The recent Pennsylvania Superior Court case of Murphy v. McDermott provides the family law practitioner with reminders and clarifications as to calculating a party's income for support purposes. The Murphy case focuses on four main issues: whether a parent should be obligated to contribute toward private school tuition; whether one-time stock options exercised in one year should be imputed as income for future years; the calculation of perquisites as income, specifically the personal use of a company-provided vehicle; and whether a withdrawal penalty should be factored into the inclusion of an employer's gross contribution to an employee's 401(k) and stock accounts.
Private school tuition is always a hot topic among family law practitioners regarding calculating child support. When calculating child support, a party's contribution to private school tuition is an additional expense added to the basic child support calculation. Pursuant to Pa. R.C.P. 1910.16-6(d), if the court determines that private school is reasonable, the expense of the private school is allocated between the parties in proportion to their net incomes. According to Pennsylvania case law, "A private school education may be a reasonable expense if: (1) it is established the child will benefit; and (2) private school 'is consistent with the family's standard of living and station in life before the separation.'" In the present case, James McDermott appealed the trial court's decision to include in his monthly support payment a monthly contribution toward the private school tuition of the parties' minor child, as noted in the opinion.
Specifically, McDermott raised two arguments on appeal regarding this issue: "whether there was sufficient evidence of a benefit to the minor child to find award of private school tuition as proper and whether the evidence established that private school is consistent with the parties' standard of living and station in life prior to separation," according to the opinion. The Superior Court addressed both of McDermott's private school issues together.
In the present case, the parties were never married, and McDermott "disagreed" with the mother's decision to enroll the child in a preschool program. Regardless, McDermott voluntarily paid $1,400 of the $1,980 cost of the 2005-06 school year tuition, the opinion noted. "For the 2006 – 2007 school year, mother enrolled the child in the same school's pre-kindergarten program. Father again 'did not agree' with the decision."
McDermott did not voluntarily contribute to pay for the 2006-07 year tuition expense, the opinion noted. Colleen Murphy, the mother, intended to enroll the child in a related school's kindergarten program (a new school consisting of five Catholic schools consolidated into one school). McDermott testified that he had a philosophical objection to the child attending private school rather than a financial objection, though the opinion states that McDermott later complained that the trial court mischaracterized his objection to the private school as philosophical as opposed to financial.
The Superior Court found that the first prong of the private school analysis was met in that it would be beneficial for the child to continue in a school system that is composed, in part, of his old school. The Superior Court stated: "That he will presumably rejoin some of his classmates from pre-K, and enjoy a similar academic philosophy as the prior school."
The Superior Court in addressing the second prong of the private school test, found that the child attending private school is consistent with the child and parents' station in life. The Superior Court stressed that the child has known only private school, and that the record reflects that McDermott's contribution toward the private school poses "little, if any, financial burden on father." Therefore, the Superior Court affirmed the trial court's decision to include a contribution toward private school in McDermott's support order.
The next issue on appeal pertained to the trial court imputing income to McDermott for stock options that were exercised in a prior year.
The facts on this issue are as follows: In 2007, McDermott exercised two stock options totaling $23,276.67, according to the opinion. The trial court included the two stock options and an additional unexercised stock option valued at $11,000 in calculating father's 2007 income. The court then included the same income in determining McDermott's 2008 support obligation. McDermott appealed and argued that this was an error by the trial court. Stock options are a form of deferred income. Pursuant to MacKinley v. Messerschmidt , a parent is imputed with the monetary gain from exercising stock options regardless of whether the parent declines to exercise the stock options. Said rationale is based on the fact that the parties' earning capacities are considered when calculating support. In the present case, the trial court erred because it calculated McDermott's support obligation from 2007 forward based on his 2007 earnings, which included the imputed one-time stock option income. This created a support obligation for future years based on a one-time increase in earnings that was limited to a single year (2007).
The next issue pertained to the calculation of McDermott's income in 2006 and 2007 regarding his company-issued vehicle. McDermott admitted that 40 percent of the time he used the car for personal use. The record also reflects that McDermott's employer deducts a total of $1,820 per year from his paycheck for the use of the company-issued vehicle. McDermott's employer pays $16,798.65 per year for McDermott's vehicle. The issue that arose in this case was the mathematics in carving out the credit to McDermott as well as his personal use of the car when calculating his income. The trial court subtracted McDermott's $1,820 yearly contribution from the gross amount that the employer paid for the car and took 40 percent of that number to reach the net perquisite that McDermott received, which was added to his yearly income. The Superior Court found that the trial court erred in its calculation. The Superior Court held that the proper method of calculating the perquisite was to take the gross amount that the employer paid for the car, subtract 40 percent from that amount and then give McDermott a dollar-for-dollar credit in the amount that he pays to his employer for personal use of the car ($1,820). The net result of the calculation is imputed as income to McDermott for calculating support.
The last issue on appeal pertained to employer contributions toward an employee's 401(k) and stock accounts. In the present case, the trial court included the gross amount of the employer's contribution to the 401(k) as income to McDermott. After analyzing Portugal v. Portugal , the Superior Court found that the trial court erred "by not accounting for the withdrawal penalty when it included the employer's gross contributions to McDermott's 401(k) and stock accounts." The Superior Court, citing Portugal , also provided that "taxes attributable to the withdrawal of the employer's 401(k) and stock contributions, however, are not considered part of the income calculation."
The Superior Court vacated the trial court's order and remanded the case for recalculation of McDermott's net income and support obligation. Judge James J. Fitzgerald III concurred and dissented with the majority. The judge's dissent focused on the issue of the private school payment, and concluded that the record contained insufficient evidence to establish that the child would benefit from the private school.
This case is important for the family law practitioner for a number of reasons. It reiterates the test to be applied for private school tuition regarding child support. It can be used to defend against the argument that because the parties were never married a private school tuition contribution cannot be added to a support order because there is no family standard of living and station of life prior to separation. As evidenced by this case, as well as others before, such an argument does not necessarily preclude the obligee from receiving a private school tuition contribution from the obligor. This case also reiterates that stock option income cannot be included as income in years subsequent to the year that it is imputed as income. Lastly, this case reminds the practitioner that employer perquisites and contributions to the employee's 401(k) and stock accounts are included as income for support purposes, and that the employer contributions to 401(k) and stock accounts should be reduced by the withdrawal penalty that the employee would incur.
Michael E. Bertin is an associate in the Philadelphia law firm of Obermayer Rebmann Maxwell & Hippel. He is co-chairman of the custody committee and a member of the executive committee of the family law section of the Philadelphia Bar Association, and a member of the executive committee and council of the family law section of the Pennsylvania Bar Association.
This article is reprinted with permission from the October 19, 2009, issue of The Legal Intelligencer. © 2009 Incisive Media US Properties, LLC. Further duplication without permission is prohibited. All rights reserved
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