Opinion ID: 2316731
Heading Depth: 1
Heading Rank: 7

Heading: Melson Formula's Mathematical Calculation Accelerated Depreciation Rebuts Presumptive Applicability

Text: The accelerated depreciation which is at issue in this case provides a model for illustrating the equitable operation of the Melson Formula as a rebuttable presumption. Because accelerated depreciation is recognized by generally accepted accounting principles, prima facie, it should be included as a legitimate business expense when the Melson Formula is used to calculate child support. R.T. v. R.T., 494 A.2d at 155. However, the mathematical result which is produced by the Melson Formula, when accelerated depreciation is included as a legitimate business expense, must then be examined in the context of the specific facts. Dalton v. Clanton, 559 A.2d at 1212. 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. In this case, the Master concluded that it was inequitable to calculate the Father's child support payments upon the basis of the mathematical result which was produced by the Melson Formula. The Master attributed that inequity to the Melson Formula's prima facie reliance upon the generally accepted accounting principle which permits a deduction for accelerated depreciation. Since the Melson Formula's mathematical calculation must yield to the extent which is necessary to balance the equities in this case, the Master concluded that this could be accomplished by not permitting the Father to deduct any accelerated depreciation as a legitimate business expense in Step 1. We agree. Accelerated depreciation is a unique type of deduction. Although it is recognized by generally accepted accounting principles, the presumptive applicability of the mathematical result which is produced by the Melson Formula will almost always be rebutted when accelerated depreciation is included in computing the amount of net income which is available for child support. [5] Since accelerated depreciation represents an expense which is unrelated to the useful life of an asset, it is also an expense which is unrelated to the actual business need to provide for the replacement of that asset. Moreover, accelerated depreciation is an expense which does not involve any expenditure of funds. Therefore, accelerated depreciation inevitably produces a distorted view of the real business demands upon a support obligor's current financial resources, when it is included as a legitimate expense in applying the Melson Formula. [6] Consequently, in such situations, this Court has concluded that the calculations as to child support payments may be based, in part, on an equitable evaluation of what is sometimes called net disposable income or cash flow. R.T. v. R.T., 494 A.2d at 154. The manner in which the cash flow approach brought John's needs and the competing needs of the Father's business into equipoise is apparent from its effect on the operation of the Melson Formula's standard of living adjustment in Step 3. The inclusion of a standard of living adjustment within the Melson Formula is based upon the equitable predicate that, when there is sufficient income to cover the basic needs of the parents and all dependents, children are entitled to share in any additional income so that they can benefit from the noncustodial parent's higher standard of living. Thus, the standard of living adjustment is made within the Melson Formula only after a self-support reserve has been allocated to the noncustodial parent. In performing the mathematical computations of the Melson Formula, the standard of living adjustment generally means that fifteen percent of the noncustodial parent's additional net income will go toward child support payments. Eighty-five percent of that additional net income is left with the noncustodial parent. In this case, when accelerated depreciation was excluded as a legitimate business expense by the Master, the Father's net (disposable) monthly income was determined to be $4,765.92. After deducting an allowance for the Father's self-support needs and his proportionate share of John's primary support needs, the Father's additional net income was $3,486.62. The Melson Formula considers this latter amount as available for the standard of living adjustment. When the usual fifteen percent standard of living adjustment was made by the Master in this case, it resulted in an allocation of $522.99 from the additional monthly income for John, and a total monthly child support payment of $1,352.29. Consequently, the cash flow approach left $2,963.63 per month from the additional net income with the Father. The record reflects that the Master properly concluded that a cash flow evaluation would result in a balancing of the equities in this case. When the Father's child support was calculated without an allowance for any accelerated depreciation, it did not mean that all or even substantially all of his net cash flow would be transferred to child support payments, thereby leading to the eventual ruin of the Father's business by eliminating his ability to replace the greenhouses it needed. R.T. v. R.T., 494 A.2d at 155. At the same time, the cash flow approach resulted in a substantial positive increase in the child support benefits which John would receive. The trial judge of the Family Court declined to follow the Master's recommendation in the case sub judice. The trial judge ruled that since the term legitimate business expense in the Melson Formula was synonymous with any expense allowed by generally accepted accounting principles for tax purposes, those accounting principles could never be the basis for finding that the mathematical result which they produced was inequitable. Accordingly, the trial judge ordered that the Father's child support obligation should be based upon the mathematical result produced by the Melson Formula, with all of the Father's accelerated depreciation included as a legitimate business expense. The ruling by the trial judge was clearly based upon a misunderstanding of this Court's prior precedents. Even the Father and his attorney recognized that the mathematical result produced by the Melson Formula, with a full deduction for accelerated depreciation, would result in an inequitable child support award. Thus, the Father included only approximately one-half of his accelerated depreciation as a legitimate business expense in his proposed child support calculation. [7] When the Father's computation was adopted by the Family Court, the result was an order which departed from the Melson Formula, and to that extent its own prior ruling, without explanation. Thus, the Family Court's child support order was not only inequitable, but because it was inconsistent with its prior ruling without any explanation, it was not the product of a logical deductive process. Accordingly, it must be reversed.