $480 in monthly child support based on 20% of his average net monthly income of $2,401 as an employee of Mahantech Corp. (Mahantech), a company located in West Virginia. The parties were ordered to share equally any medical expenses not covered by Moorthy's insurance. At the time, Arjuna lived in West Virginia and he continues to reside there, although he subsequently remarried and has one child with his current wife, and a stepchild. Moorthy and Seema have lived in metropolitan Chicago since the filing of the petition for dissolution.
[¶4] On May 26, 2011, Moorthy filed a petition to increase child support pursuant to section 510 of the Illinois Marriage and Dissolution of Marriage Act (the Act) (750 ILCS 5/510 (West 2010)) asserting that a substantial change in circumstances occurred. In the petition, Moorthy argued that, as eight years had passed since the judgment of dissolution was entered, the minor child, who was now nine years old, had increased needs, and Arjuna's income had also increased. Moorthy requested that the court order Arjuna to pay increased child support, to pay half of the medical insurance for the minor, and to
pay a reasonable portion of Moorthy's daycare expenses. Arjuna filed a response on July 8, 2011, and the parties engaged in discovery. An evidentiary hearing was conducted on April 5, 2012, and May 22, 2012, at which Moorthy and Arjuna testified.
[¶5] A. Arjuna's Testimony
[¶6] Arjuna was called to testify by Moorthy as an adverse witness. Arjuna testified that he lives in Charleston, West Virginia, with his current wife, their son, and a stepdaughter. In 2003, when the dissolution judgment was entered, Arjuna earned a salary of approximately $45,000 as an employee of Mahantech, which is a software consulting and networking services business. Arjuna testified that Mahantech was incorporated in Delaware in 1997 or 1998, and a distant relative, Gorli Hjrash, purchased the company from the original owners. Arjuna explained that the company was losing money and was going to be shut down, but Arjuna decided to buy it so that he could take over and run the corporation. He obtained 38% ownership in 2006. He did not pay anything for the ownership share because the company " was completely negative" and about to be shut down, and because he had been with Mahantech since 1999. In 2007, he acquired 91% of Mahantech, with the remaining 9% owned by Hjrash. Arjuna paid $500 for the 91%. He also testified that loans were taken out for the business, but he did not know whether he personally guaranteed them. He testified that he believed it was less than $200,000, but this had since been paid off.
[¶7] Arjuna explained that because Mahantech is a subchapter S corporation, it does not pay federal corporate taxes on its income. Instead, he receives a schedule K-1 form from the company as one of the owners. His federal tax return for 2007 showed K-1 income of $108,433, but he testified that this amount was the K-1 income from Mahantech. He explained that this amount was not money that he actually took home. He testified that the money " stays in the company" and that " [t]he company paid the tax" under his name. Arjuna testified that an accountant handles Mahantech's taxes. He indicated that his accountant calculates the taxes owed from Mahantech's income and the taxes are paid by Mahantech but under Arjuna's name since the subchapter S corporation does not pay taxes. He testified that his accountant logs on to Mahantech's online account with the Internal Revenue Service (IRS) and inputs the amount of money owed, and the money is paid out of Mahantech's bank account. Arjuna conceded that the taxes owed for Mahantech's income were his liability and not the corporation's liability. He testified that the " S corporation cannot pay the taxes. It has to be paid by the owner of the corporation." Arjuna testified that he includes the corporation's K-1 income on his personal tax return and the amount shown as total taxes owed on his tax return included the tax on Mahantech's income. He testified that on his W-2 form, he received $50,000 in gross income and he paid taxes on that as well. His individual tax return also showed that his wife had income of $31,759 as a database administrator and income of $35,000 as a contractor for other companies. She was previously employed by Mahantech, but she left when Arjuna bought the company because he did not want family to be involved. However, she occasionally did some contract work for the company.
[¶8] Similarly, for 2008, Arjuna testified that his tax return showed that he earned a salary of $50,000 with K-1 income of $91,071. Arjuna testified that the 2008 corporate tax return for Mahantech showed business income of $102,000.
[¶9] In 2009, Arjuna's tax return showed that he again received a salary of $50,000. He testified that the 2009 corporate tax return for Mahantech showed ordinary business income of $129,634. Thus, $117,967 was attributed to Arjuna for his 91% share. Arjuna testified that on his 2009 schedule K-1, it showed a nontaxable distribution of $211,077. Arjuna testified that under state tax law in West Virginia, a company pays a 2% tax on any money in its bank account as of the last business day of the year. Therefore, his accountant advised Arjuna to take the money out of Mahantech's account on the last business day of the year, and then put the money back into the account on the first business day of the next year in order to avoid paying this tax. Arjuna explained that he obtained a cashier's check for the amount, he did not deposit it in his own account or anywhere else, and he redeposited the same cashier's check into the corporation's account on the first business day of the next year. Arjuna therefore held the cashier's check in his possession for approximately 48 hours.
[¶10] With respect to 2010, Arjuna testified that his K-1 income from Mahantech was $117,281. The 2010 tax return for Mahantech showed ordinary business income of $129,119. As in 2009, the 2010 return also showed a distribution of $116,000, and Arjuna testified that he repeated the same action--taking out the amount in the Mahantech account at the end of the year in a cashier's check and then redepositing the same check back into the corporate account in the new year.
