As the holiday season brings about exponential growth in ex partes seeking holiday visitation orders, the dawning of the new year tends to bring renewed requests to pursue or modify child and spousal support obligations. Why? Maybe it is the realization of how much a party earned or did not earn when they received their last paycheck of the year. Or a belief supported or unsupported about how much the other party made. In either event, a party should pay or receive all the monies they are entitled under the law.
A common misconception is that support requests are a one-way street. A party may believe that if the process would lower the amount currently being received or result in payment of a higher amount than anticipated, the matter can just be dropped, and the status quo remains. However, requests for support obligations are a two-way street. Once a party requests a determination of a support obligation, the other party may seek an increase or a decrease in the support obligation. So both sides are encouraged encourages both sides to consider all known facts, not just suspected facts and potential outcomes, before filing any request.
Consider this hypothetical: Bradley and Linda met in high school. They got married after high school and have two kids together. After working for years flipping burgers at All American Burger and making fish and chips at Captain Hooks, Linda and Bradley strike gold when Linda's employer, Perry of Perry's Pizza, offers to let them buy the business from him. The original pizza restaurant was in a prime location in the Ridgemont Mall. The business expanded, and now they have 15 restaurants in malls all over Southern California. The parties separated in September 2021, and Bradley filed for child and spousal support. Bradley works at a company designing restaurants for malls and makes a W-2 income which is not disputed. Linda runs the pizza restaurant empire, and her W-2 income is $363,312.00, which is not in dispute. However, Bradley contends that certain expenses paid for by the business should be included as income to Linda. Specifically, $35,000 in travel to three business conferences in which she traveled first class and stayed a total of 21 extra days after the meetings were over. He also challenges the company payment of her car expense for $3,500 per month for three different cars. Bradley also questions the approximately $40,000 that Linda wrote off for "meals and entertainment" and the alleged $45,000 listed as "miscellaneous expenses" without supporting documentation. According to Linda's accountant's testimony, these are all legitimate expenses allowed by the IRS.
How do you calculate income?
For most cases, a party's monthly income is determined by reviewing their paystubs or year-end W-2. Paystubs will provide the amounts earned during a specified period (weekly, biweekly, monthly) and will have a running tabulation of the year-to-date total amount. An additional method of determining earnings is from tax returns that are presumptively correct when signed under the penalty of perjury, but the presumption may be rebutted. See Marriage of Loh, 93 Cal. App. 4th 325, 332 (2001), County of Orange v. Smith, 132 Cal. App. 4th 1434 (2005), Marriage of Calcaterra & Badakhsh, 132 Cal. App. 4th 28 (2005) (information contained in loan applications).
A disparity will sometimes occur between the YTD and the stated amount for Social Security/FICA taxation. The difference between the YTD and FICA is typically a result of contributions made to deferred compensation plans (401(d) and 457) which reduce the employee's taxable income for income tax, but not Social Security, purposes. No authority exists as to which number should be used for calculating support. However, most practitioners believe the highest number should be used for support (typically, the Social Security amount) determination because the contributions to 401Ks and 457 are voluntary.
In determining child support, California Family Code Section 4058, states, "(a) The annual gross income of each parent means income from whatever source derived, except as specified in subdivision (c) and includes, but is not limited to, the following: (1) Income such as commissions, salaries, royalties, wages, bonuses, rents, dividends, pensions, interest, trust income, annuities, workers' compensation benefits, unemployment insurance benefits, disability insurance benefits, social security benefits, and spousal support actually received from a person not a party to the proceeding to establish a child support order under this article." For spousal support, Family Code Section 4320(c) states the court should consider, "The ability of the supporting party to pay spousal support, taking into account the supporting party's earning capacity, earned and unearned income, assets, and standard of living." The above code sections will cover most cases and wage earners.
The self-employed or W-2 + benefits litigant
A more complex analysis occurs when you are attempting to calculate income for a self-employed party or, as in our example, a party who receives both a salary and other benefits. For child support, the Family Code Section 4058(a), includes in the calculation of gross annual income, "Income from the proprietorship of a business, such as gross receipts from the business reduced by expenditures required for the operation of the business." Further, it states that, "In the discretion of the Court, employee benefits or self-employment benefits, taking into consideration the benefit to the employee, any corresponding reduction in living expenses, and other relevant facts."
