David H. Levy, Kevin R. Yeanoplos, Leslie Dawson, Kenneth G. Raggio, and James Godbout
Presented to
AICPA/AAML Divorce Law Conference
May 2009
Precis:
All jurisdictions have their methods of identifying and capturing resources for determination of both spousal support and child support. This program will emphasize the practical ways of identifying income as well as some of the challenges in doing so. In addition to the discussion in the article and in the live presentation, materials to help focus and aid the practitioner in this endeavor are included.
I. Identity of Income
A. Broad definition – Internal Revenue Code § 61, R.R.1.61-1
B. Examples of Statutory Definitions
a. Broad definition of income
b. Income excludes specifics types of cash receipts (welfare payments, child support, net resources of a new spouse, etc.
c. Reduces income for taxes incurred on that income, health insurance, mandatory retirement contributions and union dues.
d. Rental income is reduced for mortgage payments but not deprecation.
e. Self-employment income is defined consistently with business principles and federal tax law.
f. Income includes capital gains distributions but not return of capital.
g. Specifically allows imputation of income to party unemployed or underemployed intentionally, and deemed income attributable to use of assets that do not currently produce income.
a. Broad definition of income.
b. Income excludes specific types of cash receipts (childsupport, public assistance).
c. Reduces income for taxes incurred on that income, health insurance, mandatory retirement contributions and union dues.
d. No specific discussion statutory definition of rental income. However, case law indicates depreciation is not an allowable deduction for child support purposes.1
e. Allows expenses “required for the production of income” against self-employment/business income.
f. No statutory guideline for capital gains. Traditionally have been excluded, however, a recent case indicates the Courts are beginning to allow2.
g. Specifically allows imputation of income to party if it is the best interest of the children.
a. Broad definition of income.
b. Does not exclude specific types of cash receipts.
c. Reduces income for taxes incurred on that income, health insurance, mandatory retirement contributions and union dues.
d. No statutory definition of rental income.
e. Allows deduction for “necessary expenses for the production of income” (including debt repayment) against selfemployment/business income.
f. No statutory guideline for capital gains – assume included.
g. No statutory allowance for imputation of income.
C. What’s traditionally not included in the definition of support
II. Identity of Business Income – Not necessarily the “taxable income”
A. Only expenses “required for the production of income” are generally allowed against gross income
B. Non-taxable benefits from employment
C. Business owner perquisites – travel & entertainment; meals; automobile use; cell phone; continuing education; etc
D. Partnerships and S Corporations – taxable income versus distributions
E. Requirement to retain income in business for prudent reserve
F. Requirement to retain income for expansion
II. Unusual or Wacky Income
A. Gifts
B. Proceeds from Loans
C. Forgiveness of Loans
D. Inheritance
E. Capital Gains
F. Stock options
G. Bonuses
H. One Time Receipt Items – i.e. lottery winnings
I. Barter
J. Personal Injury Awards
III. Negatives affecting income
A. Legitimate loss of job
B. Legitimate diminishment of income
C. Addressing temporary versus permanent nature of income loss
D. Requirements for imputation of income for personal services
IV. Cash
A. How to quantify
B. How to identify unreported cash situations
V. Ethical considerations
A. How to address income not reported on tax returns
B. Saddling a spouse with an unrealistic support obligation
VI. Consequences of Income in Court
A. How is it to be determined
B. Income for tax purposes versus income for support
C. Time period to consider
D. Impact of sworn testimony in open Court
E. Reductions or Increases of ordered amounts – factors required for modifications
F. Abatement of support
Appendix:
Texas Family Code § 154.062 “Net Resources”
Texas Family Code § 8.055 “Amount of Maintenance”
California Family Code § 4058 – “Annual Gross Income”
California Family Code § 4059 “Annual Net Disposable Net Income; Computation”
California Family Code § 4320 “Considerations in Order in Spousal Support”
Illinois Family Code §505 – “Child Support; Contempt; Penalties”
Article, Show Me the Money, Ronald L. Seigneur and Kevin R. Yeanoplos, ABA Family
Law Section, Family Advocate Magazine, Spring 2009
Article, Income for Support in a Down Economy, Leslie Dawson, AICPA
1 Asfaw v. Woldberhan (2007) – 147 Cal.App.4th 1442
2 In re: Marriage of Pearlstein (2006) – 137 Cal.App.4th 1361
3 In re Marriage of Alter (2009) – 171 Cal.App. 4th 718
4 In re Marriage of Rogers (2003) – 8025 N.E.2d 1247
5 Roseman v. Salsbury, Clements, Beckman, Marder & Adkins, LLC (2010) – NEED SITE
6 In re Marriage of Heiner (2006) – 136 CaI App.4th 1514
7 In re Marriage of Bardzik (2008)- 165 Cal.App.4th 1291