Title: Houston v. Smith

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Houston v. Smith1994 WY 91882 P.2d 240Case Number: 93-191Decided: 09/30/1994Supreme Court of Wyoming
Valerie 
(Smith) HOUSTON,

Appellant 
(Plaintiff),

v.

James 
E. SMITH,

Appellee 
(Defendant).

 

Appeal 
from District Court, Natrona County, Harry E. Leimback, 
J.

 

Representing 
Appellant:

Kenneth 
R. Marken, Casper.

Representing 
Appellee:

Donald 
L. Painter, Casper.

Before 
GOLDEN, C.J., THOMAS, MACY,* and TAYLOR, JJ., and BROWN, J., 
Retired.

* 
Chief Justice at time of oral argument.

THOMAS, 
Justice.

[¶1]      The issue 
presented in this case involves the correct application of the definitions of 
"income" and "net income" found in WYO. STAT. § 20-6-301(a)(i) and (ii) 
(Cum.Supp. 1993). In arriving at "income" and "net income," pursuant to our 
statute, the trial court relied upon the federal income tax return of James E. 
Smith (Smith). The federal tax return figures were utilized in arriving at 
"income" and "net income" for the purpose of determining Smith's income in 
computing presumptive child support according to WYO. STAT. § 20-6-304 
(Cum.Supp. 1993). We hold that federal income tax computations differ in 
significant respects from the computations required by WYO. STAT. § 20-6-301(a), 
and the district court erred in substituting the federal income tax concepts to 
arrive at those critical amounts. The Order of Modification entered in the 
district court is reversed, and the case is remanded to that court for an 
appropriate determination of child support in accordance with this 
opinion.

[¶2]      Valerie Smith 
Houston (Houston), in her Brief of Appellant, states the issues to 
be:

I. 
The trial court erred in its determination of the Appellee's "income" and "net 
income" as defined by W.S. § 20-6-301, et seq., in one or more of the following 
ways, thus resulting in an erroneous computation of the Presumptive Child 
Support:

A. 
By adopting the Appellee's "taxable income" from Appellee's IRS Form 1040 as the 
equivalent of his "net income" as defined by W.S. § 
20-6-301(a)(ii).

B. 
By permitting losses generated by the Appellee's current wife's business to 
reduce Appellee's "income" as defined by W.S. § 
20-6-301(a)(i).

C. 
By allowing depreciation to be categorized as a "legitimate business deduction", 
thus reducing Appellee's "income" as defined by W.S. § 
20-6-301(a)(i).

II. 
The trial court erred in its failure to require Appellee to pay reasonable 
attorney fees and court costs to the Appellant under W.S. § 20-2-113(m), 
although the Appellee sought to deviate from the Presumptive Child Support 
amount determined by the court.

III. 
The trial court erred in denying the Appellant a retroactive increase of her 
child support to the date notice of her Petition was given to the Appellee, as 
provided for by W.S. § 20-2-113(a)(ii).

As 
appellee, Smith offers the following counterstatement of the 
issues:

1. 
Whether the District Court properly determined Appellee's "income" and "net 
income".

2. 
Whether the District Court erred in permitting losses generated by Appellee's 
wife's business to reduce Appellee's "income".

3. 
Whether the District Court erred by permitting depreciation to be used in 
computing Appellee's "income".

4. 
Whether the District Court erred in not requiring Appellee to pay attorney's 
fees.

5. 
Whether the District Court erred in denying Appellant's request for retroactive 
child support increase.

[¶3]      Houston and Smith 
were divorced in 1981. Under the decree, Smith was required to pay $175 per 
month in child support for each of the two minor children of the parties. On 
October 23, 1992, Houston filed a petition to modify the total of $350 per month 
being paid for child support, and the matter was tried before the district court 
on April 30, 1993. The basic income information for purposes of the statutory 
computation essentially is undisputed in this case.

[¶4]      After applying 
income and expense items from Smith's federal income tax return for 1992, the 
district court found his "net income" was $31,330 for that year. This was 
converted to a monthly amount of $2,610.83. That figure was used by the district 
court to calculate Smith's share of the parties' joint support obligation 
pursuant to Wyoming's presumptive child support law, WYO. STAT. § 20-6-304. In 
accordance with the decision letter of the court authored on May 20, 1993, an 
Order of Modification was entered on June 15, 1993. Houston appealed the Order 
of Modification that represented the ultimate decision of the trial 
court.

