The New Hampshire Supreme Court
issued in the Matter of Janice E. Maves and David L. Moore on August 14, 2014
The Facts
Husband and Wife divorced in 2004. At the time of the divorce, Husband was awarded the parties’ Farm, which was initially used as a commercial campground and contained condos that were rented seasonally. The Farm was an S-type corporation, with Husband as primary shareholder. At the time of the divorce, Husband was ordered to pay $650 per month in child support for their only child, which was increased to $950 in 2008. The parents shared parenting time.
In 2011 Husband changed the Farm’s business model to condo sales. As a result, the Farm’s 2011 tax return showed an income of $1,000,389 as capital gains. Husband gave himself a line of credit from the corporation. As a result of the increase in the Farm’s capital gains and the extended line of credit, Wife sought an upward modification of child support based on materially changed circumstances. Husband argued that capital gains are not income for the purposes of child support, and even if they were, the Farm, not Husband, earned the capital gains. Family court disagreed with Husband and increased his monthly child support payments to $2,411. The Court also ordered Husband to pay $9,644 in arrears. The Court based this finding on a conclusion that the Farm’s capital gains were irregular income that should be included in Husband’s gross income. The Court used Husband’s adjusted gross income to calculate support.
The Appeal
Husband and Wife both appealed. Wife argued that the line of credit should be counted as income, the capital gains should be “regular” income, and family court should have used gross income minus legitimate business expenses in determining Husband’s income, not adjusted gross income. Husband argued that the Farm’s capital gains were not his income or personal profits, the Farm was part of the divorce settlement and therefore not able to be the basis for child support payments, that capital gains were not income for the purposes of child support calculations, and that the amount he was ordered to pay was grossly excessive.
The Holding
The Supreme Court held that capital gains are considered income for the purposes of child support calculations. The Court also held that the line of credit was not income, because “[t]he capital gains were treated as [Farm] funds, which, in turn, [Husband] drew down as a line of credit.” The Court further held that although the Farm was awarded to Husband as part of a property settlement, it was a business, and therefore any capital gains were income for child support purposes. Lastly, the Court held that courts should not solely rely on a payer’s adjusted gross income on tax returns to prove income. Rather, the Court held that the “proper measure of gross income is to deduct legitimate business expenses from business profits.”
The Takeaway
There have been many cases over the years arguing about what income may be used for child support purposes. It is worth reading the definition provided in RSA 458-C:2,IV.
“Gross income” means all income from any source, whether earned or unearned, including, but not limited to, wages, salary, commissions, tips, annuities, social security benefits, trust income, lottery or gambling winnings, interest, dividends, investment income, net rental income, self-employment income, alimony, business profits, pensions, bonuses, and payments from other government programs (except public assistance programs, including aid to families with dependent children, aid to the permanently and totally disabled, supplemental security income, food stamps, and general assistance received from a county or town), including, but not limited to, workers’ compensation, veterans’ benefits, unemployment benefits, and disability benefits; provided, however, that no income earned at an hourly rate for hours worked, on an occasional or seasonal basis, in excess of 40 hours in any week shall be considered as income for the purpose of determining gross income; and provided further that such hourly rate income is earned for actual overtime labor performed by an employee who earns wages at an hourly rate in a trade or industry which traditionally or commonly pays overtime wages, thus excluding professionals, business owners, business partners, self-employed individuals and others who may exercise sufficient control over their income so as to recharacterize payment to themselves to include overtime wages in addition to a salary.
It is certainly an interesting argument to make that income derived from a business awarded to a party in a divorce is not income for the calculation of child support but rather property settlement. It was doomed to fail though, as the result would produce absurd result. Any self-employed person would avoid having their income considered for child support. A person’s investments that derive income would similarly be discounted. The intent and plain meaning of the statute is to capture all income for the purposes of child support.