Of Counsel, Z Family Law, LLC Rockville, Maryland Family Law Attorney
SOME INCOME/ABILITY TO PAY ISSUES
John Weaver understands the importance of a Court taking into account all of a party's income in making a fair and just award of alimony or child support. As a former Family Division Magistrate, Mr. Weaver regularly dealt with the income aspects of the support and property cases he heard. The following discussion considers Maryland cases that address whether certain items are to be included in income and explain the workings of some of these types of income, such as income from a second job, overtime income, bonuses, commissions, gifts (and rent-type payments made by a paramour), self-employment income, Subchapter S corporation income, and non income producing assets. We also consider the important issue of whether a party is voluntarily impoverished which then permits the court to impute income to that party.
The Maryland Child Support Guidelines defines "actual income" to include, without limitation, (i) salaries; (ii) wages; (iii) commissions; (iv) bonuses; (v) dividend income; (vi) pension income; (vii) interest income; (viii) trust income; (ix) annuity income; (x) Social Security benefits; (xi) workers' compensation benefits; (xii) unemployment insurance benefits; (xiii) disability insurance benefits; (xiv) for the obligor, any third party payment paid to or for a minor child as a result of the obligor's disability, retirement, or other compensable claim; (xv) alimony or maintenance received; and (xvi) expense reimbursements or in-kind payments received by a parent in the course of employment, self-employment, or operation of a business to the extent the reimbursements or payments reduce the parent's personal living expenses. FL § 12-201(a)(3).
Depending on the circumstances of the case, the court may consider (i) severance pay; (ii) capital gains; (iii) gifts; or (iv) prizes, as actual income. FL §12-201 (a)(4). However, actual income does not include benefits received from means-tested public assistance programs, including temporary cash assistance, Supplemental Security Income, food stamps, and transitional emergency, medical, and housing assistance. FL §12-201(a)(5).
The child support guidelines list is not exhaustive of all the items that may be included in a party's actual income, but it is a good guide or checklist to consider in both alimony and child support cases.
A.Income from a second job.In Tracey v. Tracey, 328 Md. 380, 614 A.2d 590 (1992) - an alimony case - in computing the wife's income, the phrase “all income” in FL §11-106(b)(11)(i) does not require a court to include income from a temporary second job, but you must include income from “regular, full-time employment, i.e. money earned during the normal work week as is appropriate to a given occupation.” Tracey, 328 Md. at 389.Court relied on out-of-state cases which involved other states' child support guidelines. In Digges v. Digges, 126 Md. App. 361, 730 A.2d 202 (1999), cert. denied 356 Md. 17, 736 A.2d 1065 (1999), the trial court, in determining Ms. Digges’s projected income for purposes of alimony, included $240 per month she receives as tutoring income.The Court of Special Appeals agreed with Ms. Digges that her part-time income was not required to be included in the calculation of alimony, but that the trial court’s consideration of this additional income was within the trial courts’ discretion to make a “just” award. In Crabill v. Crabill, 119 Md. App. 249, 704 A.2d 532 (1998), it was held that a retiree’s part-time income is appropriate to consider in determining his obligation to pay alimony; here, Mr. Crabill had been a part-time painter for 4 years.
B.Overtime income. In Brown v. Brown, 119 Md. App. 289, 705 A.2d 7 (1998), overtime income in child support calculations is appropriate where overtime was a regular part of earnings from employment. Here, Mr. Brown worked consistently substantial overtime for more than 7 years; so current overtime, averaged on monthly basis is to be considered.
