We have still not seen a copy of the Senate bill although PBS Newshour reports that the final version adopted by the Senate was not circulated in the Senate until late Friday evening and about 5 hours before the vote. However, it appears that the Senate bill does not change existing alimony rules. As noted on Listserve last month, the House version does abandon alimony as a deduction effective January 1, 2018. If you are negotiating an alimony provision you need to be carefully following this issue on behalf of clients. The one thing which all reports appear to confirm is that tax reform is a freight train that will not be stopped. The House is scheduled to go out of session on December 14. The Senate one day later. The House needs to pass a bill in that time and the Senate and House need to decide on a “common” bill for joint passage and transmission to the President. The House is circulating a bill that would forestall next week’s government shutdown until December 22, 2017, which would signal that they plan to extend their session. But, suffice to say, the next ten days should provide plenty of excitement.
Any American with a pulse knows that 2017 was to be the first overhaul of U.S. Tax Law since 1986. Until this week, what was circulating through Washington was an 18 page executive summary. That changed yesterday when the House Republican Tax Policy Committee circulated a draft bill that specified exactly what changes were being proposed.
The draft bill summary merits some review because parts of it will affect most of us. But the divorce bar was shocked to see that among those tax “loopholes” on the chopping block is the alimony deduction.
Going back to the 16th Constitutional Amendment, which allowed a federal income tax, there has almost always been a deduction to the person paying alimony on the basis that the deduction would be a corresponding income item for the person receiving the payment. This rule has been uniform. But, it may be changing now. Yesterday’s draft proposal has a Section 1309. It repeals the alimony deduction for agreements and orders entered after December 31, 2017. What could this mean for you? You can still make your alimony deal now, but if this law passes and goes into effect, alimony after 2017 that comes out of new agreements or new court orders will not have any transferred tax effect.
Why would Congress care? After all, payor’s deduction from income becomes payee’s reported income. Revenue neutral right? Well, not quite. Most payors are in higher marginal tax brackets, 31%, 35% and 39.6%. A dollar of alimony costs the payor 69 cents, 65 cents or 60.4 cents, depending on the bracket. The payees are usually in 15% or 25% brackets, so the government loses revenue because the payee is reporting the same alimony but paying a lower rate than the payor. The Republicans say this costs the Treasury about $830 million per annum. Eliminate the deduction and reduce the deficit or at least help pay for other tax cuts.
In real world terms suppose I enter an agreement on December 31, 2017 and agree to pay $50,000 a year in alimony for five years. If my tax bracket is 35%, it costs me $32,500. If my ex-spouse is in a 25% bracket, she reports the $50,000 and gets to keep $37,500 after tax. The government effectively subsidizes $5,000 of revenue it would otherwise get but for the present scheme. Under the proposed bill if the agreement is signed on January 1, 2018, I have no deduction and my ex has no income to report. The payee just got a 25% increase in support based upon the same facts.
Further complicating this is the fact that for more than twenty-five years the Pennsylvania support guidelines have “assumed” that spousal support and unallocated orders of spousal and child support are fully deductible. The tax assumptions are said to be “cooked into” the guideline numbers themselves. If the current bill passes, there is some uncooking that needs to be done because the assumptions have now been undone.
Why devote all of this energy to what is just a first draft bill? After all, this will have to go through many iterations and may change or be eliminated. True enough with one exception. 2018 is an election year. Republicans in 2016 told the world that this Congress was going to reform health care and revise the tax laws. So far, nothing has been accomplished and most legislators will not want to be campaigning this time next year on a “look what wasn’t accomplished” platform. So, this bill has a good chance of moving very fast and a decade’s long tradition of alimony tax law may recede into the mists of time. Stay tuned.
The September 7 issue of TIME Magazine features our obsession with childhood sports. The statistics tell the story. In 2005, school age children played sports at a combined cost of about $8 billion per annum. Today that number is about $15 billion, almost double. And, during this same period there was no increase in the population of American children. About 73 million, then and now. So, how about household income over the same period? Nominally, it went from an average of $45,000 to $50,000, but if you adjust for inflation, it actually declined a little bit.
This writer’s conclusion? Americans are spending money they don’t have on something they want and enjoy but do not need. The cost of team sports for children is itself frightening. Time reports these as average costs including enrollment, uniforms and lots of travel:
Ice Hockey $7,000
This is not a sport economics blog but we see this every day in our divorce practices. Parents fight over the logistics of these sport activities. They fight over who will pay. They fight over whether the child belongs in the sport and, as we recently noted, whether the risk of injury exceeds the benefit.
