Reductio Ad Absurdum

Family lawyers are often perplexed by individuals who have variable or seasonable income. An actor can make a huge amount of money for three months work on a film and then have nine months of unemployment. A commission sales person can be lured to a new job by an initial large bonus characterized as a “loan” which is thereafter immediately forgiven over the succeeding years of employment. How should a court deal with that individual’s income for the purposes of child/spousal support and attorney’s fees?  The recent case of In re Marriage of Riddle, (2005) 125 Cal.App.4th, 1075, 23 Cal.Rptr. 3d 273, discusses these issues and provides a road map for handling same.

At the Riddles initial orders to show cause for pendente lite child and spousal support heard on February 28, 2003, the court found that Mr. Riddle’s available income for support was $21,950.00 per month. The court ordered that Mr. Riddle pay $3,619.00 per month in child support plus $4,338.00 monthly in spousal support plus 16% of any income in excess of $21,950.00 per month as additional child support and any monthly income in excess of that amount he would pay 20% of that figure for spousal support.

Mrs. Riddle was, by her own admission, a stay-at-home mom with no income.

The husband appealed and the trial court was reversed.

The Appellate Court found that the husband, a commissioned financial adviser for a major investment firm, had essentially four components to his income. One of these was a forgiveness of approximately one million dollars of moneys advanced to Mr. Riddle by his employer as an inducement to lure him to his new job. Essentially, for income tax purposes, the husband was credited with approximately $11,400.00 per month of income representing the monthly loan forgiveness.

The other portion of husband’s income consisted of a draw of approximately $2,000.00 per month and commissions. The Trial Court had deducted from husband’s income the  $11,400.00 of debt forgiveness per month before arriving at the figure of $21,950.00 per month as husband’s income.

The Appellate Court had no problem with the Trial Court’s exercising of its discretion in deducting the $11,400.00 from the available income of the husband. While no one appealed the court’s exercise of its discretion in dealing with such “phantom income”, representing moneys that the husband and wife had received years before, no one had appealed the issue. Nevertheless, the Court of Appeals in dicta acknowledged such authority can be found in In re Marriage of Kirk, (1990) 217 Cal.App.3d at Page 607 which ameliorated the harsh effects of assessing “phantom” income as imputed income by the tax laws under the circumstances of any given case.

What was appealed, and of concern to the Appellate Court, was the Trial Court’s selection of the time period used to determine Mr. Riddle’s other available income for determining support.

In determining husband’s income at the February 28, 2003 court hearing, the court used only the earnings for January and February of 2003. That amount included what the Appellate Court characterized as a “whopping large” commission that husband had received earlier that month. For the two months of 2003 the total figure arrived at, after deducting for the forgiveness of debt, was $21,950.00 per month or $263,400.00 annually.

The Appellate Court noted that the Trial Court had before it the husband’s historical earnings for the 12 months of 2002 which had been $216,408.63, or $18,034.05 per month. After deducting the $11,423.00 of forgiveness of debt, the monthly figure would be $6,611.05.

The Appellate Court discussed the inter-play between Family Code Section 4060 and Family Code Section 4064. Family Code Section 4060 gives a trial court discretion to adjust the annual net adjustable income required for a support order when dividing net disposable income by 12,  if same “does not accurately reflect the actual or prospective earnings of the parties at the time the determination of support is made”.  Family Code Section 4064 gives a trial court the authority to adjust a child support order “as appropriate to accommodate seasonal or fluctuating income of either parent”.

The court stated that the Family Code clearly has a preference for an income figure based upon 12 months. As the court stated:

“In short, there is a heavy emphasis on 12 months or ‘annual’ income as a bench mark for the calculation. Which is, to think of it, only common sense anyway:  the income tax laws which, like support orders, are focused on income, are also  framed, not in terms of artificially truncated and therefore unrepresentative  slices of time, but in terms of whole years.

As such, the court concluded that in this case using a slice of two months as a picture of husband’s income was inaccurate and not a realistic time sample. As the court so colorfully stated:

“(…and the case before us practically represents a reductio ad absurdum for too short a period…) clearly exaggerates events in that period. Here, husband obtained a whopping large commission in February 2003, and the trial court predicated its order on the unrealistic theory that such commissions, clearly out of line with what he was making in just the previous 12 to 14 months, would continue indefinitely. We have only to flip the facts around to see the speciousness of the analysis:  Had the Husband had a lean two months in the period January through February 2003, an order predicated on just those two months would have unrealistically understated his income. Additionally, time periods that are too short may unrealistically exaggerate economic micro-trends that may, over longer periods, smooth themselves out. Surely anyone who has even casually followed the Dow over the past decade knows that there can be periods of many months of up followed by many months of down–over the course of a year a trend may emerge, but slicing just one small period of a few months is likely to yield a high unrepresentative picture.”

The Appellate Court went on to note that this was not a case where there was a record sufficient to support an imputed income award. The court noted this was not a case like In re Marriage of Destin (2001) 91 Cal.App.4th 1385, where a spouse who had never had a real job since the marriage (given that he had sold his business before the marriage) and had sizable separate but illiquid holdings in real estate from which a return could be imputed in order to ascertain income. The court further noted that this case was not a variation on the theme of deliberate unemployment upon which other cases have supported a finding of imputed income. The court cited In re Marriage of Hinman, (1997) 55 Cal.App.4th 988 and In re Marriage of Padilla. (1995) 38 Cal.App.4th 1212. In Padilla the  parent resigned his current employment to start a business which, at the time of the hearing, was not generating any income at all.

The Riddle court noted that the Trial Court could not now charge Mr. Riddle with the ability to earn the type of moneys that he had historically earned in the late 1990’s as a commissioned investment salesperson, since this was the year 2003. The court explained:

“This is the logical fallacy of extrapolation, in which some series of events in the past is necessarily assumed to continue in exactly the same way into the future. Pretty much every sentient adult in the United States knows that the stock market did not continue to go up in the early 2000’s the way it had in the late 1990’s. The idea that a salesperson will necessarily do in the immediate future what he did in his or her best of recent years is both illogical and contrary to Rosen’s principle that samples must be representative, not selected to skew results one way–or the other.”

The Appellate Court was referencing the case of In re Marriage of Rosen, (2002) 105 Cal.App.4th 808 which, in the context of calculating the goodwill of a small law firm held, that the time period on which income is calculated must be long enough to be representative.

The Court noted that the time sampling must be reasonably illustrative of the actual earnings. What was implicit in Rosen as regards to a goodwill calculation the Appellate Court in Riddle now sought to make explicit as to support orders. The court stated:

“It is a manifest abuse of discretion to take so small a sliver of time to figure income that the determination essentially becomes arbitrary. And under the facts of this case, no other word but ‘arbitrary’ properly describes the trial court’s selection of the last two months to determine husband’s income. A mere two months is an embarrassingly short period on which to predict the annual income of a commissioned sales person who works in the financial market.”

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