Opinion ID: 2316731
Heading Depth: 1
Heading Rank: 6

Heading: Melson Formula Generally Accepted Accounting Principles

Text: This Court has specifically acknowledged that the Family Court is not bound by generally accepted accounting principles which apply under tax law, if the mathematical result which is produced by the Melson Formula, when those accounting principles are applied, is inequitable. R.T. v. R.T., 494 A.2d at 153. The state and federal tax laws are concerned with calculating each taxpayer's net income so that a uniform tax may be assessed. Id. at 154. The Delaware child support statutes, as implemented by the Melson Formula, are concerned with calculating a net income figure for each parent, so that a fair amount of child support may be assessed. Id. When the two approaches to net income conflict, the Family Court may depart from tax law accounting if, but only if, that departure is reasonable, fair, and practical under all of the circumstances. R.T. v. R.T., 494 A.2d at 155. See 13 Del.C. § 514(3). This Court has acknowledged that since depreciation is considered by generally accepted accounting principles to be an expense in determining net taxable income, it may also be a legitimate business expense for the purpose of computing the amount of net income which is available for child support, pursuant to the Melson Formula. R.T. v. R.T., 494 A.2d at 155. The concept of depreciation, as an expense, is a recognition of the fact that certain fixed assets, which are used in a business, wear out gradually and will eventually need to be replaced. Id. The simplest form of this concept is known as straight line depreciation. If straight line depreciation is used, the difference between the original cost of an asset and its scrap value is divided by the asset's estimated useful life. The quotient is treated as the annual depreciation expense. However, in addition to straight line depreciation, generally accepted accounting principles recognize several methods of accelerated depreciation for tax purposes, e.g., the sum of the years digits method and the declining balance method. See R.W. Hamilton, Fundamentals of Modern Business (Little, Brown and Company 1989). The accelerated methods of depreciation permit larger deductions, for tax purposes, in the early years of an asset's life. Id.