Stacey D. Mulligan v. Adrian J. Hohenwarter No. 2010-5-0828

Civil Action-Family Law-Child Support-Exceptions-Income-Settlement-Real Estate Litigation-Property Damage Remediation-Natural Gas Royalty Payments-Alienation of Income Producing Asset-Business Expenses-Depreciation-Shared Physical Custody-Childcare Expenses

The parties filed Exceptions to the Order adopting the Report and Recommendation of the Domestic Relations Master (“DRM”) directing Adrian J. Hohenwarter (“Father”) to pay child support regarding the parties’ two (2) minor children to Stacey D. Mulligan (“Mother”). In their Exceptions, the parties raised issues including whether monies received by Father for settlement of litigation after he and his wife had brought suit against contractors and subcontractors over the improper construction of their home properly should be included as income to Father, royalty income received by Father’s wife for natural gas extracted from a well on a property Father had transferred to his wife should be included as income to Father, the DRM appropriately included the amount claimed by Father in depreciation in his Federal Income Tax Return with regard to operation of his business, the fluctuating nature of Father’s income from his business warrants long term averaging of his income, the DRM appropriately used the date when Mother filed a Petition for Modification as the effective date of the Order and the DRM appropriately considered the parties’ child care costs.

1. In reviewing the DRM’s report, the court must give fullest consideration to the credibility findings of the DRM, who was present to observe the demeanor of the witnesses and to hear their testimony. However, the DRM’s report is advisory, and the court is not bound by its conclusions.

2. The benefits of personal injury litigation settlements or verdicts received by a parent are included as income for purposes of child support.

3. Monies received by a parent that are designated for property damage remediation are not included as income for purposes of child support.

4. To the extent that Father received a cash benefit as a result of selling or donating components of his residence that he replaced, such income must be included as income available for the payment of child support.

5. Capital assets/income specifically addressed and awarded in equitable distribution cannot also be included as income for purposes of support.

6. If the parties both were aware of the future natural gas royalty payments when they entered into their divorce agreement and Mother received a quid pro quo benefit in return for giving up her right to future natural gas royalty payments, the amounts received by Father’s wife in natural gas royalty payments cannot be included as part of Father’s income for child support purposes.

7. No parent legitimately can divest himself or herself of income-producing assets for the purpose of avoiding child support.

8. If Father alienated an income-producing asset for the purpose of diminishing his child support obligation, the DRM’s inclusion of royalties received by Father’s wife as income for purposes of support would be an appropriate remedy.

9. Depreciation expenses cannot be added back to income automatically for purpose of calculating child support. When depreciation is claimed, the DRM must determine pursuant to Labar v. Labar, 644 A.2d 777 (Pa.Super. 1994), whether the income generated by the depreciated equipment was reinvested in the business or was distributed directly to the litigant and whether the capital outlay expended to acquire the depreciated item was necessary for the operation of the business.

10. Pa.R.C.P. Rule 1910.16-2 provides that that monthly gross income ordinarily is based upon at least a six (6) month average of the parties’ income.

11. For a small business owner such as Father, his income for purposes of support may be assessed accurately on a yearly basis using income tax returns.

12. Under Pennsylvania law, child support awards generally are retroactive to the date on which the complaint or petition for modification was filed. Pa.R.C.P. Rule 1910.17.

13. Absent extraordinary circumstances, the court will not direct an effective date of a child support Order other than the filing date of the complaint for support or the petition for modification.

14. Since the parties equally share physical custody of the children and work such that childcare is required of both parties during the times they exercise their periods of physical custody, no credit or adjustment for childcare should be afforded to either party.

L.C.C.C.P. No. 2010-50828, Opinion by Bradford H. Charles, Judge, November 2, 2016.

IN THE COURT OF COMMON PLEAS OF

LEBANON COUNTY, PENNSYLVANIA

CIVIL ACTION NO. 2010-5-0828

PACSES NO. 423113841

STACEY D. MULLIGAN, Plaintiff

ADRIAN J. HOHENWARTER, Defendant

ORDER OF COURT

AND NOW, to wit, this 2^nd day of November, 2016, in accordance with the attached Opinion, the above-referenced case is remanded to the Domestic Relations Master for further proceedings consistent with the attached Opinion. Pending another hearing on remand, the Defendant shall continue to pay the sum of $2,005.12 per month on a temporary basis. Following the hearing on remand, the DRM is specifically authorized to enter a new recommendation retroactive to January 11, 2016, which is the date on which Stacey D. Mulligan filed her Motion for Modification of Support. Pending another decision by the DRM, the temporary Order of this Court is as follows.

This Order shall be effective January 11, 2016.

APPEARANCES:

Nichole Collins, Esquire For Stacey D. Mulligan

SCARINGI & SCARINGI, P.C.