[¶5]      In his 1992 IRS 
Form 1040 on which Smith reported his income for federal tax purposes, he took a 
deduction from gross income in arriving at adjusted gross income for a loss 
suffered by his current wife in the operation of a retail business situated in 
Grand Junction, Colorado known as The Little Basquette Shoppe. He also took a 
depreciation deduction for various rental properties that he owned in Casper. 
Houston contends these federal income tax deductions were not permissible in 
arriving at "income" and "net income" under the Wyoming statute, and the overall 
method adopted by the district court in arriving at Smith's "net monthly 
income," as defined by Wyoming's Presumptive Child Support Guidelines, was 
erroneous.

[¶6]      In the context of 
this case, we must decide how "income" and "net income" are to be determined 
pursuant to WYO. STAT. § 20-6-301(a)(i) and (ii). The statutory definitions 
are:

(i) 
"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. Means 
tested sources of income such as Pell grants, aid to families with dependent 
children (AFDC) basic grants, general assistance (GA), food stamps and 
supplemental security income (SSI) shall not be considered as income. Gross 
income also means potential income of parents who are voluntarily unemployed or 
underemployed;

(ii) 
"Net income" means income as defined in paragraph (i) 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, arrearage payments excluded.

We 
must use these definitions and apply them first to Smith's sources of income in 
arriving at "income" under the statute. The determination of "net income" then 
depends upon a determination of the appropriate deduction of "reasonable 
unreimbursed legitimate business expenses." WYO. STAT. § 
20-6-301(a)(i).

[¶7]      The dollar 
amounts to be invoked for making these determinations correctly were identified 
by the trial court as a matter of fact. The federal income tax definitions the 
trial court must have invoked in arriving at the determination of "net income" 
do not parallel our state statutory definitions, and there is no indication that 
our legislature intended they should. The result of applying the federal tax 
definitions was an erroneous computation of Smith's net income for purposes of 
applying the presumptive child support standards.

[¶8]      It is useful to 
compare the definitions in the INTERNAL REVENUE CODE for the terms "gross 
income," "adjusted gross income," and "taxable income." The statutory 
definitions found in 26 UNITED STATES CODE §§ 61-63 (Supp. 1993) are succinctly 
summarized in BENDER'S MASTER FEDERAL TAX HANDBOOK (1992):

Gross 
income includes all income from all sources. Only items specifically exempted 
are excluded. Gross income is taxed in year of its actual or constructive 
receipt to individual who earns it or who owns property generating 
income.

¶ 
3.100

Adjusted 
gross income is gross income less "above the line" deductions. These deductions 
include trade and business expenses, losses from sale or exchange of property, 
alimony, retirement savings for employees and self-employed persons, and rent 
and royalty expenses. Adjusted gross income determines amount of many deductions 
and credits such as miscellaneous itemized deductions.

¶ 
2.300

Taxable 
income is adjusted gross income minus personal exemptions and either standard 
deduction or itemized deductions. Taxable income is amount upon which tax rate 
is applied to compute tax owed.

¶ 
2.500

[¶9]      Houston contends 
that, when the determination of income is accomplished under WYO. STAT. § 
20-6-301(i), it relates only to the income of "an individual," and the statute 
later alludes to "any payor." We agree with Houston's argument that these terms 
are unambiguous, and there is no indication the legislature intended, in any 
manner, to include "spousal income" or "joint income" in the computation 
required by the statute to provide the premise for calculating presumptive child 
support owed by one of the parents. The ineluctable conclusion must be that, if 
only the individual parent's income is to be used in making these calculations 
for income and net income, no justification can be found for relying upon a 
joint federal income tax return. This particularly is true when the joint income 
tax return includes items attributable to the payor's current spouse, who has no 
responsibility for the child support.

