Case Title: WATSON v. WATSON

Citation: 

Docket Number: 02-24

State: wyoming

Court: Wyoming Supreme Court

Date: 2002-12-17T00:00:00Z

Document:
WATSON v. WATSON2002 WY 18060 P.3d 124Case Number: 02-24Decided: 12/17/2002
OCTOBER TERM, A.D. 2002

 

                                                                                                                                   

 

DOUGLAS 
MALCOLM WATSON,

 

Appellant(Defendant),

 

v.

 

DARLA 
LOUISE WATSON,

 

Appellee(Plaintiff).

 

 

Representing 
Appellant:

 

            
Dwight 
F. Hurich of Hurich Law Office, Gillette, Wyoming.

 

Representing 
Appellee:

 

            
Tad 
T. Daly and Patrick G. Davidson of Daly Law Associates, P.C., Gillette, 
Wyoming.

 

Before 
HILL, C.J., and GOLDEN, LEHMAN,* KITE, and 
VOIGT, JJ.

 

*  Chief Justice at time of expedited 
conference.

 

            
VOIGT, Justice.

 

[¶1]      In response to 
his former spouse's Petition for Modification of Child Visitation, the 
appellant, Douglas M. Watson (father), counterclaimed to modify his child 
support obligation due to a financial change.  The district court held a hearing and 
subsequently denied the father's counterclaim.  On appeal, the father argues that the 
district court erred in recalculating his child support obligation by adding 
back to his income the business expense he deducted from his federal income tax 
pursuant to Internal Revenue Code (IRC) 26 U.S.C.A. § 179 (2002) (Section 
179).  We reverse and remand to the 
district court for recalculation of the father's child support 
obligation.

 

ISSUES

 

[¶2]      The issues on 
appeal are:

 

A.        The 
district court erred by disallowing, for the purpose of child support 
computations, the Section 179 expense claimed by the 
father.

 

B.        The 
district court erred in computing the net incomes of both parties when 
calculating the presumed child support so as to not find a twenty percent 
decrease in presumed support, and thus, modifying the father's child support 
obligation downward.

 

FACTS

 

[¶3]      The father and 
the appellee, Darla L. Watson (mother), married in 1987, subsequently had two 
children, and divorced in 1999.  In 
the divorce decree, the district court awarded the mother primary custody of the 
children, awarded the father visitation rights, and ordered the father to pay 
child support in the amount of $818.00 per month.  On August 22, 2000, the mother filed a 
Petition for Modification of Child Visitation.1  The father filed his answer on September 
8, 2000, and counterclaimed requesting that the district court modify the 
original divorce decree by recalculating his child support obligation based on 
the parties' current incomes.  The 
district court held a hearing on January 31, 2001, and denied the father's 
counterclaim because the twenty percent threshold of Wyo. Stat. Ann. § 20-2-311 
(LexisNexis 2001) was not met.2

 

STANDARD 
OF REVIEW

 

[¶4]      A district court 
has broad discretion in determining the correct amount of a child support 
award.  This Court will disturb a 
district court's ruling only upon a showing that the district court abused its 
discretion.  Jordan v. 
Brackin, 992 P.2d 1096, 1098 (Wyo. 1999).  We have stated that:  "Judicial discretion is a composite of 
many things, among which are conclusions drawn from objective criteria; it means 
a sound judgment exercised with regard to what is right under the circumstances 
and without doing so arbitrarily or capriciously.'"  Vaughn v. State, 962 P.2d 149, 
151 (Wyo. 1998) (quoting Martin v. State, 720 P.2d 894, 897 (Wyo. 1986)).