Scott Grenoble, Esquire For Adrian J. Hohenwarter

BUZGON DAVIS LAW OFFICES

OPINION BY CHARLES, J., November 2, 2016

After applying Pennsylvania’s child support formula to the parties’ collectively generous incomes, a Domestic Relations Master (DRM) recommended that Dr. Adrian J. Hohenwarter (hereafter “FATHER”) pay child support to Stacy D. Mulligan (hereafter “MOTHER) in the amount of $2,005.00 per month. Both parties were dissatisfied with the award. MOTHER argues that FATHER’s receipt of a property damage litigation award should be included as part of his income for purposes of support. For his part, FATHER relies upon a wide variety of arguments in support of his belief that the award, which represents only about thirteen percent of his monthly income, is too high.

Because Pennsylvania’s child support guidelines reflect the concept of “utility of scale,” we have found in high-income cases like this that rarely will any party’s argument significantly impact a guideline-based award. While we will in this case address all of the interesting and esoteric legal arguments submitted by the parties, we confidently predict that when the dust finally settles after the inevitable appeal is concluded, the parties will have spent far more in counsel fees than they are fighting over.

I. BACKGROUND AND PROCEDURAL HISTORY

MOTHER and FATHER are the parents of two minor children. At all times pertinent to this dispute, MOTHER and FATHER shared physical custody of their children. Unfortunately, MOTHER and FATHER despise one another. This has predictably created friction that has spilled over into domestic relations court during a wide range of litigated disputes.

Even though custody of the parties’ children was shared, FATHER has always paid child support because his earnings as a physician far exceeded earnings that MOTHER generated from various jobs she held since the children were born. We will not highlight all of the history of the parties’ support litigation. The history relevant to the current dispute germinated in February of 2015, when FATHER filed a Petition for Modification based upon an alleged decrease in income.

During the course of the 2015 support litigation, MOTHER requested copies of FATHER’s 2014 tax return. After an inevitable dispute about discovery was resolved via an Order issued by this Court to permit limited discovery (up to ten document requests and twenty interrogatories), FATHER produced portions of his 2014 tax returns. FATHER unilaterally redacted information regarding the earnings of his wife, who at the time was employed by his medical practice. Because FATHER stubbornly refused to disclose any information about what he paid his wife, and because the tax returns submitted by FATHER were not complete, the DRM denied FATHER’s Petition for Modification. FATHER appealed. Via an Opinion and Court Order dated October 14, 2015, we rejected FATHER’s appeal and we emphasized to FATHER that he had the legal obligation to provide his complete tax returns in advance of any support hearing.

While the above process was proceeding, FATHER was involved in separate litigation with numerous building contractors regarding the construction of his home at 81 Whitetail Lane in Palmyra, PA. Ultimately, a mediation was conducted before the undersigned Jurist during the summer of 2015. As a result of this mediation, the Defendants in FATHER’s civil case agreed to collectively pay an agreed-upon settlement amount. Post-agreement disputes arose and were resolved. Eventually, the agreed-upon sum of money was paid by the Defendants later in 2015.

As part of the settlement of FATHER’s civil litigation, a confidentiality agreement was entered. However, MOTHER was told that a settlement had occurred. Therefore, she asked that the amount of the settlement be included in FATHER’s income for child support purposes.

During the spring of 2016, MOTHER sought to include FATHER’s net settlement proceeds as income. The DRM referred resolution of this question to the Court. We conducted a meeting with both counsel regarding the issue on May 12, 2016. FATHER’s counsel advised the Court and MOTHER’s counsel that he could not disclose details regarding FATHER’s settlement because that settlement was governed by a confidentiality agreement. Coincidentally, the undersigned Jurist was present at the settlement mediation and was personally aware of the settlement negotiations and all terms of the settlement itself. After reviewing portions of the civil litigation file that were public record, this Jurist communicated the following to MOTHER’s counsel:

FATHER initiated a lawsuit due to numerous problems relating to the structural integrity of his home located in Palmyra, PA.

Numerous contractors and subcontractors were drawn into the litigation. At mediation, the focus of all parties was upon the problems that exist at FATHER’s home, which contractor was responsible for those problems, and the cost of repairing or remediating the problems.

After an extensive settlement mediation conference that lasted an entire day, a global settlement was reached between FATHER and all of the Defendants to the civil litigation. Monies were paid by the Defendants to FATHER based exclusively upon FATHER’s property damage claims; no monies were paid for personal injury, inconvenience, or other similar non-economic detriment.

Some of the proceeds of the settlement reflected amounts that FATHER had already paid from his own pocket to effectuate repairs that could not wait for the outcome of the litigation. All of the monies paid corresponded to repairs that were needed at FATHER’s home.

After communicating the above, we asked the parties to provide briefs with respect to whether the proceeds of the litigation should be considered as income available for support. Both parties filed those briefs in late June of 2016.

