Byler vs. Byler

 

BYLER vs. BYLER

 

 

Domestic Relations – Support – Self-employed Defendant – DRM’s Report – Credibility – De Novo Determination – Six Month Average of Income – Tax Returns – Review Hearing – Exceptions.

 

 

1. In reviewing a DRM’s report, the Court must give its fullest consideration to the credibility findings of the DRM who was present to observe the demeanor of witnesses and hear their testimony.
2. A DRM’s report should not be lightly disregarded.  However, the DRM’s report is only advisory and the Court is not bound by its conclusions.
3. When the Court has a transcribed record to review, it must consider all of the evidence de novo and make an independent determination of the amount of support due and owing.
4. The Pennsylvania Support Guidelines declare that monthly gross income is ordinarily based upon at least a six-month average of all of a party’s income.  The obvious purpose of this rule is to avoid reliance upon snapshots of income that are either artificially high or artificially low.  While the general rule is that a six-month average of income should be used, there are exceptions to this rule.
5. The word “ordinarily” found in Pa.R.C.P. 1910.16-2 affords the Court with the discretion in appropriate cases to gauge income upon periods of time that are either greater or less than six months.
6. Without question, tax returns are evidence of income.  However, our Appellate Courts have instructed that the evaluation of income based upon tax returns must be undertaken cautiously.
7. Income must reflect actual available financial resources and not the oft-times fictional financial picture which develops as the result of depreciation deductions taken against income as permitted by federal income tax laws.  Otherwise put, cash flow ought to be considered and not federally taxable income.
8. Income of a corporation, as reflected in its tax returns, should be predicated on as long a period of time as practical.
9. There are multiple reasons why a small business owner’s income should generally be predicated upon his most recent tax return and not upon a several month snapshot of his business finances, including the fact that many businesses are seasonal in nature, that bonuses or draws are often calculated at the end of the year, that tax returns are generally prepared by professional preparers and signing them involves criminal liability and enforcement, and because the shorter the period they cover, the easier it is to manipulate income and expenses.
10. The Court held that Defendant’s 2011 tax return reflected the best information available from which to discern his income rather than just the first four months of 2012.
11. The Court entered an Order affirming the DRM’s decision and directed that a review hearing be conducted in late February or March of 2013 so that if Defendant’s 2012 annual income has decreased, his tax return can be presented to the DRM at that time.

Exceptions to Recommendation of Domestic Relations Master.  C.P. of Lebanon County, Civil Action-Law, No. 2010-5-0312.

Donna Long Brightbill, Esquire, for Plaintiff

Mary H. Burchik, Esquire, for Defendant

 

IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY

PENNSYLVANIA

 

DOMESTIC RELATIONS SECTION

 

LARIEA A. BYLER                           :  NO. 2010-5-0312

                                                          :  PACSES NO.: 877112446

1. v.                                                            :

: 

DEREK C. BYLER                            :  

 

 

ORDER OF COURT

 

AND NOW, to wit, this 2^nd day of November, 2012, upon consideration of the Exceptions filed by Derek C. Byler and after review of the file, the Recommendation of the Domestic Relations Master is affirmed as follows:

The temporary Order of Court, dated July 13, 2012, is MADE PERMANENT AS INDICATED BELOW.  It is further ordered as follows:

This Order shall be effective February 23, 2012.                  

The amount of support to be paid by Defendant is: $3,375.33 per month for child support for Josiah Byler, Emily Byler, Jonathan Byler, Christopher Byler, and Hannah Byler plus $3,143.68 per month in spousal support for Lariea Byler.  This Order shall remain a pay-direct Order and not through the Lebanon County Domestic Relations Office.  The amount to be paid by Defendant on accumulated arrears is: $337.53 per month for child support and $314.36 per month for spousal support.

This case is to be reviewed by the Domestic Relations Master in late February or March of 2013. 

The JCS Fee of $23.50 shall be paid by: N/A.

