Imputed Income: A Look at What Courts Find Persuasive

In New York support proceedings, for example, courts consistently hold that taxable income reported by a party on his or her income tax returns is not the only indicator of a party's ability to support the children (Kay. v Kay, 37 NY2d 632 (1975)), and that, where a party's current income is difficult to ascertain or deviates from historical numbers, earning capacity, as opposed to actual earnings, controls (See Sayer v Sayer, 130 AD2d 407, 410-411 (1st Dept. 1987)).

By focusing on earning capacity in these circumstances, instead of on actual earnings, courts encourage the supporting party to obtain the most lucrative employment available. They thereby ensure that said party will not realize a windfall if he or she is underemployed with a reduced income at the time a support obligation is determined, and thereafter obtains employment with compensation more commensurate with his or her earning potential. For example, in Maidman v. Maidman, 82 AD3d 577 (1st Dept. 2011), the husband was an attorney with many years of experience in the real estate industry. As of the date of the divorce action, he had recently started his own law practice after involuntarily leaving a position with a family-owned business, where he had earned approximately $400,000 per year, and $36,000 per year in partnership and/or royalty income.

Given his experience and qualifications, his admitted partnership and royalty income, his unknown earnings from his law practice, the value of an apartment and an office provided to him, and the unknown value of his partnership interests, the First Department affirmed the trial court's decision to impute more than $300,000 per year in income to the husband. (Of additional significance in Maidman is the amount of pendente lite spousal maintenance and child support the husband was ordered to pay based upon the imputed income finding. The trial court ordered the husband to pay almost $25,000 per month in spousal maintenance and child support. The First Department reduced the award to approximately $22,000 per month, or $264,000 per year. Therefore, although over $300,000 of income was imputed to the husband; he was required to pay approximately 88% of that amount as interim support. [The amount of the husband's income seems anecdotal, and the true barometer for determining the husband's support obligation may have remained ' at least tacitly ' the husband's prior level of earnings and/or the family's historical spending.])

The First Department determined a child support award based on earnings capacity in K. v B., 13 AD3d 12 (1st Dept. 2004), where the attorney-wife provided the lion's share of support for the parties and their three children (who lived with and were raised almost entirely by the wife), and the husband had appropriated marital property for his own individual use and had made various unsuccessful investments. The court emphasized that child support is based on a parent's ability to provide for his or her children, not necessarily the parent's current economic situation, and held that it was appropriate to impute $60,000 in annual income to the husband for child support purposes, especially as he possessed both an architect's and a real estate broker's license, and had extensive training and experience in both fields.

The trial court in R.L. v. C.L., 33 Misc. 3d 1226(A) (Sup. Ct., Rensselaer Cty. 2011), imposed a similar standard on the husband (whom the court did not appear to hold in high regard), imputing income to him based upon his massage therapist license. In that case, the parties were married for approximately 27 years, had two children (aged 18 and 21), both of whom resided with the wife in the marital residence, and the wife was a vice president of human resources at a corporation. The husband's prolonged education and training appeared to affect the court's assessment. He was enrolled in Ohio State University in 1999 and obtained his bachelor's degree in 2002. Then, starting in 2003, he attended a seminary program for two years; and, finally, from 2004 to 2008, he attended a massage therapy school, which granted him a licensed massage technician degree in 2008.

The husband claimed that the parties had jointly decided he would forego a career and maintain the household while the wife pursued her own career; the wife contended that the husband, who was 52 years old, was capable of working full-time but refused to do so.

The court was persuaded by the wife, finding that “over the past ten years [the husband] has pursued his own career initiatives ' and ' the husband's employment efforts throughout the marriage and at present have fallen short,” and imputed gross income to the husband of $1,000 per week (based upon a 40-hour week, at a rate of $25 per hour).

However, the wife's victory was more in form than substance. as the husband was awarded temporary maintenance in the amount of $937.10 per week in accordance with the temporary maintenance formula set forth in DRL ' 236B (5-a)[c] using the $1,000 per week imputed income amount.

