LISA ANN CLARY (NOW BARRON) v. JAMES A. CLARY
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RENDERED:
AUGUST 31, 2001; 10:00 a.m.
TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1999-CA-002969-MR
LISA ANN CLARY (NOW BARRON)
APPELLANT
APPEAL FROM HENDERSON CIRCUIT COURT
HONORABLE STEPHEN A. HAYDEN, JUDGE
ACTION NO. 86-CI-00115
v.
JAMES A. CLARY
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE:
DYCHE, JOHNSON AND McANULTY, JUDGES.
JOHNSON, JUDGE:
Lisa Ann Clary has appealed from an order of the
Henderson Circuit Court entered on November 15, 1999, which
denied her objections and adopted the Domestic Relations
Commissioner’s recommendation involving the calculation of her
former husband’s income for purposes of determining child
support.
Having concluded that the trial court erred by
prorating the capital gain on the sale of James’ real estate over
his remaining work-life expectancy for inclusion in his “gross
income” for determining child support, we reverse and remand.
The parties were married in 1982 and divorced in 1987.
During the marriage, the parties had one son, who was born in
August 1983.
During the marriage, James was a self-employed
farmer, working with his father and brother.
Under the April
1987 decree of dissolution, Lisa was awarded sole custody of
their child and James was ordered to pay $45.00 per week in child
support.
In March 1992, James’ child support obligation was
increased to $75.00 per week.
In November 1995, James’ child
support payment was reduced to $50.00 per week.
In January 1998,
the trial court modified the custody arrangement to joint custody
with Lisa having primary physical possession of the child and
James paying $50.00 per week child support.
In August 1999, Lisa filed a motion seeking an increase
in child support under KRS1 Chapter 403 based on a change of
circumstances.
She alleged that James had increased income from
a capital gain on the sale of realty.
James and his second wife,
Mary, had purchased a tract of land in 1990, on which they
conducted farming operations.
In early 1998, James and Mary were
approached about selling their farm property as part of an
industrial economic development project.
They received
$80,000.00 for granting a purchase option to the West Kentucky
Regional Development Authority.
The Development Authority
decided to exercise the option; and on October 14, 1998, it
purchased the 392.26-acre farm from James and Mary for
$792,800.00, which included the $80,000.00 option fee.
As
reported in their 1998 tax return, James and Mary realized a
capital gain of $620,181.00 on the real estate sale.
On August 19, 1999, Lisa filed a motion to modify child
support seeking an increase in James’ support obligation.
1
Kentucky Revised Statutes.
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She
asserted that his income had increased by virtue of the sale of
his farm.
James’ response acknowledged that he and his wife had
realized a $620,000.00 capital gain on the sale of their farm
property and he indicated that after paying some debts, they
retained $400,00.00 for purposes of investment through the
services of the Old National Bank.
He stated that the first year
he had received a return of approximately $7,300.00 on the
investment.
James also said that he was employed by Crop
Production Services earning $10.00 per hour, with monthly
earnings of $2,388.00, and that he received $360.00 per year
rental income on a six-acre tract of land he still owned.
James
opposed any increase in his child support payments on the grounds
that the capital gain received on the sale of his property was a
one-time event.
On September 7, 1999, the Commissioner held a hearing
on the motion to increase child support.
Lisa’s attorney argued
for inclusion of one-half of the capital gain from the sale of
the realty as income for the year it was received by James in
applying the child support guidelines in KRS 403.212.
James
argued that these circumstances did not qualify for modification
of child support under KRS 403.213(1), which requires a showing
of “a substantial and continuing change in circumstances.”
He
asserted that his child support obligation should be based on his
regular recurring sources of income, e.g., wages, rental income
and investment income, and not the capital gain from a one-time
sale of property.
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On October 15, 1999, the Commissioner issued a report
with a recommendation that one-half ($310,090.00) of the capital
gain realized on the sale of the realty be included in James’
income, but that this amount be prorated over his remaining worklife expectancy to age 65.
The Commissioner recommended as
follows:
The Commissioner finds the Respondent’s
[James’] portion (one-half) of the capital
gain must be included in his gross income for
purposes of calculating child support,
however, the Commissioner further finds this
particular event to be an anomaly and that to
include the entire amount as gross income for
one year, making his gross monthly income
from this asset $25,833.33 (according to
Petitioner’s figures) would be unjust and not
a fair representation of his monthly income.
There is no prior history of such a high
income and there is no proof there will ever
again be such a high income, figured on a
monthly basis. The commissioner finds, that
this is a “once in a lifetime” capital gain,
and should be prorated over the usual work
life expectancy of sixty-five (65) years.
Since the Commissioner was unsure of James’ age, she
deferred calculating a firm child support amount at that time.
