                  IN THE COURT OF APPEALS OF TENNESSEE
                              AT NASHVILLE
                            October 9, 2000 Session

  BOWDOIN GRAYSON SMITH v. GINGER LEE MARENCHIN SMITH

                      Appeal from the Chancery Court for Smith County
                         No. 5800 Charles K. Smith, Chancellor



                      No. M2000-01094-COA-R3-CV - Filed May 2, 2001


This is the second appeal regarding the setting of the amount of the father’s child support obligation
for four children. In the earlier appeal, this court remanded for a determination of the father’s actual
net income and his corresponding child support obligation. On remand, the trial court in early 2000
based its award of prospective support on an average of father’s income in 1992 through 1995 and
established the father’s back support based on that figure. We find that the prospective award should
be set on the most current income figures, but that an average of the most recent years is appropriate.
We also find that the amount of back child support should be computed using actual income for the
intervening years. Because the record does not contain sufficient information regarding challenged
deductions from gross income for the years now at issue, we remand for an evidentiary hearing on
the father’s income in the years since the divorce in 1996, and a redetermination of both prospective
and back support. We affirm the denial of prejudgment interest.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed in Part,
                            Vacated in Part, and Remanded

PATRICIA J. COTTRELL , J., delivered the opinion of the court, in which BEN H. CANTRELL , P. J., M.S.,
and WILLIAM B. CAIN , J., joined.

James L. Weatherly, Jr., Nashville, Tennessee, for the appellant, Ginger Lee Marenchin Smith.

Randy Wakefield, Carthage, Tennessee, for the appellee, Bowdoin Grayson Smith.

                                              OPINION

        These parties were divorced in April of 1996. They are both doctors and shared a medical
practice, although the mother spent less time at her medical practice after the birth of the parties’
children. At the time of the divorce, the trial court established the father’s child support obligation
for the parties’ four minor children, who were then all under the age of six, at $3,154 per month to
be paid directly to the mother and an additional $2,000 per month to be paid into trust for the
children. The mother appealed the amount of child support, arguing that the trial court improperly
applied the child support guidelines and failed to base the award on the father’s total net income.
Smith v. Smith, 984 S.W.2d 606 (Tenn. Ct. App. 1997).

         This court agreed with the mother and remanded the case to the trial court “for the Trial
Court’s determination as to the father’s actual net income, and corresponding child support award.”
 Id. at 609. The trial court had not determined the father’s actual net income, concluding that it was
more than $6,250 per month. The trial court had apparently relied on Nash v. Mulle, 846 S.W.2d
803 (Tenn. 1993) and determined that it had discretion with regard to setting the amount of support
for any net income over $6,250, and although the court had also ordered the father to make payments
of $500 per child per month into a trust for the education of the children, this court determined that
the total amount to be paid by the father did not “approach 46% of husband’s recent incomes.”

        In that appeal, this court determined that the provision of the guidelines applied in Nash had
been repealed after the Nash decision, and that the Tennessee Supreme Court had since spoken to
the issue of high-income obligor parents. We stated:

            The only way in which cases where income exceeds $6,250.00 are treated differently
            is that the support exceeding this category may be put in a trust fund or other fund in
            the child’s interest, instead of going directly to the custodial parent. Tenn. Comp R.
            & Regs. Ch. 1240-2-4.04(3). This change in the rules appears to have addressed the
            Nash Court’s concern that the custodial parent could receive a windfall to access for
            personal use. Indeed, the Supreme Court in a post-Nash decision has indicated that
            there are very limited circumstances in which a downward deviation from the
            guidelines would be appropriate. See Jones v. Jones, 930 S.W.2d 541, 545 (Tenn.
            1996).

Smith, 984 S.W.2d at 609.

         We also directed, “If the Court assesses less than a 46% rate against all net income, it must
state its reason for deviating from the guidelines within the constraints of Jones.”1 Id.

        Upon the mother’s request, the trial court held a hearing on the order of remand, which began
in December 1999 and concluded February 7, 2000. Thus, almost four years had passed between
the original order setting child support and the hearing on remand.2 At the first hearing on remand,
the mother asked the trial court to determine the amount of the father’s obligation for each year since

            1
                There is no dispute that 46% is the correct percentage to be applied under the child support guidelines for four
children.

            2
           This delay was not attributable to lack of diligence on the part of the parties. In addition to the time spent on
appeal in this court, the Supreme Court initially granted permission to appeal but later determined that such permission
had bee n improvid ently granted, a nd affirmed the opinion of the Cour t of Appea ls.

                                                                 -2-
the date of divorce, April 1996, based upon his actual income in each of those years. The father
argued that the obligation should be set using facts that existed at the time of divorce. After
discussion between the court and counsel, the trial court determined that it would set the father’s
child support obligation on an average of his income from the years 1992, 1993, 1994, and 1995.
The trial court interpreted this court’s opinion remanding the case as directing it to determine the
father’s actual net income at the time of the divorce.

         The trial court also determined that it would adjust the father’s 1995 income by subtracting
income received due to a contract for emergency room services. Because that contract was
eventually discontinued, sometime after the date of the divorce decree, the court determined that the
income from it was an aberration which should not be considered. The mother also sought to have
the court determine the father’s arrearage, the difference between the amount he should have paid
based on his income and the amount he actually paid since April 1996. The trial court required her
to file a motion and stated it would consider the motion at the next hearing.

        There was little real testimony at this first hearing. The mother introduced copies of the
father’s income tax returns for 1996, 1997, and 1998 into evidence. Also introduced were the
father’s tax returns for 1992, 1993, 1994, and 1995. At the close of the hearing, the court reiterated
its position that it would consider only the income for 1992-1995, would average those years, and
would set child support at 46% of that figure. The trial court ordered the father to have his
accountant prepare a statement of income for each of those years and asked the parties to report back
whether they were able to reach agreement on the figures to be used.

