Charles Van Flaherty v. Rhonda Flaherty

ca04-569

ARKANSAS COURT OF APPEALS
NOT DESIGNATED FOR PUBLICATION

DIVISION III

CHARLES VAN FLAHERTY

APPELLANT

V.

RHONDA FLAHERTY

APPELLEE

CA 04-569

FEBRUARY 16, 2005

APPEAL FROM THE COLUMBIA

COUNTY CIRCUIT COURT

[NO. DR 02-327-3]

HONORABLE EDWIN A. KEATON,

JUDGE

AFFIRMED

John B. Robbins, Judge

Appellant Charles Van Flaherty and appellee Rhonda Flaherty were married on August 8, 1981, and divorced on October 28, 2003. The parties have two children, Caitlin and Kylie, who were age fourteen and nine at the time of the divorce. Ms. Flaherty was awarded custody of the children, and Mr. Flaherty was ordered to pay monthly child support of $2465.40 and monthly alimony of $2000.00, with the alimony to terminate when the youngest child reaches the age of eighteen or graduates high school, whichever is later. The parties' assets totaled more than $800,000.00 and were divided equally.

Mr. Flaherty now appeals from the divorce decree, arguing that the trial court erred in its calculation of his net pay and corresponding child-support obligation. Specifically, Mr. Flaherty contends that the trial court erroneously failed to allow a deduction for losses incurred in a horse farming operation. Mr. Flaherty also argues that the trial court erred in awarding alimony, and alternatively that the amount awarded was excessive. We find no error and affirm.

Ms. Flaherty testified that she earned a BSE degree in 1980, and taught school for a year before the parties married. Mr. Flaherty also earned a teaching degree, but later decided to pursue a petroleum engineering degree, which he completed in 1987. Ms. Flaherty testified that she did not enjoy teaching, and that she worked at a bank while Mr. Flaherty was earning his engineering degree. In the summer of 1988, Ms. Flaherty was pregnant with Caitlin, and the parties agreed that she would stay at home and be a full-time mother. Ms. Flaherty has not worked outside of the home since then. At the time of the divorce, Mr. Flaherty was a field drilling superintendent working in Algeria, and his 2002 W-2 form reflected an annual gross income of $210,366.00.

Ms. Flaherty indicated that his job caused Mr. Flaherty to travel back and forth to Algeria. As a result, Ms. Flaherty did all of the yard work and house work. She also involved herself in her daughters' school activities. Ms. Flaherty testified that for the past several years Mr. Flaherty has operated a horse business, which consisted of bucking horses to be leased for rodeos. Ms. Flaherty helped take care of the business by ordering feed and paying the boys who worked on the farm.

Ms. Flaherty indicated that the parties' marriage disintegrated when Caitlin hacked into Mr. Flaherty's e-mails and discovered he was having an affair. Prior to that time, they lived in a 1200-square-foot apartment, but after the separation Ms. Flaherty and the children moved in with her mother on a temporary basis. Ms. Flaherty maintained that she is very frugal and that Mr. Flaherty "always told me if it hadn't been for me, we probably wouldn't have anything in the bank." Ms. Flaherty stated that before their separation they were planning to build their dream home.

Ms. Flaherty acknowledged that she could renew her teaching certificate and get a teaching job earning about $28,000.00 to $30,000.00 per year. However, she stated that she has not looked for work and wants to remain a stay-at-home mom. She indicated that the divorce was adversely impacting the children, and that they needed her to be at home now more than ever. Ms. Flaherty stated that during the marriage there had always been the arrangement agreed upon by Mr. Flaherty, and that he had told her he hoped she never had to teach again because he did not enjoy it and knew that she did not either.

Ms. Flaherty gave testimony pertaining to the horse-farming operation, and stated that it was always Mr. Flaherty's dream to be a contractor for rodeos. She stated that the operation started about six years ago and that it grew to where Mr. Flaherty had more than fifty horses. However, the venture was not profitable and showed a net loss for each year between 1997 and 2001, with the losses totaling $150,000.00. Ms. Flaherty stated, "As for the horsing business, we've also referred to it as an expensive hobby."

Mr. Flaherty testified that the horse operation is a business and not a hobby. He stated that he has invested a large sum of money and that it is a daily operation. Mr. Flaherty stated that his investment was intended to make money, and although there have been no profits, there has been equity built. Mr. Flaherty acknowledged that, in 2001, the horse farm generated no income and a $42,718.00 loss. He stated, "As for me spending $3500.00 a month on the farm, I guess I will have to be the first to admit that I probably made a bad investment."

Mr. Flaherty acknowledged in his testimony that the parties' original plan was for Ms. Flaherty to stay at home and take care of the children and home, and he stated that she did that well. Mr. Flaherty also conceded that he never suggested that Ms. Flaherty get a job. However, he thought that there was no reason why Ms. Flaherty could not work after the divorce, stating that she is intelligent, has always worked hard, and is capable of working.