 

DISCUSSION

 

            
Section 179 
Expense

 

[¶5]      A party seeking 
to modify a child support order must show, pursuant to Wyo. Stat. Ann. § 
20-2-311, that a material change in circumstances occurred subsequent to entry 
of the original divorce decree.  The 
father argues that, based on his current income and applying the presumptive 
support guidelines found in Wyo. Stat. Ann. § 20-2-304 (LexisNexis 2001), he 
should be paying twenty percent less than what he is presently ordered to 
pay.  The father, a rancher, 
testified that his ranch operation had changed since the divorce,3 and he now receives a monthly 
salary of $1,000.00 ($841.00 after deductions) as opposed to the $3,500.00 per 
month the district court determined at the time of the divorce.  He further testified that he receives 
in-kind income amounting to $450.00 per month in the form of housing, 
transportation, gasoline, utilities, and groceries, and that he has been 
depleting his retirement savings since May 1999 in order to support his modest 
lifestyle.

 

[¶6]      In calculating 
child support, the first step is to determine the parents' current monthly net 
incomes and then to apply the total amount to the tables as set forth in the 
statutes.  Wyo. Stat. Ann. § 
20-2-304.  Income is defined, in 
part, in Wyo. Stat. Ann. § 20-2-303(a)(ii) (LexisNexis 
2001):

 

"Income" 
means any form of payment or return in money or in kind to an individual, 
regardless of source.  Income 
includes, but is not limited to wages, earnings, salary, commission, 
compensation as an independent contractor, temporary total disability, permanent 
partial disability and permanent total disability worker's compensation 
payments, unemployment compensation, disability, annuity and retirement 
benefits, and any other payments made by any payor, but shall not include any 
earnings derived from overtime work unless the court, after considering all 
overtime earnings derived in the preceding twenty-four (24) month period, 
determines the overtime earnings can reasonably be expected to continue on a 
consistent basis.  In determining 
income, all reasonable unreimbursed legitimate business expenses shall be 
deducted.

 

(Emphasis 
added.)  The income used to 
calculate the child support obligation is "net income," defined 
as:

 

"Net 
income" means income as defined in paragraph (ii) of this subsection less 
personal income taxes, social security deductions, cost of dependent health care 
coverage for all dependent children, actual payments being made under 
preexisting support orders for current support of other children, other 
court-ordered support obligations currently being paid and mandatory pension 
deductions.  Payments towards child 
support arrearage shall not be deducted to arrive at net 
income[.]

 

Wyo. 
Stat. Ann. § 20-2-303(a)(iii).

 

[¶7]      At issue in the 
instant case is whether a Section 179 expense deduction claimed by the ranch 
corporation for the benefit of the father can be used to lower the father's 
monthly net income.  Citing 
Houston v. Smith, 882 P.2d 240 (Wyo. 1994), 
the district court disallowed the Section 179 expense and included that amount 
in calculating the father's net income.  
The district court reasoned that such deductions were "depreciation," 
being more properly written off over several years, which should be added back 
to income, as in Houston, for the purpose of calculating a child support 
obligation.

 

[¶8]      The district 
court concluded that the father's monthly income amounted to $2,950.00, 
resulting in a child support obligation of $692.35 per month.  This did not satisfy the twenty percent 
rule required by Wyo. Stat. Ann. § 20-2-311, so the district court denied the 
father's counterclaim.  The father 
does not dispute addition of forty percent of the LLC's depreciation and 
amortization back to income, but does take issue with the Section 179 deduction 
being added back to income.  We, 
too, disagree with the district court's treatment of the Section 179 
deduction.

 

[¶9]      The pertinent 
subsections of Section 179 that apply in the instant case are 179(a), 179(d)(1), 
and 179(d)(10).  Section 179(a) 
provides:  "A taxpayer may elect to 
treat the cost of any section 179 property as an expense which is not chargeable 
to capital account.  Any cost so 
treated shall be allowed as a deduction for the taxable year in which the 
section 179 property is placed in service."  26 U.S.C.A. § 179 at 688.  Section 179(d)(1) reads:  "For purposes of this section, the term 
section 179 property' means any tangible property . . . and which is acquired 
by purchase for use in the active conduct of a trade or business."  Id. at 690.  Section 179(d)(10) provides:  "The Secretary shall, by regulations, 
provide for recapturing the benefit under any deduction allowable under 
subsection (a) with respect to any property which is not used predominantly in a 
trade or business at any time."  
Id. at 691-92.