The decisions set forth above indicate that courts are inclined to impute income to the somewhat ne'er-do-well spouse who does not materially or sufficiently contribute to the parties' personal or family life. Logically, the responsibility to support dependent spouses and children is also imposed when the income of the historical breadwinner spouse drops precipitously or terminates altogether during or shortly before a divorce or support proceeding. See, e.g., Sotnik v. Zavilyansky, 101 AD3d 1102 (2d Dept. 2012); Pate v. Rodriguez, 109 AD3d. 595 (2d Dept.); DeSouza-Brown v. Brown, 71 AD3d 946 (2d Dept. 2010); Polite v. Polite, 127 AD2d 465 (1st Dept. 1987); cf. McLoughlin v. McLoughlin, 74 AD3d 911 (2d Dept. 2010) (Second Department questioned trial court's imputing yearly income of $100,000 to the plaintiff based upon his prior earnings as a photographer and from the sale of real estate, even though plaintiff suffered a stroke during the pendency of the action, and limited the impact thereof to noting that this “may well have a considerable negative effect on his ability to earn money in the future.”); and Mongelli v. Mongelli, 68 AD3d 1070 (2d Dept. 2009) (court failed to properly consider that plaintiff's opportunities to earn overtime pay had lessened in recent years, that the home improvement jobs that he performed on the side were for family and friends, with no showing that he profited therefrom; thus, the plaintiff's child support obligation, as determined by the trial court based upon income imputed to the plaintiff, must be modified.).

In these situations, courts have shown ' perhaps rightly so ' little regard for the difficulties these individuals may face if they are unable to comply with the financial support orders entered by courts. The emphasis is instead on ensuring that individuals who are financially dependent ' whether homemakers or children ' are provided for financially. After all, as courts routinely hold by citing the New York's highest court, the Court of Appeals, in Kay v. Kay, a dependent spouse or parent is under no duty to obtain employment solely to mitigate the other party's duty to pay support and maintenance.

Long-Held Expectations May Hold Sway

Some courts have shown a reluctance to impute income to wives even where: 1) their education or professional licenses or certificates suggest that they are capable of earning a greater amount of income; and/or 2) the parties' children are older; child care is no longer necessary, and there are fewer restrictions to working full-time. Certainly this seems to be contradictory to K.v.B. and R.L.v.C.L., supra, and, as the decisions provide only limited information, it cannot be known what swayed the courts to impute income to the dependent husbands but not dependent wives in these cases. Cf., McLoughlin v. McLoughlin, 74 AD3d 911 (2d Dept. 2010).

For example, in C.R.Z. v. D.E.Z., 200558/09, NYLJ 1202503772255 (Supreme Court Suffolk County, Referee A. Jeffrey Grob), the parties were married for approximately 20 years. At the time of the divorce, the parties' older child attended the University of Maryland and the younger teenaged child resided with plaintiff-wife, who was well-educated, having earned two degrees. The wife had returned to the job market as a party or event planner (which was only tangentially related to her background and education) on the eve of the action's commencement. She testified that her hourly rate of compensation had recently been raised to $18 per hour. She worked less than 40 hours per week, and at certain times of the year she worked only 20 hours per week.

The court acknowledged that the wife was underemployed, and explained that, were she to secure a full-time position or one more closely attuned to her education and background, her financial prospects would likely improve. Still, in the final analysis, the court found that her probable future financial circumstances remained speculative, and, in any event, paled in comparison to those of her husband. Id. at page 10.

The court in C.R.Z. v. D.E.Z. also refused to impute additional income to the wife because “[t]he estimation of a party's earning potential must have some basis in law and fact,” and determined that there was no evidence in the record to support the conclusion that the wife could secure employment congruent with her education and training, or another position at a higher rate of pay than she currently earned, or that she artificially limited her hours with her current employer. Furthermore, the wife had no track record of higher earnings from which the court could reasonably extrapolate an income above the amount she earned in her current position.

Conclusion

The holding in C.R.Z. v. D.E.Z. might be explained as simply a matter where, although income should have been imputed, the record did not provide the court sufficient justification for doing so. See Petek v. Petek' 239 A.D.2d 327 (2d Dept. 1997) (it was error to impute $30,000 per year to the plaintiff absent any evidence in the record for such finding). Or, perhaps the court found credible the wife's testimony that the parties agreed she should be a traditional stay-at-home mom. But for how long might that be an accepted norm? It will be interesting to watch how the current trend of women becoming the primary breadwinner in the family, and more fathers taking on the role of the stay-at-home father, will affect courts' tendencies with respect to employment expectations for men and women. See “Women Breadwinners: The Natural Order,” The Economist, May 31, 2013.

In next month's issue, we will discuss how courts may react to doubts about a supporting spouse's credibility.

Marcy L. Wachtel is a partner in the firm of Katsky Korins LLP. Lori Meyer, of Meyer Law Offices, P.C., was formerly a partner of Katsky Korins LLP.

In determining spousal maintenance and child support awards, the parties' respective financial circumstances ' assets, liabilities and, most importantly, income ' are the most important documentation and information for courts to consider and practitioners to present. However, in many cases, historical and current income do not provide the full picture and, alone, cannot form the basis for support awards. In those cases, courts have the discretion to impute income to one or both of the parties in order to ensure that the resulting support obligations are fair, reasonable and adequate.