On November 1, 1999, Lisa filed objections to the Commissioner’s
report concerning the calculation of James’ gross income.
did not file objections to the Commissioner’s report.
James
On
November 8, 1999, the circuit court conducted a hearing on Lisa’s
objections to the report during which the parties restated the
arguments raised before the Commissioner.
Following the hearing,
the trial court summarily denied the objections and effectively
adopted the Commissioner’s report and recommendation.
appeal followed.
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This
In 1990, the Legislature enacted the Child Support
Guidelines,2 which created a rebuttable presumption that the
guideline amount is the appropriate amount of support in
determining child support.3
The guidelines are based on the
Income Shares Model under the theory that a child should receive
as child support the same proportion of parental income that the
child would have received had the parents lived together as an
intact, two-parent family.4
The guidelines table setting forth
the applicable child support obligation is based on the combined
adjusted parental gross income of both parents.
The trial court
has discretion to deviate from the guidelines “where their
application would be unjust or inappropriate.”5
The test for
abuse of discretion in reviewing the trial court’s decision is
whether the decision was arbitrary, unreasonable, unfair, or
unsupported by sound legal principles.6
KRS 403.211(3) requires a trial court to make a written
finding that application of the guidelines would be unjust or
inappropriate in a particular case and it lists seven situations
2
KRS 403.210 et. seq.
3
See generally KRS 403.212(3) and KRS 403.213.
4
Downing v. Downing, Ky.App., 45 S.W.3d 449, 455 (2001); see
also 16 L. Graham and J. Keller, Kentucky Practice: Domestic
Relations Law, § 24.15 at 232 (2d ed. 1997); KRS 403.211(2).
5
KRS 403.211(2); Redmon v. Redmon, Ky.App., 823 S.W.2d 463,
465 (1992); Rainwater v. Williams, Ky.App., 930 S.W.2d 405
(1996).
6
Goodyear Tire and Rubber Co. v. Thompson, Ky., 11 S.W.3d
575, 581 (2000); Commonwealth v. English, Ky., 993 S.W.2d 941,
945 (1999).
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justifying deviation, including where the parents’ combined
income exceeds the guideline amounts and any similar factor of an
extraordinary nature that would make application of the
guidelines inappropriate.7
At the same time, “a trial court does
not have the discretion to deviate from the guidelines simply
because it thinks the Legislature erred in setting the
appropriate levels.
Nor does it have the discretion to ignore
the guidelines because it feels that important factors were
ignored by the Legislature.”8
Since the interpretation of a
statute is a legal question, the trial court’s interpretation is
subject to de novo review by an appellate court.9
Lisa argues that the trial court erred in calculating
James’ “gross income” for purposes of determining child support
by prorating James’ portion of the capital gain on the sale of
his farm over his remaining work-life expectancy (approximately
twenty-eight years).
She relies on the specific inclusion of
capital gains in the statutory definition of “gross income.”
KRS 403.212(2)(b) states in relevant part:
“Gross income” includes income from any
source, except as excluded in this
subsection, and includes but is not limited
to income from salaries, wages, retirement
and pension funds, commissions, bonuses,
dividends, severance pay, pensions, interest,
7
KRS 403.211(e) and (g).
8
Keplinger v. Keplinger, Ky.App., 839 S.W.2d 566, 568
(1992). See also Commonwealth, ex rel. Marshall v. Marshall,
Ky.App., 15 S.W.3d 396, 400-01 (2000).
9
Hardin Co. Schools v. Foster, Ky., 40 S.W.3d 865, 868
(2001); Revenue Cabinet v. Hubbard, Ky., 37 S.W.3d 717, 719
(2000).
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trust income, annuities, capital gains,
Social Security benefits, workers’
compensation benefits, unemployment insurance
benefits, disability insurance benefits,
Supplemental Security Income (SSI), gifts,
prizes, and alimony or maintenance received
(emphasis added).
Lisa argues that James’ capital gain of $310,090.00 should be
included as income in the year it was received on an annualized
basis of $25,833.3310 per month.
She asserts it would be unjust
to allow James to “enjoy financial prosperity while depriving his
son the proper support.”
On the other hand, James contends the trial court did
not abuse its discretion in determining his child support
obligation.
He relies upon KRS 403.213(1), which states that a
court may modify child support “only upon a showing of a material
change in circumstances that is substantial and continuing”
[emphasis added].
James argues that the calculation of child
support is based on the parents’ actual income on a continuing
basis.
He asserts that the capital gain he received was an
extraordinary, nonrecurring event whereby he was able to profit
from owning property which increased dramatically in value
because of the development of an industrial park.
Although he
admits that capital gains are included in the definition of gross
income, he contends that only capital gains received on a
recurring or regular basis should be included for determining
child support.