[¶10]   Had Smith's current wife shown a 
profit from the operation of her business in Grand Junction, Smith would protest 
and, justifiably, contend the amount should not be included in his "income" for 
purposes of child support. The plain meaning of "individual" and "payor" 
precludes that result. It seems apparent the converse must be true and, as in 
this instance, when the current spouse of the responsible parent suffers a 
business loss, that loss cannot be deducted in arriving at the "net income" of 
the responsible parent. Clearly, the trial court erred in invoking a computation 
that included a deduction for the loss incurred by Smith's current wife from The 
Little Basquette Shoppe. That loss cannot be used in calculations of Smith's 
"net income."

[¶11]   We can identify no significant 
disparity between Wyoming's statutory definition of "income" and the federal 
definition of "gross income" because it appears that both definitions 
contemplate all sources of income. There is no counterpart in Wyoming's child 
support statutes to the federal concept of "adjusted gross income." An 
examination of Smith's income tax return demonstrates he legally took advantage 
of the several deductions allowed arriving at "adjusted gross income" for 
purposes of his federal income tax return. He subtracted all the above the line 
business expenses, rental depreciation, and business losses in calculating his 
adjusted gross income for purposes of the joint federal return. Then, deductions 
also were claimed for the standard deduction for a married couple and personal 
exemptions which were subtracted to arrive at taxable income. That is the 
"amount upon which [the] tax rate is applied to compute tax owed." BENDER'S at ¶ 
2.500.

[¶12]   In Wyoming, "net income" is derived 
from income by taking the specific allowed deductions articulated in WYO. STAT. 
§ 20-6-301(a)(ii). Those items are:

1. 
personal income taxes;

2. 
social security deductions;

3. 
costs of dependents' health care coverage;

4. 
support payments currently being made for other children;

5. 
other court-ordered support obligations; and

6. 
mandatory pension deductions.

The 
only factor in the Wyoming statutory definitions of "income" and "net income" 
that relates in any way to the federal above the line deductions is the phrase 
that permits an individual to deduct "all reasonable unreimbursed 
legitimate business expenses" in arriving at income. WYO. STAT. § 
20-6-301(a)(i).

[¶13]   It is obvious the deductions 
specified in the Wyoming statutes to be used in arriving at "net income" are 
different and disparate from those invoked under the federal law to arrive at 
either "adjusted gross income" or "taxable income," which 
include:

1. 
trade and business deductions, including certain trade and business deductions 
of employees;

2. 
losses from property sales or exchanges;

3. 
rent and royalty deductions;

4. 
specified deductions for life tenants and income beneficiaries of 
property;

5. 
pension, profit-sharing, and annuity plans of the 
self-employed;

6. 
retirement savings;

7. 
lump sum distributions; 

8. 
amounts forfeited because of early withdrawal of savings accounts or time 
deposits;

9. 
alimony;

10. 
expenses for reforestation;

11. 
specified mandatory repayment amounts of supplemental unemployment compensation 
benefits;

12. 
the standard deduction;

13. 
itemized deductions;

14. 
any personal exemptions.

We 
hold there are fundamental differences in the Wyoming statutory scheme and the 
federal income tax scheme, which foreclose any reliance upon the figures derived 
for taxable income on a federal income tax return in order to compute "net 
income" for purposes of the Wyoming statute. The concepts simply are 
different.

[¶14]   The deduction for depreciation of 
Smith's rental properties also fails to fit within the statute's definition of 
"reasonable unreimbursed legitimate business expenses." WYO. STAT. § 
20-6-301(a)(i). The Montana Supreme Court decided a case that is factually very 
similar to the circumstances found in this case. That court affirmed the trial 
court and held depreciation - whether accelerated or straight line - could not 
be used as a deduction in calculating the father's net income for purposes of 
child support modification. Stewart v. Stewart, 243 Mont. 180, 793 P.2d 813 (1990). See also In Re Marriage of Mitchell, 229 Mont. 242, 746 P.2d 598 (1987). The court in Stewart, 793 P.2d  at 815, articulated its 
rationale in this way:

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. (Emphasis in 
original.)

We 
are satisfied the rationale of the Montana decision is correct and hold, in this 
case, depreciation did not reduce the net income Smith had in 1992. It 
constitutes a book reimbursement to him, and it should not be subtracted from 
income in arriving at net income for calculating his child support obligations. 
This conclusion is justified by the interest of the state in assuring adequate 
economic support for all minor children. A reimbursement of a capital 
expenditure does not fit within that policy.