On May 11, 2016, the DRM issued a Report and Recommendation. In that report, the DRM rendered the following findings:

FATHER was self-employed as a physician. He earned gross income of $215,579.00 for calendar year 2015. He also paid his wife $80,000.00 to serve as office manager. In addition to his income as a physician, FATHER also received military retirement disability pay of $7,690.00. In her report, the DRM also referenced rental income of $40,952.00. Although the DRM did not articulate in her report precisely how she totaled FATHER’s income, she ultimately decided to use $15,341.40 per month as FATHER’s net income available for support.

The DRM determined that MOTHER was employed by the Commonwealth of Pennsylvania. Based upon MOTHER’s earning statement with the state, the DRM determined that her net income per month was $2,793.50. In addition, the DRM concluded that MOTHER paid for the children’s insurance at a cost of $167.86 per month.

The DRM determined that MOTHER and FATHER enjoyed a 50-50 custody arrangement. Therefore, she adjusted child support based upon shared custody.

The DRM acknowledged that both parties had childcare expenses. However, she determined that the amount paid by FATHER to his nanny was “excessive for support purposes.” The DRM therefore determined that a “reasonable” childcare expense for FATHER would total $5,000.00 per year. Without articulating precisely how she calculated the amount, the DRM determined that FATHER should pay an additional sum to MOTHER reflecting childcare of $176.21 per month.

Applying the formula to the above determinations, the DRM calculated that FATHER should pay to MOTHER the sum of $2,005.12 per month in child support.

Shortly following the DRM’s decision, FATHER filed Exceptions. In his Exceptions, FATHER raised the following issues:

That the DRM erred by considering his wife’s income;

That the DRM erred by failing to recognize all of FATHER’s depreciation expenses;

That the DRM erred in failing to calculate income by using a long-term average for FATHER;

That the DRM erred in her calculation of childcare expenses;

That the DRM erred by determining that the parties shared custody equally;

That the DRM erred by failing to deviate from the child support guidelines; and

That the DRM erred by “improperly calculating Defendant’s income.”

Thereafter, MOTHER also filed Exceptions. In her Exceptions, MOTHER classifies FATHER’s conduct as “artificially deflating” income. In addition, MOTHER also fd that the DRM should have included the following items as part of FATHER’s income available for support:

A $1,200.00 credit for childcare expenses.

The $6,207.00 home mortgage interest deduction claimed by FATHER.

The $15,000.00 charitable deduction claimed by FATHER.

All of the issues raised by the parties, and the issue of whether the litigation settlement proceeds should be included as income, are now before this Court for disposition.

II. STANDARD OF REVIEW

Lebanon County has adopted the support procedure set forth in Pa.R.C.P. 1910.12. This procedure permits the appointment of a DRM to preside over a hearing. The DRM is then required to file a report and a recommendation that will be adopted by the Court unless exceptions are filed. In the event that exceptions are filed, we are required to review the record in order to formulate a final appealable order. See Pa.R.C.P. 1910.12.

The 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 (Pa.Super. 1992); Dukmen v. Dukmen, 420 A.2d 667 (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. at 291, citing Rankin v. Rankin, 124 A.2d 639 (Pa.Super. 1956). 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. at 291, citing Rankin v. Rankin, supra at pg. 641.

III. DISCUSSION

We will begin our discussion with an analysis of FATHER’s litigation settlement and whether it should be included as income available for support. Because many of the parties’ other arguments focus upon FATHER’s income, our next task will be to analyze and evaluate FATHER’s income. Finally, we will conclude our analysis by addressing the remaining exceptions raised by the parties.

A. Real Estate Settlement Issue

Pennsylvania defines income for child support purposes broadly. The statutory definition of income provides:

‘Income’ includes compensation for services, including, but not limited to, wages, salaries, bonuses, fees, compensation in kind, commissions and similar items; income derived from business; gains derived from dealings in property; interest; rent; royalties; dividends; annuities; income from life insurance and endowment contracts; all forms of retirement; pensions; income from discharge of indebtedness; distribution share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust; military retirement benefits; railroad employment retirement benefits; Social Security benefits; temporary impersonal disability benefits; workers compensation; unemployment compensation; other entitlements to money or lump sum awards without regard to source, including lottery winnings, income tax refunds, insurance compensation or settlements, awards for verdicts, and any form of payment due to and collectible by an individual regardless of source.

23 Pa.C.S.A. § 4302. Given this broad definition of income, Pennsylvania’s appellate courts have declared with consistency that the benefits of personal injury litigation settlements or verdicts are to be included as income for child support purposes. See, e.g. Darby v. Darby, 686 A.2d 1346 (Pa.Super. 1996); Mencer v. Ruch, 928 A.2d 294 (Pa.Super. 2007). In so ruling, the Superior Court has emphasized that the entire amount of the settlement, including amounts awarded for pain and suffering, was available to pay “all” of the obligor’s debts. In Butler v. Butler, the Court stated:

The award as actually received by appellant is a single fund which appellant may expend in his discretion. The whole tort award is subject to all appellant’s debts. It would, indeed, call into question the sanity of the law if this court were to rule that the tort award available to pay debts to “the butcher, the baker and the candlestick maker” but not debts to appellant’s child for support.