As the cost of college rises, we also see many parents eyeing their children’s athletic skills as something they can capitalize upon in the form of athletic scholarships. Putting money in a 529 plan is a tedious way to prepare for college. But travel with the child’s team to Baltimore or Richmond to watch 72 hours of continuous soccer is now viewed as an “investment.” Curiously, as time has passed, emphasis is now focusing on athletic performance at younger ages. Time reports of colleges following “star” athletes at ages as young as 10. Middle school is now where the talent is first evaluated. This means, the sport and the child must be nurtured for seven years before the scholarship is awarded. And, children are seeing repetitive motion injuries crop up more frequently because many of these sports are now scheduled “year round.” A gifted basketball player cannot afford to risk his future by playing another sport where he could be injured, or worse-yet, his shooting and passing skills are allowed to wither.
In May, I testified before the Pennsylvania House of Representatives about some possible changes in support guidelines. The witness before me was a Father who, together with his wife, invested heavily in a child’s future as a competitive snowboarder. Much of this investment was borrowed using husband’s credit cards. Shortly after it became clear that son’s snowboarding career did not have much promise, wife departed leaving husband with massive credit obligations. Then she had the temerity to sue him for support. He wanted relief from the support guidelines because a lot of his income was paying credit card debt associated with promoting their child’s sport.
I must confess, I did not have much sympathy for either parent. But, as the Time article observes, modern day parents have difficulty saying “no” to their need driven kids. What child would not want to go to Baltimore, stay in a hotel and hang with his friends while assembled to play back to back softball games on gorgeous college campuses? Unfortunately, the psychological community is warning that in addition to premature serious sports injuries, many children and their families are starting to experience competitive sports burnout. Especially where scholarships are involved, many competitions and tournaments are mandatory because that’s where the college coaches and scouts are going to be found. I spoke recently with a fellow lawyer whose child is still reeling from seeing that her son finished both college and his baseball driven career with nowhere to go. His persona and all of his goals were erected around his athletic talent and now that talent no longer had value.
This is a bad cycle and one that often robs the children of their physical and emotional well-being while robbing their parents’ purse with little chance of return. Each year about 400-500,000 high school kids play baseball, soccer and basketball. Another 1.1 million play football. The likelihood they will take this skill to the professional world is frighteningly small. Baseball: 1 in 760; Football: 1 in 600; Soccer: 1 in 800; and, basketball: 1 in 1,860. Sports have much merit. But all good things must come in moderation.
Not terribly exciting but evidence rulings are hard to find and ones where a family law ruling is reversed based on evidence used by the trial judge are especially rare.
Johnson v. Johnson 2016 Pa. Super. 294 is a published panel decision where the issue was whether Father needed to continue to support an adult child. The law in this area is made murky by the statute (adults “may be liable” for continuing support: 23 Pa.C.S. 4321(3)) but clarified by the case law holding that there must be a disability which prevents the adult child from engaging in profitable employment at a supporting wage by reason of mental or physical limitations. Hanson v. Hanson, 625 A.2d 1212 (Pa. S. 1993).
Father petitioned to suspend support. Mother defended on behalf of the child. The burden is on the child to prove that disability prevents employment and justifies continued support. Verna v. Verna, 432 A.2d 630 (Pa.Super. 1981). In holding that Father had a continuing obligation the trial court noted that it was not presented with current mental health testimony. While cautioning itself that the doctrine of judicial notice does not extend to records admitted in another case (Naffah v. City Deposit Bank, 13 A.2d 63 (Pa. 1940), the Trial court did note that 13 years earlier the court had found the child suffered from a schizotypal personality disorder. It then concluded the evidence currently showed that this disorder continues even though expert support for that conclusion was not in evidence.
Lacking expert testimony and faced with medical records which were not properly authenticated, the Trial Court denied admission of the records. But then, as noted, the trial court decided to indulge in a review of the 2002 evidence and ruling on the same subject. The court also secured its own copy of the Diagnostic and Statistical Manual of Mental Disorders (DSM) and perused that in reaching its conclusion that the disability was continuing.
The Superior Court reversed. The trial court is confined to what was presented at the hearing; not what was contained in the court file even though that evidence may have been properly admitted in 2002. The Superior Court cited Eck v. Eck, 475 A.2d 825,827 (Pa. Super. 1984) for that proposition. The appellate opinion also mentions that even though it denied admission of the newer records of treatment based on failed authentication, it referenced these records in its opinion. This also was error and the case was remanded for further determination.
The case has a number of interesting issues. If the child had the burden and we assume the Mother was acting on her behalf, why is there a remand if the burden was not met? Should this not have been a vacate order instead of a remand? One suspects that mother may have gotten a “bye” here and that she is now on notice to either secure a current expert opinion or at least work on getting the current treatment records admitted when the trial court resumes jurisdiction.