[¶15]   The net effect of the district 
court's approach was to permit Smith to take some of the deductions, reflected 
in Schedule C on his federal income tax return, which do not comply with 
Wyoming's statutory definition of "income." While some of those deductions 
clearly are "reasonable unreimbursed legitimate business expenses," (WYO. STAT. 
§ 20-6-301(a)(i)) such as expenses for advertising, car and truck expense, the 
cost of insurance, repairs and maintenance, business supplies, taxes and license 
fees, the cost of utilities, travel expenses, meal expenses and entertainment, 
and the general category for miscellaneous business expenses, the district court 
went beyond those items. It encompassed in its computations the deduction for a 
$46,332 loss on The Little Basquette Shoppe business; depreciation expense on 
rental properties; the standard deductions; and the personal exemptions, all as 
shown on the federal income tax Form 1040. These items do not come within 
Wyoming's statutory definition of "income" or of "net income." Our statute in 
providing for the computation of "net income" permits deductions only for 
personal income taxes, social security deductions, health care costs for 
dependents, child support payments as well as other court-ordered support 
obligations, and mandatory pension deductions. The deductions authorized under 
the clear language of the Wyoming statute do not include those that the district 
court allowed Smith to claim in arriving at his share of the joint child support 
obligation.

[¶16]   Under our statute, we note the 
calculation of Smith's "income" probably should be increased by including 
one-half of the total joint earned interest and dividend income, which was 
$1,108,1 as listed on Schedule B of his 1992 
federal income tax return. For the reasons set forth above, his "net income" 
should be increased by the depreciation expense of $6,805 as reflected in 
Schedule C on his 1992 Form 1040 and, of course, the income should be increased 
by the $46,332 loss that was claimed.2

[¶17]   Our calculations result in a 
monthly "net income" for Smith of $10,261.33. If this figure were used, it would 
be 88.24% of the total net joint monthly income of Houston and Smith. The result 
under our presumptive child support statute then is that his pro rata share of 
child support for the two children would be $1,917.15. It follows that we must 
reverse the decision of the trial court with respect to Smith's "net income," 
specifically requiring that the depreciation of the rental properties and his 
wife's business loss not be included as deductions in arriving at his "net 
income" for the purpose of determining his pro rata share of child 
support.

[¶18]   We affirm the decision of the trial 
court with respect to the remaining issues. The matter of awarding attorney fees 
and the decision of the judge to not allow a retroactive increase of child 
support to the date of Houston's petition were within the sound discretion of 
the trial court. We do not disturb the trial court's judgment with respect to 
those matters within its discretion on appeal, unless there was a clear abuse of 
that discretion. Halberstam v. Cokeley, 872 P.2d 109 (Wyo. 1994); 
Vanasse v. Ramsay, 847 P.2d 993 (Wyo. 1993); Martin v. State, 720 P.2d 894 (Wyo. 1986). On remand, the adjustment of Smith's pro rata share of the 
child support should take effect, however, as of the date of the initial order, 
May 20, 1993.

[¶19]   We reverse in part and affirm in 
part. The case is remanded to the district court for further proceedings in 
arriving at the appropriate child support contribution by Smith in accordance 
with this opinion.

Footnotes

1 The interest and dividend amounts were not brought before this Court as 
issues on appeal as were those issues concerning depreciation and the business 
losses of Smith's wife. However, because the interest and dividend amounts are 
listed on Schedule B as "joint income," we find Smith's net income for child 
support calculations should be increased by half of the amounts listed, or 
$1,108.00, rather than the actual total of $2,216.00 shown for both Smith and 
his current wife on the 1992 Schedule B. The addition of $1,108.00 as part of 
Smith's income comports with the requirements of WYO. STAT. § 20-6-301(a)(ii) 
(Cum.Supp. 1993).

2 Additionally noteworthy is the fact that the Montana Supreme Court 
affirmed the trial court's decision to disallow the father's business losses in 
calculating his income for child support purposes. Stewart, 793 P.2d  at 
814.