        The parties did not agree on the father’s income for purposes of calculating child support.
At the second hearing, the mother reiterated her position that father was obligated to pay child
support based on his actual income. In addition, the mother objected to reduction of father’s gross
income for losses he sustained in investments or business ventures separate from his medical
practice. She argued that allowing those losses lowered the average and, because the trial court
projected the 1992-95 average into the years beyond 1995, prolonged the effect of the losses even
though those investments actually made money in later years. The father’s accountant testified as
to the father’s income for the four years in question. His figures included downward adjustments
from gross income for the business losses and for the 1995 income from the emergency room
contract, which was $351,348. The figures also included depreciation deducted on the income tax
returns but added back into the income because the accountant concluded that the child support
guidelines do not allow reduction of income for depreciation. The accountant presented a summary
of his calculations in an exhibit, which the court adopted, showing the father’s net income as
follows:

               Year                                    Net Income
               1992                                    $191,478
               1993                                    $242,122



                                                 -3-
                  1994                                         $185,427
                  1995                                         $202,227

        The average for those years was determined to be $205,314. The court applied the
guidelines’ required percentage of 46% and set the father’s child support obligation at $7,870 per
month, with none of that amount required to be placed in trust. In addition to treating this as the
amount which should have been set in April 1996, and the amount due in every month since the
divorce, the court also ordered that this amount would be paid beginning in March 2000. The court
then calculated the arrearage due the mother by subtracting the amount paid by father since May
1996, pursuant to the original divorce decree at $ 3,154 per month in direct payments to the mother
and $2,000 per month into the trust, from the amount due under the new calculations, and ordered
the father to pay $130,358 in arrearage through February 2000. The trial court denied the mother’s
request for pre-judgment interest because “it was improper to punish the father who was not
responsible for any mistakes in calculating the child support.” The trial court awarded the mother
$7,000 in attorney’s fees, approximately half her fees.

                                    I. Nature of Child Support Obligation

        The mother’s first, and primary, argument in this appeal is that the trial court should have
used the father’s actual income for the years 1996, 1997, 1998, in determining the father’s obligation
for those years and should have used the average of his income for 1997 and 1998 in setting the
amount which should have been paid in 1999,3 and in setting the father’s future child support
obligation.

       Every parent is obligated to support his or her children during their minority. Tenn. Code
Ann. § 34-11-102. The obligations of parents to support, care for and nurture their children are joint,
and the extent of their duty to support depends on their ability to provide that support. State ex rel.
Grant v. Prograis, 979 S.W.2d 594, 600-601 (Tenn. Ct. App. 1997). If necessary, the courts may
apportion the responsibility for support between the parents according to their respective abilities
to provide support. Id. at 601. Accordingly, relevant statutes and regulations governing child
support are intended “to assure that children receive support reasonably consistent with their parent
or parents’ financial resources.” State ex rel. Vaughn v. Kaatrude, 21 S.W.3d 244, 248-49 (Tenn.
Ct. App. 2000).

         When, as in this case, a marriage is dissolved, courts are authorized by statute to provide
for the future support of minor children by fixing a definite amount to be paid on a specified regular
basis. Tenn. Code Ann. § 36-5-101 (a)(1) and (a)(2)(A). Further, courts are directed to apply the
child support guidelines developed by the Department of Human Services in determining the amount
of any such support. Tenn. Code Ann. § 36-5-101(e)(1). The child support guidelines require a



       3
           The father’s 1999 income tax returns were not available when the hearings were held in this matter.

                                                         -4-
noncustodial parent to pay a support amount which is determined by “a flat percentage of the
obligor’s net income.” Tenn. Comp. R. & Regs. ch. 1240-2-4-.03(2). The applicable percentage is
determined by the number of children to be supported. The amount dictated by the guidelines is to
be applied by the courts as a rebuttable presumption of the correct amount of support. Tenn. Code
Ann. § 36-5-101(e)(1).

        In the most common situation, the guidelines are applied in the context of establishing an
award of prospective payments, whether it is an initial award or a modification. That is, the court
uses the guidelines to set the amount that the obligor parent will pay in the future unless and until
the amount is modified by court order or the obligation terminates. Because the child will receive
prospective support based upon the court’s determination of the obligor parent’s income,
“[d]etermining the amount of the non-custodial parent’s income is the most important element of
proof in a proceeding to set child support . . . and when considering requests for modification of an
existing support obligation.” Turner v. Turner, 919 S.W.2d 340, 344 (Tenn. Ct. App. 1995).

         In the case at hand, the initial award was made at the time of divorce, in April 1996.
However, that award was determined by this court to have been incorrectly calculated. On remand,
the trial court interpreted its duty to establish the support due at the time of the divorce, based on the
father’s income at that time, even though four years had passed. The court, placing itself in the
position it would have been in April 1996, determined the father’s then-current income based on
information which would have been available at that time, the father’s income from 1992 through
1995, even though the father’s actual 1996 income was known at the time of the hearing on remand.
The court then determined the child support due in each of the intervening years on the basis of its
estimate of the father’s 1996 income, although information about the father’s actual income for each
of those years was available. Finally, the trial court set the father’s obligation for prospective support
payments, to begin March 2000, based on its estimate of the father’s 1996 income, which was a
product of averaging the father’s income in 1992-1995.

        We agree that the trial court was required to perform several tasks in order to resolve the
issues presented by the procedural posture of this case on remand. Our task is to review how the
court determined the amount of support due, both prospectively at the time of the remand hearing
and retrospectively for those years when support was clearly due but was being paid in an incorrect
amount.
                                   II. Prospective Child Support

         We first address the award of prospective child support from March 2000 forward. The court
set the amount of that obligation on the basis of the father’s income in 1992, 1993, 1994, and 1995.
We find no basis for establishing prospective support using income figures at least five years old.

