Mathematics for imputing income.

• Author: Reiss, Jerry
• Position: Florida

A number of factors determine entitlement to permanent periodic alimony. The factors include the length of the marriage; the age and health of both spouses; the education of both spouses; and the financial resources of each party. (1) Once entitlement has been established, the amount of alimony that a court may award is calculated with one simple equation involving two parameters: the needs of the party seeking alimony and the ability of the other party to pay alimony. (2) While the equation determining the alimony award appears easy, the factors that determine the ability to pay and the need for alimony are not.

Imputing Income: When and Why

Each factor that defines or limits the need for, and the ability to pay, alimony can be thought of as an equation with two variables. One of these variables is used in defining the availability of income, or alternatively, in limiting the amount of alimony that may be paid. The second variable represents that which is defined or which limits each of the established parameters. At the end of the process, at least a dozen or more simultaneous equations exist that must be solved in order to identify the correct alimony amount. This is made possible because there is a total of one less variable than equations to solve. While the process introduces complications, these complications can be dealt with and variables solved without much error.

Trial courts, however, generally use a less precise approach. The approach of the courts works well most of the time, but it fails miserably when it must deal with one or both spouses' manipulation of income. This article examines the improper imputation of income and its effect on alimony awards.

Imputing Income to Correct Unemployment or Underemployment

In order to be eligible for imputed income, competent evidence must support a finding that the unemployment or underemployment is intentional. (3) When imputing income, the amount of income is inextricably tied to what can be achieved in the long-term. (4) The same parameters that apply to imputing income to an asset apply to both unemployment and underemployment. Note, however, that imputed income must be based upon all current circumstances. (5) Before imputing income as a replacement, there must be competent evidence to support a court finding that a job with that income is currently available and that it is reasonable that a comparable job can be found in the short-term. (6) Otherwise, only extra income that satisfies these requirements may be imputed. (7)

A party may manipulate his or her income through unemployment, underemployment, or the lack of best efforts in investing to produce income. Sometimes, however, the manipulation of income is corrected through the backdoor approach, especially where there has been an intentional dissipation of marital assets. Also, trial courts routinely impute income to a mischievous spouse to correct the intentional manipulation of income. Imputation of income in this situation is where the greatest errors occur. In part, these errors are due to a lack of standardization in the treatment of various forms of income. It is also due to a lack of understanding on how imputing income actually affects the result. Further compounding judicial error, many times the trial court does not understand the process for determining the amount of income to be imputed.

Courts often erroneously impute income when manipulation of income is possible, but has not been demonstrated. (8) Moreover, the type and amount of income that courts impute is often overstated. An overstatement of the amount of income can be overcome when the spouse obligated to pay alimony experiences good fortune following the cutoff date, (9) but it is also devastating to that spouse when he or she does not experience good fortune! The reason for this is because the valuation procedures define the measurement process. They also, however, limit the extent of the need for alimony and available income to meet that need to the present circumstances. (10) Thus, if the need for alimony is understated, it can be corrected in a modification action, but when the ability to pay alimony is overstated, the damage is irreversible. The alimony award is then inflated, used to meet a party's need for alimony, and may lead to the undesirable outcome that wealth is redistributed with alimony payments. This result occurs most often when different definitions of income apply to each party and when each party's right to preserve assets (11) depends upon the varying definitions used to apply to income.

For example, redistribution of wealth occurs when one party's income producing asset is a mortgage receivable or an annuity and the other party's main asset is a house awarded in equitable distribution. The definition invariably applicable to the owner of the mortgage or annuity is the liquidation value of that asset. Conversely, the definition applicable to the owner of the marital home is the preservation of the entire asset with the appreciation intact. These differing definitions of income can often lead to different results when a request to preserve an asset is made. Adding further confusion, trial courts fail to understand when differing definitions of income are at work because the trial court confuses an income stream with actual income. The former can be pure liquidation of an asset, whereas the latter does not at all affect principal. In the example furnished above, there is no income assigned to the house, which is why that spouse's assets increase. As a result, the alimony award is then used partly to help that spouse accumulate more assets, contrary to Mallard v. Mallard, 771 So. 2d 1138 (Fla. 2000).

Lifestyle Need Cannot Include the Full Mortgage Payment

The extent of the savings component associated with the marital home is exacerbated when the need component of the mortgage payment fails to separate and exclude the principal payment. The value of the house can increase in only two ways: active or passive appreciation. If the value of a home increases due to passive appreciation, that increase is solely the result of market forces on the home over time. If the increase in the home's value is actively funded with alimony, the alimony creates more assets and once again violates Mallard. The value of the marital home on the cutoff date is the difference between the market value of the asset and the outstanding mortgage. A decrease in the outstanding mortgage has nothing to do with market conditions. Therefore, this creates extra property that was not available on the cutoff date. When the court fails to impute income to the...