A common misconception is that an expense deductible for tax purposes as a legitimate business expense cannot be considered for support obligations. Many expenses which the IRS considers legitimate business deductions are deemed income for support obligations. "A spouse who is the owner of a successful business and who has control of his or her income can structure income and the payment of expenses to depress income. This is not fair if it inures to the detriment of children. Here, the trial court drew the inference that Father's structuring of income and expenses was an attempt to minimize child support obligations." Marriage of Chakko, 115 Cal. App. 4th 104, 109 (2004). The court has stated that a company car (or reimbursement for a car) and free housing can be deemed income for support obligation calculations. Marriage of Schulze, 60 Cal. App. 4th 519, 529 (1997). Additionally, employment-related meal expenses that are reimbursed are employee benefits available for child support as income. See Steward v. Gomez, 47 Cal. App. 4th 1748 (1996).
In Asfaw v. Woldberhan, 147 Cal. App. 4th 1407, 1425 (2007), the court concluded that depreciation on a business or business assets is not a legitimate expense in calculating support: "[B]usiness can be conducted without a deduction for depreciation," and therefore is not a legitimate expense and should be included as income for support obligations. The court continued, "a proprietor cannot operate a business without inventory, without employees, without paying taxes, and so forth. We conclude that 'operation of the business' means ordinary and necessary business expenditures directly related to or associated with the active, day-to-day conduct of a business."
As such, with self-employed litigants or employee litigants who receive benefits as part of their employment, the court should look at each disputed deduction/benefit and determine if all or a portion should be reclassified as income.
Statutory deductions from income
Family Code Section 4059(a) states that, "the annual net disposable income of each parent shall be computed by deducting from the parent's annual gross income the actual amounts attributable" to the specified deductions. State and federal taxes are to be deducted from income.
As for retirement contributions, Sections 4059(b) and (c) need to be read in conjunction. Section 4059(b) discusses a deduction for FICA payments; Section 4059(c) relates to retirement benefits "required as a condition of employment." Retirement benefits are dealt with differently depending on if the contribution is "mandatory" or "voluntary." Mandatory contributions are typically those made in lieu of Social Security deductions. Voluntary contributions are paid voluntarily by the employee into a company or individual 401K retirement plan. The critical difference between mandatory and voluntary contributions is that litigants who pay into mandatory programs (typically, including local, county or state employees) will not pay FICA. This deduction will be absent from their paystubs. It is crucial to make the necessary change to the support calculation software to omit this deduction in these situations. Additionally, litigants often will list 401K deductions as mandatory deductions when they are, in fact, voluntary. Again, the key indicator would be paying FICA and contributing to their retirement plan. In the latter instance, a change would not be made to the support calculator. The contribution would be included in a different input field in the support calculator and treated differently. See Marriage of Morton, 34 Cal. App. 5th 61 (2019). Specifically, voluntary contributions are income deemed eligible for support, whereas mandatory contributions are not available for support. See Morton.
Section 4059(c) also discusses mandatory union payments provided they are also a condition of employment. However, it should be noted that In Janus v. AFSCME, 138 S. Ct 2448 (2018), the U.S. Supreme Court ruled that "public employee unions like the California Teachers Association can no longer collect mandatory fees from the workers they represent." A challenge could be raised as to whether union dues, even if collected directly from the employee, are "mandatory as a condition of employment" and therefore deductible when calculating support. At this point, no reported case has challenged this deduction or its continued applicability.
Section 4059(d) relates to health insurance premiums paid for the parent and the minor children. This deduction will typically appear on a paystub. Additionally, voluntary support (either child or spousal) paid for in a prior relationship is not an allowable deduction. Section 4059(e) only allows for a deduction for child or spousal support paid pursuant to a court order.
Section 4059(f) and (g) allow for deductions at the discretion of the court for job-related expenses and other financial hardships. Hardship deductions are not to be deducted from the child support awarded but "shall be deducted from the income of the party to whom it applies." Sections 4070 and 4071 discuss the factors to determine financial hardships. If a hardship is granted, Sections 4072 and 4073 require the court to consider "the goals set forth in this article" and make specific findings when granting or denying a financial hardship. See Haggard v. Haggard, 38 Cal. App. 4th 1566 (1995). Deductions for job-related expenses typically will be for job-related uniforms, mechanic's tools, and other items which are specific to the litigant's employment.