Arrears are due in full IMMEDIATELY.  All terms of this Order are subject to collection and/or enforcement by contempt proceedings, credit bureau reporting, tax refund offset certification, driver’s license revocation, and the freeze and seizure of financial assets.  These enforcement/collection mechanisms will not be initiated so long as Obligor does not owe overdue support.  Failure to make each payment on time and in full will cause all arrears to become subject to immediate collection by all the means listed above.

The monthly support obligation includes cash medical support in the amount of $250 annually for un-reimbursed medical expenses incurred for each child and/or spouse.  Un-reimbursed medical expenses of Obligee or children that exceed $250 annual shall be allocated between the parties.  The party seeking allocation of the un-reimbursed medical expenses must provide documentation of the expenses to the other party no later than March 31^st of the following calendar year in which the final medical bill to be allocated was received.  The un-reimbursed medical expenses are to be paid as follows:  96% by Defendant and 4% by Plaintiff.  Defendant to provide medical coverage ______________________________:

IT IS ORDERED THAT (ITEMS CHECKED BELOW APPLY):

_____The defendant is ordered to cover the dependent(s) with health care coverage whenever it is available at a reasonable cost which shall be defined as a cost that does not exceed 5% of defendant’s net monthly income and does not exceed 50% of defendants net monthly income when added to the basic child support plus additional expenses,.

_____Health care coverage is currently not available at a reasonable cost to defendant.  Therefore, plaintiff is ordered apply for government-sponsored coverage, such as Children’s Health Insurance Program (CHIP).  The cost of said coverage shall not exceed 5% of plaintiff’s net monthly income.

_____Health care coverage is currently not available at a reasonable cost to defendant.  Therefore, plaintiff is ordered to cover the dependent(s) with health care coverage if it is available at a reasonable cost which shall be defined as a cost that does not exceed 5% of plaintiff’s net income

IT IS FURTHER ORDERED:

Within 30 days after the entry of this order, the party ordered to provide health care  coverage shall provide written proof to the Lebanon County Domestic Relations Office and the other party that medical insurance has been obtained, including insurance cards and any other material necessary to utilize the coverage.

If Health Insurance is currently unavailable to the party/parties ordered to provide it, such proof shall be provided to Lebanon County Domestic Relations within 7 days of the date of this order.

If Health Insurance coverage is now available or becomes available to the party/parties ordered to provide it, the party/parties shall provide proof of the cost to Lebanon County Domestic Relations within 7 days of the date of availability.

ADDITIONAL RECOMMENDATIONS:  Effective May 30, 2012, Katie Tyann Byler is emancipated.  All aspects of the February 23. 2012 Recommendation shall remain in full force and effect.

Within thirty (30) days after the entry of this Order, the party or parties providing insurance shall submit to the person having custody of the child(ren) written proof that medical insurance coverage has been obtained or that application for coverage has been made.  Proof of coverage shall consist, at a minimum, of: 1) the name of the health care coverage provider(s); 2) any applicable identification numbers; 3) any cards evidencing coverage; 4) the address to which claims should be made; 5) a description of any restrictions on usage, such as prior approval for hospital admissions, and the manner of obtaining approval; 6) a copy of the benefit booklet or coverage contract; 7) a description of all deductibles and co-payments; and 8) five copies of any claim forms.

Payments must be made by check or money order. Said money to be turned over by the Pa SCDU for distribution and disbursement in accordance with Rule 1910.17(d). All checks and money orders must be made payable to Pennsylvania State Collection & Disbursement Unit and mailed to P.O. Box 69110, Harrisburg, PA 17106-9110.  Each payment must bear your social security number and member number in order to be processed.

IMPORTANT LEGAL NOTICE

PARTIES MUST WITHIN SEVEN DAYS INFORM THE DOMESTIC RELATIONS SECTION AND THE OTHER PARTIES, IN WRITING, OF ANY MATERIAL CHANGE IN CIRCUMSTANCES RELEVANT TO THE LEVEL OF SUPPORT OR THE ADMINISTRATION OF THE SUPPORT ORDER, INCLUDING, BUT NOT LIMITED TO, LOSS OR CHANGE OF INCOME OR EMPLOYMENT AND CHANGE OF PERSONAL ADDRESS OR CHANGE OF ADDRESS OF ANY CHILD RECEIVING SUPPORT. A PARTY WHO WILLFULLY FAILS TO REPORT A MATERIAL CHANGE IN CIRCUMSTANCES MAY BE ADJUDGED IN CONTEMPT OF COURT, AND MAY BE FINED OR IMPRISONED.