Butler v. Butler, 488 A.2d 1143, 1141 (Pa.Super. 1985) (emphasis added).

The settlement received by FATHER in this case is different than the personal injury settlements referenced by MOTHER in her Brief. In this case, monies were paid to FATHER for the express purpose of repairing his home – the very same home that the children live in one-half of their lives. The funds received by FATHER were paid by various defendants for the express purpose of remediating damage that each caused in whole or in part. By paying the monies agreed upon, each Defendant acknowledged that remediation to FATHER’s home was necessary and that the funds paid were required to effectuate that remediation. In stark contrast to the proceeds of personal injury settlements that are available to pay “the butcher, the baker and the candlestick maker,” the funds paid to FATHER in this case were required to pay for needed repairs to his home and were not available for other purposes.

We have found no Pennsylvania decisional precedent that addresses the specific issue before us today. However, the Arizona Court of Appeals did address a similar issue in the case of Strait v. Strait, 223 Ariz. 500 (Ariz.Ct.App. 2010). In Strait, an obligor received $168,000.00 because his home was damaged, resulting in mold infiltration. Even though Arizona defined income broadly, the Arizona Appeals Court determined that it would be unjust to consider payments to remediate mold damage as income for purposes of support. Therefore, the Court held that the portion of the $168,000.00 settlement that was “a recoupment of lost capital or represented funds needed to remediate the property damage” should not be includable as income. Id. We agree with the analysis articulated in Strait.

If we were to adopt MOTHER’s reasoning, monies paid by a fire insurance company when a house is destroyed by fire would be includable as income for child support purposes, monies paid by a homeowners’ policy when a flood damages a home would be includable as income and monies paid under a collision insurance policy to repair a damaged vehicle would also be includable. Results such as these would be unfair. Moreover, in many circumstances, attaching property damage settlements for child support could actually harm children if the reduction of the settlement amount caused by child support would prevent the property owner from replacing or repairing the damaged home or vehicle. We therefore hold that monies received by a parent that are designated for property damage remediation cannot be deemed income available for purposes of child support.

Having reached the above conclusion, MOTHER raises a secondary issue. According to MOTHER, FATHER “donated” to charity some of the windows and siding that were removed from his home. According to MOTHER, FATHER claimed a tax deduction of $50,150.00 as a result of donating his damaged property to Habitat for Humanity. (N.T. 42). MOTHER estimates that this donation resulted in a tax windfall for FATHER totaling $15,500.00. MOTHER believes that this amount should be added back to FATHER’s income for child support purposes.

Conceptually, we agree with MOTHER that any cash benefit to FATHER derived from the sale or gift of windows/siding that were replaced should be considered as income available for support. Unlike the totality of the property damage settlement generated from FATHER’s litigation, cash that FATHER received through the sale or donation of his old windows and siding would be available to pay “the butcher, the baker and the candlestick maker.” As such, they should be includable as income for child support purposes. On remand, this is an issue that we will instruct the DRM to consider. To the extent that FATHER received a cash benefit as a result of selling or donating replaced home components, such income must be included as part of FATHER’s income available for payment of child support.

B. FATHER’s Income

The DRM predicated her determination of FATHER’s income upon FATHER’s 2015 tax return. As best as we can determine from her report, the DRM adopted FATHER’s Schedule C income of $207,090.00, she added back depreciation of $8,489.00, she added FATHER’s military disability pay of $7,690.00, his retirement of $8,278.00, and rental income of $40,952.00. The DRM then calculated FATHER’s gross income at $22,717.33. Reducing this income by FATHER’s tax liability yielded a net income calculation of $15,341.40. Both parties challenge the DRM’s decision. We will separately address their arguments as follows:

(1) FATHER’s Spouse’s Income

At the time of the parties’ divorce, FATHER received two parcels of land located in upstate Pennsylvania. At some unknown point in time, FATHER sold one of the two parcels of land to his current wife. (N.T. 32-33). Not coincidentally, this particular parcel of land contained a natural gas well. In 2015, FATHER’s wife received $39,515.00 in royalty income as a result of natural gas extracted from the well. (N.T. 33). The DRM apparently added claimed depreciation to this royalty amount received by FATHER’s wife and included “rental income” of $40,952.00 in FATHER’s income available for support.

FATHER argues that it was improper for the DRM to include as part of his income monies that were paid to his wife. As a secondary argument, FATHER also argued that the Sullivan County parcel of land was awarded to him in the divorce and that MOTHER received a quid pro quo in the divorce in return for giving up her interest in future natural gas royalty payments.