C.Bonus Income.A parent’s income bonus in one year may be considered in determining a child support award even though it may be uncertain whether the parent would be receiving a similar amount in the future. Johnson v. Johnson, 152 Md. App. 609, 833 A.2d 46 (2003).Court of Special Appeals held that the trial court properly considered the father’s 2002 bonus income in determining a child support award even though it was uncertain whether he would be receiving a similar amount in the future. Father argued that his bonus should not have been included as it is too speculative as to what, if any, bonus he will receive in the future. The father had already received the 2002 bonus at the time when child support was calculated. Accordingly, when child support was calculated, there was no doubt that in the year 2002 father’s actual income was $122,900 ($80,000 base salary, $1,500 dividend income, taxable bonus of $30,000 and a non-taxable “pension bonus” of $11,400.Father also argued that bonus pay and overtime pay stand generally on the same legal footing, and, therefore, a bonus cannot be used if the future amount of the bonus is speculative or uncertain. (See Brown v. Brown, 119 Md. App. 289, 705 A.2d 7 (1998) – “since overtime pay constitutes ‘compensation due to an employee for employment,’ it is clearly ‘wages’ . . . Therefore, overtime pay is to be considered as actual income when a court fashions an appropriate award of child support . . . Decisions that bring overtime pay into child support calculations stress that this additional income must not be speculative or uncertain. Rather, the overtime must be a regular part of the parent’s employment.”) The Court in Johnson rejected the father’s argument and stated:
“[i]n our view, the “legal footing” of overtime pay and bonuses is not the same. For starters, the General Assembly, in enacting FL section 12-201(c)(3)(iv) [now 12-201(b)(3)(iv)], has said, without equivocation, that bonuses constitute “actual income.” Second, overtime pay is an entitlement, whereas bonuses are normally paid as a matter of discretion. Whether a bonus will be paid and, if so, its amount, are almost always speculative. Because it is nearly always impossible to predict the amount of future bonuses, if we were to adopt [father’s] position and hold that bonuses (already paid) should be disregarded when calculating child support when the amount of bonuses in future years cannot be predicted with reasonable certainty, we would not be giving effect to the language of FL § 12-201(c)(3)(iv) [now 12-201(b)(3)(iv)]. . .Parents who receive large bonuses would receive a huge advantage over parents who earn the same amount but receive the money as part of their base salary.”
While it may be possible that father will not receive any bonus in 2003, the appropriate remedy if his bonus is significantly less than $41,400 in 2003 is to petition the court for a child support modification. See Moore v. Tseronis, 106 Md. App. 275, 281 (1995).In footnote 3, the CSA discussed a possible solution of the problem of the uncertainty of future bonus payments.In cases not involving the Office of Child Support Enforcement, “we see no reason why the chancellor, in the exercise of his/her discretion, could not order a fixed percentage payment on an “if, as, and when” basis.”
D.Gifts May Be Income. FL § 12-201(b)(4) provides that “[b]ased on the circumstances of the case, the court may consider” gifts as actual income. In Petrini v. Petrini, 336 Md. 453, 648 A.2d 1016 (1994), the Court of Appeals held that non-cash gifts to a parent may be includable as part of a parent’s actual income for the purpose of calculating her or his child support obligation pursuant to the Maryland Child Support Guidelines. In Petrini, Mr. Petrini’s mother provided him with rent-free lodging, paid health insurance premiums, covered the cost of his ileostomy bag; paid some of his basic living expenses, including food, gas and clothing; and gave him cash payments. Mr. Petrini’s mother essentially paid for things that he would otherwise have been responsible for paying for himself out of his take-home salary. In determining what should be considered gifts, some considerations are: 1) a parent’s actual ability to pay the specified child support award; 2) any lack of liquidity or marketability of a party’s assets; 3) the fact that a parent’s take-home income is not an accurate reflection of his or her actual standard of living; and 4) whether either party is voluntarily impoverished. Cf. Frankel v. Frankel, 165 Md. App. 553, 886 A.2d 136 (2005) (in this above guidelines case trial court did not abuse its discretion in not including certain gifts “in light of the earning abilities of the parties” and because “the figures are from a source not compelled to support the children.”). In Allred v. Allred, 130 Md. App. 13, 744 A.2d 70 (2000), the Court of Special Appeals held that money paid by a woman’s live-in paramour toward rent and utilities should not have been included as income by the trial court in calculating her actual income for child support purposes.The CSA distinguished Petrini, and held that the trial court erred by imputing as gift income to Mrs. Allred the amount that [the paramour] paid toward bills for rent, electricity, cable, telephone service, and trash removal.