Bob Edstrom was the first of two accountants to testify. He prepared the parties' 2000 federal income tax return, and stated that he claimed that year's $33,465.00 farm loss on the return. As for farm losses being claimed, Mr. Edstrom stated:

I am a tax advisor and I have got a client who has that kind of income and those kind of losses for 5 or 6 years, as for what I tell them, well, I can't speak for what the IRS would definitely do, but I would let the client know that he has a tremendous exposure, that with these kind of losses that he could get audited and that if upon being audited the IRS would take the stand that these are hobby losses and hobby losses can only be deducted to the extent that you add income. Were he to be audited with these kind of figures, I mean, if he was in this horse business and didn't have his other income, he wouldn't have been in business 5 years. I mean, you just don't go into a business and sustain these kind of losses year after year after year and continue in business unless you are getting something out of it, other than the money. You just don't stay in business and that is what the IRS would say. Now, whether they would win the case or not, I can't say. If you get audited then their goal would be to disallow the deduction except for the amount of income earned. They would allow an offset of that income but no more than that.

Mr. Edstrom evaluated Mr. Flaherty's income from 2002 and concluded that if the farm loss is included, his monthly take-home pay was $9839.58, but if it is excluded it was $11,770.00. The trial court did not give Mr. Flaherty a deduction for the farm loss and calculated his child-support using monthly income of $11,740.00.

Don Teague prepared the parties' 2001 federal tax return. He also treated the horse farm as a business and claimed the loss for that year, explaining that Mr. Flaherty treated it as a business and was in it for profit. Mr. Teague thought that the farm loss could be sustained in the event of an IRS audit.

On appeal, Mr. Flaherty first argues that the trial court erred in its calculation of child support because it failed to decrease his net income by the farm loss sustained in 2002. The trial court found his monthly income to be $11,740.00, and pursuant to Administrative Order Number 10, Section III(b), ordered him to pay monthly support of $2465.40. Mr. Flaherty submits that the trial court should have found his monthly income to be $9839.58, which would result in monthly child support of $2066.31.

Income for child-support purposes is defined by Section II of Administrative Order Number 10, which provides:

Income means any form of payment, periodic or otherwise, due to an individual, regardless of source, including wages, salaries, commissions, bonuses, workers' compensation, disability, payments pursuant to a pension or retirement program, and interest less proper deductions for:

Federal and state income tax;

Withholding for Social Security (FICA), Medicare, and railroad retirement;

Medical insurance paid for dependant children; and

Presently paid support for other dependents by court order.

Section III(c) provides, in pertinent part:

For self-employed payors, support shall be calculated based on the last two years' federal and state income tax returns and the quarterly estimates for the current year. A self-employed payor's income should include contributions made to retirement plans, alimony paid, and self-employed health insurance paid; this figure appears on line 22 of the current federal income tax form. Depreciation should be allowed as a deduction only to the extent that it reflects actual decrease in value of an asset. Also, the court shall consider the amount the payor is capable of earning or a net worth approach based on property, life-style, etc.

Mr. Flaherty submits that he should be considered a self-employed payor with regard to his horse-farming operation, and asserts that the trial court erroneously ignored the fact that, on line 22 of his tax returns, his "total income" has been reduced by taking into consideration the yearly farm losses.

Mr. Flaherty asserts that, contrary to Ms. Flaherty's testimony, the horse operation is a business and not a hobby, and that he is in it to make a profit. He cites McWhorter v. McWhorter, 346 Ark. 475, 58 S.W.3d 840 (2001), where the supreme court held that determining expendable income is the ultimate objective in setting child support. The supreme court also stated in that case that it did not view the deductions listed in Section II as exhaustive or exclusive. Mr. Flaherty contends that, because the farm loss has reduced his expendable income, it is a proper consideration in assessing his child-support obligation.

In reviewing an equity case, we give due deference to the trial court's superior position to determine credibility of witnesses and weight to be accorded their testimony. Hunt v. Hunt, 341 Ark. 173, 15 S.W.3d 334 (2000). As a rule, when the amount of child support is at issue, we will not reverse the trial court absent an abuse of discretion. Kelly v. Kelly, 341 Ark. 596, 19 S.W.3d 1 (2000). In the present case, we hold that the trial court did not abuse its discretion in refusing to deduct Mr. Flaherty's farm losses from his net income for child-support purposes.

While Mr. Flaherty characterized the horse farm as a business, Ms. Flaherty indicated that the parties had referred to it as an expensive hobby. From 1997 to 2001, the farm lost money each year with expenses exceeding income in the aggregate of $150,093.00. In 2001, the farm had its worst year to date, showing a net loss of $42,718.00, and Mr. Flaherty testified that he expected a similar performance in 2002. While the farm losses have routinely been deducted from Mr. Flaherty's income on his tax returns, Mr. Edstrom indicated that due to the repeated losses Mr. Flaherty has "tremendous exposure" and that the IRS would take the position that these are hobby losses because "you just don't stay in business" if your motive is to make a profit.