The standard for continuing support is also ambiguous although the Superior Court notes that the remand nullified the need to address that substantive issue. The opinion references the standard of adult child support as whether the child is too “feeble physically or mentally to support itself.” Com. ex rel. O’Malley v. O’Malley, 161 A. 883 (Pa. Super. 1932). It also quotes Hanson v. Hanson, 625 A.2d at 1214, where the standard is termed “impossibility of employment.” The trial court said the standard was whether the child could be “profitably employed” and whether “such employment is available.” Setting aside the insensitivity of the language used in O’Malley, that case talks broadly about self-support. Today, we see adults with physical and mental disabilities in more and more employed positions many of which are crafted to accommodate those limitations. They can earn some money but it may not be enough, even when supplemented by transfer payments. Is there still a support obligation if it is not “enough?”. And how much is “enough?” The current self-support set aside found in the state support guidelines finds that an adult earning less than $931 per month net is presumed unable to contribute to child support. Pa.R.C.P. 1910.16-2(e)(1)(C). Effectively this means that any person earning minimum wage and working full time is not only self-supporting but able to contribute to support of his/her own child. It would stand to reason that such a person is therefore ineligible to seek support from a parent upon attainment of majority at 19. Is this a hard and fast rule? Would it make a difference if the parents had enormous income of their own? The law in this area has a mid-20th century tinge that could stand for some 21st century judicial clarification.
We live in a day when reported (i.e. precedential) decisions are rare and decisions touching upon important philosophical differences are like hen’s teeth. But on November 18 the planets aligned to give us Hanrahan v. Bakker, a 2-1 panel decision with Judges Ford Elliott and Dubow in the majority and Jenkins in dissent. The subject; how much child support is “enough” when the combined incomes exceed $15,000,000.
We have seen this before. Branch v. Jackson involved a major league baseball player. In that case there was a large support order and money deposited in an UTMA account for an unspecified “later.” This writer was troubled by support paid into trust because that really does transfigure the basic premise of the income shares approach to child support. But the result could be explained when one sees that the average career span of a baseball player in the majors is about 5.5 years. Statistics tell us that the rainy day is coming and that for professional athletes there is rarely a “second act.” Meanwhile we know that childhood is 18 years by law.
Hanrahan is different. Both parties are lawyers sharing physical custody of two children. Mother earned approximately $105-180,000. Father’s earnings as a specialist in corporate takeovers with an established Wilmington law firm ran a gamut from 1,083,000 in 2010, $4,010,000 in 2009; $2,303,000 in 2011 and $15,592,000 in 2012.
The parties divorced in 2009 after 17 years of marriage. The opinion references but does not describe income or lifestyle during the marriage. The property settlement agreement called for an annual exchange of tax returns and an annual adjustment of support based on net income and Pennsylvania guidelines. It also contained a counsel fee provision should there be a breach of the agreement.
All proceeded smoothly in 2009 which is to say the calculation was done and the support adjusted to $15,878 per month. In 2010 father’s income declined sharply but again they followed the guideline formula and support fell to $3700 a month. In 2011 Father’s income was $2,303,000 and the support was calculated as $7,851 per month.
2012 was the year the mold broke. With $15,600,000 in income and mother’s reported as $105,000 Father wrote to Mother stating that he ran the calculation but that the number was “way beyond” any realistic reasonable needs. He also generously proposed not to reduce the support below $7,851 per month. It should be noted that Father also covered about $6,000 a month in tuitions, camp, and activities in addition to the support specified by calculation.
To complicate matters Father also took $2,500,000 of the 2012 earnings and clapped it into an irrevocable trust for the children. As if that doesn’t make it complex enough, the partners of his firm agreed to fund a scholarship in honor of the law firm’s founding partner. The “contribution” to this cause for Father was $150,000 but the firm reimbursed him for the contribution.
As one might expect, $14,000 a month in support and direct payments did not seem adequate to Mother and she filed to enforce the agreement. Father filed an unspecified counterclaim and the matter was heard in January, 2015. Over Father’s objection that the income level made the guideline presumptive amount under Pa. R.C.P. 1910.16-3.1 absurdly unrealistic, the Delaware County Common Pleas Court came back with an order ranging from $52-59,000 per month from May 2013 through April 2014. But the Court simultaneously ordered Mother to deposit $30,000 per month from that sum into Uniform Transfer to Minor Act accounts for the children where she would act as custodian. It also found that Father had breached the agreement and made an award of attorneys’ fees pursuant to the agreement. Both parties appealed.
Mother’s appeal settled on the issue of putting the support money into an UTMA account. Her argument was that every other support order in Pennsylvania affords a recipient unfettered access to the support awarded. On this subject the majority agreed, noting that children should not be made to wait for child support and that UTMA is a gifting mechanism with a trust aspect in contrast to child support which is an obligation of parenthood. The UTMA statute declares that these “gifts” are not a substitution for child support. 20 Pa.C.S. 5314(c). The UTMA funds are secondary to the underlying duty to support from current resources. Sternlicht v. Sternlicht 822 A.2d 732,737 (Pa.Super, 2003) aff’d 876 A.2d 904 (Pa. 2005). That aspect of the order was reversed.