Calculation of support
Child support is calculated using the state uniform guideline for determining child support, and the court must adhere to the guideline stated amount unless special circumstances exist. Family Code Section 4052. Section 4055 lays out the mathematical computation for determining child support. Section 4057(a) states, "the amount of child support established by the formula provided in subdivision (a) of Section 4055 is presumed to be the correct amount of child support to be ordered." The amount of support "is a rebuttable presumption affecting the burden of proof and may be rebutted by admissible evidence showing that application of the formula would be unjust or inappropriate in the particular case." Section 4057(b) lays out five factors that may be considered in deviating from the state guideline amount. The use of computer programs in determining support is permissible so long as the computer program complies with the standards as specified by the Judicial Council. Section 3830; California Rules of Court, Rule 5.275. Appellate courts review child support awards for an abuse of discretion. See Marriage of Morton, 27 Cal. App. 5th 1025, 1038 (2018); Hein v. Hein, 52 Cal. App. 5th 519, 529 (2020).
For spousal support, nothing prevents a judicial officer from using a computer program to determine spousal support for a temporary support order. Marriage of Winter, 7 Cal. App. 4th 1926 (1992); Marriage of Olson, 14 Cal. App. 4th 1 (1993). However, a judicial officer cannot use a computer program, unless agreed to by the parties, to fix permanent spousal support. Marriage of Burlini, 143 Cal. App. 3rd 65 (1983); Marriage of Schulze, 60 Cal. App. 4th 526 (1997).
In deciding permanent spousal support, the court must consider the statutory factors listed in Family Code Sections 4320(a)-(n). So long as the factors are considered and weighed, the ultimate decision as to amount, duration and whether to retain jurisdiction over support rests with the court's broad discretion. Marriage of Smith, 225 Cal. App. 3rd 469 (1990). In a recent decision, the court stated that while "the trial court must consider section 4320 factors in deciding whether to modify a spousal support order, the statute does not purport to require the court to address each factor expressly." Marriage of Kahan and Diamond, 72 Cal. App. 5th 595 (2021). In Marriage of Cheriton, 92 Cal. App. 4th 269, 304 (2001), the court stated, "In making its spousal support order, the trial court possesses broad discretion so as to fairly exercise the weighing process contemplated by section 4320, with the goal of accomplishing substantial justice for the parties in the case before it. In balancing the applicable statutory factors, the trial court has discretion to determine the appropriate weight to accord to each." (Citations omitted.) A spousal support decision will be upheld on appeal, as a matter of law, unless an abuse of discretion is shown, considering all the factors, that either the court has "exceeded the bounds of reason," or that no other reasonable judicial officer would make the same order under similar circumstances. Marriage of Morrison, 20 Cal. 3rd 437 (1978); Marriage of Smith, 225 Cal. App. 3rd 469 (1990).
Don't forget the income and expense declaration
California Rules of Court, Rule 5.260(a) provides that "for all hearings involving child, spousal, or domestic partner support, both parties must complete, file and serve a current income and expense declaration (form FL-150) on all parties." A party requesting or responding to a request "must include a current, completed Income and Expense Declaration (form FL-150)" with the request for order or responsive declaration to request for order. Rule 5.260(a)(1) and (2). The failure to include the income and expense declaration renders the request procedurally defective. The income and expense declaration "must have been completed within the past three months providing no facts have changed." Rule 5.260(a)(3). A party may use a Financial Statement (Simplified) (form FL-155) instead of a current income and expense declaration "except in proceedings to determine or modify spousal or domestic partner support, to determine or modify family support, or to determine attorney's fees and costs." Rule 5.260(a)(4) and (5).
So what is Linda's income?
Are the expenses that Bradley is disputing legitimate business expenses necessary for the operation of the business? Should they be deemed wholly or partially income for Linda? It depends...
Author's note: This article was written partially on information used in lectures given by me with Judges Bruce Iwasaki and Laura Seigle of the Los Angeles County Superior Court. They are entitled to an equal amount of credit, but I will take any blame, for the information contained herein.