Case law suggests that courts are primarily interested in providing for the children and financially dependent party, and are less concerned about whether the support obligations arising from the imputed income amounts can realistically be met. The noteworthy reported New York cases discussed herein suggest that courts analyze earning capacity as well as actual earnings and the parties' standard of living, and whether the reported income is sufficient to sustain that standard, when considering whether to impute earnings.

Earning Capacity As a Basis for Imputed Earnings

In New York support proceedings, for example, courts consistently hold that taxable income reported by a party on his or her income tax returns is not the only indicator of a party's ability to support the children (Kay. v Kay, 37 NY2d 632 (1975)), and that, where a party's current income is difficult to ascertain or deviates from historical numbers, earning capacity, as opposed to actual earnings, controls (See Sayer v Sayer, 130 AD2d 407, 410-411 (1st Dept. 1987)).

By focusing on earning capacity in these circumstances, instead of on actual earnings, courts encourage the supporting party to obtain the most lucrative employment available. They thereby ensure that said party will not realize a windfall if he or she is underemployed with a reduced income at the time a support obligation is determined, and thereafter obtains employment with compensation more commensurate with his or her earning potential. For example, in Maidman v. Maidman , 82 AD3d 577 (1st Dept. 2011), the husband was an attorney with many years of experience in the real estate industry. As of the date of the divorce action, he had recently started his own law practice after involuntarily leaving a position with a family-owned business, where he had earned approximately $400,000 per year, and $36,000 per year in partnership and/or royalty income.

Given his experience and qualifications, his admitted partnership and royalty income, his unknown earnings from his law practice, the value of an apartment and an office provided to him, and the unknown value of his partnership interests, the First Department affirmed the trial court's decision to impute more than $300,000 per year in income to the husband. (Of additional significance in Maidman is the amount of pendente lite spousal maintenance and child support the husband was ordered to pay based upon the imputed income finding. The trial court ordered the husband to pay almost $25,000 per month in spousal maintenance and child support. The First Department reduced the award to approximately $22,000 per month, or $264,000 per year. Therefore, although over $300,000 of income was imputed to the husband; he was required to pay approximately 88% of that amount as interim support. [The amount of the husband's income seems anecdotal, and the true barometer for determining the husband's support obligation may have remained ' at least tacitly ' the husband's prior level of earnings and/or the family's historical spending.])

The First Department determined a child support award based on earnings capacity in K. v B., 13 AD3d 12 (1st Dept. 2004), where the attorney-wife provided the lion's share of support for the parties and their three children (who lived with and were raised almost entirely by the wife), and the husband had appropriated marital property for his own individual use and had made various unsuccessful investments. The court emphasized that child support is based on a parent's ability to provide for his or her children, not necessarily the parent's current economic situation, and held that it was appropriate to impute $60,000 in annual income to the husband for child support purposes, especially as he possessed both an architect's and a real estate broker's license, and had extensive training and experience in both fields.

The trial court in R.L. v. C.L. , 33 Misc. 3d 1226(A) (Sup. Ct., Rensselaer Cty. 2011), imposed a similar standard on the husband (whom the court did not appear to hold in high regard), imputing income to him based upon his massage therapist license. In that case, the parties were married for approximately 27 years, had two children (aged 18 and 21), both of whom resided with the wife in the marital residence, and the wife was a vice president of human resources at a corporation. The husband's prolonged education and training appeared to affect the court's assessment. He was enrolled in Ohio State University in 1999 and obtained his bachelor's degree in 2002. Then, starting in 2003, he attended a seminary program for two years; and, finally, from 2004 to 2008, he attended a massage therapy school, which granted him a licensed massage technician degree in 2008.

The husband claimed that the parties had jointly decided he would forego a career and maintain the household while the wife pursued her own career; the wife contended that the husband, who was 52 years old, was capable of working full-time but refused to do so.

The court was persuaded by the wife, finding that “over the past ten years [the husband] has pursued his own career initiatives ' and ' the husband's employment efforts throughout the marriage and at present have fallen short,” and imputed gross income to the husband of $1,000 per week (based upon a 40-hour week, at a rate of $25 per hour).

However, the wife's victory was more in form than substance. as the husband was awarded temporary maintenance in the amount of $937.10 per week in accordance with the temporary maintenance formula set forth in DRL ' 236B (5-a)[c] using the $1,000 per week imputed income amount.