        One of the stated goals in the development of the guidelines was “[t]o ensure that when
parents live separately, the economic impact on the child(ren) is minimized and to the extent that
either parent enjoys a higher standard of living, the child(ren) share(s) in that higher standard.”


                                                   -5-
Tenn. Comp. R. & Regs. 1240-2-4-.02(2)(e). Thus, courts are to set the amount of prospective child
support so that children will receive support reasonably consistent with their parents’ resources and
ability to provide support. These goals are best fulfilled by use of current, accurate information
regarding the obligor parent’s income.

       The guidelines specifically recognize that the court needs reliable information regarding the
“current ability to support” when establishing or modifying a support order. Tenn. Comp. R. &
Regs. 1240-2-4-.03(3)(e) and (f). Otherwise, there could be no reasonable assurance that the children
are receiving support commensurate with the parent’s ability to provide support. Because child
support is based on income, an award for future support, including a prospective modification, is
necessarily based upon most recent actual income.

       Therefore, we conclude that the amount of child support to be paid by the father
prospectively from March 2000 should have been set based upon a determination of his income at
the time of the hearing on remand, not on his income five to eight years earlier.

         The problem with the trial court’s method of setting prospective child support lay primarily
in its use of outdated income figures, not in its averaging the father’s variable income in order to
arrive at a reliable income figure. The child support guidelines provide that “the child support award
is based on a flat percentage of the obligor’s net income.” Tenn. Comp. R. & Regs. ch. 12-2-4-
.03(2). Net income is defined as gross income, which is “all income from any source,” minus certain
specified deductions such as income tax and social security contributions. Tenn. Comp. R. & Regs.
ch. 1240-2-4-.03(3). Often, the determination of gross income or net income is based on a relatively
invariable income, such as a salary. Where, however, the obligor parent’s income is subject to
variation, averaging is appropriate to determine net income for the purpose of calculating child
support. Alexander v. Alexander, 34 S.W.3d 456, 460 (Tenn. Ct. App. 2000).

        The guidelines specifically allow averaging in determining gross income when establishing
a prospective award: “[v]ariable income such as commissions, bonuses, overtime pay, and
dividends, etc., should be averaged and added to the obligor’s fixed salary.” Tenn. Comp. R. and
Regs. 1240-2-4-.03(3)(b). Although that provision of the guidelines applies to variable components
of income, the reasoning is just as applicable to situations where a parent is self-employed or whose
total income is variable.

        Another provision in the guidelines authorizes averaging for establishing the obligation for
past support. Under the heading “Criteria for Deviation from Guidelines,” the following directive
is given:

       In cases where the initial support is being set, a judgment must be entered to include
       an amount due for monthly support from the date of the child’s birth or date of
       separation or date of abandonment whichever is appropriate, until the current support
       order is entered. This amount must be calculated based upon the guidelines using the


                                                 -6-
       average income of the obligor over the past two years and is presumed to be correct
       unless rebutted by either party. . . .

Tenn. Comp. R. & Regs. ch. 1240-2-4-.04(1)(e).

       Referring to this provision, this court has stated:

               While this provision does not mandate that trial courts average
               variable monthly income from the past two years to determine gross
               income for current child support, it does reflect the legislative intent
               that when the exact amount of gross income is not known an average
               must be taken, and a period of two years is an appropriate time period
               to average than income.

Brown v. Brown, No. 03A01-9812-CV-00417, 1999 WL 552854 at *5 (Tenn. Ct. App. July 28,
1999) (no Tenn. R. App. P. 11 application filed).

         While our courts have approved or endorsed a two year period for purposes of averaging, see,
e.g., Norton v. Norton, No. W1999-02176-COA-R3CV, 2000 WL 52819 at *7 (Tenn. Ct. App. Jan.
10, 2000) (no Tenn. R. App. P. 11 application filed), other time periods have also been used. See,
e.g., Siegel v. Siegel, No. 02A01-9708-CH-00198, 1999 WL 135090 at *6 (Tenn. Ct. App. March
5, 1999) (no Tenn. R. App. P. 11 application filed) (“Based on the entire record, it appears that
Husband’s earnings for the entire twelve months of 1996 best reflect his income and earning capacity
for the purpose of determining child support and alimony.”); Alexander, 34 S.W.3d at 460 (four
years income averaged). The time period to be used lies within the discretion of the trial court based
upon the facts of the situation.

       The guidelines themselves do not prescribe how variable income should be averaged.
       Therefore, it is left to the courts to determine on a case-by-case basis the most
       appropriate way to average fluctuating income.

Hanselman v. Hanselman, No. M1998-00919-COA-R3-CV, 2001 WL 252792 at *3 (Tenn. Ct. App.
March 15, 2001). However, periods of one year or longer have been consistently approved or
applied depending on the circumstances. Id. at *4 (determining that averages of short duration are
generally inappropriate, and listing cases approving averaging over more than one year); see also
Brown, 1999 WL 552854 at *6 (author of concurring opinion expresses view that the two-year
average approach may not be appropriate in all cases.)

        The father in this case is self-employed primarily as a physician, and his yearly income is
subject to variation. Therefore, we see no error in establishing his current income by averaging his
income from the two years prior to the establishment of the prospective award, as asserted by the
mother. However, we also see no necessity for choosing two years rather than some other period of


                                                 -7-
time that the facts of this case may indicate is more likely to accurately reflect the father’s current
ability to pay prospective support.

