Opinion ID: 1955578
Heading Depth: 1
Heading Rank: 4

Heading: Stock-Option Income

Text: The second issue which the Father raises in this appeal is whether the Family Court's decision concerning the 1987 recalculation, properly applied the Melson Formula by including, as part of his income, the taxable profits which were realized when he exercised certain stock options. In 1977, the Father's employer gave him an option to purchase stock at $25.866 per share. On April 1, 1985, when that stock was selling for $73 per share, the Father partially exercised that stock option thereby realizing a profit of $22,058.40. The profit, which reflected the difference between the option price and the market price, was included on the W-2 form provided by the Father's employer and was taxed as ordinary income in 1985. [5] The W-2 which the Father received from his employer for 1986 reflects that additional stock options were exercised in that year and profits of $51,845 were realized. The procedure used by the Delaware Family Court to determine the amount of child support to be paid is known as the Melson Formula. Dalton v. Clanton, Del.Supr., 559 A.2d 1197, 1210 (1989). This Court has recognized the validity of that procedure. Id. The first step of the Melson Formula requires the Family Court to determine each support obligor's net income. [6] The Delaware General Assembly has defined income with regard to child support obligations as: any form of payment made by the obligor's employer to an individual, regardless of source, including, but not limited to, wages, salary, commission, vacation pay, severance pay, bonuses, compensation as an independent contractor, workers' compensation, disability, sick pay, SUB benefits, unemployment compensation, railroad retirement, pensions, annuity and retirement benefits; provided, however, that income excludes: a. Any amounts required by law to be withheld, other than creditor claims, including, but not limited to, federal, state and local taxes, Social Security and other mandatory retirement and disability contributions; b. Union dues; c. Any amounts exempted by federal law; d. Public assistance payments; and e. Tax refunds, which shall be governed by §§ 1205-1209 of Title 30 and § 454 of the Social Security Act (42 U.S.C. § 654). 13 Del.C. § 513(b)(5) (emphasis added). Although the profits which are realized when an employee exercises an option to purchase his employer's stock, at a discounted price, are not explicitly mentioned in the statute, such options are analogous to a bonus and are included within the phrase any form of payment made by the obligor's employer in Section 513(b)(5). We find that the Family Court correctly decided to include the profits realized from the exercise of the employee stock option when determining the Father's net income. Nevertheless, the conclusion that the Father's stock option profits should properly be included within the income component of the Melson Formula's equation is not determinative of whether the Family Court properly applied the Melson Formula in its entirety. This Court has attach[ed] particular significance to the fact that the Melson Formula is recognized and operates as a rebuttable presumption in all child support cases. Dalton v. Clanton, 559 A.2d at 1211 (footnote omitted). We stated: The mathematical result which is the product of the Melson Formula can never be the basis of a child support order under the Delaware procedure, until that result passes the litmus test of the rebuttable presumption. When the calculation according to the Melson Formula is mixed together with the specific facts in a case, the result must be equitable. If the result is inequitable, the presumption is rebutted, and the support calculation pursuant to the Melson Formula must yield to the extent that is necessary to balance the equities in the case. Id. at 1212. The Father argues that, even if the $51,845 in stock option profits were properly included within the income component of the Melson Formula, the Family Court did not apply the litmus test of the rebuttable presumption to the mathematical result before it. In support of his argument, the Father points out that when the Family Court decided to order the Father to pay child support, in accordance with the mathematical result, it simply stated there had been no testimony why the stock options were not valuable remuneration. The Father argues that the Family Court failed to address whether presumptive applicability of the mathematical result, which was the product of the Melson Formula, had been rebutted by his showing that the income component of the equation in his case includes a non-cash asset, i.e., stock. We find that the Family Court's decision concerning the 1987 recalculation, was based upon an incomplete analysis. The Father's argument required the Family Court to examine the child's needs, the Father's income, and the prospect of requiring the Father to liquidate [7] his stock holdings to pay child support in accordance with the mathematical result reached by the Melson Formula. In fact, in its opinion regarding the 1986 recalculation in this case, the Family Court did consider those issues and concluded that the Father had rebutted the presumptive applicability of the mathematical result which was the product of the Melson Formula: [T]he ownership of the stock as noted in the Company stock registry and as evidenced by stock certificates does not provide him with any additional monies to use to pay child support. In those cases where a support obligor is employed and earning ample wages from which adequate child support can be paid, this Court customarily does not require that the obligor liquidate his or her assets for the purpose of paying even more support. ... It is my understanding that IRS taxes this paper profit today to insure payment of taxes on the actual gain and not just on a gain calculated on the difference between the future selling price and today's market price. In the application of the Melson Formula to this case, consideration of the paper profit realized in the exercise of the `AIG' stock options must be excluded. [8] The Father contends that this Court should not look beyond the decision of the Family Court with regard to the 1986 recalculation, since, in that year, the Father's stock option profits were excluded from the income component of the Melson Formula and that ruling was not appealed. Relying upon the law of the case doctrine, the Father argues that the Family Court's initial ruling should stand as a bar to further litigation on the question of whether stock option profits should be removed from his income, when recalculating his support obligation in years subsequent to 1986. Frank G. W. v. Carol M.W., Del.Supr., 457 A.2d 715, 718 (1983). We find that the Father's argument is not supported by a proper application of that doctrine. Id. The law of the case is established when a specific legal principle is applied to an issue presented by facts which remain constant throughout the subsequent course of the same litigation. Id. The facts which are relevant to a proper evaluation of a petition to modify an order to pay child support are never static. As children pass through their minority, their needs often change, as does their parents' ability to support them. Even within the context of determining the support obligation for a single child, like this case, it may be necessary for the Family Court to periodically adjust the placement of the fulcrum upon which its decision rests. As a rebuttable presumption, the Melson Formula operates as a recognition that the Family Court may have to move away from a prior position, in reaching a subsequent decision, in order to bring the evolving equities into balance. In this case, the subsequent facts which were presented to the Family Court may or may not have supported a conclusion that it would have been equitable to order the Father to pay child support in accordance with the mathematical result which was the product of the Melson Formula. However, since the Family Court failed to acknowledge that the Melson Formula operates as a rebuttable presumption, we are unable to meaningfully review the order entered concerning the Father's 1987 support obligation. We find that the Family Court abused its discretion in not addressing the Father's contention that presumptive applicability of the mathematical result of the Melson Formula had been rebutted. Accordingly, we reverse its decision with regard to the 1987 child support order and remand that issue to the Family Court. Dalton v. Clanton, 559 A.2d at 1212.