Non-custodial parents pay child support in a variety of ways.   Divorced parents should be provided with all possible options for making these payments.  Some new options have emerged both in the public and private sectors.

            Perhaps the most common way child support is paid is through an income withholding or income deduction order, which is issued to the employer of the payor, and mandates payment of support directly to the recipient.  In most states income deduction orders have been mandatory unless (1) there is a written agreement between the parties specifying an alternative arrangement, or (2) there is a court order finding good cause against it and finding that the income deduction order is not in the child’s best interest. 

            However, income deduction orders can be problematic.  If the payor is self-employed, periodically unemployed, or is paid only on commission, income deduction orders may have little effect.  Moreover, many payors do not wish to disclose to their employer their private matters. Also, some employers refuse to comply without a court order.  Further, recipients of support do not want the payor to know their bank account information, which would be necessary if the payor’s employer is to follow the income deduction order.

            Most states have established agencies for the enforcement of child support orders.   The problem is these agencies have huge case overloads, suffer intermittent backlog of work, and delay in transferring payment to recipient.  Consequently, many custodial parents have to resort to private suits for enforcement through contempt, garnishment, and use of private child support enforcement companies. Problematically, many private child support enforcement companies charge astronomical fees for their services, deducting a large percentage (as high as 34%) from the child support collected, and in addition, charge annual fees (some as much as $500).

            In reality, most divorce cases settle privately and, divorce lawyers draft settlement agreements providing for the required “alternative arrangement” for child support payment.  The settlement agreements include the amount of monthly support due, the manner it shall be paid, how often, and until when.  A paragraph should also be included in the settlement agreement that provides if payments fall behind more than 30 days, garnishment for support is allowed. 

            The most common manner of private payment is still paper check.  Of course, the worst delivery method is through the child, at the conclusion of the payor’s visitation time.  When mailed, payment by check sets up the classic problem of “the check is in the mail” and real or false accusations of late receipt. 

            Both payors and recipients of support complain that they hardly use paper checks anymore.   Payors do not want to deal with mailing support checks when they pay most bills online.  Recipients do not want to deal with waiting to get the check in the mail, driving to the bank, and waiting in line, to deposit the check. Further, if the recipient is out of town when the check arrives, the deposit will be delayed even further.

            Most people do not want to use the government agencies to transfer the support from payor to payee. The parties have been involved in the court system during the divorce process. After the conclusion of the case they want to handle things privately, outside of government involvement. The solution: payment of child support online by credit card through a private company, rather than the government. Using a rewards credit card to pay support could allow the payor to earn cash back rewards or frequent flyer points. Better yet, setting up payments on a recurring basis would be convenient to the payor. The benefit to the recipient would be receiving the full amount of support conveniently directly deposited into their account whether they are home or not on the date support is scheduled to arrive. Bringing the payment of child support into the 21st century would prevent a lot of post-divorce conflict that too often happens.

SupportCertain is the brainchild of Sue Varon, a Georgia family law attorney and her daughter, Jennifer, an accountant with a Master’s Degree.  The company was established to provide divorced parties with “the peaceful way to pay”, minimizing interaction between the parties, while providing them with a way to make and receive support directly and on time. For further information, visit www.supportcertain.comor contact SupportCertain at jennifer@supportcertain.comor at 404 551-4849.

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Factual Scenario:  The Final Judgment and Decree of Divorce has finally been executed by the parties and has been filed with the Court.  But, alas, Husband finds that Wife is not willing to pay what he is supposed to receive from her; and Wife is not forthcoming in dividing the U.S. Savings Bonds that were acquired during the parties’ marriage; and she is refusing to convey to Husband certain household goods and furnishings as directed in the Final Judgment and Decree of Divorce.

What remedies does Husband have?

