ELIZABETH HOROWITZ v. ALAN D. HOROWITZ

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6547-03T36547-03T3

ELIZABETH HOROWITZ,

Plaintiff-Respondent,

v.

ALAN D. HOROWITZ,

Defendant-Appellant.

_______________________________

 

Argued: November 9, 2005 - Decided:

Before Judges Axelrad and Payne.

On appeal from the Superior Court of New Jersey, Chancery Division - Family Part, Essex County, FM-07-2196-98.

William C. Slattery argued the cause for appellant.

Debra E. Guston argued the cause for respondent (Guston & Guston, attorneys; Ms. Guston, on the brief).

PER CURIAM

In this post-judgment matrimonial matter, defendant Alan Horowitz (husband) appeals from an order of the Family Part retroactively recalculating alimony from l999 to the present and imputing income to him for alimony purposes for 2004. He contends the court: (1) improperly interpreted the parties' property settlement agreement (PSA) and ignored their use of tax definitions for calculating adjusted earned income for alimony purposes; (2) lacked any basis for halving the amounts he claimed for the cost of goods sold or otherwise imputing income to him during the two years in which he was unable to work full-time due to medical problems; (3) erred in retroactively imposing alimony arrearages for the period prior to the filing of wife's motion; and (4) incorrectly imputed income to him for alimony purposes for the 2004 year. We affirm in part and reverse in part.

The parties had a twenty-seven year marriage, commencing in l971. Husband was employed in the family bookbinding business until its bankruptcy in l994, rising to the position of president and earning a salary and perquisite package of about $400,000 per year. The parties and their two children enjoyed a high-level lifestyle. After the collapse of the family business, the parties were able to remain in their home in North Caldwell, but they substantially reduced their standard of living. Husband was unemployed for over two years, despite diligent efforts to obtain employment. Husband then began operating his own business, "Macademia," as an authorized Apple value-added reseller and computer servicer. Macademia had gross receipts of $106,640 and net income of $24,369 in l997, and gross receipts of $140,273 and net income of $36,282 in l998. At the time of the divorce, the parties anticipated husband would have an annual earned income of about $60,000, but recognized he was in a fluctuating business. Wife was a homemaker and freelance watercolor artist. Royalties from the sale of her work averaged about $1,000 per month. The parties did not anticipate her earned income to exceed $30,000. At the time of their divorce, husband was fifty-years old and wife was forty-nine years old. Both parties were expecting substantial inheritances from their families.

The parties were granted a final judgment of divorce on July 7, 1999. The judgment incorporated the parties' PSA, which was negotiated with the assistance of their respective counsel and spread on the record on May 20, 1999. The parties divided their assets evenly, including about $500,000 in proceeds from the sale of the marital home. The PSA obligated husband to pay permanent alimony to wife of $1400 a month beginning June l, l999, until the earlier of husband's death or wife's death or remarriage. The PSA had no provision for husband to maintain life or disability insurance. The PSA contained the following additional provisions regarding alimony:

2. It is the intention of the parties that [wife] shall receive 1/3 of [husband's] adjusted gross earned income, exclusive of unearned income and/or capital gains, interest income or dividends.

3. The parties are projecting that [husband's] income will be approximately $60,000 for the year l999. Therefore, [wife] will receive 1/3 of that sum beginning with the June 1, 1999 payment or $20,000 per year, of which this year [wife] shall receive 7/12ths -- meaning 7 months, June through December l999.

4. In the event [husband's] earned adjusted gross income is less than $60,000, [husband] shall be entitled to a credit so [wife] shall receive 1/3 of [husband's] earned adjusted gross income.

5. The parties have imputed $15,000 per year in income to [wife]. [Wife] may earn up to $30,000 per year before there is any reduction in the support paid to her. Any income [wife] earns over $30,000 per year, [husband] shall be entitled to a one-third reduction against each dollar [wife] earns above $30,000.

6. If [husband's] income is between $60,000 and $70,000 per year, [wife] shall receive no portion of that increase. Over $70,000 per year of adjusted gross earned income by [husband], [wife] shall participate at the rate of 1/3 of [husband's] adjusted gross earned income for the year in question.

7. The parties shall exchange their income tax returns each year in order to make the appropriate calculation as to where they stand financially.

In explaining the agreement in open court, husband's counsel elaborated upon the parties' intended definition of "adjusted gross earned income" stating:

By adjusted gross income, that's the -- as defined by Internal Revenue Code. It does not include capital gains. It does not include interest income or dividend income. It is earned income from his business. He has a computer business and we are hoping that he would make at least $60,000 this year. And Mrs. Horowitz would be entitled to one-third of that adjusted gross income, beginning with the first of June.

He emphasized that the PSA contained an escalation as well as de-escalation clause:

He is going to pay that to her at the rate of $1400 a month, which represents a $16,800 year payout if it was a 12 month period. Obviously, for the year l999, it'll be over a seven month period.

