Case Law Development: Pass-through income in an S corporation is not ordinarily income in divorce action

How should an individual’s interest in a small business corporation be characterized in a divorce action if the corporation elects to operate as an S corporation, so that all the corporation's income "passes-through" to the individual owners for tax purposes?  The question has produced divergent answers among the Florida court of appeals districts. Some districts had adopted a bright line rule that automatically treats undistributed business income as income attributable to a spouse.  In this case, the 4th District Court of Appeals chooses the alternative approach that does not characterize undistributed “pass-through” income as income in divorce unless there is proof that the undistributed income was retained for non-corporate purposes.  In a clear and carefully written opinion, the court describes the nature of S corporation income, interprets Florida statutes defining income for alimony and child support purposes in light of other Florida states regarding the right of corporations to distribute income to shareholders, and reflects on the effect of a bright-line rule rather than a individualized determination. 

Zold v. Zold, 2005 Fla. App. LEXIS 14467 (4th Dist. September 15, 2005)
Available on the web at www.5dca.org/Opinions/Opin2004/062104/5D03-148.op.pdf (last visited September 17, 2005 bgf)