                                                III. Back Child Support

        We turn now to the trial court’s calculation of back support. The father’s obligation to
provide support was established by court order in April of 1996, and the law in effect required him
to pay support at 46% of his actual net income. Accordingly, this court’s opinion remanding the case
directed the trial court to determine the father’s actual net income and to set the child support at 46%
thereof. We interpret our earlier ruling in this case as affirming the children’s right to support,
computed under the guidelines at 46% of the father’s actual net income, unless the trial court made
the requisite finding that deviation from the guidelines was appropriate.4

        For the years between the initial entry of the order obligating the father to pay child support
until the order on remand, we can find no basis for ignoring actual income and establishing support
on outdated projections of income.5 The amount of the father’s obligation for past years should be
determined using actual income figures.

        In Anderton v. Anderton, 988 S.W.2d 675 (Tenn. Ct. App. 1998), this court vacated the trial
court’s child support award and remanded for the second time for calculation of the appropriate




         4
           On remand, the trial court did not determine that deviation from the guidelines was justified, and that is not
an issue in this app eal. See Tenn. Code Ann. § 36-5-101(e)(1) (providing the requirement that the trial court make a
written finding that the application of the child suppo rt guidelines wo uld be unjust or inapprop riate in that particular case
as a prerequisite to rebutting the presumption that the guidelines provide the appropriate amount of support).

         5
             The fact tha t this case was rem anded fo r determina tion of the father’s actual net income and corresponding
child support award, but the remand hearing was not held until four years after the divorce, cr eated a pr oblematic
procedural situation. On appeal the father argues that the trial court was correct is setting back support on the basis of
projected income and maintains that the mother could have filed, during the in tervening yea rs, a petition to modify the
child support obligation based on the father’s increased income. That argument ignores the fact that this court had
determined that the amou nt originally set by the trial court was incorrect and had remanded for determination of the
correct amount. Therefore, the mother had already taken the procedural steps necessary to have the amount of support
calculated; further, she was entitled to have the correct amount set and had no reason to ask for a m odification o f a
correct amount which was then unknown. The other side of the mother’s quandary is demonstrated by a ruling of the
trial court. Between the first and second hearing on remand the mother filed a petition to increase child support asking
that the court grant an increase for 1997 based on 1996's actual income, an increase for 1998 based on 1997's actual
income, and an in cre ase for 1 999 bas ed o n 19 98's actual income. The mother’s counsel explained that this motion was
based on comments made by the court at t he first hearing on remand. The trial court concluded that it could not
retroactively increase the support amount beyond the date the petition was filed in early 2000, a correct statement of the
general rule. Tenn. C ode Ann . § 36-5-10 1(a)(5). T hus, the mother had no rea son to requ est an increase while
anticipating that the support would be established in the correct amount, but was precluded from requesting such an
increase retro actively when sh e learned tha t the suppor t for the intervenin g years was to b e set on outd ated figures.

                                                              -8-
amount of support, having reached the conclusion “that Mr. Anderton’s child support obligation has
been seriously miscalculated from the beginning.”6 Id. We then stated:

         The amount of child support required by the guidelines is presumptively correct. In
         the absence of any definitive written findings by the trial court setting forth cogent
         reasons to deviate from the guidelines, Mr. Anderton’s child support obligation since
         June 1995 should have been consistent with the preceding discussion. Since it was
         not, Mr. Anderton’s current child support obligation and the arrearage must again be
         determined by the trial court. Unless the trial court finds reasons for deviating from
         the guidelines, it should set Mr. Anderton’s current child support obligation in
         accordance with the child support guidelines. It should then recalculate the amount
         of the arrearage consistent with Mr. Anderton’s actual net income during the
         relevant periods using the formula required by the guidelines.

Id. at 681-82 (citations omitted) (emphasis added).

         Like the Anderton court, we conclude that the father’s child support obligation in this case
has been miscalculated from the date of divorce, as determined in our opinion in the earlier appeal.
To the extent the father has paid amounts since the date of divorce which are substantially less than
the amount he should have paid, he owes back child support. The way to determine the arrearage
is to recalculate the correct amount for each of the years since the divorce decree and subtract the
father’s actual payments. The trial court performed this calculation, but used the father’s 1992-1995
average in determining the amounts which should have been paid, in effect using a projection for the
father’s income for 1996, 1997, and 1998. Like the Anderton court, we conclude that the correct
amount for those years is determined by using the obligor parent’s actual income.

        This approach is the same as that used in cases where, although the obligation to support a
child existed from the child’s birth, an order establishing the paternity of the child and setting
prospective and past support is not entered until a number of years after the birth. For example, in
State ex rel. Vaughn v. Kaatrude, the biological father was unaware he had a child until the state
Department of Human Services, on behalf of the mother, initiated proceedings to establish paternity
and to obtain past and future child support when the child was fifteen years old. When blood tests
confirmed he was the child’s biological father, Mr. Kaatrude indicated his willingness to pay support
prospectively. This court affirmed the trial court’s determination that he should also pay child


         6
           This conclusion was reached by applying certain “straightforward principles:” that income can be determined
by ascertaining either the gross or net income according to the directives of the guidelines; that the guidelines require
that variable income such as bonuses and commissions should be averaged and add ed to the ob ligor paren t’s fixed salary;
that courts are to calculate the required amount of support using the percentages in the guidelines applied to the relevant
income; and that generally, the resulting amount is the parent’s child support obligation, absent a finding by the court
that a deviation is warranted. Finally, we recognized that the guidelines as they existed when the order was first entered
recognized alternative arrangements for wealthy parents with a net monthly income in excess of $6,250, which included
payment of some p ortion of the su pport ob ligation into a trust fo r the child’s ben efit. Anderton, 988 S.W.2d at 680-81.

                                                            -9-
support going back to the birth of the child. 21 S.W.3d at 248. In explaining the reasons for an
award of back support, this court stated:

         Mr. Kaatrude’s duty to provide support existed during all those years, and his lack
         of financial assistance during that time either required Ms. Vaughn to shoulder more
         than her share of the support responsibility or, more likely, caused the child to get by
         with less. An award of back child support fills this gap.