The trial court had made a downward deviation in the support amount by reason of the $2,500,000 Father had deposited into trust for the children. Mother asserted that this also was an unwarranted intrusion into the support formula. The trial court had reviewed the deviation factors under Pa.R.C.P. 1910.16-3.1(a)(3) and concluded that the trust was a “relevant factor” warranting deviation. Here the Superior Court again relied upon cases noting that the support obligation was not reduced because of the child’s own property. This contribution was made voluntarily at a time when Father knew he had a child support obligation. See Portugal v. Portugal, 798 A.2d 246 (Pa. Super, 2002)(a parent’s voluntary retirement contributions are still income available for support). The downward deviation was reversed.
On the counsel fee award, the trial court had found this to be a reasonable dispute and not a breach of the agreement. The Superior Court disagreed finding that Father covenanted to pay according to the guidelines and that his position that the guidelines were now absurd or confiscatory was without legal basis. This denial of fees was also reversed.
Father’s appeal starts with a claim that the 1994 decision in Ball v. Minnick, 648 A.2d 1192 (Pa. 1992) somehow eliminated reasonable needs as a standard for support. The Superior Court held that guidelines and the rebuttable presumption of their applicability had been part of a statutory scheme approved by Act 66 in 1985 and remained the law. The income shares model had been adopted in 1989. Ball v. Minnick had established that where the guidelines stopped (then at $10,000 combined net income) the formula of Melzer v. Witsberger, 480 A.2d A.2d 991 (Pa. 1984) would prevail. But Ball was overruled in 2010 by adoption of Pa. R.C.P. 1910-3.1 which stated that all support cases were to be first analyzed through an income shares model after which the courts could evaluate whether deviation was appropriate. Father placed his reliance upon use of the terms “reasonable needs” in the statutory framework of 23 Pa.C.S. 4322. But the Superior Court responded that the guideline formula adopted in the Rules was the formula adopted for determining reasonable needs. It further noted that reasonable needs were not a deviation factor specified in the existing rules.
Along the same lines Father asserted the deviation was appropriate because this support result was an aberration of the standard of living of the parties. Pa.R.C.P. 1910.16-5(b)(7). He also borrowed from the trial court’s reliance on “other factors” to deviate. 1910.16-5(b)(9). The trial court appears to have followed the rainy day reasoning of Branch v. Jackson. Essentially, the argument there was that funds needed to be set aside for a day when incomes were likely to be reduced. The amended trial court order referenced the children’s’ post majority needs. The analysis here seems somewhat muddled but the clear import is that post majority needs and standards of living are not part of a child support analysis.
What makes this case interesting is not so much the result but the trend. We are seeing lots of disparity in annual earnings on the part of more and more people. In this case, even Mother’s income varied markedly. The support amount (excluding the add ons) over three years varied from $3,700 to $59,000 a month. Assuming a caring, honest and intelligent recipient what is that person to do. We can hope the payee would not spend every dollar received, but we are trusting that the right thing will be done with some fairly astronomical levels of child support. If the payee took the excess over the mean level of support (roughly $8300 a month) and purchased a $500,000 home with the excess cash accumulated over the 12 months of “surplus” whose house is it when the children are emancipated.
When large sums like that in Hanrahan come into play, would it not make sense for the court to appoint a guardian ad litem to at least make some suggestions or perhaps ask some questions. Certainly this should not be an appointment to wrest control of the support from the payee but we have all heard the stories, whether apocryphal or not of fortunes wasted on cashmere socks and fast cars. As a business lawyer Mr. Hanrahan probably still has a few more seasons in the big leagues of mergers and acquisitions. But wide receiver Michael Jackson was drafted in 1991 and finished in 1998. We don’t know how Ms. Branch’s children by Mr. Jackson ended up but even the best of us certainly would be tempted to think that the father of her children might become the next Jerry Rice (20 seasons). If the money we call child support really is for the kids, some caution should be taken in circumstances where the income level is erratic and the source fleeting. A GAL would be money well spent to assure that children do not ride the road from rags to riches back to rags when that calamity could be avoided.
The dissenting opinion of Judge Jenkins would go even farther. She believed that a downward justification was warranted based upon the funding of the trust and she also approved of the notion that it was in the best interests of the children for funds to be segregated into a UTMA account.
I was researching material for this blog when courtesy of some “cookie” embedded in a website, I was treated to an opportunity to save substantially on my divorce legal fees by signing on for a service that offered me “al a carte” divorce services by law firms standing by to help me without the “unnecessary” cost associated with full service divorce representation. Sounds appealing, right? Why buy the whole car when only the tires need to be replaced?
