In the divorce world a common question posed to lawyers who do this work is: “How do you manage to cope with this?” It’s a fair question to which the answer is: “Because every time I think I have the strangest case in the world, someone shows me one stranger.”
Today’s nominee is Folkerts v. Folkerts, 919 EDA 2024 out of York County. It’s a child support case with a twist or, perhaps 265 twists to be precise. The Folkerts have three children and the support actions began to be filed in May 2022. Once the gate was opened, there appear to be lots of modification petitions and the order bounced around between $1,500 and $2,000 a month. In the round now on appeal the support was elevated to $2,300 a month based on implied income. Therein lies a story.
In Pennsylvania income is defined for support purposes by 23 Pa.C.S. 4302. In a word, it’s any money you do receive and any payment that is due and collectible. We aren’t favored with any explanation related to just how Mr. Folkerts acquired 265 automobiles especially in a world where his primary employment was with a national consulting firm until he was terminated. In their divorce the parties agreed that he owned 265 autos and related parts which were assigned a value of $800,000 in equitable distribution.
In the 2024 support proceedings Mrs. Folkerts wanted something done about this fleet of vehicles with an average value of $3,000 each. So the trial court elected to imply an income value of $4,000 a month on the basis that $800,000 invested at the legal rate of 6% would spin off interest income of $48,000 a year.
A nice try, but the Superior Court found no basis for implied income in Section 4302. Yes, he could sell the cars and if he did get his $800,000 he could put that money in a corporate bond fund that would probably yield 6% a year. But the cars were not sold, the cash did not exist and so it was never invested in any fund. Case reversed.
In corresponding with a colleague who alerted me to the case, I noted that the legal theory of implied income from assets seemed to develop some currency in last Fall’s election. Democrats Plan to Tax Unrealized Capital Gains: What It Means for Wealthy Households
It’s a swell idea until you take it out for a spin (sorry for the car analogy). But let’s try it out on Elon Musk and the 14 children he pays to support. Elon owns about 411 million shares of Tesla. Let’s assume that they are shares he got in 2010 when the company went public. Then, he would have paid about $1.50 a share. Let’s next assume that all the moms ganged up on him for a child support proceeding on January 2, 2024 and they succeeded in getting support based on his implied capital gains. The stock that day was $237 a share so his implied gain was $237 – 1.50 (x 411,000,000). That’s about $97,000,000,000 before taxes so the support order might be a hefty one that day. Now the moms all come back on January 2, 2025. Stock price is now $404 which means they will want support based on the gains of the past year. That’s $404-237 (x 411,000,000) or $67,400,000 pre-tax.
As we all know, Elon had a bad Spring this year. So, in March he files for a reduction in support. Tesla is trading at $230 a share, back where it was 15 months earlier. He paid support on gain that has now disappeared. But wait. Today the stock is back up to $340. Should the support increase? When do we calculate support where the stock has ranged from a low of $280 to a high of $360 over the course of one week (May 31-June 5).
With 265 cars in his back yard, Mr. Folkerts has a similar problem. You can’t just drop 265 cars on the market any more than Mr. Musk can call his broker and say “Sell my 411 million shares please.” And, Mr. Folkert has a different problem because unless scrap metal prices rise, his investment actually declines in value every day.
The central point to this is we don’t put assets to the economic efficiency test in support. Your home equity, your retirement account, your prized Rolex Oyster wristwatch and yes, ….your automotive fleet could all be liquidated and the proceeds placed in a total market index fund to support your children. But, the statue confines your support obligation to your income under Section 4302 which is “any form of payment due and collectible by an individual regardless of source.”