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It is a lament divorce judges frequently hear.  Since alimony and child support are based on income, you can’t blame the judges for being somewhat cynical.  It is a law of the Universe.  Income decreases in the year of divorce.

But what if you make a million dollars a year?  Carol Rose, estranged spouse of former baseball star, Pete Rose, says that Pete makes at least $100,000 a month signing autographs and making personal appearances.  However, according to Carol, he has spent most of it on high stakes gambling and still owes significant amounts to the casinos and the IRS.

Carol is asking the court to compel Pete to reveal the full details of his finances in their divorce.

In the Mumma case, the wife called the court’s attention to the depreciation deduction that the Husband was taking for his business.  She pointed out that depreciation is a non-cash flow event and so the money is available to the Husband.

The argument on the other side is that equipment really does wear out and needs to be replaced eventually.  When it does, it will take cash flow to purchase new equipment.

Taking a look at the Maryland Child Support Guidelines in Section 12-201 of the Family Law Article, we see that income from self employment means gross receipts minus ordinary and necessary expenses.

However, the statute goes on to say that ordinary and necessary expenses do not include accelerated depreciation, investment tax credits, or any other expenses the court determines in not appropriate to subtract.

So what about straight line depreciation?  Does the fact that the law expressly disqualifies accelerated depreciation but not straight line depreciation mean you get to deduct it from income?  Or does the catch-all provision at the end allow the court to decide?  In the cases I have tried, the trial judges have included straight line depreciation as income.

The IRS does not consider a loan to be income.

But if you own your own business, you can manipulate your income.  So if someone owes you $50,000 for goods and services, you don’t bill them until next year.  You have your business borrow $50,000 from the bank, using your $50,000 accounts receivable as collateral.  Then your business loans $50,000 to you for your living expenses.

Is your income zero or $50,000?

It’s a situation where you will want to have an accountant as an expert witness.  And even then, the accountants for each side will have conflicting opinions.  I’ve had cases where the judge decided to include loans as income.

Leroy and Mynell Gassaway married in 1952.  They separated in 1979.

In their DC divorce, the trial court divided marital property upon consideration of the fact that Leroy’s mother owned a house and that Leroy was the only heir and would inherit the property.  After all, “opportunities for the future acquisition of assets” is one of the factors a judge must consider in dividing martial property.

On appeal, however, the court said this was not an equitable way to divide property.

In Mumma v. Mumma, 280 A.2d 73, 76 (D.C. 1971), this court ruled that gifts to the husband from his parents could not be considered in determining his income for purposes of computing his alimony obligation, presumably, because any expectation of gifts is inherently speculative and thus could not be counted upon as a predictable portion of the husband’s annual financial return.  Accord Scott v. Scott, 645 S.W. 2d 193, 198 (Mo. Ct. App. 1982) (despite history of gifts to wife from parents, court property declined to consider “such an uncertain source of funds as future gifts” in computing her alimony award).  The same reasoning is applicable to anticipated gifts of real property or other assets, e.g., though inheritance.

The court recognized decisions from some courts ruling otherwise, but rejected this approach as “mischievous”.

— Gassaway v. Gassaway, 489 A.2d 1073 (D.C. 1985)

Albert  Mumma married Jean in 1952 and they had three children together.   Albert supported the family as an architect.  He had an office in Georgetown.  In 1968 the parties had a violent altercation and they decided to divorce.

The judge awarded $200 a month in alimony and $500 a month in child support to Jean, plus attorney fees and costs.  Albert appealed complaining that he was ordered to pay support of $8,400 a year, while his income was only $9,422 in 1968 and $12,726  in 1969.   Jean countered that, among other things, he received gifts from his parents.

The DC Court of Appeals reversed the trial court, holding that “gifts do not constitute income” and suggested that Albert’s income tax returns would be an appropriate guide to his actual income in the absence of affirmative evidence otherwise.

Mumma v. Mumma, 280 A.2d 73 (1971)

Need to know how much a federally employed spouse makes for an alimony or child support determination?  Just go to Search Federal Pay and type in their name.  You will instantly see their salary and bonuses for 2012, 2011 and 2010.