 

[¶10]   In general, Section 179 property is 
used in the active conduct of a taxpayer's trade or business that would be 
subject to depreciation but for the election.  See 4 Fed. Tax Guide Rep. (CCH) ¶ 
12,126.01 (2002).  Without an 
election under Section 179, the cost of such property would be treated as 
capital expenditure, and the cost would be recovered as depreciation over a 
period of years pursuant to IRC 26 U.S.C.A. §§ 167(a) and 168.  However, when Section 179 property is 
sold, any gain is recognized as ordinary income to the extent of amounts 
expensed and depreciation claimed.  
See 4 Fed. Tax Guide Rep. (CCH) ¶ 12,126.01.

 

[¶11]   In 2000, the ranch corporation 
claimed $20,000.00 in Section 179 expenses for the purchase of eleven bulls and 
a horse.  Since the father owned 
forty percent of the corporation, forty percent of the allowable $20,000.00 
Section 179 expense4 or $8,000.00, passed through to the 
father, which he claimed on his personal federal income tax for the year 
2000.  The father asserts that the 
Section 179 deduction should not be added back to his income as 
"depreciation."  He argues that, 
whereas depreciation is added back to income because it does not reflect an 
actual cash expenditure, a Section 179 deduction reflects an actual cash 
expenditure, reducing available resources from which to pay child 
support.

 

[¶12]   The states are split on the issue 
of whether certain business expenses such as Section 179 deductions should be 
added back to income in determining child support obligations.5  In Major v. Major, 124 N.M. 436, 
952 P.2d 37 (1997), 
the court dealt with a situation somewhat similar to the instant case.  In Major, the father raised 
cattle and sold his cull cattle in the spring, purchasing impregnated cattle to 
replace the cull cattle.  Id. 
at 38.  The Major court 
reviewed several cases that discussed determining the net income of 
self-employed parents, and stated:

 

The 
lesson we glean from these cases is that we are more concerned with a parent's 
actual cash flow than we are with income as represented on tax returns.  . . .  We do not rely on technical treatments 
more appropriate for accounting and tax purposes unless there is evidence that 
those technical treatments bear some relation to actual cash 
flow.

 

Id. 
at 39.  Regarding Section 179 
expenses, the Major court stated:

 

            
The limitation imposed by the trial court comes from Section 179 of the 
Internal Revenue Code.  This section 
allows a taxpayer to elect to treat the cost of depreciable property purchased 
for use in the active conduct of a trade or business as an expense in the year 
the property is placed in service, rather than as property that is capitalized 
and thereafter subject to depreciation over a number of years.  . . .  It is designed to "encourage additional 
investment in small business since it provides for a faster recovery of capital 
before the taxing of earnings.'"  
Smyers v. Commissioner of Internal Revenue, 57 T.C. 189, 203, 1971 
WL 2598 (1971) (quoting H.R. Rep. 85-2198 (1958)).  Additionally, since the property is 
immediately expensed, there is no need to maintain a depreciation schedule on 
these assets.

 

Major, 
952 P.2d  at 39.  The Major court 
continued:

 

            
Mother argues that this case comes down to an analysis of 
depreciation.  She appears to be 
arguing that because Father depreciates the cattle over a period of years, he 
cannot expense them as inventory in one year.  That is not what is happening here.  Rather, Father is requesting that, when 
the trial court determines his income for child support purposes, it deduct as a 
necessary business expense the annual cost of replenishing his breeding 
herd.  Again, how that cost is 
treated for income tax purposes is not necessarily relevant to determining 
income for child support.