 

PENNSYLVANIA LAW PROVIDES THAT ALL SUPPORT ORDERS SHALL BE REVIEWED AT LEAST ONCE EVERY THREE (3) YEARS IF SUCH REVIEW IS REQUESTED BY ONE OF THE PARTIES. IF YOU WISH TO REQUEST A REVIEW AND ADJUSTMENT OF YOUR ORDER, YOU MUST DO THE FOLLOWING: CALL YOUR ATTORNEY. AN UNREPRESENTED PERSON WHO WANTS TO MODIFY (ADJUST) A SUPPORT ORDER SHOULD CONTACT THE DOMESTIC RELATIONS SECTION.

 

ALL CHARGING ORDERS FOR SPOUSAL SUPPORT AND ALIMONY PENDENTE LITE, INCLUDING UNALLOCATED ORDERS FOR CHILD AND SPOUSAL SUPPORT OR CHILD SUPPORT AND ALIMONY PENDENTE LITE, SHALL TERMINATE UPON DEATH OF THE PAYEE.

 

A MANDATORY INCOME ATTACHMENT WILL ISSUE UNLESS THE DEFENDANT IS NOT IN ARREARS IN PAYMENT IN AN AMOUNT EQUAL TO OR GREATER THAN ONE MONTH’S SUPPORT OBLIGATION AND (1) THE COURT FINDS THAT THERE IS GOOD CAUSE NOT TO REQUIRE IMMEDIATE INCOME WITHHOLDING; OR (2) A WRITTEN AGREEMENT IS REACHED BETWEEN THE PARTIES WHICH PROVIDES FOR AN ALTERNATE ARRANGEMENT.

 

UNPAID ARREARS BALANCES MAY BE REPORTED TO CREDIT AGENCIES. ON AND AFTER THE DATE IT IS DUE, EACH UNPAID SUPPORT PAYMENT SHALL CONSTITUTE, BY OPERATRION OF LAW, A JUDGEMENT AGAINST YOU, AS WELL AS A LIEN AGAINST REAL PROPERTY.

 

IT IS FURTHER ORDERED that, upon payer’s failure to comply with this order, payer may be arrested and brought before the Court for a Contempt hearing; payer’s wages, salary, commissions, and/or income may be attached in accordance with law; this Order will be increased without further hearing by 10 % a month until all arrearages are paid in full.  Defendant is responsible for court costs and fees.

 

OPINION BY CHARLES, J., November 2, 2012

 

This is a child support dispute that focuses upon the methodology by which a small business owner’s income should be established.  Derek C. Byler (hereafter “FATHER”) owns a home kitchen installation business that has historically provided him with lucrative income.  FATHER claims that his business income has plummeted in 2012 and that his child support obligation should be based upon a relatively brief “snapshot” of his business during a portion of 2012.  For reasons that follow, we conclude that FATHER’s income and his child support obligation should be predicated upon a broader year-long evaluation.

 

I.       FACTS

FATHER and Lariea Byler (hereafter “MOTHER”) are the parents of seven children.  The parties’ oldest daughter graduated from high school in May of 2012.  The remaining children reside with both MOTHER and FATHER under a shared custody arrangement.

MOTHER and FATHER separated in 2010.  On April 21, 2011, MOTHER filed an initial Complaint for Support seeking both child support and spousal support.  An Order by agreement was entered on June 10, 2011 that required FATHER to pay $3,000.00 per month in spousal support and $4,000.00 in child support.

On January 26, 2012, FATHER filed a Motion for Modification of Support.  He alleged that his business had “suffered a severe economic downturn due to the state of the construction industry.”  FATHER’s modification petition was eventually scheduled for a hearing before a Domestic Relations Master (DRM) on July 13, 2012.  By this time, the parties’ oldest daughter had become emancipated.