Id.

         With regard to the proper amount of back child support in Kaatrude, we vacated the $50,000
award ordered by the trial court because there was no evidence introduced at trial which established
that the amount of the award bore a “traceable relation to Mr. Kaatrude’s actual ability to support
his son from 1981 to 1996.” Id. at 249. Determining that the record did not allow us to do complete
justice, we remanded the case to the trial court to calculate the father’s back child support using the
guidelines, with specific instructions that the parties should be permitted to present evidence
concerning the father’s earnings for the relevant years. “Based on this evidence, the . . .court should
then determine Mr. Kaatrude’s back child support obligation for each year based on the guideline
percentage applicable to that particular year.” Id. at 250.

        Similarly, in State Dep’t of Human Servs. v. Springs, 976 S.W.2d 654 (Tenn. Ct. App. 1997),
we affirmed the trial court’s award of back child support in a paternity action. The amount of the
award was calculated by applying the guidelines instructions to the father’s gross monthly income
during the years from the child’s birth until his majority.7 Id. at 655.

       In the case before us, the obligation to provide support has existed since the divorce, but the
amount of the obligation has not been correctly set, and the amount of back support cannot be
determined until that is done. The situation is similar enough to the cases involving calculation of
back support in late-discovered paternity cases for us to use those cases for additional guidance.

       Therefore, we conclude that the amount of back child support owed by the father should have
been calculated using his actual income for each of the years since the divorce, proof of which was
available at the time of the remand hearing.



         7
            The Springs court reco gnized the d istinction betwe en prosp ective child sup port and b ack child support i n
paternity cases, relying on Kirchner v. Pritchett, No. 01A01-9503-JV-00092, 1995 WL 714279 (Tenn. Ct. App.
December 6, 1995) (no Tenn. R. App. P. 11 petition filed). Back child support in paternity cases is not required to be
set in strict accord ance with the g uidelines. “T hat is not to say that a trial court, in the exercise of its broad but sound
discretion, could not award child support back to the date of the child’s birth in an amount calculated in strict adherence
to the formula set forth in Tenn. Comp. R. & Regs., ch. 12 40-2-4-.03 .” Springs, 976 S.W.2d at 656. No such discretion
applies in this case; the child support herein, both prospective and back support, must be set in compliance with the
guidelines.

                                                            -10-
                                     IV. Determination of Income

        The mother also objects to the trial court’s calculation of income because of the exclusion
of income in 1995 from an emergency room services contract and the allowance of deductions for
various business or investment losses during the years used in the averaging to arrive at the father’s
income. Because the court used an average income which allowed these exclusions and deductions
to set support for later years, the mother argues that the effect of these improper calculations was
exacerbated. Our determination that back support should be based on actual income for the
intervening years renders some of these objections moot.

        The actual income for 1996, for example, will include any amounts earned from the
emergency services contract, because it clearly falls within the guidelines’ definition of gross
income, “all income from any source . . ., whether earned or unearned, and includes . . . income from
self-employment.” Tenn. Comp. R. & Regs. ch. 1240-2-4-.03(3)(a). The trial court’s concerns about
the fairness of setting child support on an income amount that included earnings from a contract
which no longer existed at the time of the hearing, as well as mother’s objections to the effect on
subsequent payments by averaging in an amount which excluded that income, are eliminated by our
determination on the method for setting the amount of back support.

        However, the issues raised by mother regarding allowable deductions from gross income,
while moot as to pre-1996 income, must be considered in the context of determining the father’s
actual income for 1996 through the present for purposes of setting the amount of back as well as
prospective support. In the years 1992 through 1995, the father claimed on his tax returns various
losses from business ventures or investments other than his medical practice.8 The trial court
allowed these same deductions from income, except for depreciation, in determining the father’s
actual income. Because the father’s tax returns for 1997 and 1998 reflect similar deductions from
gross income, the issues surrounding the consideration of losses from secondary business ventures
remain.

        The mother’s proof includes a calculation of father’s net income (total income minus
specified allowable deductions) for each of the years in question as follows:

                Year                      Monthly                  Yearly
                                          Net Income               Net Income

                1996                      23,676.71                284,120.52

                1997                      31,063.97                372,767.64



        8
         For example, in 1994 the father claimed losses of $81,389 from JAPOP Productions; in 1995 he claimed
deductions of $73,287 for JAPOP Productions and $37,171 from T iff Arnold Paving.

                                                    -11-
                  1998                         21,173.43                   254,081.16

        A closer examination of the mother’s calculations demonstrates the continuing existence of
the issues she raised regarding allowability, for child support purposes, of various losses allowable
for income tax purposes. In her calculations for 1997, the mother included the father’s self-
employment income from his medical practice, as shown on his tax return, but did not subtract the
depreciation allowed by tax law but not allowed by the child support guidelines, which made the
father’s self-employment income $459,688.9 To this she added wages, as shown on the tax return,
of $79,710 from the medical practice and $4,747 from Tiff Arnold Paving. She also added $65,406
in investment income. That amount is the sum of three lines on the father’s 1040: capital gains,
dividends, and interest. These amounts totaled $609,551, which the mother treated as the father’s
gross income. From that amount she deducted allowable income tax, FICA, and Medicare payments,
arriving at a total net income for that year of $372,767, or $31,063.97 per month.

        In her calculations of the father’s gross income for 1997, the mother did not deduct certain
losses claimed on his tax return, specifically: $151,928 in losses from partnerships and subchapter
S corporations (described in the return as a nonpassive loss from an “S” corporation, Bulldog
Productions) and $29,054 in investment interest expense (including disallowed expense from 1996),
which amount was claimed as part of the father’s itemized deductions and reduced his taxable
income. The parties disputed the appropriateness of similar deductions with regard to the father’s
1992 - 1995 income; thus, those disputes appear to remain with regard to 1996 and later.

