In The Matter of Gregory Landgraf and Natasha Landgraf

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minutes for rebuttal, is that right? Yes, your Honor. Please Proceed. Thank you, your Honor. May it please the court. My name is Andrew Pila. I am an attorney with Shaheen and Gordon. I represent the wife Natasha Landgraf. There are two questions that this court must answer on this interlocutory appeal. And they are whether cash payments received by a subchapter s shareholder that are intended to be used to pay for that shareholder's individual tax liability and to pay the premium on a life insurance policy that is part of a cross purchase agreement, is that income for child support purposes? The answer to both questions we submit is yes, briefly. New England Industries is a metal fabrication facility. It is a sub-chapter S corporation. There are two brothers that each own 50% of the, uh, shares. Gregory the response, uh, petitioner in this case and his brother Michael, the family owned business, there is something called a cross purchase agreement. And as I understand it, the cross purchase agreement basically requires or allows one brother to buy the other brother's interest out. If that brother were to pass away. The cross purchase agreement is funded or secured by a life insurance policy each brother has on the other brother's life. And the reason why I wanna make that distinction is that in the notice of, uh, uh, interlocutory appeal, it is called a key man policy. It is not a key man policy, a key man policy. The corporation is the beneficiary on a life insurance policy that protects or insures the life of a critical employee and compensates the company. If that critical employee were to die, in this case, the beneficiary of the, of the life insurance policy or the individual shareholders. But here, isn't there some sort of agreement, uh, between the shareholders and the corporation that they will buy such a policy? There is a cross purchase agreement that they each is going to be bound by. Now the question is whether that binds to corporation or whether the corporation can enforce that that has been not argued or pled. But, and I would also submit Judge, But it's not just an agreement between the brothers. It's an agreement between each of the brothers and the corporation that they'll maintain this policy. Is that right? That I do not know, your Honor, but I would suggest it does not matter because here's why. And I'd like to quote from the respondent's own brief. 'cause I think that answers the questions. Are these payments income for child support purposes? And the answer and the three elements that the respondent laid out in his opening brief is are they cash payments? Can the employee compel the receipt of those payments? And are these payments available to the employee? The answer to each question, yes, because there's no doubt these are cash payments. These are checks written by the corporation directly to Gregory Landgraf. Can the employee compel their payment? The answer to that question is yes. Gregory Landgraf is a 50% shareholder in the corporation. He can vote to disperse monies out of that corporation. And even if The corporation isn't making a profit, If the corporation has a profit, the brothers can vote to disperse or retain those profits. But if the brothers vote to disperse the profits, which they have done, 'cause remember these checks are now coming outta that corporation to Gregory Landgraf. It's an enforceable, right? Gregory could sue Not if there's no profit, he doesn't have an enforceable right, if they Not making money, if it's not making money. But in this case it is making money. And the question of whether there is profit or loss, again, all we know is that these checks are flowing out of the corporation cash, money and landing in Greg Land Grant. Why aren't they retained earnings and how we, how do we make that decision? You don't have to make that distinction, judge, because if you look at the Albert Case, this court indicated that even a retained earning of a subchapter s corporation could be considered income for child support purposes. And if you look at the subsequent decision of in Ray MAs, that was a situation where the corporation, uh, received a very large capital gain and it was a subchapter s shareholders that that should not be income to me because as part of the corporation, this court said, yes, it is income to you. So whether it's a re a retained earning or a dispersed earning, I would argue under Albert and Mays, it makes no difference. The well, but isn't it a more fact intensive inquiry for a retained earning situation? It could be a fact intensive earning, uh, inquiry judge. But here's the thing. Gregory Landgraf, if you look at the trial court, some of his interlocutory orders noted that Mr. Landgraf never broke out the distinction between whether this was taxes on retained earnings or taxes on dispersed earnings. But so is this appeal even though it's interlocutory, somewhat premature? No, your Honor, because if this court has indicated that retained earnings themselves, remember in MAs, the corporation never dispersed the actual cash out to the shareholder. If that, if, and Albert this court specifically, um, prognosticate that retained earnings could be considered income for child support. So if those earnings are income, Well, they could be, but they aren't necessarily. It's a very fact intensive inquiry whether particular retained earnings are in fact income for these purposes. But here's the, the point I'm trying to make judge is that this, whether these are retained earnings or, or should be considered non-income