The decisions set forth above indicate that courts are inclined to impute income to the somewhat ne'er-do-well spouse who does not materially or sufficiently contribute to the parties' personal or family life. Logically, the responsibility to support dependent spouses and children is also imposed when the income of the historical breadwinner spouse drops precipitously or terminates altogether during or shortly before a divorce or support proceeding. See, e.g., Sotnik v. Zavilyansky , 101 AD3d 1102 (2d Dept. 2012); Pate v. Rodriguez , 109 AD3d. 595 (2d Dept.); DeSouza-Brown v. Brown , 71 AD3d 946 (2d Dept. 2010); Polite v. Polite , 127 AD2d 465 (1st Dept. 1987); cf. McLoughlin v. McLoughlin , 74 AD3d 911 (2d Dept. 2010) (Second Department questioned trial court's imputing yearly income of $100,000 to the plaintiff based upon his prior earnings as a photographer and from the sale of real estate, even though plaintiff suffered a stroke during the pendency of the action, and limited the impact thereof to noting that this “may well have a considerable negative effect on his ability to earn money in the future.”); and Mongelli v. Mongelli , 68 AD3d 1070 (2d Dept. 2009) (court failed to properly consider that plaintiff's opportunities to earn overtime pay had lessened in recent years, that the home improvement jobs that he performed on the side were for family and friends, with no showing that he profited therefrom; thus, the plaintiff's child support obligation, as determined by the trial court based upon income imputed to the plaintiff, must be modified.).

In these situations, courts have shown ' perhaps rightly so ' little regard for the difficulties these individuals may face if they are unable to comply with the financial support orders entered by courts. The emphasis is instead on ensuring that individuals who are financially dependent ' whether homemakers or children ' are provided for financially. After all, as courts routinely hold by citing the New York's highest court, the Court of Appeals, in Kay v. Kay, a dependent spouse or parent is under no duty to obtain employment solely to mitigate the other party's duty to pay support and maintenance.

Long-Held Expectations May Hold Sway

Some courts have shown a reluctance to impute income to wives even where: 1) their education or professional licenses or certificates suggest that they are capable of earning a greater amount of income; and/or 2) the parties' children are older; child care is no longer necessary, and there are fewer restrictions to working full-time. Certainly this seems to be contradictory to K.v.B. and R.L.v.C.L., supra, and, as the decisions provide only limited information, it cannot be known what swayed the courts to impute income to the dependent husbands but not dependent wives in these cases. Cf., McLoughlin v. McLoughlin , 74 AD3d 911 (2d Dept. 2010).

For example, in C.R.Z. v. D.E.Z., 200558/09, NYLJ 1202503772255 (Supreme Court Suffolk County, Referee A. Jeffrey Grob), the parties were married for approximately 20 years. At the time of the divorce, the parties' older child attended the University of Maryland and the younger teenaged child resided with plaintiff-wife, who was well-educated, having earned two degrees. The wife had returned to the job market as a party or event planner (which was only tangentially related to her background and education) on the eve of the action's commencement. She testified that her hourly rate of compensation had recently been raised to $18 per hour. She worked less than 40 hours per week, and at certain times of the year she worked only 20 hours per week.

The court acknowledged that the wife was underemployed, and explained that, were she to secure a full-time position or one more closely attuned to her education and background, her financial prospects would likely improve. Still, in the final analysis, the court found that her probable future financial circumstances remained speculative, and, in any event, paled in comparison to those of her husband. Id. at page 10.

The court in C.R.Z. v. D.E.Z. also refused to impute additional income to the wife because “[t]he estimation of a party's earning potential must have some basis in law and fact,” and determined that there was no evidence in the record to support the conclusion that the wife could secure employment congruent with her education and training, or another position at a higher rate of pay than she currently earned, or that she artificially limited her hours with her current employer. Furthermore, the wife had no track record of higher earnings from which the court could reasonably extrapolate an income above the amount she earned in her current position.

Conclusion

The holding in C.R.Z. v. D.E.Z. might be explained as simply a matter where, although income should have been imputed, the record did not provide the court sufficient justification for doing so. See Petek v. Petek ' 239 A.D.2d 327 (2d Dept. 1997) (it was error to impute $30,000 per year to the plaintiff absent any evidence in the record for such finding). Or, perhaps the court found credible the wife's testimony that the parties agreed she should be a traditional stay-at-home mom. But for how long might that be an accepted norm? It will be interesting to watch how the current trend of women becoming the primary breadwinner in the family, and more fathers taking on the role of the stay-at-home father, will affect courts' tendencies with respect to employment expectations for men and women. See “Women Breadwinners: The Natural Order,” The Economist, May 31, 2013.

In next month's issue, we will discuss how courts may react to doubts about a supporting spouse's credibility.

Marcy L. Wachtel is a partner in the firm of Katsky Korins LLP. Lori Meyer, of Meyer Law Offices, P.C., was formerly a partner of Katsky Korins LLP.