Q. How do California Family Courts deal with depreciation in setting child and spousal support? Does depreciation reduce the paying spouse's income available for support and so lessen the amount that must be paid?
There are very few reported appellate decisions in California giving direct
guidance to family courts about how to assess, and what to do with, depreciation
deductions when ordering child support, or temporary or judgment spousal
support. Commentators have noted that many courts tend to add back all
depreciation in all circumstances, and some have criticized this approach.
One question that arises is, is this phantom income or a phantom expense
and how does it practically affect a payor's cash flow (depreciation
add backs can also bite support payees)?
Another question is whether depreciation should be treated differently
if we are talking about child support verses spousal support orders. If
so, then trial courts dealing with guideline temporary spousal support
awards should possibly be running two different analyzes in every case
where depreciation is an issue and both alimony and child support may
be due, denying the add back in child support settings but possibly allowing
it when determining spousal support.
"Income" is not defined in any California family law statute
for purposes of determining spousal support. "Gross" and "net"
"income" are defined for purposes of awarding
child support, in
Family Code section 4058 and
Family Code section 4059.
The two primary statutes addressing spousal support are
Family Code sections 3600 and
Family Code section 4320. When alimony is awarded prior to the division of the community property
estate, whether by way of a marital settlement agreement/stipulated judgment
or trial court decision, it is termed "temporary spousal support."
FC § 3600 provides that "the court may order ... the husband
or wife to pay any amount that is necessary for the support of the wife
or husband, consistent with the requirements of subdivisions (i) and (m)
of Section 4320 and Section 4325...." Subsections (i) and (m) concern
incidents of domestic violence, as does
§ 4325. Hence, as one court has recently ruled, except for cases involving DV,
Family Code section 4320 does not otherwise apply to temporary spousal
support determinations.
Tong v. Samson (2011) 197 Cal.App.4th 23. Instead, trial courts traditionally employ
the child support guideline formula (in the form of the Xspouse or Dissomaster)
without considering the other 4320 factors - beyond considering each party's
need for support and the other's ability to pay.
The only reported decision directly approving a depreciation add back is
Asfaw v. Woldberhan (2007) 147 Cal.App.4th 1407.
Asfaw is a child support case. The trial court accepted husband's argument
that he should receive $57,000 worth of depreciation, which would reduce
his income available for support in a corresponding amount. Its findings
were reversed as a matter of law (meaning that it was not simply an abuse
of discretion). The appellate court ruled that depreciation is not properly
deductible under Family Code sections 4058 and 4059. However, it is noted
that different public policy considerations, and legislative histories,
apply to child support as opposed to spousal support statutes, and therefore
while this ruling lends support for arguments that depreciation should
be added back when dealing with the latter it is not direct authority
for that proposition.
Asfaw addressed depreciation for rental properties only, and the facts did not
involve other forms of depreciation that typically apply to small businesses
- like the acquisition of equipment or vehicles. Nonetheless, most Family
Courts will add all forms of depreciation back and rarely exercise discretion
in deciding whether business expenses were reasonably necessary and should
therefore not be added into the payor's income.
Marriage of Blazer (2009) 176 Cal.App.4th 1438 is a spousal support case that lends support
for the idea that accounting and business decisions made by support obligors
may be upheld, and business related expenses may not be charged to the
payor for purposes of assessing income available to pay spousal support,
where the trial court after hearing all the evidence concludes that the
expenses are rationally related to the conduct of the business. Scott
Blazer was paying temporary spousal support of $57,000/month, and operated
an agricultural business that involved the sale of strawberries, among
others. He and his expert testified that in order to compete and stay
in business, investment of capital was needed to "diversify the company's
work" and that funds spent for that purpose were accordingly "reasonable
expenses" properly chargeable to the business, and not to the husband.
The trial court agreed, and was affirmed on appeal. Clearly trial courts
will rarely be reversed in issuing support findings and awards at the
"permanent" (trial) support phase of the proceedings, where
the record shows that the court considered all the evidence and the relevant
4320 factors, and therefore exercised an informed discretion in reaching
a decision. In
Blazer Scott's position made some sense, and the trial court was free to
accept it.
Hence, one can argue by extension that
Blazer supports trial court discretion NOT to add back depreciation under appropriate
circumstances - if the support obligor demonstrates a sound business reason
for the expense, as with a car rental business replacing its fleet of
vehicles, they may not be charged with those monies expended as though
they should have, could have, used it to maintain their former spouse.
This becomes more difficult if the issue at bench is child support, at
least if one gives
Asfaw a wholesale application.
Clearly, one can argue that
Asfaw should be limited to child support settings because that Court expressed
its view that child support and spousal support serve different masters,
so to speak, and this observation about public policy is correct.
On the other hand, depreciation that does not relate to business enterprises
would seem to be likely to find little traction with family court judges
and commissioners.
I guarantee the forensic accountants will vigorously differ on this point
based upon business accounting principles and the historical IRS treatment
of depreciation. I will discuss what I understand to be their reasoning
in a future Blog.
T.W. Arnold, CFLS