Family law economics, child support, and alimony: ruminations on income.

• Author: Willis, Steven J.

Part I

My economics of the family course covers the quantitative aspects of family law: Who gets what, who pays what, and why. To me, the quantitative aspects of family law and the practice of tax law are very similar. Both deal with money, income, property, who gets them and why, and how does my side keep more of them. Legions are the tax lawyers and accountants who seek to minimize income and assets to save client taxes. While doing this, they do not (or at least should not) strive to minimize client wealth, as that would be counterproductive. Instead, using legal, technical definitions of income and assets, tax practitioners minimize what is reportable and thus keep all of the nonreportable income and assets for their clients. This huge tax planning industry exists to minimize the government's approximate 35 percent tax share of income or 50 percent of assets (through estate/gift taxes).

But an ex-spouse's share of income and assets often equals--and may greatly exceed--the government's tax share. I refer to this as a "family tax." Whatever incentives exist to minimize reportable income and assets for tax purposes, also exist for alimony, child support, and property division purposes. Thus, techniques to plan income streams and asset creation for tax purposes apply to the quantitative part of a family law practice, as well as IRS techniques to detect and to defeat income or asset planning. Tax practice is often likened to a game. Analogously, game theory should help explain spousal behaviors, especially in cases of divorce planning.

This article focuses on "income" as it relates to both child support and alimony. Isolating this factor is helpful because the definition of income is critical to a child support determination and is a major factor for an alimony determination. But, the isolated focus is risky because other factors are also important. For child support, factors such as expenses, age, and special needs are also relevant. For alimony, while "income" is a major factor, its role in the calculation is far less significant than that of child support. Because a judge may consider "any factor to do equity and justice," an overemphasis on quantifiable "in come" may risk an unjust result. I believe this is unlikely, however, for two reasons. First, "need" and "ability to pay" are by far the most important factors for alimony (1) and "income" is paramount to each. Second, a court using equitable powers should consider the possibility of misleading "income" figures. To do so, the court must understand the term "income."

For child support, F.S. [section] 61.30(2)(a) defines gross income and F.S. [section] 61.30(3) defines allowable deductions. Despite the many ambiguities, at least a statutory definition exists. In contrast, for alimony purposes, F.S. [section] 61.08(2)(g) provides that "all sources of income available to either party" are relevant, but fails to define "income" for purposes of alimony. Presumably, the child support definition would apply--after all, the parties file a single financial affidavit, used for both purposes. The child support statute is deceptively detailed, including 14 specific items as gross income. (2)

The statute defines "gross income" but uses both gross and net figures, as discussed later. Neither the statute nor the related financial affidavit3 provides explicitly for losses--such as those from a business. Presumably, these constitute negative income; however, traditional tax and financial accounting uses of the term "gross income" would not include such losses. Instead, losses would be a factor in net income. Anecdotal evidence suggests that tax definitions of income and other terms are relevant for family law purposes; however, the unusual use of the term "gross income" to lead the statutory definition, followed by the inclusion of net numbers, calls such evidence into question. If we do not rely on a tax definition of "gross income," then why would we use tax concepts at all?

Additionally, the statute fails to list any accounting principles. Tax and financial accounting both require consistency of accounting methods from year to year. For tax purposes, any taxpayer, or for financial accounting purposes, any audited company, could not change their depreciation or inventory methods without violating the consistency principle. Presumably, this would also be the case for family law. Without such a rule, a potential payer of child support or alimony could easily manipulate income by changing various accounting methods during the relevant periods. But if the consistency principle applies, where is the statute or court decision that says so?

The statute generally fails to require any particular method of accounting. (4) In contrast, financial accounting requires (for external reporting) the complicated accrual method. (5) Tax law sometimes requires the accrual method, but generally permits, for individuals, the cash method. (6) The child support statute appears to use the cash method for some items--such as for retirement and annuity payments; however, it fails to discuss a method of accounting for major items such as business income, rental income, or trust income. Without a defined method of accounting--or clear rules for favoring one method over another--the statute leaves much room for manipulation and confusion. The following categories are confusing and are discussed below.

1) Salary or wages: Initial observation suggests this category relies on the cash method of accounting: Salary and wages are income during the year received. Yet for many individuals, deferred or prepaid compensation is commonplace. Suppose, for example, in 2001 husband/ father received $100,000 as an advance payment for work to be performed over several years. Would that be income in 2001 for family law purposes? Financial accounting would spread the income out over the period that the work is supposed to be performed, while tax law would include the full value in the year the payment is received. For family law purposes, it probably should be spread over the time earned, as that would involve the periods to which it properly relates (particularly in relation to asset division). But that necessitates the accrual method of accounting, which would need to be applied consistently from year to year and from item to item (including deductions) if the measure of income is to be fair. The many difficulties of accrual accounting suggest that the cash method may be better, but under this method, the $100,000 would count as income during the year it is received.

That solution, however, presents two other problems. First, it permits spouses to accelerate income in advance of a planned (but likely undisclosed) divorce, effectively removing the income from the relevant base periods. Second, it permits spouses to defer income to years following a divorce. While such...