SupportGuidelines.com | Article: Hidden Sources of Income

This article is taken from chapter 2 of Child Support Guidelines: Interpretation and Application (Aspen Law & Business 1996 & Supps).

HIDDEN SOURCES OF INCOME

Laura Wish Morgan

I. INTRODUCTION

Family law practitioners have learned not to overlook unusual assets for purposes of equitable distribution. Unusual assets that can be equitably divided include frequent flyer points, points for hotel programs, country club memberships (including golf clubs, swim clubs, tennis clubs, etc.), credit card points, season tickets to sporting or cultural events, equity in auto leases, transferable government permits (e.g., Individual Fishing Quotas, taxi medallions), general powers of appointment, accrued vacation or sick time, book royalties less future post-marital marketing efforts, and, in some states, celebrity good will.

Family law practitioners must also learn not to be constrained when it comes to looking for income for purposes of spousal and child support. In a family law case, unlike other civil cases, a certain amount of disclosure is required by rule of court. The parties must, by the use of mandated forms, disclose income and certain expenses. Indeed, some states even require that this information be updated annually, even after the support order is entered. See Shofmaster v. Shofmaster, 138 N.H. 460, 642 A.2d 1361 (1994) (where financial statement is required by law, parties have ongoing duty to keep statement up to date); Walles v. Walles, 295 N.J. Super. 498, 685 A.2d 508 (App. Div. 1996) (if one party obtains a modification due to a decrease in income, then that party has to provide updated financial data to allow the other party to seek reinstatement of original order if earnings then increase).

Moreover, most states also require that the statements made concerning income and expenses be verified and documented, specifically denoting the type of verification that is sufficient. The most common forms of verification of income are pay stubs for at least three months, employer statements, or, in the case of a self-employed parent, receipts and expenses, and federal income tax forms. See, e.g., In re Marriage of Krone, 530 N.W.2d 468 (Iowa Ct. App. 1995) (father's 1992 tax returns and pay stubs verified his income); Young v. Muthersbaugh, 415 Pa. Super. 591, 609 A.2d 138 (1992) (father's pay stubs and letters from employers were sufficient to substantiate his income). The failure to comply with these requirements may result in reversal on appeal and a remand to the trial court for a redetermination of support with the appropriate disclosure, Crefasi v. Crefasi, 628 So. 2d 1274 (La. Ct. App. 1993); Zayed v. Zayed, 100 Ohio App. 3d 410, 654 N.E.2d 163 (1995), or may preclude a party from appealing an adverse decision. Hackman v. Hackman, 847 S.W.2d 193 (Mo. Ct. App. 1993) (father was precluded from appealing modification of support where he had not completed the appropriate Form 14); In re Marriage of Bucklin, 70 Wash. App. 837, 855 P.2d 1197 (1993) (father was not entitled to a reduction in support even though his hotel business was destroyed by a hurricane, because he failed to verify his income). In at least one state, the failure to make the required disclosure can result in the presumption that the noncomplying parent's income is the greater of 150% of the most recently available annual average covered wage for all employment as calculated by department of employment or training. Vt. Stat. Ann. tit. 15, § 662.

Some attorneys mistakenly presume that because the basic income and expense information must be disclosed and because the support calculation may then be accomplished by means of a calculator, there is no need for further discovery in a child support case. This is not true for two basic reasons. First, the required disclosure only begins to tell the story of income and expenses. Tax law is simply not controlling on what constitutes "income" for purposes of support. E.g., Stepp v. Gray, 58 Ark. App. 229, 947 S.W.2d 798 (1997) (chancellor may not use definitions of income in federal tax code to find true disposable income of child support obligor); Beardsley v. Heazlitt, 654 N.E.2d 1178 (Ind. Ct. App. 1995) (tax law is not controlling on definition of income, expecially where party is self-employed); In re Marriage of McBride, 166 Ill. App. 3d 504, 519 N.E.2d 1095 (1988) (tax law principles did not apply in computing father's net income for purposes of child support); Hudson v. Markham, 948 S.W.2d 1 (Tex. Ct. App. 1997) (court not bound by tax return; could discount business deductions that were really personal in nature). Second, the fact remains that some parties will simply not tell the truth in the required forms, and further discovery may be necessary to check the accuracy of the other party's financial statement.

The family law practitioners must therefore learn to go beyond the 1040, take additional discovery, and think of income that will not be reflected on tax records or even financial disclosure forms.