Unfortunately, very little testimony was presented at the support hearing regarding the natural gas royalty payments, the circumstances and reasoning behind FATHER’s transfer of the Sullivan County property to his current wife, and whether future natural gas royalties were in fact specifically included as part of a bargained for exchange during the parties’ divorce settlement. Because of the paucity of information in the record regarding these issues, the DRM will be required to address the rental income issue on remand. As the DRM does so, we wish to afford some guidance.

If in fact MOTHER and FATHER were both aware of future natural gas royalty payments when they entered into their divorce agreement, and if in fact MOTHER received a quid pro quo benefit in return for giving up her right to future natural gas royalty payments, then the amounts received by Marilyn Hohenwarter in 2015 cannot be included as part of FATHER’s income available for support. Our Superior Court has consistently declared that capital assets/income that were specifically addressed and awarded in equitable distribution cannot also be included as income for child support purposes; such a result would be “double-dipping.” See Miller v. Miller, 783 A.2d 832 (Pa.Super. 2001). On the other hand, if MOTHER was unaware of the potential for future royalty payments when the Sullivan County property was awarded to FATHER, then by definition MOTHER did not receive a quid pro quo bargained for exchange in return for giving up those benefits. In the latter circumstance, income generated from natural gas royalties could be included as income.

By itself, the fact that the Sullivan County property is currently owned by Marilyn Hohenwarter does not preclude the DRM from including the royalties as income available for support. Under Pennsylvania common law, no parent can legitimately divest himself/herself of income-producing assets for the purpose of avoiding child support. See Labar v. Labar, 644 A.2d 777 (Pa.Super. 1994) (“a parent may not ‘voluntarily decrease’ the ability to provide support by sheltering income.” Id. at 779). Under Pennsylvania’s Uniform Fraudulent Transfer Act (UFTA), any transfer of assets made by a debtor “is fraudulent as to a creditor” when the transfer was made after an obligation is recognized and the debtor acted “with actual intent to hinder, delay or defraud any creditor of the debtor.” Factors set forth in the UFTA when assessing whether a transfer is fraudulent include whether the transfer was to an “insider,” whether the debtor retained the use or benefit of the transferred property, whether the transfer was disclosed or concealed, whether a lawsuit was pending at the time, and whether the value received by the debtor was “reasonably equivalent” to the value of the asset transferred. See 12 Pa.C.S.A. § 5104. The UFTA has been applied in family law disputes. See, e.g. Kraisinger v. Kraisinger, 34 A.3d 168 (Pa.Super. 2011), Melat v. Melat, 602 A.2d 380 (Pa.Super. 1992): Stinner v. Stinner, 446 A.2d 651 (Pa.Super. 1982).

Litigation commenced under the UFTA most often addresses the question of whether a conveyance should be set aside for benefit of a creditor. Typically, UFTA litigation involves debtors who are insolvent or nearly so. This case is somewhat different. Here, FATHER is nowhere near insolvent. Still, this fact does not obviate applicability of the UFTA and the common law principle of law outlined above.

Here, MOTHER alleges that FATHER alienated an income-producing asset for the purpose of diminishing his child support obligation. If MOTHER is correct, then the remedy apparently chosen by the DRM – including transferred royalties as income for child support – is an appropriate remedy under common law and under the UFTA.

At this point, the record is not nearly complete regarding FATHER’s transfer of the Sullivan County property to his current wife. Was that transfer made in return for fair consideration? Did FATHER transfer the property for the purpose of avoiding child support? Why did FATHER transfer title into his wife’s name alone, instead of creating a tenancy by the entireties? These are but a few of the questions that will have to be addressed at a hearing on remand. After that hearing, the DRM will be required to enter specific findings with respect to whether FATHER’s transfer of the Sullivan County property could be deemed improper as it relates to MOTHER and these child support proceedings.

(3) Depreciation

At oral argument, FATHER’s counsel argued that it was “not rational” to add back depreciation to FATHER’s business income. In support of this rather bold statement, counsel presented a cogent argument. He pointed out that small businesses need on a regular basis to acquire equipment such as computers, fax machines, copiers, etc. in order to conduct their business. Federal tax rules do not permit a small business owner to deduct the entire cost of purchasing these items of equipment during any one year. Rather, they must be “depreciated” over time. The fact that some depreciation expenses may indeed represent a “cash fiction” does not change the fact that others relate to legitimate business-necessitated equipment.

In thinking about the issue, we could not blithely dismiss the logic of FATHER’s counsel. Equipment such as computers are necessary for the operation of any modern business. Without them, the business could not compete in the modern marketplace. Because the purchase of equipment used exclusively to benefit a business must be considered a legitimate business expense, why shouldn’t depreciation be considered a legitimate expense for child support purposes?