At the DRM hearing on July 13, 2012, significant testimony was presented regarding FATHER’s business income.  FATHER testified that he worked as a self-employed kitchen designer for thirteen years.  He described his business income as steadily declining.  He claimed that his business income for the first quarter of 2012 had plummeted by seventy-five percent compared with the preceding year.

FATHER’s business is an S corporation.  FATHER is the sole shareholder of this corporation.  He receives income from his business in two ways.  He receives a payroll check as an employee and periodic owner’s draws as business profits allow.  The corporate tax return for FATHER’s business was admitted into evidence as Exhibit 6.  An examination of that tax return reveals the following:

(1)     FATHER’s business generated gross receipts for 2011 of approximately 1.1 million dollars.

(2)     After deduction of FATHER’s cost of goods sold, the gross revenue generated from FATHER’s business for 2011 was $475,498.

(3)     After deducting expenses, FATHER’s business declared a net income for tax purposes of $150,768.

The DRM utilized FATHER’s 2011 corporate income tax return in order to determine FATHER’s income.  Although the DRM’s Report is somewhat confusing, it appears as though the DRM calculated FATHER’s income by adding his yearly salary of $70,781.88 to the ordinary business income reflected on FATHER’s tax return of $150,768.00.  From this total, the DRM deducted a “health insurance cost” of $8,046.60 and a self-employment tax of $21,609.00.  At Section V.d. of her Report, the DRM declared FATHER’s net monthly income to be $14,477.00.  The DRM then added “additional income” based upon the non-cash depreciation expenses set forth on FATHER’s tax return to arrive at a revised income for FATHER of $17,238.00.  However, when actually calculating support under the guidelines, the DRM utilized her initial figure of $14,477.00 per month as FATHER’s income.

At the DRM hearing, FATHER presented financial information for the first four months of 2012 as Exhibit 5.  FATHER claimed that this document revealed a seventy-five percent downturn in sales from 2011.  The DRM reviewed this document and reached a different conclusion.  According to the DRM, an analysis of Exhibit 5 pro-rated for the remainder of 2012 would have generated for FATHER a net business income of $149,087.00, which she characterized as “basically the same” as FATHER’s income in 2011.

Based upon her determination of FATHER’s income, the DRM determined that FATHER should pay $3,375.33 per month for child support plus an additional $3,143.68 per month for spousal support.  She further recommended that the Order should not be changed when the parties’ oldest daughter graduated from high school.

On July 30, 2012, FATHER filed one exception.  This exception challenged the DRM’s calculation of his income.  In his brief, FATHER further refined his exception by setting forth two related but separate arguments.  First, FATHER argued that the DRM erred by basing his income upon his 2011 income instead of his reduced 2012 earnings.  Second, FATHER argued that he made payments directly from his business, thereby “benefiting mother greatly by both removing the obligation for mother as well as deceptively overstating father’s income.”

The parties initially submitted their arguments to this Court based upon briefs.  By a Court Order dated September 18, 2012, we directed that the parties appear for oral argument.  We were specifically interested in questioning the parties regarding the nature and extent of what FATHER purportedly paid from the business account in order to benefit MOTHER.

The parties appeared as directed on October 16, 2012.  We addressed questions to FATHER’s attorney regarding the claim that FATHER paid expenses for MOTHER directly from his business account.  At oral argument, FATHER’s attorney essentially abandoned the argument that MOTHER received direct payments from FATHER’s business.  As a result, the only issue remaining before for disposition us is FATHER’s claim that his income should have been predicated upon the first four months of 2012 instead of the entire calendar year of 2011.