         The mother’s basic argument is that the father’s primary employment is as a physician and
that his net self-employment income from that activity should not be reduced by losses sustained in
other activities, such as the paving company and the productions company.

        A review of Tennessee cases involving secondary business ventures or investments reveals
few hard and fast rules, but some guiding principles useful for analysis of a particular fact situation
can be gleaned. In a recent case, Alexander v. Alexander, this court refused to allow deduction from
gross income, which came from a number of other sources, for losses sustained in a business
enterprise, stating:

         By the same token, we also agree with the trial court that the net losses from DJA
         Leasing should not be utilized to reduce Father’s other sources of income in
         determining his net income under the Guidelines. There is no proof in the record that
         Father was required to “go into his pocket” to cover these losses. They are paper
         losses only - - losses that enabled Father to shelter other sources of income from

         9
          The mother’s calculations do not challenge any business expenses from the medical practice as unreasonable,
and she has appropriately added in the depreciation deduction claimed on the tax returns. “Income from self-employment
includes income from business operations and rental properties, etc., less reasonable expenses necessary to produce such
income. Deprec iation, home offices, excessiv e travel, exces sive car exp enses, or exc essive perso nal expense s, should
not be considered reasonable expenses.” Tenn. Comp. R. & Regs. 124 0-2-4-.03(3)(a).

                                                          -12-
       federal income tax. Accordingly, Father’s net “losses” from the operation of DJA
       Leasing cannot be considered in determining his net income to set child support.

Alexander, 34 S.W.3d at 462.

        While the quoted language in Alexander implies a different result if the losses were more
than “paper losses” or tax shelters, but resulted in an actual decrease in the parent’s income, other
language in that opinion suggests that the guidelines provide the appropriate guidance on this issue.
The Alexander court, when discussing how to convert gross income to net income, noted that
because the leasing business at issue resulted in net losses rather than net income, there was no self-
employment income and, therefore, Tenn. Comp. R. & Regs., ch. 1240-2-4-.03(4)’s instructions for
calculation of reductions from gross income for the obligor’s FICA tax on income from self-
employment had no applicability. Id. at 465.

        The language of the guidelines’ definition of gross income also uses the term “income from
self-employment,” and the guidelines make no reference to losses from self-employment. This
treatment by the guidelines apparently formed the basis of this court’s holding in Humphrey v.
O’Conner, No. 01A01-9502-PB-0006, 1995 WL 428679 (Tenn. Ct. App. July 21, 1995) (perm. app.
denied Nov. 20, 1995), wherein the obligor parent sought to reduce her income from salary for her
regular job by losses on rental property. Without discussion, this court noted that the guidelines
contain no provision for decreasing gross earnings by business losses and affirmed the trial court’s
award of child support based upon the salary unreduced by outside business losses. Id. at *7-8.

         The same result was reached, but partly on different grounds, in Howard v. Howard, No.
03A01-9811-CV-00374, 1999 WL 427596 (Tenn. Ct. App. June 25, 1999) (no Tenn. R. App. P. 11
application filed). In that case, the obligor parent’s primary occupation was as an employee of an
insurance company, from which he earned approximately $89,000, and he had other sources of
income. For tax purposes, he claimed a business loss of $32,762 from a sole proprietorship sports
card business. That business had earned a gross profit of $48,300, but the parent claimed expenses
of $81,000, including a salary to his wife. The trial court refused to deduct the business loss from
the father’s other income, finding the father’s gross income to be roughly $95,000. We stated, “The
Trial Court then found that the father realized no income as a self-employed individual, because his
claimed expenses exceeded his income from the business.” Id. at *2. However, this court affirmed
the trial court’s finding on a slightly different basis, that the father had failed to prove the claimed
expenses were reasonable. Id.

       Two other cases, relied upon by the parties, should be examined. In Kimble v. Kimble, No.
02A01-9503-CV-00049, 1996 WL 445272 (Tenn. Ct. App. Aug. 8, 1996) (no Tenn. R. App. P. 11
application filed), this court considered whether capital expenditures may be used to reduce the gross
income of a self-employed obligor parent, and concluded that the trial court has discretion to
determine whether such expenditures are “reasonable expenses to produce such income” under
Tenn. Comp. R. & Regs. ch. 1420-2-4-.03(3). 1996 WL 445272 at *5. We are not convinced that


                                                 -13-
this holding has any direct applicability to the issues presented in this case, because the mother does
not object to any expenses associated with the father’s medical practice, and because Kimble does
not deal with more than one source of self-employment income.10 However, in Kimble, this court
relied upon cases from other jurisdictions in establishing principles which provide some guidance
in our analysis: first, that any business expenses must have been incurred in an activity intended to
produce income; second, that those expenses must have been reasonable, ordinary, or necessary; and
third, that such expenses be actual cash or out-of pocket expenditures. Id. at *3-4. Conversely,
where expenditures are appropriately characterized as “investments” which benefit the obligor
parent, or are merely non-cash or paper losses for tax deduction purposes, they are not allowable as
reasonable expenses to be deducted from self-employment income. Id. The trial court is charged,
in the first instance, with making the necessary factual determinations.

        Finally, in Norton v. Norton, No. 02A01-9901-CH0030, 2000 WL 52819, this court held that
interest payments on loans to acquire capital for the obligor’s business were generally11 allowable
deductions from self-employment income “because they represent out-of-pocket expenses that are
never recouped by the obligor.” Id. at *7. Norton involved an obligor parent with several businesses,
and nothing in the opinion indicates that he had a primary occupation or business. See also
McDuffee v. McDuffee, No. 90DR-896, 1993 WL 339302 at *6 (Tenn. Ct. App. Sept. 8, 1993) (no
Tenn. R. App. P. 11 application filed) (this court treated obligor parent’s self-employment ventures
collectively for determining net income.)

