Investment or Business Income – Effect on Child Support

In Oregon and Washington, all of the parents’ income is used to calculate child support. This may include income from investments. It may also include business income. In both state, business expenses may be deducted from business income, but investment expenses are not deducted from investment income. The question sometimes arises whether a particular purchase is for business or investment purposes. A recent case from Washington, In re Marriage of of Aiken, No. 73257-9-I (Wash. App., May 23, 2016 (slip op.), <http://www.courts.wa.gov/opinions/pdf/732579.pdf&gt;), helps illustrate the distinction.

The Aikens were divorced in 2010. The husband agreed to pay child support of $3,000/month. The youngest child has severe Down’s Syndrome and autism, and the mother stopped working after his birth in 2004 to care for the children. She returned to her career as an attorney in 2014. The husband worked as CFO of a construction company. In addition to his salary, beginning in 2006, he began taking advantage of an employee stock ownership plan offered by his employer, by which he purchased stock every two years. He took loans from the company to finance the purchases, and the stock and debts were awarded and allocated to him in the property division. He continued to purchase stock after the divorce.

In 2014, the mother moved to modify child support. The husband agreed with her request to order post-secondary support for the two older children and that the support award should be readjusted to reflect their current income, but his income was disputed. From 2012 to 2014, the gross dividends from the stock owned by the husband averaged about $103,000 per year. His annual loan payments over the same period averaged about $93,000. If the loan payments could be deducted, his income would be decreased substantially.

The trial judge did not deduct the loan payments. As a result, it found the husband’s monthly net income to be about 90 percent more than it would have been with deductions. The base child support was reduced to $2,366/month. The husband also was ordered to pay about 70 percent of various other expenses, which probably increased his total support over $3,000.

As noted above, in both Oregon and Washington, investment income is treated differently from business income. Business income may have business expenses deducted, but investment income may not. The Court of Appeals, in this case, agreed with the trial judge that the stock purchases were an investment and not required for employment. In making this ruling, it distinguished an earlier case in which a lawyer was promoted from associate to partner and was required to make contributions to the partnership. Unlike the prior case, the husband was not required to buy stock and would have suffered no adverse effects to his employment if he had not taken advantage of the opportunity. The Court of Appeals also noted that the partnership distributions in the earlier case were more clearly compensation than a stock dividend. The purpose of the stock ownership plan was stated by the company to be an encouragement to retain employees by giving them a stake in the company, a provision not present in the law firm partnership agreement. As a result, the Court of Appeals considered the stock purchase to more closely resemble a purchase of a publicly traded corporation’s stock on the open market.

If you obtain a stock, partnership, or LLC interest in your employer, be aware that in most cases, it won’t be a job requirement, so it probably won’t be subject to business expense deductions when calculating child support. If you have any questions about this, get a copy of the relevant documents and bring them to your lawyer for an opinion.

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