Child Support

Depreciation Expenses Should Not Be Included in Father’s Gross Income for Determining Child Support

In the family law, child support appellate case of S.L.W. v. S.R.W., PICS Case No. 14-1246, (Pa. Super. August 5, 2014), the Honorable Susan P. Gantman, President Judge, writing on behalf of the Pennsylvania Superior Court addressed the issue of whether depreciation and depletion expenses, permitted under federal income tax law, should be deducted from gross income for purposes of determining awards of alimony and equitable distribution. The facts of the case are as follows:

The trial court could not include depreciated expenses in determining amount of child support without conducting the Labar analysis.

On appeal in a child support case, father argued that trial court erred in considering as income the depreciation of assets held by his privately-owned business (equipment, machines and supplies) where there was no evidence those cash flows could have instead been dispersed to father, father showed the expenditures were necessary for the continued operation of his business, and the value of the assets after the designated depreciation period would be de minimis. He also argued that the trial court erred in failing to assign the dependency exemption to him every year because father paid the majority of child’s expenses, including medical insurance. The Superior Court affirmed in part and vacated and remanded in part.

When determining a parent’s financial obligation to his children based on the parties’ monthly net income, a trial court must make a detailed appraisal of the parent’s actual earnings, perquisites such as entertainment and automobile expenses paid by a party’s business and the true nature and extent of his property and financial resources.

Depreciation and depletion expenses, permitted under federal income tax law without proof of actual loss, should be deducted from gross income for purposes of determining awards of alimony and equitable distribution only where they reflect an actual reduction in the personal income of the party claiming the deductions. Thus, a calculation of disposable income for purposes of support would include federal tax deductions, unless obligor proved the tax deductions actually represented a real reduction in obligor’s gross personal income.

Whether depreciation and depletion expenses reflected an actual reduction in father’s personal income depends upon whether any such marginal income created through tax savings was reinvested in the business or distributed to father directly and whether the capital outlays underlying the reduction were necessary, or represented an attempt to shelter income for purposes of avoiding child support obligations; each expense must be examined separately and the trial court must make clear which factor it is scrutinizing.

Here, the trial court did not make a Labar inquiry into the listed depreciation on father’s

Federal income tax return and it was unclear whether father actually made capital expenditures or whether the listed depreciation expense was sheltered cash flow. Based on this lack of record, the trial court erred in including the depreciation in father’s income for support purposes simply because the assets father alleged to be depreciating had significant value at the end of their depreciated life. The Superior Court vacated the order in part and remanded for further proceedings.

The primary purpose of allocating the dependency tax exemption is to maximize income available for child support. Here, the parties followed a shared equal physical custody schedule. Both parents provided for the child’s expenses in an approximately equal manner. Thus, the trial court properly split the dependency exemption between the parties.

Reference: Digest Of Recent Opinions, Pennsylvania Law Weekly, 37PLW787 (August 19, 2014)

Filed Under: Family Law, Child Support, Child Dependent Tax Exemption

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