Child support when a parent owns (or sold) a business

The "phantom income" problem

Pass-through entities (S-corporations, partnerships, most LLCs) do not pay income tax themselves — the income flows through to the owners, who are taxed on their share whether or not it is actually distributed. An owner can owe tax on a K-1 figure they never received in cash because the business retained the money. That taxable-but-undistributed amount is what practitioners call "phantom income."

• S-corporations — 26 U.S.C. § 1366 (and 26 CFR § 1.1366-1) tax a shareholder on a pro-rata share of corporate income "whether or not distributed."
• Partnerships / LLCs — 26 U.S.C. §§ 702 & 704 and the IRS Schedule K-1 (Form 1065) instructions make a partner "liable for tax on [their] share of the partnership income, whether or not distributed."

The child-support question is whether that phantom income is also the parent's income available for support. The federal tax code creates the phantom income; it does not decide the support question — that is state law.

Federal analogue (conceptual only): the constructive-receipt regulation 26 CFR § 1.451-2 says income is not "constructively received" where the taxpayer's control of it "is subject to substantial limitations or restrictions." That mirrors the child-support idea that income must be available (controllable) to count — but § 1.451-2 is a tax-timing rule and does not itself govern K-1 pass-through income, which is taxed regardless of control. It is an analogy to the principle, not controlling authority.

Wisconsin's two-part test — Weis & Winters

In Wisconsin, a business's undistributed (retained) earnings are counted as the paying parent's income only if both parts of a conjunctive test are met:

1. the payer can individually control or access the undistributed earnings; and
2. there is no valid business reason for the company to retain them.

If either part fails, the retained earnings are excluded from gross income under § 150.02(13)(a)9. — both conditions must be present (Winters ¶ 12). That is not the end of the analysis, and the point cuts the other way: subdivision 9. itself carves out income that "is an asset under s. DCF 150.03 (4)," and § 150.03(4) separately reaches "cash and corporate income in a corporation in which the parent has an ownership interest sufficient to individually exercise control and the cash or corporate income is not included as gross income under s. DCF 150.02 (13)." So where control exists but a valid business reason defeats the second limb, the same funds can still be reached as an underproductive asset.

Weis v. Weis, 215 Wis. 2d 135, 572 N.W.2d 123 (Ct. App. 1997), is the origin of the test. A partner who "does not have an ownership interest in the partnership sufficient for him to individually exercise control over the partnership's undistributed earnings" could not have those earnings counted — "it was error for the trial court to include [his] share of the undistributed earnings in his gross income." Caveat the other way: Weis held that employer- or partnership-paid health-insurance premiums are income. Its second condition traces to Lendman v. Lendman, 157 Wis. 2d 606 (Ct. App. 1990) (retained earnings as a "necessary adjunct of a well-managed business" versus a pretext).

Winters v. Winters, 2005 WI App 94, 281 Wis. 2d 798, 699 N.W.2d 229, restates and applies the test to an S-corporation minority (10%) shareholder.

A detail worth knowing, because it is the opposite of what people assume: Weis himself was a 50% partner, not a minority holder, and still lacked the "individual" control the first limb requires, because he could not act unilaterally. The doctrine is about unilateral power, not the size of the stake — a 50% owner is not automatically outside it.

A citation warning that matters if you are filing something. Under Wis. Stat. § 809.23(3), an unpublished Wisconsin Court of Appeals opinion generally may not be cited as authority at all; the narrow exception in § 809.23(3)(b) lets you cite an authored opinion issued on or after 1 July 2009 for its persuasive value only. A per curiam opinion, or any unpublished opinion predating that date, falls outside the exception entirely. The controlling authority on this page is Weis (published) and Winters, 2005 WI App 94 (published); anything else is labelled inline where it appears.

Codified in DCF 150 — and one subsection states the whole rule

The conjunctive test is not only case law. Wis. Admin. Code § DCF 150.03(2)(b) states it in a single subsection, and the conjunction is right there in the text:

"(b) Adding undistributed income that meets the criteria in s. DCF 150.02 (13) (a) 9. and that the court determines is not reasonably necessary for the growth of the business. The parent shall have the burden of proof to show that any undistributed income is reasonably necessary for the growth of the business."

