Child Support Calculation With Unusual Forms of Income

Every year, our court system issues many important rulings pertaining to divorces.  While the legislators try to write very clear laws, sometimes, it takes a court to apply the law to individuals’ circumstances.  And even then, the court can err.  That is why we have appeals courts.

Working in the Silicon Valley, I often deal with “unconventional” types of income.  This is why I find special interest in rulings dealing with startup CEO’s, investors or anyone else who doesn’t derive regular income from a standard every day paycheck.  Below is one such summary reprinted from the California Family Law Report.

In this divorce, “Marriage of Berger”, the court deals with the issue of whether someone who is wealthy, can basically “live off their savings” and as such claim they have little t0 no income (On which support is based).  I think it is interesting that the court states:

“The justices saw no reason to allow Marc to avoid paying his fair share of support simply because he was wealthy enough to defer a sizable amount of his salary. “It would be ironic indeed,” the justices declared, “if we allowed the fact that Marc does not need a job to support himself in the short-term — as a less wealthy man would — to be spun into the justification for granting him a break from the obligation to support his family.” The panel reversed the lower court’s order and remanded, with directions to the court to recalculate Marc’s support obligations “at a level commensurate with” his deferred earnings, and to reconsider an attorneys’ fee order by “treating Marc as though he has actually received that income.”

Here is the full text.

Rachael and Marc Berger were married in 1991; their two daughters were born in 1992 and 1994. In 2001, Marc resigned as a partner at PricewaterhouseCoopers (PWC) in order to work full time as president and CEO of X-Scapes, a landscaping business that he and other investors had started earlier that year. X-Scapes offered financed landscaping to new-home developers, who could then offer it to home buyers as an optional enhancement. The business, which was Marc’s brainchild, was capitalized by $1 million in cash contributions from the other investors; Marc got credit for $500,000 in “ ‘sweat equity.’ ”

Rachael and Marc separated in November 2002; he filed for divorce 13 months later. In October 2003, the trial court entered their status-only disso judgment, and ordered Marc to pay $3,500 in monthly child support and $4,000 in monthly spousal support until the remaining issues were resolved. In mid-2005, the parties sold their family home and split sale proceeds that exceeded $2 million. A few months later, Marc filed an OSC, seeking to modify the support orders; he claimed that he couldn’t make the payments on his current salary. He asserted that he had earned up to $600,000 annually at PWC, but said that his salary at X-Scapes never exceeded $215,000, and was then about $2,000 a month.

In February 2006, Rachael and Marc stipulated that his support payments would be suspended from December 2005 on, subject to reinstatement at trial. They also stipulated that Rachael would have custody of the girls, and Marc would have scheduled visitation. Prior to trial, Marc submitted an I&E declaration, reporting income that “ ‘varies’ ” and monthly expenses of $21,372. Rachael, who worked part time at a financial firm for $15 an hour, reported monthly expenses of $17,749. At the start of the trial in April 2006, Marc testified that because X-Scapes was in financial trouble, he and the other officers agreed to amend their employment contracts by reducing and deferring their salaries. Marc had been paid, he said, $2,000 a month “since some time in 2005,” an amount that covered only health insurance for himself, Rachael, and the kids; he’d been living on his share of the divided community-property assets, which then amounted to $800,000. Marc admitted that the annual income he agreed to defer “was as high as $350,000,” but said that he believed that the deferred salary “would ultimately be ‘converted to some type of equity ownership’ ” when X-Scapes was on more solid financial footing. Meanwhile, Marc testified, he’d obtained a $1.8-million loan for the purpose of purchasing a lot in Laguna Beach and building a house thereon. He explained that he was sticking with X-Scapes because he’d made loan guarantees that would force him into bankruptcy if the company failed. The trial took place on four days spread over six months, ending in October 2006. In his final testimony, Marc said that his liquid assets had dropped from $800,000 to $450,000, and that he had $500,000 equity in the Laguna Beach lot. In April 2007, the court issued a statement of decision in which it declined to impute to Marc a level of income comparable to what he earned at PWC, as Rachael had requested, or to order him to pursue other job opportunities. The court did order Marc to report quarterly on the financial status of X-Scapes and on any jobs that he had sought. The court found that Marc had accrued “ ‘somewhere around $350,000 in deferred income,’ ” with actual monthly income of $2,000, to which it added imputed income of $3,168 a month from return on investments. The court also imputed income to Rachael of $1,875 for return on investments. Marc was ordered to pay child support of $1,115 a month, but no spousal support was ordered. The court declined to make an attorneys’ fee order, citing the parties’ parity of income. It reserved jurisdiction over the deferred salary and future loans or monies that Marc might receive from X-Scapes, as well as over attorneys’ fees.

Rachael appealed, and the Fourth District reversed and remanded.

Coulda, shoulda, woulda . . .
Rachael contended that the first mistake the trial court made was failing to impute to Marc the same level of income that he earned at PWC. The justices disagreed, pointing out that in order to prevail on this point, Rachael had to show more than the fact that Marc had once earned a certain amount or even that he still possessed the same “skills and qualifications” that made his previous earning level possible. She needed to present evidence, the justices said, showing that Marc “could have resumed that work,” either through the testimony of a vocational evaluator, as was done in In re Marriage of Mosley (2008) 165 Cal.App.4th 1375, 82 Cal.Rptr.3d 497, 2008 CFLR 11001, 2008 FA 1354, or through other evidence showing the availability of jobs for which he was qualified and that paid what he once earned. But Rachel had failed to present any such evidence at trial. Therefore, the panel concluded, the trial court had not erred by refusing to impute a higher income level to Marc.

The long and the short of it . . .
The justices then looked to see whether the lower court erred by failing to measure Marc’s current income or earning capacity “by the salary he was contractually entitled to receive,” without considering the income he deferred. They were willing to assume, as the trial court had, that Marc was deferring his income in good faith because that was the prudent thing to do, given the financial condition of X-Scapes. But the panel reminded him that the “first and principal obligation” that a parent has is to support his or her children. By voluntarily deferring income, Marc was, “in effect,” investing in X-Scapes while depleting his other assets. But as he was “shoring up the company’s capital,” the justices said, Marc was “able to claim only minimal current earnings, and thus minimal ability to pay current support.” Marc hadn’t been forced to defer his income, the panel noted; he could have decided not to defer his salary, used his other assets to prop up the company’s finances, and had monthly income with which to make his support payments. The justices concluded that “Marc cannot unilaterally, and voluntarily, arrange his business affairs in such a way as to effectively preclude his children from sharing in the benefits of his current standard of living.” Therefore, the trial court erred in calculating his support obligation by failing to consider the amount of monthly salary that Marc deferred.

Isn’t he special . . .
The justices also reasoned that the lower court could have looked at Marc’s deferred income as a special circumstance justifying a departure from guideline child support. The special circumstance here, they explained, was the voluntary agreement by Marc to keep working for a company that is unable to pay him his full salary and his ability to take that action because he has sizable assets he can use to support himself. The panel pointed out that this decision hadn’t diminished Marc’s lifestyle, but it had shortchanged his family. The justices saw no reason to allow Marc to avoid paying his fair share of support simply because he was wealthy enough to defer a sizable amount of his salary. “It would be ironic indeed,” the justices declared, “if we allowed the fact that Marc does not need a job to support himself in the short-term — as a less wealthy man would — to be spun into the justification for granting him a break from the obligation to support his family.” The panel reversed the lower court’s order and remanded, with directions to the court to recalculate Marc’s support obligations “at a level commensurate with” his deferred earnings, and to reconsider an attorneys’ fee order by “treating Marc as though he has actually received that income.”