Opinion ID: 1130042
Heading Depth: 3
Heading Rank: 2

Heading: The superior court erred in accepting the Master's clearly erroneous child support calculation.[3]

Text: After hearing testimony and receiving evidence, the Master concluded that Robert's modified support obligation should be $535.01 per month. In arriving at this figure, the Master disallowed approximately $7,020 worth of claimed expenses submitted by Robert. Robert argues that the Master, as well as the superior court by virtue of its adoption of the Master's report, erred in two ways: (1) as a matter of law, it was improper for the Master to disallow business expenses that are otherwise allowable under the Internal Revenue Code; and (2) in any event, the Master's factual findings were clearly erroneous. In considering Robert's claim that the Master improperly disallowed over two-thirds of his claimed business expenses, the commentary to Civil Rule 90.3 is instructive: Self-Employment Income. Income from self-employment .. . includes the gross receipts minus the ordinary and necessary expenses required to produce the income. Ordinary and necessary expenses do not include amounts allowable by the IRS for the accelerated component of depreciation expenses, investment tax credits, or other business expenses determined by the court to be inappropriate. Civil Rule 90.3 Commentary, III(B). [4] Robert argues that lacking any guidelines for what constitutes an ordinary and necessary expense, or for what constitutes an inappropriate expense, the superior court should accept those deductions which the IRS allows self-employed persons pursuant to the Internal Revenue Code, provided there is no evidence of fraud. In this vein, Robert argues that there should be a rebuttable presumption that business expenses reported to the IRS are ordinary and necessary for the production of income for purposes of child support determinations. We have addressed the question of whether it is proper for a parent to deduct business expenses in the context of determining income for purposes of Rule 90.3. In Ogard v. Ogard, 808 P.2d 815 (Alaska 1991), this court, while recognizing that total deference to a parent's tax returns may pose problems, nonetheless held that straightline depreciation is an allowable deduction under Civil Rule 90.3: Furthermore, while we acknowledge the court's concerns regarding the accuracy of an income tax return as a reflection of true income, the technique the court employed did not allow sufficient recognition of appropriate business expenses.... Depreciation is a means of reflecting on an annual basis the costs of capital equipment. Such costs are real and should not be disregarded unless it appears that equipment was acquired in order to avoid or reduce the obligor's child support obligation. Id. at 819. See also Eagley, 849 P.2d at 781 (We therefore hold that in the context of a Civil Rule 90.3 adjusted income determination, the superior court should allow, as ordinary and necessary business expenses, a deduction for straightline depreciation of the parent's business' real estate.). This court also addressed the issue of claimed business expenses in Coghill v. Coghill, 836 P.2d 921 (Alaska 1992): [T]he [superior] court disallowed deductions for certain expenses relating to use of an automobile, work clothing, meals, a home office, and imputed taxes.... In our view [appellant] misunderstands the superior court's denial of his various deductions. The court was not implying that his expenses ... were not legitimate business expenses. Rather, the court recognized that such expenses reduced [appellant's] living expenses. Here, where the meals were consumed by [appellant] and where the type of clothing purchased by [appellant] was not significantly different from the clothing purchased by most Alaskans, the superior court properly disallowed deductions for these and other expenses for the purposes of computing Civil Rule 90.3 income. Id. at 926. Though Judith takes this to mean that Rule 90.3 limits business expenses beyond what is allowed by the IRS, a closer reading of Coghill reveals that the holding was fact specific. Id. at 926 n. 6. The distinguishing factor in Coghill, as illustrated above in reference to clothing, was that the disallowed business expenses would have been otherwise incurred. Id. That is, in Rule 90.3 parlance, the expenses were not ordinary and necessary expenses required to produce ... income. Rule 90.3 Commentary, III(B). In Coghill, the superior court made specific findings that the claimed expenses were in fact personal, a distinction lacking in the case at bar. Id. In Zimin, 837 P.2d at 118, this court held that a parent's contribution to a Capital Construction Fund was not an allowable deduction for Rule 90.3 purposes. Id. at 122-23. Significantly, the $25,000 contribution at issue, unlike accelerated depreciation, is not the type of expense that the commentary expressly disallows. Furthermore, under federal law, the contribution was deductible from the parent's reportable income. Id. at 120 & n. 2. Nonetheless, we held that [s]ince the goal of the Rule 90.3 guidelines is to obtain a realistic estimate of an obligor's adjusted annual income, these funds should be included in [the obligor's] 1990 income for the purposes of calculating child support. To hold otherwise would severely understate [appellant's] most current income figures. Id. at 123. Two propositions can be gleaned from these decisions: (1) this court, in contrast to Robert's suggestion, has refrained from adopting a bright line test