or income, the fact of the matter is that we are looking at a cash payment. Okay? Not a phantom income that, that you saw in Albert. You were, were looking at cash that got into the hands of Gregory Landgraft. So is the issue of retained earnings just a red herring here? I would say it's a red herring because again, the corporation brothers voted to disperse these sums of money and the corporation, um, once the brother said, yes, we release the funds corporation has no obligation to do it. Gregory could enforce that right? On a breach of fiduciary duty. If his brother suddenly said, you know what? I'm not gonna release the money. I'm not gonna cooperate with you. What if he didn't vote to do it? If he didn't vote, then this, then the money doesn't get dispersed. We don't have that problem. But the money got dispersed and it's available to him because it hit his pocket. And I wanna distinguish that from the case of Giacomini, which I cite in my brief, where the corporation itself wrote checks to the IRS to pay for the shareholder's own tax liability. In that case, this court said that is not income to the shareholder because the money was never received. Same with Albert. Passive income. Phantom income, money never received. If, if Mr. Uh, Landgraf here were to take the monies received, uh, both for the paying his tax liability and also for the key man insurance and spent them on, uh, Porsche's instead, does the corporation have any rights against him? I Would say no. Judge, here's why. And this is why I don't believe it. It would be a business expense that the corporation who would be looking to get back in the, remember sub-chapter S corporation, the tax liability falls on the shareholders, not the corporation. If Mr. Landgraf says, I'm gonna spend the money on on cars and, and whatever else and not pay my personal tax liability, the IRS will be knocking on his door, not the corporation. Similarly, if Mr. Landgraf says, you know what, I'm not gonna buy that, that life insurance policy. So when my brother dies, I can't purchase his shares and his shares will go out presumably to be purchased by a third party. That does not impact the corporation. The corporation continues. The corporation is facing no liability. That is on Greg's shoulders. And if we follow that train of thought, judge, aren't we now running into the situation which was discussed in the D case at 1 72 New Hampshire, where the individual obligor was saying, wait a minute, I have tax liabilities. I have to pay my rent. I have to pay my car insurance. If I don't do these things, I'm homeless or I could be violating the law, therefore that income should be, um, excluded or those expenses should be considered. This court said no, it agreed with the trial court. Those are expenses that everybody incurs. And moreover, they fall within the umbrella of gross income. Now I want to direct the court's attention to another case, which I think helps my arguments in Ray Sullivan Sullivan, the employee got a loan from his corporation, his employer, he was paying that loan back. The corporation chose to forgive part of that loan and indicated on his paycheck bonus income $23,000. Which ironically, that's how a lot of these payments were shown on Gregory Land grafts pay stub bonus income. The courts, this court said that is income. The corporation is retiring and paying directly a personal debt that you have. It's not a business expense, it is a personal expense and therefore should be considered income to you. I submit to this court that there's not a lot of difference a between the corporation paying your personal loan that you've made, taken from the company to paying your own personal taxes. And the last thing I want to point out is, is we have to look at RSA, you know, 4 58 C six C two six, where the trial court struggled with whether or not we should be looking at this as part of the net income or gross income. I would submit, judge that we avoid that argument because simply the statute when read as a whole says that net income, which is what you calculate, irregular child support payments, the employee or the obligor can deduct the, the FICA unemployment social security taxes that the employer withholds, NEI withheld nothing NEI gave Gregory Landgraf says, here's a check which we think will cover your tax liability, But if the company were under the prior arrangement, these two owners would be getting payments throughout the year and there would be withholding to pay the tax. Correct. And so the child support guidelines focus on gross income and factor in that, um, deduction for taxes, if you will. Right. So how do we take a gross number here and plug it into the child support guidelines without making allowance for the tax implication? Because we have to read the statute as a whole. And the legislature clearly said, which the employer withholds. And moreover the legislature was very clear that the only taxes you can claim, um, as a deduction off that gross income mark is withholdings for one person or one, uh, I will stand by the language of it, right? But if the owner got half a million bucks it salary and then, um, and taxes were withheld. Mm-Hmm. And then there's this pass through mm-Hmm. Income from the company. Mm-hmm. Additional And There are taxes, additional taxes on that. Correct. And now he's getting paid to pay the taxes on that. Aren't we missing a tax deduction Again, judge, if we have to. We're we're constrained by the statute and as, um, the, we heard in the last oral argument, if the legislature feels, uh, that the statute is needs to be amended, we can only do what the legislature has told us. In this case, it's what the employer withholds for a specific limitation. I see my red lights up. I will be happy to talk