E. Commissions. Commissions are considered income. FL §12-201(b)(3). InWalker v. Grow, 170 Md. App. 255, 907 A.2d 255 (2006) the Court of Special Appeals held that the father’s “one-time real estate management fee” of $9,000 should have been included as actual income. The court said it is “immaterial whether this was a one-time fee, or represents a likely source of future income.”
F. Self-employment, rent, etc. income. For income from self-employment, rent, royalties, proprietorship of a business, or joint ownership of a partnership or closely held corporation, “actual income” means gross receipts minus ordinary and necessary expenses required to produce income. FL§12-201(b)(2), and §12-201(i). A self-employed parent’s retirement contribution is not considered a necessary business expense. Cohen v. Cohen, 162 Md. App. 599, 875 A.2d 814 (2005).
G. Subchapter S corporation income. The trial court can consider whether a parent’s Subchapter S corporation income shown on parent’s income tax return was actually received by the parent as actual income, or constituted pass-through income not available for child support; however, the trial court should ensure that the retained earnings and distributions are truly “ordinary and necessary expenses required to produce income” and not available to the parent, and any amount that is actually received by the shareholder not used for such expenses should be included in the actual income calculation. Walker v. Grow, 170 Md. App. 255, 281-82, 907 A.2d 255, 270-71 (2006).The burden is on the parent seeking to exclude pass-through income from actual income to persuade the court that the pass-through income is not available for child support purposes.
H. Non Income Producing Assets. In Barton v. Hirshberg, 137 Md. App. 1, 767 A.2d 874 (2001), the appellate court discusses the circumstances under which the court may consider a party's assets when making an award of child support. If a parent's income is not not adequate to provide support to meet the standard of living enjoyed by the child during the marriage, and a parent has assets which could be converted into income-production, the court may look to these assets when determining above-guidelines support.
I. Annualizing Income – a “safe harbor”. As stated by the Court of Special Appeals in Lorincz v. Lorincz, 183 Md. App. 312, 961 A.2d 611, 619 (2008), in its discussion of Johnson v. Johnson, 152 Md. App. 609, 833 A.2d 46 (2003), “[i]t would be absurd in a child support case to order a very high award of child support for the bonus month and then significantly lesser awards for the less rewarding months.” The Court indicated that the “best, if not the only feasible, measuring rod for determining the amount of and for ordering support payments” is on an annualized basis. Lorincz, 961 A.2d at 619. In Lorincz, the Court addressed the situation of a party who has a lucrative summer job earning $36,424 over three months, and is a full-time student over the next nine months. The Court of Special Appeals rejected the father’s argument that the year be divided into alternating periods of three fat months and nine lean months. The appellate court stated
"Were he to prevail, will the next case divide the year into nine fat months and three lean months? Or divide the year into more than two fragments? May the million dollar athlete be deemed to have voluntarily impoverished himself during the off season? May the high-powered executive be deemed to have voluntarily impoverished himself for a month if he takes a month of unpaid vacation? How will careful planners save up for a rainy day if the rainy day itself may be declared to be a cognizable unit of voluntary impoverishment? The potential shoals and shallows of venturing forth onto such uncharted seas are too numerous to risk. Per annum analysis remains a safe harbor."
Lorincz, 961 A.2d at 620. Similarly, in Smith v. Freeman, 149 Md. App. 1, 814 A.2d 65 (2002), a mother sought to modify upward a child support award from the father, a professional football player whose salary increased from one million dollars to 3.2 million dollars. Although the father’s professional football salary was for a five-month professional season, the father’s ability to pay and his obligation to pay were averaged out on a per annum basis.