The Court does not have a “police force” or “private investigators” to monitor compliance with Final Decrees or Agreed Entries.  There simply is not enough money for the Court to examine whether or not former spouses are following the mandates of their Decrees.  In order for the Court to learn about a party’s non-compliance, the former Husband must file a Motion asking the Court to find his Ex-wife in Contempt of Court for her willful failure to comply with certain terms of the Final Decree or Agreed Entry.  Another name for the same action is for Husband to file a Motion to Show Cause why Wife should not be held in Contempt of Court.  The terms “Motion to Show Cause” and “Motion for Contempt” are used interchangeably.  This is a “civil” contempt action, not a “criminal” contempt action.  The Motion must also contain other information:

1. Notice of Hearing: The Court will have to conduct an evidentiary hearing to determine if Wife should be found in contempt of Court.  The Notice will set forth the date and time of the hearing and the name of the Judge or Magistrate who shall conduct the hearing.
2. In addition to the Motion for Contempt, there must be a notice advising the former Wife that if she is found in contempt of Court, she may be ordered to pay a fine and that she may be sent to jail.  Persons accused of contempt are entitled to constitutional protections, including having an attorney represent him/her.  In all the years that I have practiced Family Law, the only times that I have seen a party sent to jail were in relation to non-payment of child support, which is the most common type of contempt proceeding.

If Wife is the non-compliant party, must Husband incur more legal expenses to take her back to Court?

Unfortunately, the answer is “yes”.  Again, the system may not seem “fair” but there are no funds or monies available to assist the wronged party.  So, the attorney must advise the potential client that there will be a filing fee involved along with expenses to have the former spouse served with the Motion and Notice of Hearing, and attorney fees to take the matter back to Court.  In Montgomery County, Ohio, the filing fee for post-Decree contempt matters is $125.00 and service of process in a contempt matter must be accomplished by personal service.

If Wife is found to be in contempt of Court, can she be ordered to pay Husband’s reasonable attorney fees and court costs incurred by him?

The Court has the authority to direct the errant Wife to pay to the former Husband his reasonable attorney fees and court costs expended by him in bringing the matter before the Court.  In fact, the threat of having to pay Husband’s attorney fees and court costs may act as an incentive to encourage compliance with the Order.  In Montgomery County Domestic Relations Court, the Local Rule allows the court to assess only a nominal $350 in attorney fees against the contemnor unless another attorney is retained to testify about the necessity and propriety of a request for additional attorney fees. Even upon expending additional money to hire another attorney to appear in Court and testify about the actual attorney fees incurred in pursuing the Contempt matter, the Court has discretion whether to Order any additional attorney fees or not.

Is it “worth it” to bring a Contempt of Court or Show Cause Action?

The answer to that question must be made on an individual case-by-case basis. The attorney and client should carefully analyze the costs associated with filing the Motion in relation to the financial value of the monies or goods being sought.  In the scenario set forth at the beginning of this article, Husband decided it was worth the legal fees and court costs to take the matter back to Court.  In that post-Decree matter, he was seeking payment of several thousand dollars and saving bonds worth approximately $25,000.  There are instances, however, where it just does not make economic sense to spend additional monies going after a “deadbeat” ex-spouse.

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Buried in DRL 240(1-b) and FCA 413(b)(5) is this often missed clause:

iv) at the discretion of the court, the court may attribute or impute income from, such other resources as may be available to the parent, including, but not limited to: … (A) any depreciation deduction greater than depreciation calculated on a straight-line basis for the purpose of determining business income or investment credits, …

I’ve seen this clause confuse judges and litigants, giving child support orders that are either too high or too low. So what exactly does this mean? In short, it means that some legitimate business deductions permitted by the IRS will not be allowed for determining income for child support.

Let’s take it one step at a time.

Straight Line Depreciation

First, what exactly is depreciation and what is meant by a straight line basis? I’m going to make up some numbers to make it easier to follow. For this example, all expenses are legitimate; there is no hidden income or artificially inflated expenses.

Let’s assume someone is self employed, and has gross revenue of $500,000 per year. Obviously, there are certain expenses associated with running a business, and those expenses should be deducted off the gross income. For example, rent, the cost of goods sold, salaries paid and utilities are all deducted off the gross income to determine profit. For this example, let’s say there are $275,000 in legitimate business expenses and all are valid deductions by the IRS. Other than depreciation, there are no other expenses. That leaves $225,000 in profit so far.