That single "and" carries the whole two-part test — the § 150.02(13)(a)9. control criterion, plus the business-necessity finding. If you are putting this in front of a judge, one subsection stating the entire rule is stronger than two cited separately. The component provisions (ch. DCF 150, current as of Register November 2024 No. 827) are:

• Control / access limb — § 150.02(13)(a)9. Gross income includes "undistributed income of a corporation, including a closely-held corporation, or any partnership, including a limited or limited liability partnership, in which the parent has an ownership interest sufficient to individually exercise control or to access the earnings of the business, unless the income included is an asset under s. DCF 150.03 (4)." Subd. 9.a. measures that "undistributed income" by federal taxable income of the entity, plus depreciation claimed on its federal return, less a reasonable allowance for economic depreciation.
• Valid-business-reason limb — § 150.03(2)(b) & § 150.02(16). Retained income is added to a parent's income only to the extent the court finds it "not reasonably necessary for the growth of the business," and "the parent shall have the burden of proof to show that any undistributed income is reasonably necessary for the growth of the business."

Practical upshot, with its precondition stated: the burden in § 150.03(2)(b) attaches only to income that already "meets the criteria in s. DCF 150.02 (13) (a) 9." — that is, once the court finds the control-or-access criterion satisfied. Under Winters ¶ 12, if that first limb fails the court never reaches the second and the parent carries no burden at all. Once the gate is cleared, though, it is the parent who wants to keep retained earnings out who must prove the retention was reasonably necessary for the business.

Retained capital, spending, and depreciation are different economic events

The phrase “retained earnings” can obscure what happened to the money. Retained earnings are an equity account, not a bank account. A profitable company may retain earnings as cash, working capital, inventory, debt reserves, or assets needed to keep producing income. The support analysis should therefore trace the dollars instead of assuming that an accounting profit remained freely spendable by the parent.

This creates a real timing asymmetry. A parent who immediately consumes cash on accepted operating expenses may report less business income now. A parent who preserves the same cash in the enterprise or converts it into a productive asset can show taxable or support income before the cost is fully recovered. That can make investment look like available personal income while spending receives an immediate deduction. Whether that is a flaw in the rule or the rule working as intended is contested, and this page takes no position; what it is, for a litigant, is a proof problem — and not an automatic exemption: the parent must connect each retained dollar, reserve, asset, and depreciation schedule to a documented business need.

The tax-return shortcut — and why “AGI” is not the Wisconsin rule

Federal adjusted gross income (AGI), taxable income, cash flow, and Wisconsin income available for child support are not interchangeable. DCF 150.03(1) directs the court to combine gross income (or income modified for business expenses) with any income imputed from earning capacity or assets. DCF 150.03(2)(c) expressly allows the court's view of necessary business expenses to differ from tax law. A tax return is evidence and an obvious starting point; it is not conclusive.

That broad starting point can place the business-owning parent on an uphill evidentiary path, and the two propositions that matter come straight from the regulation rather than from any case: § DCF 150.03(2)(c) means a tax return or an accountant's opinion is not conclusive, and § DCF 150.03(2)(b) puts the burden of proving business necessity on the parent asserting it. On depreciation, the published authority is Brad Michael L. v. Lee D., 210 Wis. 2d 437, 458, 564 N.W.2d 354 (Ct. App. 1997): a court has discretion to add back depreciation it finds was not reasonable for the party to deduct. Kanehl (unpublished, persuasive only) applies that to commercial real estate the court viewed as an investment. Together these explain why a bare “the company needed it” or “the return shows a loss” argument often fails.

Winters still matters. It prevents a court from equating a minority shareholder's K-1 allocation, stock value, or ability to sell shares with individual access to company earnings. But it governs undistributed income. In Bjorgo, the court held that actually received S-corporation distributions—including amounts used to pay the shareholder's pass-through tax—were not excluded merely by invoking Winters. The opinion left room for a better-developed, fact-specific reason, but the tax-payment label alone was insufficient. Bjorgo is unpublished (persuasive value only). If you read Winters ¶ 21 and think the two decisions conflict, Bjorgo ¶ 19 answers it directly: the Winters court “did not consider the argument that distributed income that covered the payer's income tax liability should be included,” because that argument was undeveloped and therefore forfeited — so it was never decided.

This evidence does not guarantee an outcome. It forces the analysis away from a single tax-return line and toward control, availability, economic cost, and business necessity—the questions the rule actually asks.