II. TAKING ADDITIONAL DISCOVERY

Discovery should be undertaken with the following goals in mind: marshalling the facts necessary to prepare for trial; confirming the initial good faith judgment that suit is warranted; narrowing and clarifying the issues; refining the theory and presentation of the case; preview the trial demeanor of witnesses and counsel; avoiding surprise at trial; and the preservation of evidence. L. Hampton, L. Moskowitz, S. Moskowitz, & F. Silberberg, "Discovery," Family Law Litigation Guide with Forms (Matthew Bender 1993) (discussion of general purposes of discovery).

The only general limitation imposed on the admissibility of evidence is that it be relevant; that is, the evidence must be rationally related to the issues in the case in that it tends to prove or disprove the issues which have to be decided. Relevance is thus the fundamental limitation on discovery. Further, evidence can be relevant and inadmissible if it is prejudicial, misleading, or confusing.

One particular issue regarding discovery has arisen on which the reported case law is split. The issue concerns how much discovery regarding a person's assets and income is permissible where the person is very wealthy and admits he can pay any reasonable child support order. In Estevez v. Superior Court, 22 Cal. App. 4th 423, 27 Cal. Rptr. 2d 470 (1994), the court accepted the "millionaire's defense" to discovery, and held that in the case of an extraordinarily high earner who stipulates that he can and will pay any reasonable amount of child support, discovery of the earner's lifestyle and net worth is not warranted. Rather, the only issue before the court is the reasonable needs of the child. On the other hand, in Miller v. Schou, 616 So. 2d 436 (Fla. 1993), the court rejected this argument. There, the court held that without knowing what the parent's financial status is, it is impossible for the court to determine what the reasonable needs of the child are. Accord In re Marriage of Shivers, 557 N.W.2d 532 (Iowa App. 1996) (party is entitled to inquire into other party's income, even though total incomes were above the highest amount, because ultimate award is in the court's discretion and the court has the right to be informed); Jeffress v. Johnson, No. 279 (Md. Ct. App. slip op. 10/25/96); Chambers by Cochran v. Sanderson, 107 Nev. 846, 822 P.2d 657 (1991); Shaw v. Cameron, 125 N.C. App. 522, 481 S.E.2d 365 (1997). But see Woodward v. Berkery, No. 97-0938 (Fla. 4^th DCA 12/17/98) (restricting mother's access to complete financial information of father, singer Tom Jones, because of mother's specific statement that she would turn over all information to the press).

III. INCOME THAT WILL NOT BE REFLECTED ON TAX FORMS

Normally, a 1040 form will reflect salary and wages, including tips, commissions, bonuses, profit-sharing, deferred compensation, severance pay, cost of living allowances, over-time pay, pay from second jobs, income from investments. Tax forms will also include payments that are intended to take the place of wages and salary, such as workers' compensation, unemployment insurance, disability insurance, disability pensions.

The family law practitioner should look for the following types of "income" that will not necessarily be reflected on a tax form:

Employer's contributions to tax-deferred savings plan. Shaver v. Kopp, 545 N.W.2d 170 (N.D. 1996).
Interest and dividend income that is reinvested and not received. In re Marriage of Tessmer, 903 P.2d 1194 (Colo. Ct. App. 1995); Fabiano v. Fabiano, 10 Conn. App. 466, 523 A.2d 937 (1987); In re Marriage of Fain, 794 P.2d 1086 (Colo. Ct. App. 1990); Tulloch v. Flickinger, 616 A.2d 315 (Del. 1992); Villanueva (Garcia) v. O'Gara, 282 Ill. App. 3d 147, 668 N.E.2d 589 (1996); Good v. Armstrong, 218 Mich. App. 1, 554 N.W.2d 14 (1996); Mower County Human Services ex rel. Meyer v. Hueman, 543 N.W.2d 682 (Minn. Ct. App. 1996); In re Marriage of Durbin, 251 Mont. 51, 823 P.2d 243 (1991); Mehne v. Hess, 4 Neb. App. 935, 553 N.W.2d 482 (1996); Cleveland v. Cleveland, 249 N.J. Super. 96, 592 A.2d 20 (App. Div. 1991); Erie County Department of Social Services on behalf of Trunfio v. LaBarge, 159 Misc. 2d 806, 606 N.Y.S.2d 520 (Fam. Ct. 1993); Geyer v. Geyer, No. 9-92-39 (Ohio Ct. App. 11/25/92); Darby v. Darby, ___ Pa. Super. ___, 686 A.2d 1346 (1996); Butler v. Butler, 339 Pa. Super. 312, 488 A.2d 1141 (1985); Klemetsrud v. Klemetsrud, No. 02A01-9306-CV-00150 (Tenn. Ct. App. 1993).
Social Security benefits. In re Marriage of Simon, 856 P.2d 47 (Colo. Ct. App. 1993); Forbes v. Forbes, 610 N.E.2d 885 (Ind. Ct. App. 1993); In re Marriage of Lee, 486 N.W.2d 302 (Iowa 1991); In re Marriage of Benson, 495 N.W.2d 777 (Iowa Ct. App. 1992); In re Marriage of Callaghan, 19 Kan. App. 2d 335, 869 P.2d 240 (1994); In re Marriage of Durbin, 251 Mont. 51, 823 P.2d 243 (1991); In re Marriage of Stringham, 124 Or. App. 626, 863 P.2d 504 (1993); Whitaker v. Colbert, 18 Va. App. 202, 442 S.E.2d 429 (1994).
Veterans' benefits, including military retirement benefits and veterans' disability benefits. McCall v. McCall, 596 So. 2d 2 (Ala. Civ. App. 1991); Belue v. Belue, 38 Ark. App. 81, 828 S.W.2d 855 (1992); Savelle v. Savelle, 650 So. 2d 476 (Miss. 1995); Cook v. Cook, 201 Wis. 2d 72, 547 N.W.2d 817 (Ct. App. 1996).
Military Personnel Fringe Benefits, foreign post allotments (FPA), overseas housing allowance (OHA), basic allowance for quarters (BAQ), basic allowance for subsistence or separate rations (BAS/Sep. Rats.), variable housing allowance (VHA). Rogers v. Sims, 671 So. 2d 714 (Ala. Civ. App. 1995);Berkbigler v. Berkbigler, 921 P.2d 628 (Alaska 1996); In re Long, 921 P.2d 67 (Colo. Ct. App. 1996);In re Marriage of McGowan, 265 Ill. App. 3d 976, 638 N.E.2d 695 (1994); Pegler v. Pegler, 895 S.W.2d 580 (Ky. Ct. App. 1995); Peterson v. Peterson, 98 N.M. 744, 652 P.2d 1195 (1982); Alexander v. Armstrong, 415 Pa. Super. 263, 609 A.2d 183 (1992); Hautala v. Hautala, 417 N.W.2d 879 (S.D. 1988).
Gifts, prizes, educational grants, lottery and gambling winnings. Cummings v. Cummings, 182 Ariz. 383, 897 P.2d 685 (Ct. App. 1994) (gifts); Gilbertson v. Graff, 477 N.W.2d 771 (Minn. Ct. App. 1991) (student loan proceeds); County of Contra Costa v. Lemon, 205 Cal. App. 3d 683, 252 Cal. Rptr. 455 (1988) (lottery winnings); Darden v. Darden, 66 N.C. App. 432, 311 S.E.2d 600 (1984) (father's income was not limited to sporadic income from job, but included income from gambling and numbers running).
The income of a new spouse or paramour to the extent that it reduces living expenses and makes other income available for support. Harris v. Superior Court (Smets), 3 Cal. App. 4th 661, 4 Cal. Rptr. 2d 564 (1992); Gilpin v. Gilpin, 664 N.E.2d 766 (Ind. Ct. App. 1996); Rogers v. Rogers, 923 S.W.2d 381 (Mo. Ct. App. 1996);Rodgers v. Rodgers, 110 Nev. 168, 887 P.2d 269 (1994); Ribner v. Ribner, 290 N.J. Super. 66, 674 A.2d 650 (1995); MacVean v. MacVean, 203 A.D.2d 661, 611 N.Y.S.2d 926 (1994);In re Marriage of Hardiman, 133 Or. App. 113, 889 P.2d 1354 (1995); McCarty v. Smith, 440 Pa. Super. 280, 655 A.2d 563 (1995); In re Paternity of Steven J.S., 183 Wis. 2d 347, 515 N.W.2d 719 (1994).