 

II.      STANDARD OF REVIEW

Our Superior Court has provided guidance with respect to the scope of review that we should ordinarily employ.  In reviewing a DRM’s report, we must give “fullest consideration” to the credibility findings of the DRM, who was present to observe the demeanor of witnesses and hear their testimony. Schuback v. Schuback, 603 A.2d 194, 195-6 (Pa.Super. 1992); Dukmen v. Dukmen, 420 A.2d 667, 670 (Pa.Super. 1980).  A DRM’s report should not be lightly disregarded.  Pasternak v. Pasternak, 204 A.2d 290, 291 (Pa.Super. 1964).  However, the DRM’s report is only advisory, and we are not bound by its conclusions.  Id.  When we have a transcribed record to review, we must consider all of the evidence de novo and make an independent determination of the amount of support due and owing.  Id. (citing Rankin v. Rankin, 124 A.2d 689 (Pa.Super. 1956).

We cannot forget the advantage enjoyed by the DRM in assessing the credibility of the parties.  We are limited to the static black and white of the transcript and exhibits that were admitted at the hearing; the DRM had the ability to actually eyeball the witnesses as they testified.  As our Superior Court discussed the nuances of credibility under Smith v. Smith, 43 A.2d 371 (Pa.Super. 1945):

Although we are not concluded by a master’s findings upon credibility, his judgment upon that vital factor is entitled to the fullest consideration, and especially in a contested case.  He possesses an advantage not granted to us.  He sees the parties and their witnesses face to face and observes their appearance and demeanor as they testify.  We are restricted to the cold type of the record from which temperament and personality have been subtracted. Yet the demeanor of witnesses is the very touchstone of credibility; in the absence of reactions produced by other applicable tests, the appearance and demeanor of witnesses are the litmus by which the presence of truth is revealed.  They are trifles light as air, imponderables, but for all that they are luminous integrants which ineluctably enter into the calculation by which trustworthiness is appraised.  The spontaneous gesture, the lifting of an eyebrow, the shrug of the shoulders, the intonation of the voice, the flash of the eye, the facial expression,-these are a few of the vital and influential indicia of credibility which the master observes and by which he is guided.  The mental and psychological impact of these inarticulate expressions experienced by a master form the basis for a conclusion which, to borrow the telling phrase of an anonymous master, ‘will depend upon a judgment or intuition more subtle than can be objectively demonstrated.’  Frequently, they speak more eloquently and possess greater significance than the verbal utterance which they accompany, yet they cannot be reproduced upon the record submitted to the reviewing court.

 

Id. at 372 (citations omitted).

 

III.    DISCUSSION

The Pennsylvania Support Guidelines declare that: “Monthly gross income is ordinarily based upon at least a six-month average of all of a party’s income.”  Pa.R.C.P. 1910.16-2.  The obvious purpose of this rule is to avoid reliance upon “snapshots” of income that are either artificially high or artificially low.  The six-month average paradigm has been applied frequently by Pennsylvania’s Superior Court.  See Humphreys v. DeRoss, 790 A.2d 281 (Pa. 2002); Heisey v. Heisey, 633 A.2d 211 (Pa.Super. 1993).

While the general rule is that a six-month average of income should be used, there are exceptions to this rule.  In Young v. Muthersbaugh, 609 A.2d 1381 (Pa.Super. 1992), the Superior Court focused on the fact that the word “ordinarily” was used as a preface to the support guideline requirement of a six month average.  The Court stated:

[T]o ignore a reduction in the obligor’s income which occurred through no fault of his own, would work an injustice to Appellee.  If we were to ignore the reduction in income from the part-time job, the recent raise from the full-time employer would also have to be disregarded.  Rather, we hold that sufficient evidence exists in the record to support [a finding of the obligor’s income based upon less than a six-month average].

 

Id. at 1383.  Essentially, the word “ordinarily” found in Pa.R.C.P. 1910.16-2 affords this Court with the discretion in appropriate cases to gauge income upon periods of time that are either greater or less than six months.

In this case, the primary evidence of FATHER’s income is found in his Federal Income Tax Return.  Without question, tax returns are evidence of income.  See Serhan v. Besteder, 500 A.2d 130 (Pa.Super. 1985); Caccavo v. Caccavo, 565 A.2d 1199 (Pa.Super. 1989); Piso v. Piso, 761 A.2d 1215 (Pa.Super. 2000).   However, our Appellate Courts have instructed that the evaluation of income based upon tax returns must be undertaken cautiously.  In McAuliffe v. McAuliffe, 613 A.2d 20 (Pa.Super. 1992), the Court stated:

[I]ncome must reflect actual available financial resources and not the oft-times fictional financial picture which develops as the result of depreciation deductions taken against…income as permitted by federal income tax laws.   Otherwise put, “cash flow” ought to be considered and not federally taxable income.