So as the reader has probably already surmised, this piece is being written by one of those pricey full service divorce lawyers. Thus, as the Latin’s would say Caveat emptor (let the buyer or in this case the reader, beware).
The typical person in an unhappy marriage faces a myriad of issues. Custody. Division of property and the debt that accompanies it. Division of future assets like pensions or other retirement plans; child support; spousal support; alimony; health insurance; life insurance. The list goes on but you get the point.
If each of these issues was wholly independent of the other, a la carte divorce services might make more sense. But, that is usually not the case. So let’s take custody. That should be an easy topic to sever from the rest, right? Kids are not for sale and so money issues should not really tie into custody.
Well, not so fast. Do you have primary custody? Then you will probably be a head of household for tax rates and you will be able to deduct the kids on your return even though the other parent contributes more to child support than you do. Do you have shared custody? Then your tax treatment is probably going to be different. Do you have the kiddies more than 146 nights per year? Then your support is subject to adjustment. If you have primary custody of minor children that’s a reason why you should get a greater percentage of the marital estate. At least that’s what the statute says. Spousal support and alimony pendent lite (which is to say spousal support with a Latin spelling) are calculated differently if you are getting child support and you get child support because of how much custody you have of your children. The parent with primary custody will want to ask whether there is life or disability insurance should the other parent experience disability or its more lasting cousin, death.
So you hire a la carte lawyer to help you draft a custody stipulation. Is that lawyer also going to assess and advise on the issues I just described? You want to say yes but you know better.
Let’s use property division as another example. Mother keeps the house subject to the mortgage because she will have primary custody. Do you want Mother to refinance the house to get your name off the mortgage or are you OK with having an extra $200,000 in debt sitting on your Experian credit report for a house that’s now in her name? And if Mother takes up with Mr. Loser and together they decide not to pay the mortgage on that home where the kids live, do you know whose credit rating is going to be dinged and who might be liable if the house sells for less than the principal balance due in foreclosure? One guess only.
In fairy tales, everything turns out right. That’s why you don’t read a lot about lawyers in books by the Grimm Brothers or Hans Christian Andersen. Lawyers came about because things go wrong. Like the parent who signed up to pay for his kids’ college in 2006 thinking that he had a solid job paying him $200,000 a year. He loved his kids and with $12,000 a month in after tax income he felt confident that he could afford it. But then came the Great Recession and it has now been eight years since he cracked $140,000 a year in income. Meanwhile his loving children all chose to go to private universities and so far they have averaged 6 years to complete a four-year program. He didn’t need a lawyer, right? So now he wanders the streets with a $250,000 judgment accruing interest at 6% that has almost no chance of being addressed in a bankruptcy. A lawyer might have suggested capitating the cost of enrollment, the length of enrollment and a failsafe provision in case he lost his job. But, this 21st century Dr. Pangloss trusted that all would be well.
Some readers will call these war stories a form of fear mongering. Bad things don’t always happen. The entire life insurance industry is built around the premise that in any given year only a small fraction of people actually die. Only a small portion of legal agreements blow up in bad ways. But when they do, they can inflict a lifetime of financial pain. The trouble with on line or over the phone legal advice is that you’ll never be able to find the lawyer or algorithm that gave it to you when it turns out badly.
There are times when two conversations with two wholly separate individuals causes a person to distill some interesting new thoughts. Earlier this month I had lunch with a woman who has long run the intake program for the Domestic Relations Office in Chester County. We were discussing the triumphs and tragedies associated with the daily business of processing support cases where both emotions and money are at stake. My lunch companion, Rae Morgan, observed that one of the real problems they encounter is that because the litigants are so nervous about going to court over support they lose their ability to listen and appropriately process even simple instructions.
Two weeks later my lunch companion was Judge Daniel Clifford from Montgomery County. Dan is new to the judging business but a long time divorce practitioner before he was elected to the bench in January of this year. He has been hearing a lot of custody cases and we spent some time discussing how his perspective has changed as he transitioned from before the bench to behind it. His comments echoed those of Rae Morgan. Namely, that he wishes that litigants could observe their own testimony because in many instances what they were advocating was really not consistent with a child’s best interest. Put another way, their anxiety about the hearing often deprived them of what might otherwise seem common sense.
In both instances we spoke about how lawyers can try to help people understand how the judicial process works and how they could be less reactive to it. But then today my inbox brought me an article from Popsugar captioned “30 Things that Children of Divorce Wish Their Parents Knew” I commend every parent to take a few minutes to look at this because a great deal of it would address the kinds of concerns Judge Clifford was talking about in a custody setting. I will edit what I saw as editors tend to do. Their 30 became my 15.
- As your kid, I want to love both of you fairly and equally and not have you think that my love for you diminishes my love for the person you once promised to love “forever.”