J. Ability to pay shown by prior payments.In Danziger v. Danziger, 208 Md. 469, 475, 118 A.2d 653, 656 (1955), the court stated that the Husband's payment of $17.90 per week for a long period of time prior to institution of the divorce litigation was substantial evidence upon which to base an order compelling a payment of approximately the same amount.Similarly, in Willoughby v. Willoughby, 256 Md. 590, 261 A.2d 452 (1970), the obligor Husband's payment of court ordered alimony pendente lite for 2 and 1/2 years without seeking modification or a final adjudication was "the most persuasive testimony in this case of his ability" to pay a similar amount as permanent alimony.
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K. Voluntary Impoverishment.
After you have reviewed the following discussion, you may find it helpful in organizing and presenting a case for voluntary impoverishment to review and use the provided Voluntary Impoverishment Worksheet listing the relevant factors in a determination of voluntary impoverishment and of imputation of income.
Maryland recognizes that where a party has "voluntarily impoverished" himself or herself, the voluntarily impoverished party's potential income or capacity to earn money will be attributed to such party for purposes of determining the voluntarily impoverished party's obligation to pay, or entitlement to receive, alimony or child support.John O. v. Jane O., 90 Md. App. 406 (1992);Colburn v. Colburn, 15 Md. App. 503, 292 A.2d 121 (1972); FL §12-204(b) (2019 Repl. Vol.)- Child Support Guidelines; See also Link v. Link, 35 Md. App. 684 (1977); Bracone v. Bracone, 16 Md. App. 288 (1972); Wagner v. Wagner, 109 Md. App. 1, 674 A.2d 1 (1996) and (Wagner-)Schwartz v. Wagner, 116 Md. App. 720, 698 A.2d 1222 (1997).
The Court in John O. v. Jane O., 90 Md. App. at 421, stated that "in the context of a divorce proceeding, the term 'voluntarily impoverished' means: freely, or by an act of choice, to reduce oneself to poverty or deprive oneself of resources with the intention of avoiding child support or spousal obligations ... Some of the factors to be considered in determining whether a party is voluntarily impoverished include: (1) his or her current physical condition; (2) his or her respective level of education; (3) the timing of any change in employment or other financial circumstances relative to the divorce proceedings; (4) the relationship between the parties prior to the initiation of divorce proceedings; (5) his or her efforts to find and retain employment; (6) his or her efforts to secure retraining if that is needed; (7) whether he or she has ever withheld support; (8) his or her past work history; (9) the area in which the parties live and the status of the job market there; and (10) any other considerations presented by either party." In Goldberger v. Goldberger, 96 Md. App. 313, 624 A.2d 1328 (1993): "for purposes of the child support guidelines, a parent shall be considered 'voluntarily impoverished' whenever the parent has made the free and conscious choice, not compelled by factors beyond his or her control, to render himself or herself without adequate resources."To determine whether a parent has freely been made poor or deprived of resources, look to John O. v. Jane O. factors.Once "voluntarily impoverished" determination has been made, to determine potential income consider: 1) age; 2) mental & physical condition; 3) assets; 4) educational background, special training or skills; 5) prior earnings; 6) efforts to find & retain employment; 7) status of job market in area where parent lives; 8) actual income from any source; 9) any other factor bearing on parent's ability to obtain funds for child support.
In Wills v. Jones, 340 Md. 480, 667 A.2d 331 (1995), the Court of Appeals stated that the inquiry into the parent’s intent adopted in John O. is “too narrow.”The question is “whether a parent’s impoverishmentis voluntary, not whether the parent has voluntarily avoided paying child support.The parent’s intention regarding support payments, therefore, is irrelevant. It is true that parents who impoverish themselves ‘with the intention of avoiding child support . . . obligations’ are voluntarily impoverished.” John O., supra, 90 Md. App. at 421. But, as the court recognized in Goldberger, supra, 96 Md. App. at 326-27, a parent who has become impoverished by choice is ‘voluntarily impoverished’ regardless of the parent’s intent regarding his or her child support obligations."