 

Id. 
at 40.6

 

[¶13]   A Section 179 deduction reflects a 
cash expenditure made during the year in question, whereas depreciation taken in 
years subsequent to the initial year property is placed in service does not 
reflect cash expenditures made in those subsequent years.  We note, however, the similarity between 
a Section 179 deduction and that of depreciation taken in the year in which 
property is placed in service, which typically reflects an actual cash 
expenditure made during that year.  
However, we conclude that when courts consider business expenses, they 
should make allowance for expenses that are actually necessary for the parent to 
sustain his or her business and that are unreimbursed business expenses.  In determining a parent's income for a 
presumptive child support obligation, "all reasonable unreimbursed legitimate 
business expenses shall be deducted.'"  
Roseman v. Sackett, 979 P.2d 940, 943 (Wyo. 1999); 
Wyo. Stat. Ann. § 20-2-303(a)(ii).

 

[¶14]   We distinguish the instant case 
from Houston, where we considered depreciation of real property and 
adopted this rationale:  "Since the 
purpose of depreciation is to assist a person in regaining their 
expenditures, it does not follow that depreciation is a business 
expense for the calculation of disposable income under the 
Guidelines.'"  Houston, 882 
P.2d at 244 (quoting Stewart v. Stewart, 243 
Mont. 180, 793 P.2d 813, 815 (1990)) 
(emphasis in original).  We held 
that depreciation of rental properties failed to fit within the statute's 
definition of "reasonable unreimbursed legitimate business expenses" and 
concluded that it could not be deducted from income for child support purposes 
because it constituted a book reimbursement.  Houston, 882 P.2d  at 
244.  However, a Section 179 expense differs 
from depreciation in that it directly affects business cash flow and a parent's 
disposable income.  It is this 
distinction that makes a Section 179 expense more closely resemble the mortgage 
principal payments we allowed to be deducted from income in Fleenor v. 
Fleenor, 992 P.2d 1065, 1070 (Wyo. 1999) than the depreciation we disallowed 
as a deduction from income in Houston.

 

[¶15]   We conclude that the district court 
abused its discretion in calculating the father's monthly net income.  The Section 179 deduction in this case 
may have been a reasonable unreimbursed legitimate business expense that should 
not have been added back to income in determining child support 
obligations.  In its decision 
letter, the district court did not, however, make that determination.  Instead, it concluded only that the 
amount "would more properly be written off over several years without this 
special section . . .."  But for 
child support computation purposes, the question is not whether an amount should 
be depreciated over time for tax purposes or whether it should be treated as an 
expense in the current tax year under Section 179.  The question is whether it was a 
"reasonable unreimbursed legitimate business expense" under Wyo. Stat. Ann. § 
20-2-303(a)(ii).

 

[¶16]   We reiterate what we said in both 
Fleenor and Houston: the focus should be upon the reasonable and 
legitimate nature of the expense and its impact on the party's actual cash flow 
in the year in question rather than the treatment of the expense by federal law 
in the context of income taxes.  The 
rationale of Houston was that book depreciation does not reduce actual 
net income.  Houston, 882 P.2d  at 244.  The rationale of 
Roseman was that the child support payor had failed to prove that the 
amounts he claimed were reasonable business expenses.  Roseman, 979 P.2d  at 943.  The rationale of Fleenor was 
that, after the payor established that the expenses were reasonable expenses 
that directly affected business cash flow and his own disposable income, the 
payee failed to prove that the payments were unreasonable.  Fleenor, 992 P.2d  at 1070.  That is the type of analysis required in 
cases of this nature.  A central 
question in that analysis is whether the questioned expenses were unreasonably 
excessive or the assets were acquired to depress income to avoid support 
payments.  Id. at 1069.  The burden of proving that an expense 
was a reasonable unreimbursed legitimate business expense lies with the party 
seeking the deduction.  Erhart v. 
Evans, 2001 WY 79, ¶ 15, 30 P.3d 542, 546 (Wyo. 2001); Fountain v. 
Mitros, 968 P.2d 934, 938 (Wyo. 1998).