No specific rule exists in Pennsylvania’s Support Guidelines regarding depreciation. However, courts have often disallowed a depreciation expense, particularly when the depreciation related to real estate or a capital outlay designed to shelter income for purposes of avoiding child support. See Labar v. Labar, 644 A.2d 777 (Pa.Super. 1994). In Cunningham v. Cunningham, 548 A.2d 611 (Pa.Super. 1988), the difference between depreciation expenses designed to paint a misleading financial picture and those that were necessary for the ongoing operation of a business was highlighted. The Court stated:

Depreciation and depletion expenses should be deducted from gross income only where they reflect an actual reduction in the personal income of the party claiming the deductions, such as where, e.g., he or she actually expends funds to replace warn equipment or purchase new reserves.

Id. at 613. On the other hand, the Court in Cunningham recognized that in many circumstances, deduction of depreciation expense would create a “fictional financial picture” because the party claiming the deduction never had to expend funds that were claimed as depreciation.

The difference between proper depreciation expenses and fictionalized depreciation expenses was directly addressed in Labar v. Labar, supra. In Labar, the Court acknowledged that hard and fast rules regarding depreciation could be used “as a spring board for advancing an otherwise unwarranted position.” Id. at 780. Instead of espousing a bright line rule, the Court in Labar determined that two related but independent inquiries must be undertaken when analyzing depreciation. The Court put it this way:

First, a choice of accounting methods may be utilized to raise or lower the depreciation expense taken so as to raise or lower net income. When gross income is reduced, this produces a marginal income tax savings, which then becomes income that is available to the business and that can be distributed to the proprietor as he or she may choose. Thus, in inquiring into whether the depreciation and depletion expenses reflected an actual reduction in husband’s personal income, . . . we must look at whether any such marginal income created through tax savings was reinvested in the business or distributed to the husband directly.

Second, even if the accounting method is unaltered, the proprietor may simply make substantial capital outlays, which will proportionately increase the depreciation expense, even though the capital outlays are unnecessary to maintain the business. Thus, we must also inquire as to whether the capital outlays underlying the reduction were necessary . . . or whether they represented an attempt to shelter income for purposes of avoiding spousal and child support obligations. . .

Id. at 780-81 (emphasis added).

Based upon Labar, we hold today that depreciation expenses cannot be automatically added back to income for purposes of calculating child support. When depreciation is claimed, the DRM must undertake the two-step analysis articulated in Labar, supra. Specifically, the following two questions must be asked:

(1) Was the income generated by the depreciated equipment reinvested in the business or distributed directly to the litigant; and

(2) Was the capital outlay expended to acquire the depreciated item necessary for the ongoing operation of the business?

In this case, the two questions highlighted above were not addressed at the hearing before the DRM on April 21, 2016. On remand, the parties and the DRM will be required to drill down deeper with respect to FATHER’s claimed depreciation expense. An analysis such as that required by Labar will have to be undertaken.

(4) Long Term Averaging

FATHER claims that the income generated by his business fluctuates. He believes that long term averaging should be used to calculate his income. He legitimately points out that long term averaging could have the benefit of limiting serial support modification petitions.

As it relates to calculating a litigant’s income, we have learned to “never say never.” It would not be practical to craft an immutable rule governing the length of time by which a party’s income can be gaged. In some cases where a litigant only recently obtained a job, income can properly be calculated based upon a few weeks worth of data. In cases where a party’s income is seasonal, a relatively short snapshot of income could be profoundly unfair.

With the above being recognized, the Pennsylvania support rules do provide guidance regarding the calculation of income. Pa.R.C.P. 1910.16-2 provides that “monthly gross income is ordinarily based upon at least a six-month average of the parties’ income.” As a general rule, we very rarely question income determinations made by a DRM that are predicated upon a six month analysis of income. Moreover, in cases involving small businesses, we have routinely declared that reliance upon tax returns that reveal yearly income can be important. In Yassine v. Attalla, C.P.Leb.Co. No. 2007-5-0871 (Feb. 1, 2011), we stated:

In a child support case, a business owner’s income cannot be completely defined by a tax return, but neither can it be adequately defined without reference to one . . . Tax returns also contain a wealth of information regarding revenue, cost of goods sold, expenses, etc., the accuracy of which is subject to criminal penalties under federal tax law. While not controlling, a small business owner’s tax return is certainly a valuable tool that should be used . . . when assessing a small business owner’s income.

For a small business owner such as FATHER, we believe that it will be possible to accurately assess income on a yearly basis using income tax returns. While we stop short of declaring that income in past years should be ignored, we are satisfied that a fair assessment of child support can generally be made yearly based upon tax returns.

In this case, we agree with the DRM’s decision to base her analysis of FATHER’s income upon the 2015 tax return. While we recognize that this decision could be construed as an invitation for the parties to embark upon yearly support litigation, we hope that the parties recognize the futility of doing so. As stated at the outset of this opinion, when support litigants achieve financial success such as that enjoyed by the parties to this case, even income fluctuations that most Americans would deem substantial will not cause a huge difference in the calculation of child support. To be sure, the parties will be required to update each other with financial information on a yearly basis. Going forward, we hope that both parties will use common sense to determine the cost-effectiveness of proceeding with modification litigation. Bluntly, we suspect that unless one party or the other enjoys or suffers fluctuating income of a magnitude greater than what is being fought about now, the utility of proceeding with serial support litigation would border on pointless.