- Moving from one house to another sucks and it’s made even worse when you get all stressed about my leaving. I will be back, just like the court order says.
- You are not responsible for everything that happens to me and I realize that when parents disagree, it gets disagreeable. But please don’t make it worse by making yourself crazy. If you feel trapped, try being in my place with two powerful adults wrangling over me.
- Please don’t share with me what you and my other parent are fighting about. And, oh yes, I did tell you each something different about what sport I want to play because I didn’t have the courage to stand up to either of you and feel your disappointment.
- Let me figure out whether I like the other parent’s new significant other. I am stressed with conflicting loyalty issues already.
- It really, really hurts when you don’t show up for something we have scheduled.
- Yes, gifts and trips are great but I can tell when the motivation is “Love me more.”
- When I’m with you, I do miss my other parent and that does not diminish my love for you.
- I am not staying with you to provide information about what the other parent is doing.
- Understand that when you share your animosity for the other parent or the frustration you have with them, I have just about no ability to help you with that. I am just the child which usually means all I can really do is channel your stress together with mine.
- You may have “moved on” emotionally and found the man or woman of your dreams. Please don’t ask me to share your dream until I am ready. I also know when your “friend” is a lot more than a friend.
- If I score a goal or play Dorothy in the “Wiz” I would like you both there sharing my joy. If I hug the other one first afterward, it is not a judgment.
- I don’t need to know your side of what happened. I don’t have the coping abilities of an adult and I have never been an adult. If money (or its absence) means you can’t say yes to me, that is something you can tell me without feeling that you failed me.
- If there is bad news, please don’t ask me to be the courier.
- Over time, I may judge the other parent harshly either with justification or without. I may be asking you to listen. I do want you to listen but I’m not ready to sign up permanently for the “Hate the Other Parent” team.
We have written before about the subject of when and how a person can be in “contempt” of a court order. The word itself is riddled with often misunderstood meaning. What could be worse than having a court decide that you are contemptible?
In the past week I have been called to court to prosecute or defend two of these cases. The first instance involved a request to find my client in contempt of a custody order. The court where the matter was heard summons people to a non-record hearing where a hearing officer either recommends or denies a request for a finding of contempt. The hearings are scheduled one per hour and if you don’t like the recommendation you take an appeal and have a record hearing before a judge. The typical remedy of make up time for lost custody, an award of $118 in costs and a $200-300 fine makes it such that the game is not worth the candle. I recommended to my client to do what he wanted as Step 1 would cost $1000-2000 in attorney time and an appeal would consume that much and more. Who wins contempt proceedings? Almost without exception it is the party who has superior financial resources. The litigant with $50,000 in net earnings has twice the staying power of the one making $25,000 and the remedies are pathetically weak. So if you want to exhaust your opponent financially, spurious or weak contempt proceedings and appeals are a great way to win a custody war by attrition.
This week was a petition to enforce a prior court order in divorce. I had the enforcing side and the spouse had been held in contempt on at least two prior occasions for ignoring an order to sell a house. The most recent petition was filed after the house was finally sold while in foreclosure and the actual damages could be calculated and assessed as the hemorrhaging had ended. The petition to assess the damages had been filed almost 90 days earlier but, the Respondent waited until the day before the hearing to retain counsel. That begot a request for a continuance to prepare.
My newfound opposing counsel is resourceful. As I anticipated she came to court ready to challenge every paragraph of the petition and to assert defenses that might have had some traction two or more years ago but were effectively waived by the fact that they should have been raised in prior proceedings. But in contempt court the rules work to the advantage of the party who plays games. You see, they are entitled to a specific pleading setting forth how they violated the court’s orders. Do they have to specify their defenses? Not in Pennsylvania. The joke is on the party seeking to enforce the order because the responding party needs to do nothing except appear in court on the appointed day. So in my case, we killed three hours of time while new counsel asserted defenses and demanded “proofs” never before articulated. In candor, some of them had merit. But whether the defense arguments were good, bad or indifferent, the party prosecuting the contempt never gets to see or hear about them until the case is called. The cost of preparing a contempt hearing is always unnecessarily high because the person prosecuting the case has to conjure what the defenses might be. Why force a party to explain why he or she disobeyed a court order or put in writing the reasons their conduct did not violate the order? That would be efficient.
Then we get to the remedies. In under Section 3502(e)(7) a divorce setting you can at least claim attorneys fees. But what about damages caused by a party’s refusal to comply with a court order? You won’t find that remedy in the statute. Support law is even worse. Section 4345 allows 180 days of county subsidized imprisonment, a fine not to exceed $1,000 which is payable to the Court and up to a year of taxpayer funded probation. You have to go to Section 4351(b) to get reasonable fees and costs and you have to prove the obligor did not have good cause for his failure to comply. Once again, burden is not on the person with the duty to comply but on the person supposedly benefiting from the award. Custody violations are covered by Section 5339 and impose the same standard as 42 Pa.C.S. 2503. The action must be obdurate, vexatious, repetitive or in bad faith. Pa.R.C.P. 1915.12’s notice for hearing makes no reference to counsel fees as a remedy which, of course, creates a due process problem in its own right should an award be made.