[¶11] Arjuna testified that his W-2 form from 2011 showed that he received a salary of $50,000. He testified that he was unsure whether he would receive the same salary in 2012 because business was down, and he would pay his employees before himself. A paystub from March 31, 2012, showed he earned a monthly income of $4,166.67. He testified that in 2011, Mahantech showed ordinary business income of only $25,429, which was significantly less than in prior years. The schedule K-1 form for 2011 showed income attributed to him in the amount of $21,105. Arjuna also testified that he went through the same procedure as in prior years in obtaining a cashier's check for the amount in Mahantech's bank account on the last business day of the year and redepositing the amount back into the account in the new year. He testified that he believed that Mahantech's bank account had a balance of approximately $220,000 on the last day of 2011.
[¶12] Arjuna agreed that in the years 2007, 2008, 2009, and 2010, the corporation's earnings were greater than its expenses. Arjuna testified that he has never taken any money out of Mahantech other than for his salary and to pay taxes, except that in 2010, he took approximately $7,000 out to buy a plane ticket to visit his family in India because of a family emergency and he did not otherwise have the money to purchase the flight. He testified that the corporation currently had no debt, but the company was in the negative when he became owner and he was trying to make sure that all the corporation's obligations were met.
[¶13] He testified that his salary was decided by the owners when he bought the company. When asked if he could increase his salary to $60,000, he testified that he could not because Mahantech " needs the working capital. If I had to take the money from the payroll, I cannot. *** It is a small company. Every penny counts in the company." He testified that with the $50,000 salary he receives, he was " living a very simple, I could say loyal [ sic ] middle class level of living because I am devoting myself towards this to give a
better life for my kids." He testified that he does " have a lot of issues. I want this or that, but I have to sacrifice to make something good for the family and the future."
[¶14] Arjuna testified that Mahantech needed sufficient funds to support payroll and to pay employee taxes, unemployment taxes, health benefits, business liability insurance, worker's compensation insurance, business auto insurance, business theft insurance, and accounting and tax expenses. The various insurance policies that Mahantech required, such as worker's compensation insurance and business auto insurance, cost approximately $15,000 every year.
[¶15] Arjuna testified that he had five salaried employees who work as programmers on-site with clients to help with computer network problems. He testified that Mahantech had approximately $50,000 to $60,000 in employee salary requirements per month. He provided the following examples of current employee contracts to which Mahantech was bound: (1) a contract for 2012 at a rate of $12,800 per month; (2) a contract with a 40-hour-per-week requirement and a salary of $70,000; (3) a contract for $5,000 per month; (4) a contract to pay an employee $12,809.55 per month; (5) a contract for $4,000 per month; (6) a contract for $61 per hour, plus benefits; (7) a contract to pay an hourly rate of $75 per hour; and (8) a contract to pay $5,000 per month, plus benefits. Arjuna testified that Mahantech had to pay the salaries for employees under these contracts regardless of whether it had a project for them to work on. Arjuna did not have a contract for himself as an employee; he was the only " at-will" employee.
[¶16] With regard to Mahantech's expenses and deductions as reflected on the corporation's tax returns, Arjuna testified that, in 2008, the gross sales for Mahantech totaled $1,512,738. The company paid salaries and wages in the amount of $551,621. There was a deduction for $517,829, which represented professional fees, accounting fees, legal fees, work visa expenses, and consulting expenses. Mahantech's employees were " H1B" employees who were in the United States on work visas, and obtaining and maintaining these visas comprised a significant expense to Mahantech. The legal expenses were incurred for managing the work visas and for applying to a federal minority certification program. Mahantech also had to pay filing fees for the work visas, which were $1,000 to $3,000 each time something had to be filed, such as when an employee changed client locations. Mahantech also filed applications to sponsor all of its employees, except one, to obtain a three-year extension on their work visas, which last for six years, and to obtain green card applications, which were approved. He testified that if Mahantech is not able to find a project within a reasonable time period, it was the company's responsibility to send the employee and his family back to his home country and pay travel and relocation expenses. He denied that he could lay off his work visa employees if there was no work for them. He testified, " I cannot lay them off. One thing, if I lay them off, I have to--the company has to pay the money for that employee and that employee's spouse and everybody to send back to their home country." Also, even if Mahantech was one day late in paying payroll, the employees could report Arjuna to the immigration service as he would be violating federal regulations.
[¶17] In addition, Arjuna testified that Mahantech paid a large amount of money for consulting or contract work to another company for that company's employees to work on Mahantech's projects with Mahantech's
clients. Arjuna testified that he currently was not using any contract or consultant labor. He testified that his clients prefer his permanent employees instead of contract workers because they were more likely to stay for the duration of a project.
[¶18] He testified that Mahantech currently had five contracts with other companies. He testified that the clients typically pay Mahantech monthly; he sends an invoice at the end of the month, and once billing rates are agreed on, the client takes 15 to 30 days to pay. He testified that " [m]ost of the time I get paid on time," but sometimes a client delays payment, and in that case, Mahantech still had to cover its payroll and other expenses while waiting to receive the client's payment. Arjuna testified that two contracts with customers would end in 2012 and that " this last year was getting worse" and Mahantech " may end up negative" or with only a few thousand dollars.
[¶19] Arjuna explained that Mahantech's gross receipts decreased in 2011 because a few contracts with one local company, Technology Solutions, ended in 2010. He testified that Technology Solutions comprised 60% or more of Mahantech's business in 2010, but less than 5% of its business in 2011, and none of its business in 2012. Technology Solutions, in turn, did business with a worker's compensation insurer, ...