(5) FATHER’s Interest Deduction

In her Exceptions and in her Brief, MOTHER argues that the DRM erred by failing to add $6,207.00 of home mortgage interest deduction to FATHER’s income available for support. Unfortunately, MOTHER did not expand her argument much beyond stating it. In fact, the entirety of MOTHER’s argument on this issue contained in her Brief was: “For the reasons previously stated herein, the undersigned believes that the Special Master erred in failing to add Defendant’s $6,207.00 home mortgage interest deduction as income available for support.”

Without more, MOTHER’s argument is insufficient to enable us to analyze her claim of error. Therefore, we will not do so. On the other hand, this case will be remanded for a plethora of other reasons. On remand, MOTHER is at liberty to argue her home mortgage interest deduction issue, and hopefully she will do so in a more comprehensive and understandable way.

C. Effective Date of Order

The effective date of the DRM’s Recommended Support Order of $2,005.00 per month was January 11, 2016. This was the date on which MOTHER filed her Petition for Modification. MOTHER filed exceptions to this effective date. She claimed that the 2015 support litigation occurred because FATHER unilaterally redacted his tax return in order to hide income. MOTHER therefore asked that we revise the effective date of her Support Order to a time in 2015.

What MOTHER forgets is that the 2015 support litigation was based exclusively upon FATHER’s Petition for Modification. During 2015, MOTHER did not file for modification. Eventually FATHER’s petition was denied on October 14, 2015 because FATHER failed to provide full and complete tax returns. Because MOTHER never requested a modification during 2015, there would be no basis to create a support order retroactive to a date that preceded MOTHER’s request for modification in 2016.

In addition to the above, we also remind MOTHER that the DRM’s recommendation of $2,005.00 per month was predicated upon FATHER’s 2015 tax returns. FATHER’s 2015 tax returns were not filed until the spring of 2016, and the information that was contained in those tax returns would not have been available for anyone to review in 2015.

Under Pennsylvania law, child support awards are generally retroactive to the date on which the complaint or petition for modification is filed. See, e.g. Pa.R.C.P. 1910.17. Absent extraordinary circumstances, we will not make an order effective on a date other than the filing date. No such extraordinary circumstances exist in this case. We therefore deny MOTHER’s request that the support order be made retroactive to a date preceding January 11, 2016.

D. Equal Custody

In her report, the DRM concluded that MOTHER and FATHER enjoyed equal custody rights. Because of this, the DRM afforded a shared custody adjustment to FATHER totaling $561.00 per month. FATHER alleges that the DRM erred. In support of this position, FATHER actually added up all of the number of overnight periods of time that the children spent with him and with MOTHER during calendar year 2015. FATHER calculated that he enjoyed custody on slightly more than fifty-one percent of available nights, while MOTHER enjoyed custody “only” forty-eight percent of the time.

To articulate FATHER’s position emphasizes how silly it is. As the DRM aptly pointed out in her report, the custody decision of this Court was clearly intended to create a fifty-fifty shared custody arrangement. The fact that one party may have actually enjoyed a few more days than the other over a year’s period of time does not change that paradigm. We refuse to split hairs regarding custody time as requested by FATHER. In reality, this Court intended to create a shared custody arrangement. The DRM in this case recognized that reality and afforded a shared custody adjustment in accordance with the Pennsylvania rules governing support. By so doing, the DRM did not err.

E. Childcare

The issue of childcare has become a focal point of conflict between the parties. Under the Court Order that was in place prior to 2016, the parties were to pay their own childcare and then amicably agree to “adjustments” based upon the cost paid by each. Predictably, no agreement regarding these adjustments ever occurred.

The problem with childcare in this case is that MOTHER and FATHER employ very different means of providing childcare. MOTHER uses a traditional daycare center; FATHER employs a nanny. The nanny is significantly more expensive.

The DRM issued the following finding with respect to childcare:

Childcare expense: Defendant pays his nanny $13.00 per hour and she cares for three children. It is clear that she provides additional services beyond basic childcare, including transportation, meal preparations, etc. His childcare expenses for 2015 were $13,534.00: Mia $5,000.00, Ben $5,000.00, and Emmy $3,534.00.

The DRM declared FATHER’s childcare expense to be “excessive for support purposes.” She thus unilaterally reduced FATHER’s childcare expense to $5,000.00. The DRM did not explain how she computed this $5,000.00 amount.

We have concerns about whether or how to apply a childcare adjustment in this case. Among the issues of concern to us are the following:

FATHER’s income greatly exceeds that of MOTHER. Because of this, FATHER can afford to pay a nanny, while MOTHER cannot. While we do not quarrel with the care provided to the parties’ children by their nanny, we do not view it as fair to compare apples with oranges in terms of childcare cost.