James argues that since his capital gain should
10
This figure represents only the capital gain and not the
other items of income including salary and rental income.
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not have been included at all, the trial court did not err in
including it on a prorated basis.
We note that while this precise issue is an issue of
first impression in Kentucky, courts in other jurisdictions
generally have construed child support statutes to include
nonrecurring income.11
For example, in Helbling v. Helbling,12
the Court held that money received by the father for relocation
moving expenses should be included as income despite the fact
that it was nonrecurring.
Courts, by necessity, rely on past
information about a child support obligor’s
income when calculating child support
amounts. Past income is generally the best
predictor of future income and child support
is based upon income. The guidelines broadly
define “income” to include not only wages and
salaries, but nonrecurrent payments such as
bonuses, severance pay, capital gains, and
gifts and prizes. . . . There is no
deduction from gross income, however, for
nonrecurrent payments. No matter whether a
payment is recurrent or not, the guidelines
require that courts consider an obligor’s net
income “from all sources” when calculating
child support [citations omitted].13
11
This Court recently thoroughly addressed the various
factors a trial court should consider in setting child support
when the combined parental gross income exceeds the highest level
set out in the guidelines. Downing, supra.
12
541 N.W.2d 443 (N.D. 1995).
13
Id. at 447. See also Longtine v. Yeado, 567 N.W.2d 819
(1997)(holding capital gain on house after receipt of insurance
proceeds following destruction of house by fire was income). But
see Burnette v. Bender, 184 Ariz. 301, 908 P.2d 1086
(Ariz.Ct.App. 1995)(capital gain on sale of commercial fishing
boat not required to be included as income because not a
continuing change in circumstances).
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In In re Marriage of Zisch,14 the Court held that a
$262,000.00 capital gain from the sale of stock should be
included in the father’s income for determining the modification
of child support.
It stated that under the child support
statutes, capital gains were specifically included in the
definition of “gross income.”
The Court noted that the statutes
did not directly address the issue and prior cases had approved a
variety of approaches to accounting for the receipt of money from
nonrecurring sources.
The Court held that capital gains should
initially be included in the recipient’s gross income for the
year received, but the trial court could exercise its discretion
to deviate from the guidelines in determining the ultimate child
support obligation.15
It stated that any deviation must be
accompanied by findings specifying the reasons for the deviation,
and that income generated from the capital gain in later years
should be included in the obligor’s income.
The Court held that
receipt of the capital gain constituted a “substantial and
continuing” change of circumstances subject to modification, and
rejected the trial court’s approach of prorating the capital gain
over the father’s expected lifetime.16
14
967 P.2d 199 (Colo.Ct.App. 1998)
15
Id. at 203, See also In re Marriage of Campbell, 905 P.2d
19 (Colo.Ct.App. 1995).
16
Cf. Alexander v. Alexander, 34 S.W.3d 456 (Tenn.Ct.App.
2000) (holding capital gains on sale of stock should be included
in gross income for child support, but prorated amount over
number of years stock generating the gains were held by the
father); Mehne v. Hess, 4 Neb.Ct.App. 935, 553 N.W.2d 482
(1996)(discussing various approaches to allocation of lump sum
(continued...)
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In Howe v. Howe,17 the Court held that a $10,000.00
Christmas gift should be included in the father’s gross income in
determining modification of child support.
It relied on the fact
that gifts were explicitly included in the statutory definition
of gross income, which includes “all income from all sources.”
The Court noted that once the gift was included as income, the
trial court had discretion to deviate from the presumptive
guideline child support obligation if it would be unjust or
inappropriate.18
Moreover, when determining child
support, the emphasis should be on including,
not excluding, income especially where
including the income more accurately reflects
a parent’s economic condition and financial
circumstances for that year. Father can seek
a modification in child support payments for
the next year, if and when his income no
longer includes such gift proceeds. Indeed,
it is the payor parent’s obligation to seek
modification when a change in circumstances
occurs. The trial judge is not required to
speculate as to what the circumstances may be
in the future.19
James analogizes his situation to that of a lottery
winner and argues that his capital gains should not be included
16
(...continued)
personal injury settlement and choosing to prorate amount over
remaining minority of the children); Darby v. Darby, 455
Pa.Super. 63, 686 A.2d 1346 (1996)(holding lump sum personal
injury settlement should be included in father’s gross income in
year received).
17
30 Va.App. 207, 516 S.E.2d 240 (1999).
18
Id. at 216, 516 S.E.2d at 245.
19
Id. See also Gardner v. Yrttima, 743 N.E.2d 353
(Ind.Ct.App. 2001)(finding inheritance should be included as
income and may amount to substantial and continuing change in
circumstances for modification of child support).
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in a single year.
He claims that lump sum lottery winnings are
prorated over a term of years rather than in a single year.