        Where, however, as in this case, an obligor parent has a primary occupation or profession
which provides the primary source of income, we find no basis in the guidelines for allowing
deduction of losses from other business ventures from that primary income. The guidelines include
in gross income “[i]ncome from self-employment.” Thus, where self-employment activities produce
income, after deduction of “reasonable expenses necessary to produce such income,” that income
is includable as gross income. The guidelines do not expressly address how to treat losses from self-
employment activities where the reasonable deductions exceed the income. However, we do not find
any basis in the guidelines for deducting losses from one self-employment enterprise from the
income of another unrelated and successful source of income from a primary profession or
occupation. Similarly, while income from investments, “whether earned or unearned” is includable
in gross income, we find no basis in the guidelines for reducing gross income by investment losses




         10
           Based upon the record before us, we are unable to determine whether the father’s involvement in the
compa nies for which h e has claimed losses amo unts to self-emp loyment or sh ould be c onsidered investments. We do
note, however, that the father has paid self-employment tax only on his earnings from his medical practice, a fact
considered significant in Alexander, 34 S.W.3d at 465.

         11
            This court recognized exceptions to this general statement where the facts indicate the interest expenses are
not reason able or nec essary. Norton, 2000 WL 52819 at *7 n. 6.

                                                         -14-
which exceed investment income.12 Where an obligor parent has the ability through a primary
occupation or profession to produce income which will provide his or her children with support, as
a general rule, any losses they sustain in voluntary outside business ventures cannot be used to
reduce the support obligation. Specific factual situations may justify departure from this general
principle.

         Decisions from other jurisdictions are in accord with this general approach. See, e.g.,
Wilhelm v. Wilhelm, 543 N.W.2d 488, 491 (N.D. 1996) (obligor’s losses as a rodeo rider could not
be used to decrease his income from his salary at his regular job, because the rodeo venture was an
avocation); Meyer v. Meyer, No. A-93-579, 1995 WL 676409 at *4 (Neb. App. Nov. 14, 1995)
(losses from obligor’s health food business could not be used to reduce income from military pay
because the business was a future investment, not intended to be a primary source of income, and
obligor continued the venture although it was operating at a loss). As one court has observed, “Either
parent may freely engage in entrepreneurial endeavors, but these excursions will not relieve them
of their parental obligations.” Meyer, 1995 WL 676409 at *4 (citing Dworak v. Fugit, 1 Neb. App.
332, 495 N.W.2d 47 (1992)); see also Koch v. Koch, 714 So.2d 63, 66-67 (La. App. 4 Cir 1998)
(obligor parent cannot rely on his voluntary investment choices to reduce his support obligation).

       The mother takes the position that the record before us is sufficient to allow this court to
perform the necessary calculations to establish the father’s support obligations, prospectively and
retrospectively. We are unable to agree.

        The mother has presented evidence of the father’s income for 1996, 1997, and 1998.
Therefore, the burden shifted to the father to dispute her calculations or present evidence relevant
to the determination of his income under the guidelines.13 The father presented no evidence to


         12
            The distinction between self-employment and other types of business ventures, such as investment, is not
always clear, and, in the case before us no evidence exists from which we can determine whether the losses and
deductions at issue were the result of self-employment or investment. While the guidelines recognize allo wable
deductions from self-employment income for reasonable expenses necessary to produce income, no such lang uage exists
regarding investments. With regard to business ventures that are second ary to a primary profession or source of income,
however, we think the distinction makes no difference: losses in voluntary business ventures not related to or necessary
to the income-producing primary occupation generally should not b e used to reduce gross income from the primary
source of inc ome.

         13
            W e have previously held that because the child support guidelines embody a rebuttable presumption that the
custodial parent is entitled to receive financial support from the noncustodial parent, once the custodial parent proves
custody, the burden of going forwa rd with proo f relating to incom e may shift. Kirchne r v. Pritchett , 1995 WL 714279
at *3. In that case, d espite disco very attempts by the mother, the evidence at trial regard ing the father’s past income and
expenses was sketchy at b est. Although our opinion was based on a situation where the noncustodial parent, who was
most able to provide information on his income, was unable or unwilling to produce satisfactory evidence, the following
rationale also applies in other situations:

         If the noncustodial parent has not already submitted proof of his or her income, the custodial parent
                                                                                                         (continued ...)

                                                            -15-
challenge the calculations submitted by mother because he submitted no evidence at all regarding
the years after 1995. Based on the trial court’s earlier ruling, the father’s accountant testified about
various aspects of the father’s income and tax returns for 1992-1995, but not about any later years.
Thus, the record before us does not include any of the kind of factual information needed to
determine which, if any, of the claimed deductions or losses should be allowed.

        While the father did not provide such proof herein, we do not think he should be precluded
from doing so. He acted in conformance with the trial court’s ruling that it would set the support
obligation on the basis of 1992-1995 income and the directive that his accountant prepare the figures
for those years. Therefore, we think the father should have the opportunity to present evidence to
challenge the income figures propounded by the mother and to advocate for the exclusion of items
included by the mother in her calculations.14 Thus, we decline to set the father’s child support
amounts on the basis of the mother’s unchallenged calculations. Further, we are unable, with only
the unexplained tax returns appearing in the record, to make the necessary determinations on the
inclusion or exclusion of specific items from the calculation of the father’s gross or net income for
child support purposes. Therefore, we must remand this case to the trial court for the taking of
evidence relevant to determination of the father’s income for each of the years relevant to
prospective and back support.15

        On remand, the trial court shall set the prospective child support on the basis of the father’s
actual recent income, which may be determined by averaging his income in the number of years
determined by the trial court to be the most appropriate for predicting future income, but no more
than four. The court shall include in the average the most recent year for which information is
available.16 The gross income for each year shall be determined by the court, after proof, in
accordance with the principles set out above regarding losses and deductions from secondary


         13
           (...continued)
         may present evid ence of the no ncustodial p arent’s income obtained during discovery, as well as other
         evidence of the need for more support than the guidelines require. Thereafte r, the burde n shifts to the
         noncustodial parent to dispute the custodial parent’s evidence, to present proof of other factors
         affecting the amoun t of suppor t, or to demo nstrate why th e trial court should depart from the
         guidelines.

