Sunday, May 24, 2015

Income Imputation Issues

Patnode v. Urette, 2015 VT 70

By Andrew Delaney

Long-distance relationships are never easy. Add a child to the mix and things can get exceedingly difficult. This is the third SCOV opinion in the five years since this one fizzled out (I almost said “went south” but as dad lives in Florida, that seemed unfair).

So, the last time the parties were at the SCOV, we said something like the SCOV “dodges this bullet” in avoiding a child-support issue not properly before it. On reflection, we probably should’ve said something more along the lines of “avoids the inevitable.” The parties have a nine-year-old daughter together. Mom’s primarily a Vermonter; dad’s primarily a Floridian. The SCOV articulates the parties’ relationship thusly: “After their break-up, mother filed this parentage action in 2010 and the parties have been engaged in litigation regarding parent-child contact and child support ever since.” Good times.

This appeal is, as alluded to above, about child support. Specifically, mom says the trial court should’ve imputed income to dad because dad has an interest in a business and it made property sales in 2008 and 2010.

Dad is self-employed in the family business and owns 45% of two companies with significant real-estate holdings. Two eminent-domain sales in 2008 and 2010 created potential capital gains. The 2008 sale caused dad to have an approximately $1.75M gain on his taxes that year, and the company distributed enough to dad to cover his tax liability, with the rest of the proceeds being used to make payments on notes on the property. The 2010 sale proceeds were used to acquire another property in a like-kind exchange, and accordingly did not result in a capital gain.

In calculating dad’s income, the magistrate noted (despite mom’s request to the contrary) that you couldn’t really base it on the book value of the assets because they’re income-producing assets. The magistrate also noted that there was no real valuation of dad’s interest and—because dad is a minority shareholder—valuing his interest is particularly difficult because he doesn’t have control over distributions or sales.

The magistrate did impute income from the 2008 sale even though it was remote from the child-support proceeding to the extent it increased dad’s income-generation ability—by increasing his equity in the company—and imputed an annual income “based on the average long-term interest rate for treasury securities as applied to the amount of the 2008 capital gain income.”

Both parties appealed to the family division. The family division reversed on the 2008 capital-gain issue on the basis that it was a one-time event and not recurring income. The family division noted that to the extent the sale produced income-producing assets, the magistrate could use those assets to impute income to dad. And so it went back to the magistrate, who recalculated child support without including the imputed income from the 2008 sale at all. Mom appealed, the family division affirmed, mom appealed to the SCOV, and that’s how an appellate opinion is born.

The SCOV begins by noting its review of the case is based on the magistrate’s record just like the family division’s review—which makes the SCOV and the family division appellate review twinsies if you want to be all silly about it. Anywho . . . this means deference to facts as found by the magistrate and affirmance if there’s support for the conclusions of law in the factual findings.

Mom argues that both the 2008 and 2010 sales should’ve resulted in imputed income to dad. First, mom says that the family division screwed up because the magistrate really found that the 2008 sale resulted in income to dad, and the family division should’ve stuck to that finding. Despite mom’s this-is-a-factual-question framing, the SCOV notes that whether the 2008 sale meets the statutory definition of gross income is a question of law and it can do whatever it wants.

In this context, the SCOV notes that the statute dictates that child support be based on “available income,” which in a nutshell is gross income minus certain expenditures. While the SCOV goes through the motions and talks about what gross income is and isn’t, it doesn’t matter in regards to the 2008 sale. The SCOV reasons that “the receipt was too remote in time to be included as income at the time this parentage action was filed.”

The SCOV explains that child support has to be based on the current financial situation of the parties and so, even if the 2008 sale was “income,” because the case was filed in 2010, that’s the furthest back the calculation can go. Otherwise, it’d frustrate legislative intent and SCOV-ie don’t play dat. The SCOV is careful to limit its holding, however, noting that historical income could certainly be relevant in imputing income attributable to voluntary underemployment or unemployment and the like.

There’s more discussion of the point, but it doesn’t change the bottom line. The SCOV does briefly discuss the idea that a non-income producing asset can impute income “at the current rate for long-term U.S. Treasury Bills” under this statute, that doesn’t apply in this case because the company is invested in income-producing assets. So that’s that—nothing gets imputed from the 2008 sale.

Mom also argues that the 2010 sale should’ve resulted in imputed income to dad because it increased his asset base. The SCOV disagrees. There was no taxable gain to dad and the money was reinvested in a similar property. It didn’t necessarily cause an increase in the amount of money dad had available for his personal use, and to the extent the asset is income-producing, that’s already factored into the calculation of dad’s income.

Child support can be complicated in some cases and this one falls squarely into the complicated category. I’m sure it was difficult for the magistrate to look at $1.75M in capital gains and despite its remoteness say, “Nope, doesn’t count.” But that, as they say, is the way the cookie crumbles.

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