that all expenses recognized by the IRS are similarly recognized under Rule 90.3; [5] and (2) instead of a hard and fast rule, the determinative factor as to whether a claimed expense is deductible under Rule 90.3 is whether it is an ordinary and necessary expense[] required to produce the income and whether the allowance of such an expense would defeat the goals of Civil Rule 90.3. Thus, insofar as Robert's claimed expenses are necessary for producing his income, they are deductible under Rule 90.3. In this light, a parent's tax return serves two functions. First, as evidence, it indicates whether a claimed expense was in fact incurred. Second, it may support a parent's claim that a given expense is ordinary and necessary. It does not, however, serve as a proxy for the necessary determination of whether a claimed expense was ordinary and necessary, though there will be significant overlap. In the case at bar, as we previously noted, the Master disallowed over two-thirds of Robert's claimed business expenses. In so doing, the Master deferred to Judith's testimony at hearing and accepted her objections in toto. As the Master stated in his report: Then [Judith] took his claimed business expenses for that eight month period and did her own review of their applicability. Her testimony went through each of his claimed expenses. Her testimony was convincing that his claim of $10,334.98 in business expenses for the eight month period was excessive. She was persuasive that only $3,315.62 of his claimed business expenses would be applicable to the child support computation. Judith's review of Robert's claimed expenses consisted of an analysis of Robert's banking records as well as the underlying components of each expense item. Some of her assertions were supported. She noted that Robert claimed $179 for dues and publications expenses, which included a subscription to Surfer Magazine, and that Robert claimed hundreds of dollars for professional expenses that actually consisted of a debt for legal services stemming from his personal bankruptcy. However, most of Judith's assertions amounted to little more than her unsubstantiated opinion as to what constituted a valid expense. For instance, she testified that Robert's claimed rental expense of $3,552.50 should not be allowed because that is not an allowable expense for self-employed people who work out of their home. [6] Judith disallowed Robert's claimed expenses for repairs and maintenance as well as his utility expenses on the same grounds. As for expenses related to Robert's vehicle, the Master endorsed Judith's seemingly arbitrary claim that only one-half of such expenses should be allowed since Robert also uses his vehicle for personal use. [7] On this record, it is clear that the Master erred. For reasons discussed above, Robert's expenses, insofar as they were ordinary and necessary, should be allowed under Rule 90.3. Though deductions for a home office should be subject to scrutiny, [8] they should not be categorically disallowed. Accordingly, to disallow all deductions for rent, utilities, and repairs, when the record clearly indicates that such expenses occurred and were necessary, is error. Unlike Coghill, there is no evidence here that Robert's claimed rental and vehicle related expenses would have been incurred in any event. In fact, the only evidence presented indicates that these expenses would have been avoided but for Robert's income producing activities. The basis for holding that Robert is entitled to a rental deduction for his home office is not that the IRS recognizes such a deduction. Instead, the basis is that the record clearly demonstrates that his allocated rental expense is ordinary, necessary, and reasonably calculated. [9] Similarly, the Master's adoption of Judith's arbitrary allotment of 50% of Robert's vehicle expenses, in light of the evidence to the contrary, is in error. Accordingly, Robert's rent and vehicle related expenses should be held to be deductible. [10] In addition to erroneously determining Robert's allowed business expenses, the Master erred in his allocation of taxes under Rule 90.3(a)(1)(A), which states: (1) Adjusted annual income as used in this rule means the parent's total income from all sources minus: (A) mandatory deductions such as federal income tax, social security tax, mandatory retirement deductions and mandatory union dues. In short, the Master made two additional errors: (1) he computed Robert's social security tax at 7.65%, though the rate for self-employed persons is 15.3%; (2) he failed to consider Robert's State of California income taxes, an expense no less mandatory than the others listed in Rule 90.3(a)(1)(A). Finally, Robert also claims that the Master erred in computing the income side of his support calculation. Specifically, he argues that it was error for the Master to project his income for eight months of 1993 for the whole year, since he earns less money from September to December. Though Robert did present some evidence that the basis for the Master's projection was flawed, we conclude that the Master's proration of Robert's income was not clearly erroneous and it does not reflect an abuse of discretion. [11] See, e.g., Coghill, 836 P.2d at 926 (the superior court properly exercised its discretion and, on the basis of the most complete evidence before it, chose the best indicator of [appellant's] future earning capacity); Renfro v. Renfro, 848 P.2d 830, 833 (Alaska 1993) (This court has approved of an averaging approach when a parent's future earnings are uncertain.).