Id. (citations omitted).

         14
           W e note that an obligor has the burden of demo nstrating that a challenged business de duction is a re asonable
expense necessary to produce income. Norton, 2000 WL 52819 at *5. Similarly, on remand, the father will have the
burden of establishing the allowab ility for child support purposes of any red uctions in gross income he claims.

         15
            This court may remand cases where we determine that complete justice cannot be done on appeal and where
the record indicates that m ore satisfactor y evidence c an be pre sented on r emand. Kaatrude, 21 S.W .3d at 250 .

         16
          At the February 2000 hearing, the father’s tax return for 1999 was not available, and apparently no other
evidence of his 1999 income co uld be pro duced a t that time. Presu mably it would be availab le for any hearing on
remand, and information on his 2000 income may also be available.

                                                          -16-
business or investment activities and in accordance with the guidelines. Net income shall be
determined by the formula set out in the guidelines.

        Back child support shall be determined by calculating the child support due based on the
father’s actual income for 1996, 1997, 1998, 1999, and 2000 and subtracting therefrom the amounts
actually paid by the father during those years. The mother is entitled to an award of the difference
as back child support.

                                       V. Prejudgment Interest

        The mother next argues that the trial court should have granted her request for prejudgment
interest on the arrearage, or back child support. She argues that since the arrearage was calculated
using the father’s accountant’s testimony, the father cannot in good faith argue that the amount is
incorrect or that he was not obligated to pay on the basis of a correct determination of his net income.
She also argues that the trial court mistakenly considered an award of prejudgment interest to be
punitive in nature.

        The relevant statute provides that prejudgment interest “may be awarded by courts or juries
in accordance with the principles of equity . . .” Tenn. Code Ann. § 47-14-123. Where the amount
of an obligation is certain, or can be ascertained by a proper accounting, and the obligation is not
disputed on reasonable grounds, courts may allow prejudgment interest, because loss of use of funds
by the obligee is the result of the failure to pay an obligation according to its terms, and interest is
the usual means of compensating for this loss of use. Mitchell v. Mitchell, 876 S.W.2d 830, 832
(Tenn. 1994). The decision whether to award prejudgment interest is within the discretion of the
trial court. Spencer v. A-1 Crane Service, Inc. 880 S.W.2d 938, 944 (Tenn. 1994); Brandt v. Bib
Enterprises, Ltd., 986 S.W.2d 586, 595 (Tenn. Ct. App. 1998). The same standard applies to past
child support obligations. Silverstein v. Rice, No. W1999-01336-COA-R3-CV, 2000 WL 33146933
at *5 (Tenn. Ct. App. Oct. 20, 2000) (perm. app. denied Apr. 9, 2001).

         A party seeking to have a lower court’s holding overturned on the basis of abuse of discretion
undertakes a heavy burden. The abuse of discretion standard is intended to constrain appellate
review and implies “less intense appellate review and, therefore, less likelihood of reversal.” BIF
v. Service Constr. Co., No. 87-136-II, 1988 WL 72409 at *2 (Tenn. Ct. App. July 13, 1988) (no
Tenn. R. App. P. 11 application filed). As a general principle, an appellate court will not reverse a
decision that lies within the discretion of the trial court unless it affirmatively appears that the lower
court’s decision was against logic or reasoning and caused injustice to the complaining party.
Ballard v. Herzke, 924 S.W.2d 652, 661 (Tenn. 1996). The fact that a decision is discretionary with
a trial court necessarily implies that the trial court has a choice of alternatives among a range of
acceptable ones; the reviewing court’s job is to determine whether the trial court’s decision is within
the range of acceptable alternatives, given the applicable legal principles and the evidence in the
case. “While we will set aside a discretionary decision if it rests on an inadequate evidentiary
foundation or if it is contrary to the governing law, we will not substitute our judgment for that of


                                                  -17-
the trial court merely because we might have chosen another alternative.” Kaatrude, 21 S.W.3d at
248.

        In the case before us, the father has paid child support in the amount initially set by the trial
court. This court found that amount to be incorrect, but remanded for determination of the correct
amount. Under the facts of this case, we do not find that it was inequitable for the trial court to
refuse to grant the mother prejudgment interest, and, therefore, find that the court’s decision was
within the range of acceptable alternatives. We affirm the denial of prejudgment interest.

                                            VI. Conclusion

        Based on the reasoning set out above, we vacate the trial court’s award of child support and
hold that prospective child support should be set using the most current income information and that
the back child support should be computed using actual income figures for each year since 1996.
Because the record does not contain all the evidence necessary for this court to calculate the father’s
actual net income, we must remand the case for the trial court to take such evidence as is necessary
and to establish the father’s prospective support obligation, from the date of the order on remand,
and to establish the father’s back support obligation, up to the date of the order on remand, in
accordance with the instructions in this opinion. The father shall continue to pay child support in
the amount set by the trial court, $7,870 per month, until the order on remand is entered. The court’s
denial of prejudgment interest is affirmed.

       The case is remanded for such further proceedings as may be necessary, consistent with this
opinion. The costs of this appeal are taxed to the Appellant, Bowdoin Grayson Smith, for which
execution may issue if necessary.



                                                         ___________________________________
                                                         PATRICIA J. COTTRELL, JUDGE
\




                                                  -18-