Section III(d) of Administrative Order 10 provides:

Imputed income. If a payor is unemployed or working below full earning capacity, the court may consider the reasons therefor. If earnings are reduced as a matter of choice and not for reasonable cause, the court may attribute income to a payor up to his or her earning capacity, including consideration of the payor's life-style. Income of at least minimum wage shall be attributed to a payor ordered to pay child support.

In the present case it may be that the horse operation will continue to result in a reduction of Mr. Flaherty's expendable income,1 but if that is the case there was evidence to show that this was a matter of choice and not for reasonable cause. Therefore, the trial court did not abuse its discretion in refusing to treat Mr. Flaherty as a self-employed payor in connection with the horse farm, or give him any deductions for the losses when calculating his expendable income.

Mr. Flaherty next argues that the award of alimony was erroneous, or in the alternative was excessive. He cites Bolan v. Bolan, 32 Ark. App. 65, 796 S.W.2d 538 (1990), where we held that the primary factors in awarding alimony are the need of one spouse and the ability of the other spouse to pay. Mr. Flaherty concedes that he has the ability to pay, but asserts that Ms. Flaherty does not need any alimony.

Ms. Flaherty testified that her monthly expenses total about $3300. She further testified that she could take home about $1800 or $1900 per month if she worked as a teacher. Mr. Flaherty asserts that, when combined with the $2465.40 in monthly child support that was awarded, or even the $2066.31 that he proposes, the money Ms. Flaherty could earn working would exceed her monthly needs. Mr. Flaherty contends that he has erroneously been ordered to pay child support based on fault, and that the trial court committed error in holding the parties to their original agreement and relieving Ms. Flaherty of her obligation to work to support herself and the children.

Mr. Flaherty further argues that, even if monthly alimony was proper in this case, $2000.00 was excessive. He notes that each party has been awarded half of more than$800,000.00 in assets, and submits that Ms. Flaherty will be able to earn interest on her share. Mr. Flaherty asserts that, taking the $3300.00 that Ms. Flaherty needs each month and deducting his proposed child support of $2066.31 results in a balance of only $1233.69, and that as such his alimony obligation should be no more than that amount.

The purpose of alimony is to rectify, insofar as is reasonably possible, the frequent economic imbalance in the earning power and standard of living of the divorced husband and wife. Mitchell v. Mitchell, 60 Ark. App. 88, 946 S.W.2d 411 (1998). If alimony is awarded, it should be set at an amount that is reasonable under the circumstances. Mulling v. Mulling, 323 Ark. 88, 912 S.W.2d 934 (1996). Many factors are considered in setting the amount of alimony, and a trial court's award of alimony will not be reversed absent an abuse of discretion. Mitchell v. Mitchell, supra.

Mr. Flaherty is correct in asserting that fault or misconduct is not a factor in awarding alimony. See Russell v. Russell, 275 Ark. 193, 628 S.W.2d 315 (1982). However, our review of the divorce decree does not indicate that the trial court considered fault in assessing alimony. In its letter opinion the trial court stated, "Shortly before the onset of the defendant's affair, the parties had discussed and agreed to build plaintiff her dream home," but Mr. Flaherty's affair was mentioned only as a time reference and not as a basis for awarding alimony. Moreover, we find no abuse of discretion in the amount of alimony awarded by the trial court.

Our review does not indicate that the trial court bound the parties to their agreement that Ms. Flaherty be a housewife and not work; rather, it was considered along with the other factors in assessing the situation of the parties upon divorce. Mr. Flaherty is capable of earning more than $200,000.00 per year, and while Ms. Flaherty has the potential to earn about $30,000.00, she testified that the children were emotionally affected by the divorce, were accustomed to her being at home, and needed her to be a full-time mother now more than ever.

While Ms. Flaherty testified that her monthly expenses are about $3300, she indicated that this does not include incidental expenses and stated, "You never can predict what could happen." Moreover, these was evidence that Ms. Flaherty was very frugal during the marriage and that the parties lived modestly, which resulted in extensive assets and no debts at the time of divorce. She stated that immediately prior to the divorce they were planning to build their dream house.

Discounting the farm losses claimed by Mr. Flaherty, under the arrangement ordered by the trial court his monthly income will be about $7275.00, while the monthly income for Ms. Flaherty and the children will be $4465.00. Significantly, the alimony will terminate along with the child support when the youngest child reaches majority or graduates from high school. Considering the economic imbalance between the parties, we find no error in the amount of alimony ordered by the trial court.

Affirmed.

Griffen and Roaf, JJ., agree.

1 Because the divorce decree divides all of the marital property equally and orders a sale of the horse farm, we would have to speculate to assume that Mr. Flaherty was the successful bidder at the sale of the horse farm operation.