Now let’s assume the business owner purchases a new piece of equipment for $100,000. Since $100,000 was spent as a legitimate business expense, you’d think that it would be acceptable to deduct this expense from the gross income, giving a profit of $125,000.

Nope says the IRS. Even though you paid for this piece of equipment in full, you have to spread out its cost over its useful lifetime. And, the IRS being what it is, has charts saying what the useful lifetime is for every conceivable item. For this example, let’s say the IRS says the lifetime is 10 years.

So, to determine the business deduction, you divide the cost of the equipment ($100,000) by its useful lifetime (10 years) giving you a permitted deduction of $10,000 per year for 10 years. This type of depreciation gives an equal amount for each year, and if you draw a line on a chart for the annual depreciation, you get a straight line. Somebody decided to call this “straight line depreciation” So far so good. So for out example, the $225,000 in profit would be reduced by $10,000, reflecting one year’s worth of straight line depreciation.

Accelerated Depreciation

Now here’s where it starts to get complicated. In 1981, Congress said it would be a good thing to allow business owners a tax break if they bought new equipment. To accomplish this goal, accelerated depreciation was invented, otherwise known as the Accelerated Cost Recovery System, known as ACRS for short. Using hypothetical numbers, ACRS would allow our business owner to obtain more depreciation early on at the expense of less depreciation down the road. For example, ACRS might allow 60% of the cost to be deducted the first four years, 20% of the cost spread out over the next two years, and the remaining 20% spread out equally over the remaining four years. Thus, under ACRS, the depreciation might be 15%-15%-15%-15%-10%-10%-5%-5%-5%-5%.

In 1986, Congress said that ACRS needed to be changed, and modified the depreciation schedule, giving us the Modified Accelerated Cost Recovery System, otherwise known as MACRS. Using hypothetical numbers, the depreciation schedule for our machine was changed to 20% the first year, 20% the second year, 15% for the third, 15% for the fourth year, and 5% for each of the remaining years. Thus under MACRS, the depreciation would be 20%-20%-15%-15%-5%-5%-5%-5%-5%-5%.

Separate from ACRS and MACRS, there is also the Section 179 expenses, which in simple terms, allows a business to deduct 100% of the expenses associated with certain qualified property in the year in which it was purchased. And for those who have made it this far, a Section 179 expense deduction is an exception to the depreciation rule. Remember, our tax code consists of rules, exceptions to the rules, and exceptions to the exceptions.

So turning back to the example, let’s say we are using MACRS, and the equipment is in the second year of service, giving a 20% depreciation deduction. Thus, for tax purposes, the net income is $125,000 less 20% of the cost (20% of $100,000 being $20,000), for a bottom line of $105,000.

But for child support, DRL 240 (1-b)(b) (vi)(A), and its twin companion, FCA 413 (b)(5) (vi)(A) require that any depreciation over the straight line be added back in. The straight line depreciation gives 10% of the total cost, or $10,000. The business properly deducted $20,000 under MACRS. Thus, any amount of depreciation over $10,000 is added back in. As $20,000 – $10,000 = $10,000, the income for child support is properly determined to be $105,000 plus $10,000, or $115,000.

In reality, the IRS has numerous classification of property, ranging from three to twenty years for personal property, and 27.5 & 30 years for buildings.

Examples

Now for two real examples. In one case, I represented the custodial parent, and got the credit for the increased depreciation added back in when the non custodial parent’s income was determined. In another case, I represented the non custodial parent. The judge was about to disallow all depreciation expenses, since they were only “paper losses.” I showed the judge this section of the statute, and preserved the deduction, thereby lowering the child support obligation.

For both cases, I anticipated that the court may not properly apply this section of the statute, and had several hard copies of the section ready to show the court. As a practice tip to any attorney dealing with the self employed, I’d recommend doing the same, highlighting the section helps greatly too.

One final point that’s worth repeating – this section of the child support statute simply disallows a legitimate deduction. There is no artificial manipulation of income or expenses going on.

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