The statute and the rules need to make it clear that failure to obey costs money and lots of it. The sanction of a fine or award for failure to comply should be monetary and have a temporal element. When the message gets out that failure costs $25 a day or $250 a day, people will pay attention. Putting parents and divorcing people in prison or on parole only punishes the taxpayer without corresponding benefit to the innocent party victimized by the non-compliance. But the starting point is to force litigants to frame the issues in writing before anyone enters the courthouse. It takes what is supposed to be a pointed procedure and dulls it beyond recognition.
Having just finished one of these, I searched our database and noted that we had written very little about it.
In my case earlier this week, my adversary and I had been negotiating a child support order. After several rounds, we reached a mutually acceptable conclusion. When I wrote to confirm our “terms” I received a responsive email that the child’s father wanted to claim the child as a dependent on his federal income tax returns “every other year.” My client would justly ask: What does that concession mean and what is it worth?”
If you do your own income taxes at the federal level, you know that on page 1 of the return you are asked to name your “dependents” and on page 2 you can claim a deduction reducing your taxable income by $4,000 for every eligible dependent including yourself. So if Mr. and Mrs. Hubbard are living in the same shoe and they have two minor children, they can take a total of $16,000 in exemptions (i.e. deductions) from their income ($4,000 x 4). But what happens when Father Hubbard splits to live with another storybook character? Clearly, if the Hubbard’s continue to file joint returns, nothing much changes. But Father Hubbard is now paying some deductible alimony to Mother and he needs to file separately in order to claim it. And since he is paying child support as well why can’t he deduct at least one of the kids?
Well the Internal Revenue Service is on this and since 1984 they have taken the position that the deduction associated with a child goes to that parent who had primary physical custody.
The parties can agree to split the deductions (one parent takes each child) but absent an agreement, the deduction stays with the parent who has the kid most of the overnights, even though the non-custodial parent may be paying most or all of the freight. More recently as we have seen increases in shared physical (50/50) custody, the service has held that the deduction in that instance goes to the parent with the larger adjusted gross income. See our blog on this 11/1/12.
As we have noted, the deduction can be traded and the IRS has a Form called No. 8332 that allows parents to do that. So what is the deduction worth? $4,000 right? Well, not so fast.
The real value of the deduction depends on your taxable income for single folks with taxable income under $10,000; the deduction is only worth 10% of the face amount or $400. But for a head of household with taxable income over $50,000 it is worth 25% or $1,000. Get that taxable income up into the $200,000 range and the deduction accelerates to 33% or $1,320. The value of the deduction tops out at 39.6% or $1,584 but your taxable income has to top $400,000 to get that amount. Beware that as adjusted gross income (AGI) starts to exceed $150,000 the IRS begins to nibble away at the value of the exemption through a “phase out.” For many high income taxpayers, there is effectively no personal exemption to deduct because of the phase out.
One other thing to know. Assigning the exemption to another does not affect a taxpayer’s right to be a head of household and to use those slightly lower tables in determining the actual tax due. But one thing is clear; while dependency exemptions do reduce your taxes, they do not do so dollar for dollar. An exemption is, at best worth the equivalent of $110 per month and, at worst worth about $35 monthly.
N.B. IRS Publication 504 is the best place for a layperson to consult on line. Every one of the rules described above has a plethora of exceptions.
A Friendly Amendment To Our Blog On Dependency Exemptions:
I heard from one reader with a very apt point. As income rises, into levels above $150,000, the dependency exemption does phase out and there is a level where it disappears completely. So I was incorrect to suggest that it has a minimal value. It can be zero and you certainly don’t want to get into a fight over “nothing.”
One of the things the Pennsylvania Bar Association makes a part of its mission is to review and, where appropriate, comment on legislation introduced for consideration by the General Assembly. These proposed laws cover a large swath of public policy territory. Earlier this year the legislature passed a bill creating a presumption of consent to divorce where a violent crime had occurred between spouses. Today there is a bill to reduce the separation period required to obtain a consent divorce from 2 years to 1. It may well pass before the end of the month. There is another bill to affect how custody proceedings may change upon a parent’s military deployment.
The Family Law Section was recently asked to comment on House Bill 1975, a bill introduced by Representative Todd Stephens of Montgomery County and 18 of his colleagues imposing interest on support arrears. While this writer sees limitations in the bill as currently drafted, the subject is one that certainly merits legislative consideration.