to you again for two more minutes later. Thank you judges. Thank you Very much Ms. Sweeney. Good morning pleases the court. I'm Mary Beth Sweeney from Mountain Attorney and I'm here arguing before you, it'd be my pleasure again, on behalf of Gregory Landgraf, I think a little bit of historical information is important when you assess an analysis of a case such as this. Um, NEI was originally a C corp, as we all know, which has very different tax treatment than it presently does in its incarnation. As a Subchapter S corporation, when this company was a C corp, my client received a base salary and he received a bonus. He is a 50 50 non-controlling partner in this entity. It has been in his family for generations. I think it's about 75 years at this point in time. In 2015, the accountants who have been longstanding working with this particular industry in July of 2015 suggested a conversion for tax purposes to a subchapter S corporation, which the company did that saved some tax benefits for the parties and it created additional revenue that was available not just to my client but also to Ms. Land grab. When the Tax Cuts and Jobs Act came, it was a further tax restructuring tax savings measure that the CPAs recommended to this company. And that changed the structure of base and bonus to base and dividends prior to that change. Any payments that were calculated on the gross corporate revenue calculated by the accountants were distributed out to the two shareholders on a irregular basis for the sole and only purpose of making a tax payment. What the evidence reflected at trial and continues to reflect during the proceedings that we've been engaging in the last year and a half is that any i's corporate accountants continue to make calculations as revenue comes in as to what the overall tax burden would be of the company and distributes that amount out now directly to the shareholders as opposed to the taxing authority. That is the sole distinction. There is no different Tax on what Tax corporate gross corporate earnings, corporate profit earnings Yes. Retained or distributed. So there are retained earnings for this company that was part of the lower court's decision that remained unchanged in this analysis. And as I'm sure you all read in the underlying record, there were two competing business valuation experts and the subject of retained earnings, um, really centered around what is an appropriate amount of money for a company like any i with many employees in the town Lebanon on to have in its coffers in order to meet expectations if there were economic downturns. 'cause there have been, it's the automotive industry that's their predominant, um, organization that they are supplying their metal fabrication parts to. And the um, expert Mr. Maloney who was hired by Greg Landgraf, his methodology was accepted. Now, when we look in this court at hampers, I mean it's very specific that New Hampshire has already adopted a fact specific approach when analyzing what is an appropriate amount of retained earnings for A company. So this tax theoretically we don't know applied to retained earnings, which may be completely appropriate, but also to some distributed earnings. Yes. And we don't know that yet. So under the Kansas approach, it would be fact intensive and you'd have to figure out how much of the tax went to retained earnings, which arguably are not available to the business owner as income. And then we'd have to figure out what part of this tax is actually paying in lieu of withholding the owner's own tax obligation. Yes. And that might be deemed income. And in the current incarnation of proceedings under the remand, that is part of the, um, part of the analysis that we are all performing. We both have experts. I have the same expert, the other side has the same expert, and those are calculations that will need to be done. I will tell you that we um, had offered if there were any calculation at the end of the year that there could always be a true up that would, would analyze that. But when we look for example at JC versus cc, which I've cited to in my brief, it does talk about things such as, you know, does my client have a controlling managerial interest in the company? No, he doesn't. My client and his brother do not get along. That was well settled for the last 10 years. My client is the factory guy. He is on the floor. He is building machinery and equipment. He is buying machinery and equipment to manufacture the metal components that the company sells. But his brother is the financial person of the company. He's the one who makes all financial decisions. My client is a rubber stamper. Well, let me ask on the retained earnings issue, I mean we have two specific questions in front of us and the word retained earnings doesn't show up anywhere in either of those questions. We don't have to address that, do we? I don't think that you do. I think that you look at, you know, the analysis is really how has the corporation run and we have a very substantial record that it has always been run with my client not having the financial responsibilities of the company. Well, it isn't a critical inquiry whether or not the expenses, uh, incurred are for the operation and are necessary for the production of income. That's a test we've laid out in here. How, how can you say that the purchase of Keyman life insurance is necessary for the production of income of the corporation at this time? We're not. We, we, one thing we agree on it. This is not keyman life insurance. This is Successful, well, whatever