California Family Law Attorney
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December 15, 2010
  IS LEGISLATION NEEDED To Redefine "GROSS INCOME" Under Family Code Section 4085?
Posted By Thurman Arnold

Q. I have a question about proposing legislation to fill a loophole in the Family Code section 4058 definition of gross income, as it relates to net ERISA disability benefits. Under Family Code section 4058, gross income includes disability benefits, (including net, untaxable benefits). Under ERISA, if an insurer denies payment of disability benefits, the insured must file a quasi-administrative appeal of the benefits denial decision to overturn the denial. If that quasi-administrative appeal is successful, benefits are reinstated, but the insured cannot recover attorney fees expended to successfully prosecute the quasi-administrative appeal. (If the quasi-administrative appeal fails, one may appeal that decision in federal district court, obtaining attorney fees if successful.) Because generally, ERISA preempts state law regarding insurance, one may not sue the insurer for bad faith denial of ERISA disability benefits.

In my case, an insurer denied ERISA disability benefits, a decision I had reversed on quasi-administrative appeal under ERISA. That appeal cost me 45% of my net disability benefits, as a contingency fee. The family court commissioner found that the contingency fee merely increased my expenses, but the contingency fee did not reduce my gross income under section 4058, in spite of the fact that I only received 55% of the benefit I would otherwise have received. Because this result is inconsistent with the definition of gross income under section 4058, subd. (a)(2), (in which a business proprietor's income is defined as gross receipts minus business expenses), inconsistent with appellate decisions defining gross income as income that is actually received, and imposes a double burden on those who lose disability benefits, requiring that child support be paid from unreceived income, I would like to propose legislation to amend the Family Code to fix this inconsistency. The proposal would merely define section 4058 gross income as including disability benefits, less the attorney fees and costs expended to obtain those benefits.

Do you think that such a change to the Family Code is warranted?

Best regards,

John


John:

This is a penetrating question, a very specialized inquiry, and an unfortunate story - thank you for taking the time to bring it to my attention. I do wonder if I have all the facts, however, because it is also surprising.

My initial response is that the court must have erred, much as you point out. You mention appellate court rulings that also suggest this - but I understand the point that 'who can afford an appeal' and that these matters are best resolved by providing clear direction to trial courts to they don't make mistakes in the first place (assuming this is indeed true under existing appellate decisions). LOL, eh? Have you filed for Reconsideration?

It is also a question I've not thought about before, having never faced the issue in my practice. I will have to give you what may be a shallow response, although I plan to look into it and possibly improve this blog soon.

One solution would be the changes you propose, or perhaps there needs to be some clarification in Family Code section 4058 that "net benefits" should be charged to the recipient rather than simply "receipts." This could then ignore the attorney fee deduction language component, if legislators were troubled by that remedy, but might open a larger can of worms without language that applied it to disability benefits only. But I don't know if it is the best answer, since letting people deduct attorney fees from income is a broad and difficult task and could create interpretational problems and factual controversies.

Perhaps legislators might liker the vagueness of adding "net" to "receipts," since trial courts could then evaluate it on a case by case basis. I note that Family Code section 4058(a)(1) has "actually received" language, except that it is within wording that relates to spousal support income from a third party. If the "actually received" language was applied to the overall subparagraph (section 4058(a)(1)), this would resolve the problem. I would have to review the legislative history of section 4058 to offer more.

Family Code section 4058(a)(2) gives trial courts discretion to deduct an arguably similar class of write-offs or deductions from gross income (i.e., "expenditures from the operation of a business") for self-employed people. Family Code section 4059 speaks in terms of "net disposable income" and an amendment there might be of use - but, 4058 is the biggie for trial courts dealing with child support issues.

As to recommendations about what family law organizations might be available to champion a legislative change, unfortunately other than AARP and your local California assembly person, I have no intelligent recommendations today. But I will endeavor to look into it. I am hoping in time that legislators will in time read my blogs!

BTW, there may be further facts to your situation that influenced the outcome, since it does seem hard to comprehend. For instance, do you have new-mate income that the court considered in some fashion? Are family members paying for any of your living or residence expenses and was this attributed to you? Was other income imputed? I am assuming that you are tax exempt on this disability income stream, and might the court put you in the support calculator in the nontaxed income column?

A final note - if the time is not up, you might appeal this ruling. Appellate decisions that create unfair results (i.e., refusing to charge you with the net) are an alternate but expensive route to change inequities in our system when they exist, since they are courts telling the legislature - "if you want a different result, you change it."



Thurman W. Arnold, CFLS

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