How other states handle the same question

Wisconsin's approach lines up with leading sister-state authority (persuasive, not binding):

• Kansas — In re Marriage of Brand, 273 Kan. 346, 44 P.3d 321 (2002). "There can be no bright line rule" on undistributed S-corp earnings; a case-by-case analysis weighs past earnings history, ownership share, and the shareholder's ability to control distribution or retention. A controlling shareholder bears the burden of proving retention was necessary to preserve the business; a minority shareholder "has less ability to control" and, on the facts, the retained earnings were not counted.
• Pennsylvania — Fennell v. Fennell, 753 A.2d 866 (Pa. Super. 2000), the burden-of-proof source Brand relied on.
• Florida — McHugh v. McHugh, 702 So. 2d 639 (Fla. 4th DCA 1997). Retained S-corp K-1 income (~$247,000) of a 10% minority shareholder was excluded because the company retained it "for purposes of building the business" and the other parent "offered no proof that the husband … had any access to, or control over, these funds." Florida's access-and-control framework was later taken up by the state Supreme Court in Zold v. Zold, 911 So. 2d 1222 (Fla. 2005).

The former owner — sold or exited the business

A different fight arises when a parent sells or leaves a business and then reports a low W-2 salary. Here the question is not phantom income but whether the court should use actual income or earning capacity.

Wisconsin's "shirking" doctrine lets a court base support on what a parent could earn rather than what they report, when the income reduction is found to be voluntary and unreasonable. The leading statement is the Wisconsin Supreme Court's decision in Chen v. Warner, 2005 WI 55, 280 Wis. 2d 344, 695 N.W.2d 758 — shirking does not require bad faith, but the choice that reduced income must be both voluntary and unreasonable under the circumstances. It is a fact-intensive inquiry; reduced income after a genuine, reasonable business exit is not automatically "shirking."

So a former owner's order can turn on the gap between a sale-year flow-through figure and a later modest salary — the court decides which the support number rests on. This is the post-sale version of the same "what income counts" problem.

Other non-W-2 income to expect in the analysis

DCF 150 sweeps in more than wages. For a business-owner or self-employed parent, courts commonly look at:

• Self-employment / 1099 net earnings — gross receipts less ordinary and necessary business expenses.
• Depreciation add-backs — § 150.02(13)(a)9.a adds back federal depreciation and allows only a "reasonable allowance for economic depreciation," so accelerated/bonus depreciation and § 179 expensing that drive taxable income below cash flow can be partly added back.
• In-kind perks and "income modified for business expenses" (§ 150.02(16)) — a company car, paid personal expenses, and similar benefits can be counted.
• Distributions actually received, including cash distributed to cover the tax on pass-through income; Bjorgo (unpublished) holds that Winters does not automatically exclude those distributions.

None of this is a verdict on any real case — the figures and findings are intensely fact-specific.

Sources & further reading

Weis v. Weis, 215 Wis. 2d 135 (Ct. App. 1997)·Winters v. Winters, 2005 WI App 94·Bjorgo v. Bjorgo, No. 2014AP214 (Wis. Ct. App. Apr. 30, 2015) — unpublished; persuasive value only, Wis. Stat. § 809.23(3)(b)·Kanehl v. Pitel, No. 2012AP1164 (Wis. Ct. App. June 11, 2013) — unpublished; persuasive value only, Wis. Stat. § 809.23(3)(b)·In re Marriage of Brand, 273 Kan. 346 (2002)·McHugh v. McHugh, 702 So. 2d 639 (Fla. 4th DCA 1997)·Chen v. Warner, 2005 WI 55 (earning capacity / "shirking")·Wis. Stat. § 767.511 (with annotations)·Wis. Admin. Code ch. DCF 150 (PDF)·26 U.S.C. § 1366 (S-corp pass-through)·26 CFR § 1.451-2 (constructive receipt)·IRS Schedule K-1 (Form 1065) instructions

Verification note: the Weis/Winters two-part test, the DCF 150 sections, the later Bjorgo/Kanehl limits, and the Brand/McHugh holdings were checked against primary sources (CourtListener and Wisconsin Court System opinions and the Wisconsin Legislature statute/administrative-code text); the federal pass-through mechanism was checked against the U.S. Code, Treasury regulations, and IRS instructions. Grohmann v. Grohmann is part of the Wisconsin predecessor line but its holding was not independently re-verified for this summary. Wis. Admin. Code ch. DCF 150 is current as of Register November 2024 No. 827 — confirm it has not been re-promulgated, and run a citator (Shepard's/KeyCite) check, before relying on any citation in a filing.

Informational summary, not legal advice. For the mechanics behind these doctrines, see Did You Know?, the multi-state child-support estimator, and the FYI hub. Consult a Wisconsin family-law attorney before relying on any of this.