you call it, whatever you call it. How, how is it a, an expense of for the production of income at this time? Because it would be a violation of the stockholder's agreement, which you have in the record for my client or his brother to fail to pay the life insurance premium that would cause a breach in the company. And 'cause these brothers do not get along. It would result in a lawsuit and there would be extensive litigation in other courts to address that Issue. But these policies ultimately benefit the two brothers, not the corporation. Yes and no. So if there wasn't life insurance and say Michael Landgraf passed away, my client would have to replace him with somebody who has, um, that level of, um, financial knowledge in order to continue to run the company. The goal is to keep the company afloat because Ms. Landgraf would not be the recipient of her child support payments if the company faltered. So you have to have some type of mechanism in a company like this to both keep the company in family hands, which is a generational issue that has gone on since my client's grandfather founded this company many years ago, while also preserving an ability to continue an income stream. Ms Landgraf had the benefit of $190,800 in payments to her in 2022 because in large part of the tax saving strategy that the CPAs, But once she's paid out in a property settlement, then her reliance on the company goes away. It depends. That's part of the argument that we're having in terms of, of the property settlement. I mean it's not really for this court today. It may be for another day if there's a property settlement that my client can't afford to pay 'cause he would have to borrow money from the company and his brother says no 'cause they have this 50 50 issue, then the company would get sold and then my client would have no income stream and neither would his brother. There aren't sufficient assets available other than this company to meet that type of analysis. But I, I do fear, I will tell you that I will be back here again when a decision comes out. 'cause if there's a, uh, decision, for example, to give to the wife as pro property settlement, um, shares in the company, then she's gonna vote against my client and effectively the company will be sold. And she's really cut off her own Hands. What is your po what is your position as to whether Mr. Landgraf has a legally enforceable agreement to get these funds from the company? He does. I mean he has, he has a legal obligation. He has obligations as a shareholder of, uh, of a company. We already know what the risks are. If there's a lawsuit he may even be, be subject to, um, there may even be a criminal issue involved. If he fails to pay the taxes that are due, this is his only source of income. Well, the IRS will go after him, not the company. Well, I think it could go after the company as well. 'cause there are retained earnings in the company. So, so the company gives him $200,000 to pay his taxes and he takes it and buys two Maseratis. Uh, why, what prohibits him from doing that? Can't he take the money and do whatever he wants with it, Not without breaching his fiduciary obligations to the company? In in the case we have in our Record what's, what, what the fiduciary, what's the fiduciary obligation he has to the company to pay his own income taxes? There Are, there are corporate instruments. So if he failed to pay his taxes, for example, which he has never done, there is no reflection in the record that, that there have ever been machinations of that sort. Then the IRS would go in and they would levy first all of his wages. They would levy any bank accounts that he has. Um, they could then also go after, retain earnings in the company, which jeopardizes the overall ongoing operation of the company and also jeopardizes a whole host of individuals who've been working for NEI for years in, in Lebanon. So I think it has far reaching consequences. I think that the, it is very important in a case like this that you do do a fact specific analysis. If I were standing before you and had the, the gentleman purchasing Maseratis and, and going on lavish vacations, um, I wouldn't be making these arguments. But I have two brothers who have followed their operating agreement, who have done whatever they could to take advantage of tax saving strategies the federal government offered, um, in order to preserve income for their families. And that's resulted in significant revenue streams that benefits my client for sure. Um, but also Ms. Landgraf. So we would have three categories of payments, actually four salary to your client. Yes. Bonus income or distributions. Then there are these tax distributions and then the insurance distribution. So lemme call the first set of distribution sort of non earmark. That would be the equivalent under the C corp of his salary and bonus. And he would owe taxes on that totality, even though the salary has withholding the distributions on earmark, um, don't have withholding associated with them. So, um, you are correct that his W2 component of his income is salary. Um, taxes are withheld on that. Right. And they are generously withheld. Um, and the rest of these distributions, there's no tax withheld. Correct. So for example, when the company is doing its analysis on, um, what they are estimating corporate revenues tax liability would be they distribute a like amount to our client and to his brother on a quarterly basis. And the record reflects that 100% of what those, um, tax payments are, go into his account for a second and then immediately go to the tax Or only the companies Yes. Tax obligation. Yes. Not So