In Guarino v. Guarino, 112 Md. App. 1, 14-15 n. 4, 684 A.2d 23 (1996), the Court of Special Appeals stated that “[t]he voluntary impoverishment discussion contained in John O. v. Jane O.,90 Md. App. 406, 601 A.2d 149 (1992), pertains to child support. See §12-201(b)(2) of the Family Law Art. This Court has, however, prior to the passage of §12-201(b)(2), used the concept in the context of alimony awards. See Colburn v. Colburn, 15 Md. App. 503, 514-16, 292 A.2d 121 (1972).”
In Reynolds v. Reynolds, 216 Md. App. 205 (2014), the Court of Special Appeals discussed some technical distinctions between the concept as applied to child support and alimony awards:
Technically, “imputed income” is a child support concept predicated on a finding of voluntary impoverishment, which asks the court to consider several facts about a party’s ability to work, including:
(1) his or her current physical condition;
(2) his or her respective level of education;
(3) the timing of any change of employment or other financial circumstances relative to the divorce proceedings;
(4) the relationship between the parties prior to the initiation of divorce proceedings;
(5) his or her efforts to find and retain employment;
(6) his or her efforts to secure retraining if that is needed;
(7) whether he or she has ever withheld support;
(8) his or her past work history;
(9) the area in which the parties live and the status of the job market there; and
(10) any other considerations presented by either party.
Although alimony is a separate issue from child support, it similarly requires the court to consider “the ability of the party seeking alimony to be wholly or partly self-supporting” and “the time necessary for the party seeking alimony to gain sufficient education or training to enable that party to find suitable employment,” FL § 11-106(b)(1), (b)(2). Most, if not all, of the voluntary impoverishment factors will be relevant to alimony under FL § 11-106(b)(1) and (b)(2), and so a finding of voluntary impoverishment would ordinarily entail a finding, for purposes of alimony, that the impoverished party could support him or herself, but chooses not to.
Some Practice Pointers: Voluntary Impoverishment
Here are some practical aspects to consider in pursuing a voluntary impoverishment case:
1.Some underlying policies/competing concerns:
•Parents have an obligation to support their child, and to alter a chosen lifestyle if necessary to enable that parent to meet his or her support obligation •Parent seeking alimony has responsibility to attempt to become self-supporting •Alimony pendente lite is intended to lessen, not create, hardship
2.Do you really want to impute income in all situations?
•E.g. Mom has custody, but not working, so no work-related childcare. If impute employment income to Mom, then Dad may be paying a smaller % of greater amount of basic child support, and could actually calculate to greater obligation, especially if you consider work-related child care expense. Often, if you run guidelines both ways it informs parties, avoid exceptions.
a.Starts w/ preparation, discovery, game plan
b.Opening statement Don’t merely say Voluntary Impoverishment doesn’t apply pendente lite – it does apply at all stages, although there may be other practical reasons someone may not be found to be voluntarily impoverished pendente lite.
i.Cover the factors in John O.
ii. Evidence of recent work history, qualifications, job opportunities, efforts to obtain employment (were any jobs declined/turned down?)
iii.Defending – show efforts, plan to become self-supporting, etc.
iv. Vocational expert?
Be prepared to point to evidence proving voluntary impoverishment.
a.Homemaker throughout marriage preparing to re-enter job market.. This is a common situation that arises at pendente lite hearings usually resulting in a finding that such person is not voluntarily impoverished.
b.Retirement – early vs. regular retirement.
c.Part-time employed parent who could workgreater hours.
d.Starting own business.
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John S. Weaver, Of Counsel
Z Family Law, LLC 51 Monroe Street, Suite 1501, Rockville, MD 20850