 

Id. at 22.  Moreover, in a case involving capitalization, our Commonwealth Court has stated that income of a corporation as reflected in its tax returns should be predicated on as long a period of time as practical.  In Consolidated Rail Corp. v. Commonwealth, 670 A.2d 722 (Pa.Cmwlth. 1996), the Court stated that should the Plaintiff “be allowed to calculate its capital stock tax by using its income for a few months as its net income for an entire year, [this] would result in a windfall…” Id. at 727.

There are multiple reasons why a small business owner’s income should generally be predicated upon his most recent tax return and not upon a several month “snapshot” of his business finances.  Some of these reasons include the following:

(1)     Many business ventures are seasonal in nature.  Evaluating profits and losses during only one “season” could unduly emphasize a business’s “slow time” or “peak season.”[1]

(2)    For many small business corporations, bonuses and/or owner’s draws, are calculated at the end of the business year.  Accountants prefer to possess information about a business’ expenses incurred over an entire year before the accountant will recommend how much money should be removed from the business by its owners at year end.  If we were to sanction an evaluation of income based only on a few months of the year, expenses and income that are used by accountants to determine year-end profits for its owners cannot be accurately calculated or even predicted.

(3)     While not foolproof, tax returns have an indicia of reliability in that they are generally prepared by accounting firms and are signed subject to criminal penalties and potential enforcement by the I.R.S.  Interim financial statements, on the other hand, are most often prepared entirely by business owners who may have a motive to understate income during the pendency of a child support proceeding.

(4)     It is easier to manipulate income and expenses over a period of months than it is over an entire year.  If income is to be based on only a few months, it would be easy to hold revenue or accelerate expenses in order to create an artificially grim financial picture.  If finances are evaluated over a period of an entire year, this type of short-term manipulation becomes much more difficult.  Moreover, short-term manipulation of expenses and income will not generally affect an owner’s year end draw, while any effort to manipulate income over the period of an entire year could affect the owner’s ability to remove profits from the business at year end.

In this case, the DRM chose to evaluate FATHER’s income based upon the financial portrait for the entire year that was painted by FATHER’s S corporation tax return.  The DRM did so after observing FATHER as he implored her to evaluate his income based upon the first four months of 2012.  We view the DRM’s decision to reject FATHER’s entreaties as a credibility determination that we will not lightly reject.  In addition, we note that FATHER’s business is tied to the construction industry, which is seasonal in Lebanon County.  We also emphasize that the Support Guidelines clearly prefer that income be evaluated over a period of time longer than what FATHER proposes.  Because we do not have financial information for at least six months in 2012, the only evidence that complies with the Support Guideline preference for a six month evaluation is FATHER’s 2011 tax return.

The bottom line is that FATHER’s income should be predicated on more than just the first four months of 2012.  Because the 2011 tax return reflects the best information available from which to discern FATHER’s income, we will utilize it.  By so doing, we will reject FATHER’s argument that his income should be based upon a four month “snapshot” that may or may not be consistent with what FATHER’s income will generate over an entire year.

 

IV.     CONCLUSION

FATHER has argued only one exception. That exception asked us to decide whether his average monthly income should be calculated over four months or one year.  For all of the reasons set forth above, we have chosen one year – 2011 – as the timeframe from which to calculate FATHER’s income.

 

We will reject the one exception that was submitted to us.[2]  Doing so requires us to affirm the recommendation of the DRM.  As we enter an Order affirming the DRM’s decision, we will also direct that a review hearing be conducted in late February or March of 2013.  If in fact FATHER’s 2012 annual income has decreased, FATHER should expedite preparation of a tax return so that the return can be presented to the DRM at the time of the next review hearing.  An Order to accomplish all of the above will be entered on this date.