when does he pay his own tax obligation on the un earmarked, let me call it distributions to him, the equivalent of his bonus. When does he figure out the tax implication of that? So typically the CPAs do that for the company. And is it true up a year end? Let me ask you about in Ty. Um, yes. Uh, why isn't that a problem from your perspective? I don't think the facts in in Dougherty, um, are analogous to the facts in this case. I mean, that was a, a woman who, um, decided to take in some elderly people and she received maybe some benefits from the state, maybe not, some benefits from the state. It was a little bit Unclear. Well, she got money from the state and she argued that it wasn't includable as income because it was earmarked for foster care. And we said it didn't matter what it was earmarked for, it was includable in her gross income. Why, why isn't that analogous to this situation? Well, They didn't actually include all of it in her gross income. What they, they said was, um, wife has not provided us with a record concerning the origins of the foster care payments. Thus on the record before us, there's no evidence that the payments that she received were actually made under the aid to the permanently and totally disabled program. Additionally, there's no evidence that the adults in her care met all of the statutory requirements to establish eligibility for such aid. Accordingly, we cannot conclude that those payments can be excluded from the definition of gross income. Given the state of the record, we also cannot conclude that the payments derived from a public assistance program constituted general assistance received from a county or town or would otherwise fall within one of the other exceptions. Again, that was fact specific. They looked at a reasonable test, what is reasonable to house the number of adults that she had in her home at that point in time. If you go to the grocery, if you receive, I don't know, $2,000 a month in a benefit and you go to the grocery store and it really only costs you $500 to feed the five adults who are living at your house, I would say the $500 is reasonable. And I would say the $1,500 excess is probably something that should be considered for income. But I also noted that the court in that case, um, at the time it was finally reached some of the disabled individuals living with her, um, had left her care. So the court did a, a new analysis and found that, well, we should be looking at what she's actually receiving now and then applying the reasonable nest test. But you would agree that the stated purpose of the distribution of monies is not, uh, binding at all for the purposes of whether it's income or not. I agree. I think it's, it's a fact specific analysis. So the, the fact that the company designates it and says, well this is so you pay your taxes or this is so you buy the life insurance, that is of no moment. Right? I think those are contractual obligations under the terms of their operating agreement that would expose them each to future lawsuits and litigation if they did not comply with the terms of their agreements towards one another. And again, they have always complied with those agreements towards one another. Thank you counsel. Thank you so much Mr. Paella. Do you wish to use your two minutes? Yes, please. Just to Go back to what, uh, my opponent has said. Just because you will be exposed to a lawsuit or a potential lawsuit doesn't exclude the item from income. That's what Mr. Naja was trying to argue. I'm gonna be, uh, sued for back rent. If I don't pay my rent, I'm gonna be sued by my lender for my, uh, car lease. If I don't pay my car lease doesn't as of no moment. The situation is that cash came in. He has oblig, he has personal obligations. Okay. I think we've established that these, that the life insurance policy, the corporation's not the beneficiary. It is he's the beneficiary on his brother's life. We've established that the, the corporation, these are, uh, by the matter of law, the Subchapter S corporation, the taxes on his profit flow to the shareholder, corporation's not exposed to it. These are his personal expenses. And the earmarked doctrine as said in Dougherty, and even going back to Jerome, uh, where the wife tried to argue that this is, uh, compensation for personal injuries and not income. The court said of no moment. I think this is the facts can't get in the way of the law. And you have stated that the, in that the definition of gross income is broad, it's not all encompassing. In fact, the item has to be specifically excluded from gross income before it is not counted. And in this case, there is nothing in 4 58 C two four, which excludes these type of payments. I'd like to talk little briefly on, uh, judge this, um, Han Marconis, uh, Kansas analogy. Kansas has a kind of a split analogy where they say taxes on retained earnings are, are not income under their child support statute, but taxes paid on dispersed earnings are income. Well, here's the, the issue that we have. How do we square the Kansas decision with Albert and you? The court wrote, Albert does not argue that McCree received any distributions from the jaire other than his draw or that aire, which is the corporation had any retained earnings, both of which probably qualify as gross income under 4 58 C two Roman four. How do we square Kansas with MAs? Remember the corporation had its retained, capital gains didn't hit the shareholder. This court said that is still income for child support. I see my red lights up. Thank you very much for your time and attention. Thank You very much counsel. Case submitted. The court is now in recess. Thank you.