 

[¶17]   One court has commented that "were 
we not to treat Section 179 deductions as depreciation pursuant to the Nebraska 
Child Support Guidelines, a self-employed parent could distort his or her income 
in any given year by purchasing depreciable property and deducting the cost 
pursuant to Section 179, thereby reducing income available for child 
support."  Gammel v. Gammel, 
259 Neb. 738, 612 N.W.2d 207, 212 (2000).  
That, of course, is true; a scheming non-custodial parent could seek to 
manipulate his or her income in such a manner.  But the opposite is also true; if in 
computing child support, a court automatically rejects a business expense that 
has been afforded Section 179 treatment, that court has not fulfilled its 
obligation under Wyo. Stat. Ann. § 20-2-303(a)(ii) to determine whether the 
amount should be deducted as a reasonable and legitimate business expense.  Either course is wrong.  The proper course is to make the 
statutory determination.

 

            
Net Income 
Computation

 

[¶18]   The father next alleges that the 
district court erred in computing the net incomes of both parties when 
calculating the presumed child support so as not to find a twenty percent 
decrease in presumed support, and thus modifying the child support obligation 
downward.  In its decision letter, 
the district court found that the net monthly income of the mother was 
$2,043.00.  Unfortunately, the 
record does not disclose how the district court calculated the mother's monthly 
income.7  There is no factual basis from which we 
can conclude whether this truly reflects her net income.  On remand, the district court should set 
forth in its decision letter its computations of both parties' 
incomes.

 

CONCLUSION

 

[¶19]   The district court erred when it 
added the Section 179 expense deduction back to the father's income in 
determining his child support obligation, without first having made a 
determination whether the expense was a reasonable unreimbursed legitimate 
business expense under the statute.  
We reverse and remand to the district court for recalculation of the 
parties' monthly incomes consistent with this opinion and a determination of the 
father's appropriate child support obligation.

 

 

FOOTNOTES

    1Visitation 
is not at issue in this appeal.

  2Wyo. Stat. Ann. § 20-2-311(a) 
states, in part:  "Any party . . . 
may petition for a review and adjustment of any child support order . . ..  The petition shall allege that, in 
applying the presumptive child support established by this article, the support 
amount will change by twenty percent (20%) or more per month from the amount of 
the existing order."

  3The father and his parents joined 
their sole proprietorship ranches into a corporation effective January 1, 2000, 
with their land being held by a limited liability company (LLC).  The father owns forty percent of the 
corporation and forty percent of the LLC.

  4The applicable amounts allowed for 
Section 179 expenses are:  Tax year 
1997, $18,000.00; 1998, $18,500.00; 1999, $19,000.00; 2000, $20,000.00; 2001 or 
2002, $24,000.00; 2003 or thereafter, $25,000.00.  26 U.S.C.A. § 179(b)(1) at 
688-89.

  5See, e.g., In re Marriage of 
Knickerbocker, 601 N.W.2d 48, 51 (Iowa 1999); 
Preussner v. Timmer, 414 N.W.2d 577, 579 (Minn.App. 1987); 
Gammel v. Gammel, 259 Neb. 738, 612 N.W.2d 207, 211-12 (2000); 
and Labar v. Labar, 557 Pa. 54, 731 A.2d 1252, 1255-56 (1999).  See also Frank J. Wozniak, 
Treatment of Depreciation Expenses Claimed for Tax or Accounting Purposes in 
Determining Ability to Pay Child or Spousal Support, 28 A.L.R.5th 46 (1995).

  6Those jurisdictions that consider 
Section 179 expenses as "depreciation" to be added back to income for computing 
child support obligations appear to ignore the recapture provision of Section 
179(d)(10).  In the instant case, 
the father's accountant testified that, when the Section 179 animals are sold in 
later tax years, the income will then be treated as ordinary 
income.

  7The record does disclose a Contract 
of Employment for the mother at the Northern Wyoming Community College for the 
school year 2000-2001, which indicates a nine-month salary of $27,375.00.  On an annualized basis, this amounts to 
a gross monthly income of $2,281.25.  
How the district court arrived at a net monthly income of $2,043.00 is 
not discernable from the record.