Q. How do California Family Courts deal with depreciation in setting child and spousal support? Does depreciation reduce the paying spouse's income available for support and so lessen the amount that must be paid?
A. There are very few reported appellate decisions in California giving direct guidance to family courts about how to assess, and what to do with, depreciation deductions when ordering child support, or temporary or judgment spousal support. Commentators have noted that many courts tend to add back all depreciation in all circumstances, and some have criticized this approach. One question that arises is, is this phantom income or a phantom expense and how does it practically affect a payor's cash flow (depreciation add backs can also bite support payees)?
Another question is whether depreciation should be treated differently if we are talking about child support verses spousal support orders. If so, then trial courts dealing with guideline temporary spousal support awards should possibly be running two different analyzes in every case where depreciation is an issue and both alimony and child support may be due, denying the add back in child support settings but possibly allowing it when determining spousal support.
"Income" is not defined in any California family law statute for purposes of determining spousal support. "Gross" and "net" "income" are defined for purposes of awarding child support, in
Family Code section 4058 and
Family Code section 4059.
The two primary statutes addressing spousal support are Family Code sections 3600 and
Family Code section 4320. When alimony is awarded prior to the division of the community property estate, whether by way of a marital settlement agreement/stipulated judgment or trial court decision, it is termed "temporary spousal support." FC § 3600 provides that "the court may order ... the husband or wife to pay any amount that is necessary for the support of the wife or husband, consistent with the requirements of subdivisions (i) and (m) of Section 4320 and Section 4325...." Subsections (i) and (m) concern incidents of domestic violence, as does
§ 4325. Hence, as one court has recently ruled, except for cases involving DV, Family Code section 4320 does not otherwise apply to temporary spousal support determinations.
Tong v. Samson (2011) 197 Cal.App.4th 23. Instead, trial courts traditionally employ the child support guideline formula (in the form of the Xspouse or Dissomaster) without considering the other 4320 factors - beyond considering each party's need for support and the other's ability to pay.
The only reported decision directly approving a depreciation add back is Asfaw v. Woldberhan (2007) 147 Cal.App.4th 1407.
Asfaw is a child support case. The trial court accepted husband's argument that he should receive $57,000 worth of depreciation, which would reduce his income available for support in a corresponding amount. Its findings were reversed as a matter of law (meaning that it was not simply an abuse of discretion). The appellate court ruled that depreciation is not properly deductible under Family Code sections 4058 and 4059. However, it is noted that different public policy considerations, and legislative histories, apply to child support as opposed to spousal support statutes, and therefore while this ruling lends support for arguments that depreciation should be added back when dealing with the latter it is not direct authority for that proposition.
Asfaw addressed depreciation for rental properties only, and the facts did not involve other forms of depreciation that typically apply to small businesses - like the acquisition of equipment or vehicles. Nonetheless, most Family Courts will add all forms of depreciation back and rarely exercise discretion in deciding whether business expenses were reasonably necessary and should therefore not be added into the payor's income.
Marriage of Blazer (2009) 176 Cal.App.4th 1438 is a spousal support case that lends support for the idea that accounting and business decisions made by support obligors may be upheld, and business related expenses may not be charged to the payor for purposes of assessing income available to pay spousal support, where the trial court after hearing all the evidence concludes that the expenses are rationally related to the conduct of the business. Scott Blazer was paying temporary spousal support of $57,000/month, and operated an agricultural business that involved the sale of strawberries, among others. He and his expert testified that in order to compete and stay in business, investment of capital was needed to "diversify the company's work" and that funds spent for that purpose were accordingly "reasonable expenses" properly chargeable to the business, and not to the husband. The trial court agreed, and was affirmed on appeal. Clearly trial courts will rarely be reversed in issuing support findings and awards at the "permanent" (trial) support phase of the proceedings, where the record shows that the court considered all the evidence and the relevant 4320 factors, and therefore exercised an informed discretion in reaching a decision. In
Blazer Scott's position made some sense, and the trial court was free to accept it.
Hence, one can argue by extension that Blazer supports trial court discretion NOT to add back depreciation under appropriate circumstances - if the support obligor demonstrates a sound business reason for the expense, as with a car rental business replacing its fleet of vehicles, they may not be charged with those monies expended as though they should have, could have, used it to maintain their former spouse.
This becomes more difficult if the issue at bench is child support, at least if one gives Asfaw a wholesale application.
Clearly, one can argue that Asfaw should be limited to child support settings because that Court expressed its view that child support and spousal support serve different masters, so to speak, and this observation about public policy is correct.
On the other hand, depreciation that does not relate to business enterprises would seem to be likely to find little traction with family court judges and commissioners.
I guarantee the forensic accountants will vigorously differ on this point based upon business accounting principles and the historical IRS treatment of depreciation. I will discuss what I understand to be their reasoning in a future Blog.