FATHER and his wife are required to provide childcare for three different children. MOTHER’s only responsibility is to the two children who are the subject of this litigation. By definition, FATHER’s household childcare “needs” are different than those of MOTHER.

The DRM determined that FATHER’s nanny provides “additional services beyond basic childcare.” These “additional services” are not provided by MOTHER’s daycare center, nor are these type of services typically contemplated when a childcare adjustment to support is awarded. It would be difficult to quantify the value of the “additional services” provided by FATHER’s nanny.

While we do not necessarily quarrel with the DRM’s decision that FATHER’s claimed childcare expense should be considered “excessive” for support purposes, neither are we comfortable with the decision of the DRM to unilaterally reduce FATHER’s childcare expense to $5,000.00 total. There is nothing in the record to justify such a calculation.

In this case, the parties equally share custody. Both parties work. Childcare is required of both parties during the time each has custody. Although it might be a simplistic view, we conclude that the fairest way to handle childcare at this point in time would be to ignore it. Both parents have the obligation to provide quality care for the children during the time allotted to them. How the parents choose to undertake this responsibility is their business, and we do not find it appropriate to award either parent a credit or “adjustment” for childcare. Therefore, on remand, we will direct that no childcare adjustment be afforded to either party for the period of time governed by this order.

IV. CONCLUSION

As is obvious from the above, a remand will be necessary. We rue the fact that a remand will require additional expense and inconvenience for both parties. Nevertheless, the current record is not nearly complete enough for us to enter a final order. Supplemental testimony and evidence will be required.

Because we strongly suspect that this case will ultimately find its way to the Pennsylvania Superior Court, we request that the DRM issue a detailed and specific report that outlines precisely how FATHER’s income was calculated. To be sure, the DRM will be able to incorporate the prior record and her prior findings. We hope that the guidance we have provided by this Opinion will assist both the DRM and the parties to focus upon the salient issues identified in this Opinion. An Order to accomplish the remand will be entered today’s date.

 

1) One way or another, we highly doubt that the amount of support will deviate by more than $300.00 per month from the amount recommended by the DRM. Together, the parties are spending more on counsel fees per hour than the amount they can hope to gain each month via this litigation.

2) On remand, we request the DRM to specifically outline all components of FATHER’s income.

3) FATHER was asked why the land was given to his wife Marilyn. However, his answer was abbreviated and we did not understand it completely. (N.T. 44). If in fact there was a quid pro quo between FATHER and Marilyn, more information needs to be presented about the nature of the transaction and the nature of FATHER’s financial relationship with his current wife.

4) Not every transaction between a child support obligor and his/her spouse will be deemed to violate the UFTA. In Bales v. Bales, 421 A.2d 422 (Pa.Super. 1980), the Court determined that because a father’s conveyance to his current wife was made “with fair consideration” and did not render father insolent, conveyance would not be set aside. On the other hand, in Coscia v. Hendrie, 629 A.2d 1024 (Pa.Super. 1993), an ex-husband’s transfer of property was deemed fraudulent as to his ex-wife to whom he owed $46,000.00 in overdue child support.

5) In determining what would be “fair consideration,” past, present and future royalty income would necessarily be considered.

6) We cannot forget the history of this support case. Specifically, FATHER stubbornly refused to turn over his entire tax return by arguing that income of his wife should not be a part of any child support determination. At least circumstantially, this attempt by FATHER to hide Marilyn’s income constitutes evidence that he transferred entitlement to natural gas royalties to his wife so that he could hide it from MOTHER and the DRM.

7) There are a plethora of Pennsylvania appellate decisions that have added back depreciation expense in order to calculate income for support purposes. The vast majority of these cases involved real estate. When real estate is depreciated, almost never does the owner have to expend funds that are claimed as depreciation expenses. See, e.g. Commonwealth ex rel. ReDavid v. ReDavid, 380 A.2d 398 (Pa.Super. 1977); Lyday v. Lyday, 519 A.2d 967 (Pa.Super. 1986).

8) For example, a small business owner could in one year suffer a large casualty loss that temporarily but dramatically reduces income. On the other hand, a small business could receive a huge windfall in one year based upon a large job or based upon a large downpayment for which work will be performed over more than one year. In such circumstances, a financial picture of more than one year could and probably would be appropriate to accurately access income.

9) In custody court, we repeatedly advise parties that they should display flexibility by accommodating the other parent when requests for additional time for special events are communicated. If courts hearing support disputes are going to split hairs over a couple percentage points of yearly time available with the children, that would afford warring parents with a financial incentive to refuse legitimate requests for custody accommodation. This would not be in the best interest of any child.

10) Emmy is Marilyn’s daughter from a prior relationship.

11) We understand that the parties’ custody arrangement has changed since the date of the hearing before the DRM. Nothing in this Opinion should be deemed to govern the parties’ situation prospectively.