The nub of the problem can be described as follows: Two parents separate on January 1, 2016 and parent A has primary custody of their child. Parent A applies to the court for a child support order and on March 1, a conference is held and an interim order of $1,000 a month is issued. The Court instantly attaches the wages of Parent B and the matter is referred for a hearing to establish a final order. That hearing takes place on June 1 and a decision is rendered setting support at $2,000 a month on June 30, 2016. This means that the support account would be set at $12,000 (6x $2,000) against which there would be credits for the $4,000 for those payments collected under the interim order (Mar, Apr, May, Jun). Thus the account would show what lawyers call an arrearage of $8,000. The technical legal term is called “past due support.” When it enters a final order, courts are also supposed to address liquidation of the past due support. Typically, courts add 10% to the order to reduce the arrearage over time. An award of $2,000 would be increased to $2,200 per month with $200 being applied to eliminate the $8,000 arrearage.
Those facile at long division and the “time value of money” will see the immediate inequity. Parent B paid no support for two months and half the correct amount of support for the next four months while the final order was being decided. At $200 per month it will take 40 months to pay off the overdue support. At the legal rate of 6%, the interest that should be applied to this payout would be about $48 per month or $1,920. But under prevailing law, Parent B gets the payout interest free. So, the effective rate of the payout is not $200 a month but $152.
House Bill 1975 does not change this if Parent B unfailingly remits $2,200 per month as the June 30 order mandated. But if Parent B, fails to make the correct payment amount each and every month, the “past due support” becomes “overdue support.” And that is not just the particular missed payment but all past due support (arrearages). Under Bill 1975, if Parent B paid only $2,100 per month in September, 2016, all past due support would become overdue and subject to interest at the legal rate of 6%.*
*The proposed bill applies interest at 6% or Wall St Journal Prime +1%, whichever is greater.
The statute does not specify the date the interest would be calculated from. Should it be from the date the case was initiated; the date the order became final or the date of the default. There are meritorious arguments for all three dates.
But there is also reason not to apply these interest rates or to apply them at a rate that is today 25% above prime rate. One cannot reasonably defend an interest free loan of what the law defines as essential support for dependent minor children. On the other hand, many if not most support obligors incur unusual expenses at separation (e.g., moving, rental or home purchase deposits and related soft costs) and the economies of one family under one roof are erased. Another concern is the new trend toward spasmodic employment. In the past decade employers have increasingly relied on computer models to instantly add and/or terminate employees. Payor parents who find themselves terminated often forget to put on their “to do” list a visit to modify support based on unemployment. So the employee who neglects to make $2,200 a month payment in the month immediately following his/her termination risks falling into the “overdue support” bin that would trigger interest rates at a time when the payor is least able to make the full payment. Presumably, this might be rectified in subsequent modification proceedings but that requires recalculation of not only the support but any interest which began to accrue.
In a conference call of the state bar association’s family law section, the discussion focused upon the complex interest algorithms that would need to be written to trigger and calculate interest and to revise those numbers if, as, and when a modification is granted. In our example Parent B pays his $2,200 in July, August and September but is fired on September 30 and pays only $1,000 in October. Now his past due support is overdue support and the computer calculates and adds interest to his arrearage. In November, he applies for a reduction and in January, his support is modified to $750 a month because his income is vastly reduced. Are we still charging interest on $7,400 arrearage balance at 6% despite his reduced condition?
Lest we be accused of shilling for the payor, the plain fact is that there are times when lengthy payouts of past due support should be subject to some form of interest. Often Courts routinely apply their unwritten 10% on arrears rule despite the fact that the parties have large deposits that could easily satisfy the arrearage. At its worst, in one case, the arrearage on a $45,000 a month order was well in excess of $1,500,000. Despite the fact that the payor had reported income 5x the arrearage, the Court ordered a token payment of $5,000 a month in reduction of the past due amount. The effect was a 26 year interest free loan. The Superior Court deemed this alleged error to be harmless. See Karp v. Karp, 686 A.2d 1325 (Pa. Super. 1996)
Is there a middle ground? Encourage courts to award modest interest to incentive Payors to liquidate their obligation. Apply it to all final orders but allow it to be suspended where justice would make such accruals inappropriate in the court’s discretion. This might create the proper tension between interest free payment of past due support and debilitating interest assessments against those not really in a position to pay interest. Research provided to us by Summer Clerks Eunice Kim and Kelsey O’Neil informs us that 28 states apply interest on past due support and 40 states charge it on overdue support as H>B. 1975 suggests. When states such as Alabama, Mississippi, and Arkansas are charging 7.5-10% interest, one has to ask whether this is another example of “Carville was right” except that we might be a little less modern.
For a list of which states charge interest and how search http://www.ncsl.org/research/human-services/interest-on-child-support-arrears.aspx