However, a review of the case law contradicts this approach to
handling lottery winnings in child support cases.
In In re Marriage of Bohn,20 the Court held that the
$816,000.00 received by the father who chose the cash option on a
$1.2 million lottery prize should be included in his gross income
for child support purposes.
The Court refused to create an
exclusion for lottery winnings from the broad statutory
definition of “gross income” and indicated the trial court had
the discretion to deviate from the guidelines in determining the
actual child support obligation.21
The Court held that the
principal amount of the winnings should be included in the year
received and that any additional income received in subsequent
years from investment of the principal amount should also be
included as income when received.22
On the other hand, lottery
winnings received in periodic payments over a fixed number of
years generally are included as income in the year each payment
is received.23
James’ argument that lottery winnings received in
a discounted lump sum generally are treated the same as periodic
payments is erroneous.
Unlike periodic payments, a recipient of
20
8 P.3d 539 (Colo.Ct.App. 2000).
21
Id. at 541.
22
Id.
23
See e.g., Pratt v. McCullock, 100 Ohio App.3d 479, 654
N.E.2d 372 (1995); In re Marriage of McCord, 910 P.2d 85
(Colo.Ct.App. 1995)
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a lump sum amount has immediate access to the funds and therefore
recognition of the entire amount as income the year received is
appropriate.
We believe the analysis and approach provided in the
cases in the above discussion are consistent with the Kentucky
Child Support Guidelines.
KRS 403.212(2)(b) defines “gross
income” broadly to include income from any source and explicitly
includes capital gains.
The statues do not specifically exclude
nonrecurring income and the list includes items, i.e., bonuses,
gifts, severance pay, and prizes, that are typically singular,
nonrecurring events.
To justify modification of child support,
KRS 403.213(1) requires a material change in circumstances that
is substantial and continuing.
We believe the receipt of a
substantial amount of money that is available to the recipient
for a continuing period of time constitutes a material change of
circumstances.
Under KRS 403.213, a 15% change in the amount of
child support due creates a rebuttable presumption of a
substantial change of circumstances.
We hold that when a parent
receives income from a nonrecurring event, the trial court should
include that amount in the year received and then apply the
guidelines pursuant to the table in KRS 403.212 to determine the
child support obligation.
The trial court has discretion to
deviate in determining the child support obligation, especially
where the combined adjusted parental gross income exceeds the
uppermost levels of the guideline table.
Among the factors the
trial court should consider are the reasonable and realistic
needs of the child, the standard of living the child enjoyed
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during the marriage, and the financial circumstances of the
parents.24
Thus, we hold that the trial court abused its
discretion by prorating the capital gain over James’ work-life
expectancy.
The trial court’s decision was based on the fact
that the capital gain was a one-time event and that including the
entire amount in one year would be an unjust and unfair
representation of his monthly income.
While we recognize the
trial court’s concerns, the fact is that James received the
entire amount in a lump sum and he had immediate access and
control over it.
He spent a portion of the amount received and
retained $400,000.00 for investment purposes.
The Child Support
Guidelines require the inclusion of money from a broad range of
sources in the parents’ gross income including regular earnings
and nonrecurring events.
The potential for unfairness is
mitigated by the trial court’s authority to deviate from the
guidelines in the ultimate determination of the child support
obligation of each parent on a case-by-case basis.
In addition,
upon a motion to modify the trial court may adjust the child
support obligation to reflect the fluctuation in income that
results from an unusual or nonrecurring event.
The trial court’s
attempt to prorate the large capital gain over an extended period
in the first instance is contrary to the statutory definition of
gross income.
Furthermore, in this case, James’ child support
obligation will terminate in August 2001 when the parties’ child
24
KRS 403.212(5); and Downing, supra at 456-57.
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reaches age eighteen unless he is still attending high school.25
The trial court’s decision substantially precluded the child from
enjoying the benefits of the increase in James’ financial
resources.
Consequently, we hold that the trial court erred in
prorating the capital gain over James’ work-life expectancy.
In conclusion, we affirm the trial court’s order to the
extent that James’ portion of the capital gain on the sale of his
farm was included in his gross income, but reverse its decision
to prorate the amount over his work-life expectancy.
On remand,
the trial court in calculating the parties’ annual monthly income
and in applying the guidelines should include James’ share of the
capital gains for the year it was received, as well as James’
wages and rental income.
The trial court then has the authority
to deviate from the guideline amounts by making specific written
findings on the record that application of the guidelines would
be inappropriate or unjust.
For the foregoing reasons, the order of the Henderson
Circuit Court is reversed and this matter is remanded for further
proceedings consistent with this Opinion.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Karen L. Wilson
Henderson, Kentucky
J. Christopher Hopgood
Henderson, Kentucky
25
See KRS 403.213(3).
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