What Constitutes Income for Child Support

In the recent case of Yesem Asfaw v. Zeman Woldberhan, 2/27/07 DJDAR 2721. BI82096 (Second Appellate District Division 8)  the appellate court found that in determining what made up available income to utilize the formula for child support pursuant to Family Code Sections 4058 and 4059,  that in certain circumstances depreciation is not an allowable deduction from gross income.

The case involved a non-custodial father whose source of income was monies received from various investments including apartment buildings. In determining his income available for support calculations  with respect to money derived from his rental properties, the court deducted depreciation. The mother appealed and the appellate court reversed.

As the appellate court stated:

“Our analysis of the statutory language, the stated California policies attendant to a parent’s child support obligations, and the available authorities on the subject, cause us to conclude that depreciation is not deductible, and that trial court erred in this respect.” DJDAR at page 2722-2723.

The appellate court had to define very specifically what constituted gross income for child support pursuant to Family Code Section 4058. The relevant section, in pertinent parts, reads as follows:

“(a) The annual gross income of each parent means income from whatever source derived…, but is not limited to, the following:…(2) income from the proprietorship of a business, such as gross receipts from the business reduced by expenditures required for the operation of the business.”

After a discussion of the legislative history of the code section, different states approach to the question of depreciation used for child support, and Webster’s Dictionary, the appellate court explained the difference between a business expense and a business expenditure in the context of child support. The court stated:

“…an expenditure involves the paying out of something, usually cash, for, by way of example, rent, equipment or inventory. By contrast, an expense is a cost of doing business and may or may not involve an actual payment of money.” DJDAR at page 2725.

The appellate court found that the legislative use of the word expenditure in Family Code Section 4058, dealt with actual cash payments that were necessary to run the business. As the court stated:

“A proprietor cannot operate a business without inventory, without employees, without paying taxes, and so forth. A business can be conducted without a deduction for depreciation.” DJDAR at page 2727.

As such, the case was remanded to the trial court with instructions to recalculate the child support payments adding back the income that was deducted for depreciation.

The appellate court begged the question of allowing depreciation as a deduction from gross income for the calculation of child support in other circumstances. Those points were raised in footnotes 11 and 12 of the opinion.

Footnote 11 states as follows:

“We do not suggest that promotion of the long-term health of a business is unimportant; Only that the legislature did not apply a deduction for it in calculating child support.”

Footnote 12 states as follows:

“Our opinion addresses only depreciation deductions for rental income. The parties do not raise and we have not considered, other types of depreciation, such as for equipment, nor do we address the treatment of actual reserved accounts. (Citing cases).”

In a situation where a small business proprietor acquires computers and other high tech items on a four year cycle, if that individual pays child support, and the amount is set the year that he purchases same, the acquisitions now may have to be expensed out from his income in the year he acquires the property. As such, his gross available income for the child support calculation would be lower than usual based on this one time expense.

On the flip-side, this proprietor  may be placed in a situation where the computers/high tech equipment that he purchased in year one has to be replaced in year four. If his income for years two and three are used for the child support calculation, his  gross income would be higher than year one, making his child support higher. Further, any reserve account (retained earnings) that he had kept in the three years anticipating having to replace high tech computer equipment, would be available for income to be included in the new child support calculation. This is  a strong argument in favor of recognizing depreciation in child support cases,  as the “long-term health” of a business may be seriously affected by the inability of the proprietor to have the monies available to replace the equipment.

As footnote 12 suggests, the Asfaw/Woldberhan decision only deals with depreciation in a rental property situation. Arguably, depreciation for replacement after the useful life of other equipment may still be allowable. For example, a self employed machinist, may be able to depreciate his machines since they do need to be replaced after a certain number of years. What the court in Asfaw/Woldberhan seemed to focus on, was the fact that after an investment in real estate is fully depreciated, the asset still has a useful life (i.e., the apartment can still be rented). This writer knows of no place other than Las Vegas where the practice of investors in real estate is, that after a real estate investment has depreciated down to zero, to tear down the property and rebuild same.

The public policy of the State of California is that child support is a top priority for not only parents, but also for the State. This thinking has been codified in Family Code Section 4053. The section is entitled “Principles of Statewide Uniform Guidelines.”  Code Section states:

“(a) A parents first and principle obligation is to support his or her minor children…(e) the guideline seeks to place the interest of children as the state’s top priority.”

Court attempts to find money for child support every possible way. In addition, by statute the legislature also attempts to make certain that child support remains a top priority.

A recent statute referred to as the “co-conspirator” statute, Civil Code Sections 1714.4 and 1714.41, (effective January 1, 2007) further illustrate this policy. These code provisions provide that any third party who knowingly assists a child support obligor to “escape, evade or avoid paying” child support is potentially liable for three times the value of the child support that was avoided. That figure of three times the amount is paid to the child support recipient as a windfall, and the amount does not go towards the child support arrears. An example might be where a  business partner of a child support obligor retains the obligors portion of the partnership profits in order to reduce the K-1 return of the payor for the purpose of avoiding support.. As this code section provides, the result could break up the partnership.

Statutes and case law in California do everything possible to make available as much money for child support and show obligors how serious the state is in collecting support.

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