Expense reimbursements, such as the company car, employer provided residence (including a church parsonage), monthly or per diem expense allowances, pre-tax flex plan reimbursement for health or day care, transportation expenses, food or beverages provided, relocation expenses, entertainment expenses, E.g., Gray v. Gray, 242 Mont. 69, 788 P.2d 909 (1990) (housing, utilities, housing fuel, and telephone expenses at farm that lessor provided to husband constituted income).
In-kind income. Spilovoy v. Spilovoy, 511 N.W.2d 230 (N.D. 1994) (in-kind income contributed by the obligor's spouse included food, shelter, utilities, clothing, health care, and transportation, all of which constituted income); Carmon v. Commonwealth, Department of Social Services ex rel. Jones, 21 Va. App. 749, 467 S.E.2d 815 (1996) (income includes value of free room at boarding house in exchange for cleaning rooms).
The savings benefit to a parent as the result of being able to claim a child as a dependent. Scott v. Scott, 103 Md. App. 500, 653 A.2d 1017 (1995).
The retained earnings of a close corporation, sub-chapter S corporation, or partnership that could be distributed. Merrill v. Merrill, 587 N.E.2d 188 (Ind. Ct. App. 1992); Roth v. Roth, 406 N.W.2d 77 (Minn. Ct. App. 1987);In re Marriage of Glueck, 913 S.W.2d 951 (Mo. Ct. App. 1996);Boudreau v. Benitz, 827 S.W.2d 732 (Mo. Ct. App. 1992);Smith v. Smith, 197 A.D.2d 830, 602 N.Y.S.2d 963 (1993);Quamme v. Bellino, 540 N.W.2d 142 (N.D. 1995); Williams v. Williams, 74 Ohio App. 3d 838, 600 N.E.2d 739 (1991); In re Marriage of Perlenfein, 316 Or. 16, 848 P.2d 604 (1993); King v. King, 390 Pa. Super. 226, 568 A.2d 627 (1989); Fitzgerald v. Sharum, 857 P.2d 92 (Okla. Ct. App. 1993).
Depreciation on equipment that was taken for federal taxes may be added back in to income. Baker v. Baker, 183 Ariz. 70, 900 P.2d 764 (Ct. App. 1995); Pierce v. Pierce, 268 Ark. 864, 596 S.W.2d 364 (Ct. App. 1980); Emsley v. Emsley, 467 A.2d 700 (Del. Fam. Ct. 1983); Reid v. Reid, 822 P.2d 532 (Idaho 1992); Leisure v. Leisure, 589 N.E.2d 1163 (Ind. Ct. App. 1992); Cox v. Cox, 580 N.E.2d 344 (Ind. Ct. App. 1991); Harloff v. Harloff, 279 So. 2d 91 (Fla. Dist. Ct. App. 1973); Miller v. Miller, 610 So. 2d 183 (La. Ct. App. 1992); Mireille J. v. Ernst F.J., 220 A.D.2d 503, 632 N.Y.S.2d 162 (1995); Eberly v. Eberly, 12 Md. App. 117, 278 A.2d 107 (1971); In re Marriage of Pedersen, 261 Mont. 284, 862 P.2d 411 (1993); Houmann v. Houmann, 499 N.W.2d 593 (N.D. 1993); Kamm v. Kamm, 67 Ohio St. 3d, 616 N.E.2d 900 (1993); Sizemore v. Sizemore, 77 Ohio App. 3d 733, 603 N.E.2d 1032 (1991); Holland v. Holland, 444 Pa. Super. 251, 663 A.2d 768 (1995); Flory v. Flory, 364 Pa. Super. 67, 527 A.2d 155 (1987); Hopkins v. Hopkins, 1993 Tenn. App. LEXIS 273 (1993); Powell v. Swanson, 893 S.W.2d 161 (Tex. Ct. App. 1995); Houston v. Smith, 882 P.2d 240 (Wyo. 1994).
Inappropriate business expenses for the self-employed obligor may be added back into income. In re Marriage of Eaton, 894 P.2d 56 (Colo. Ct. App. 1995); McGinley-Ellis v. Ellis, 638 N.E.2d 1249 (Ind. 1994); Johnson v. Johnson, 533 N.W.2d 859 (Minn. Ct. App. 1995); Roberts v. Wright, 871 P.2d 390 (N.M. Ct. App. 1994); Sizemore v. Sizemore, 77 Ohio App. 3d 733, 603 N.E.2d 1032 (1991); Minnich v. Minnich, 898 P.2d 747 (Okla. Ct. App. 1995); Fettig v. Kailes, 124 Or. App. 455, 863 P.2d 476 (1993).
Voluntary contributions to pension, retirement, savings plans, and voluntary debt reduction, although deductible from income for tax purposes, may be added back into income. Nelson v. Nelson, 651 So. 2d 1252 (Fla. Dist. Ct. App. 1995) (voluntary contribution to pension plan not deductible); State ex rel. Nielsen v. Nielsen, 521 N.W.2d 735 (Iowa 1994) (party cannot claim as deductions to income payments for voluntary savings, indebtedness, current child support, and IRS settlement); McCarty v. McCarty, 192 Mich. App. 279, 480 N.W.2d 617 (1991) (voluntary contribution to retirement account is income); Parzynski v. Parzynski, 85 Ohio App. 3d 423, 620 N.E.2d 93 (1992) (husband's pension contribution was income to him, where he owned 50% of his business and could thus control his contribution).

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