If, in fact, [husband's] income is below that, there will have to be an adjustment fact. This is going to fluctuate upwards and downwards. If his income is $60,000, he's going to owe her an additional payment come April l5th, of the year 2000, which would increase the amount that she is to receive. If, on the other hand, his income, just hypothetically, is $30,000, then there's going to be an adjustment downward for the l999 income as well.

. . . .

And I've got to keep emphasizing for the record and for the parties, that this adjustment goes upwards and it goes downward. So if he doesn't hit the number, there's an adjustment back to him from her for a reduction of what he pays her. . .

The parties agreed to continue to utilize the same accounting firm they had used during the marriage to prepare their separate tax returns after the divorce. After the parties' returns were filed, the accounting firm would calculate husband's alimony obligation based on the parties' earned income for the prior year. Each of the parties agreed to the terms of the PSA, voluntarily, and with full knowledge of its terms.

Husband paid wife $16,800 in alimony in l999, $19,984 in 2000 and $15,341 in 2001. According to the accountant's statement, in 200l and 2002 husband's earned income reduced by social security taxes was $48,585 and $12,443, respectively. Thus, his 2002 alimony obligation premised on the prior year's earnings was increased to $16,195, but was decreased in 2003 to $4148 annually ($345.67 a month). Husband's decreased income in 2002 resulted from a car accident in January that kept him out of work for the first six months of that year. He did not find anyone to take over the company in his absence. He took money from his savings to maintain his alimony obligation. In August 2003, husband underwent gastric bypass surgery, upon the recommendation of his physician to combat his insulin resistant diabetes, which resulted in complications. Husband spent three weeks in intensive care and was unable to work for the balance of the year. His tax returns reflected a net business income of $8515. Husband returned to work in 2004 and claimed his physical disabilities did not impact his work; however, the work from his largest client, NBC, was greatly reduced.

On July 7, 2003, wife filed a motion for the court to direct husband to file a case information statement and provide his 2001 and 2002 tax returns, so the court could determine and attribute to defendant "a reasonable income for the purposes of alimony calculation" and direct husband "to make such alimony payments in accordance with the Court's finding." Wife maintained she was unable to survive on her salary as an artist and part-time art teacher ($18,447 in 2002 and $15,523 in 2003) and husband's "meager alimony payments." Wife acknowledged that husband had "some health problems due to diabetes" but claimed he had chosen not to work, was not truthfully representing his income and was not in good faith pursuing meaningful employment. Wife also contended husband had sources of income other than his employment, such as a rental apartment that he inherited from his mother, from which to pay alimony consistent with the amount paid in the first three years after the divorce.

Husband contended he had consistently met his alimony obligation calculated on the adjusted earned income as contained in the PSA and understood by the parties. He explained the reasons for his decreased income, detailed his medical condition and produced a letter from his physician, and provided information as to the debt on his mother's condominium.

After conducting a plenary hearing and reviewing the parties' tax returns, the Family Part judge issued a written opinion and order on June 15, 2004, which is the subject of this appeal. The court disallowed a significant portion of the business deductions claimed by each party, including home office, utilities, travel and automobile expenses and depreciation, in calculating adjusted earned income for the purposes of alimony. The court stated:

For both parties income from self-employment or closely held corporations, gross income is gross receipts minus ordinary and necessary expenses required from business operation. It is clearly a general rule that income and expense from the operation of a business should be carefully reviewed to determining adjusted gross earned income to pay alimony. Specifically excluded from ordinary and necessary expenses for support purposes would be (1) home office; (2) travel; (3) automobile; and (4) any other business expenses the court finds to be inappropriate for determining gross income for support purposes. Many of the business expenses taken by the parties were perquisites in which each obtained a tax benefit while also being used as a deduction from gross receipts to modify the plaintiff's alimony payment under the parties' property settlement agreement.

The court concluded, for the years 1999 to 2004, it would be "inappropriate to permit [these types of tax-perquisite business expenses] . . . to be deducted from gross profit to arrive at the amount of alimony to be paid to [wife] under the parties' property settlement agreement. If permitted, [wife] would have contributed to one-third of those expenses under business control of [husband]." The court's disallowance of these reported expenses resulted in significant increases in income to husband and concomitant increases in the amount that should have been paid in alimony, which the court assessed retroactive to l999.

Additionally, the court found "the parties' alimony provision in their [PSA] required [husband] to operate his business on a full time basis to assure [wife] of her agreed upon method of payment of her alimony." As husband had not hired an employee to carry on his business in the two six-month periods of his illness, nor obtained disability insurance, the court found husband had breached his obligations. The court reasoned,

[Husband] did not hire any employee or consultant to oversee his business while he convalesced and [was] able to return to his business in 2002 or 2003. As to those two issues the parties' agreement is silent as to . . . any monetary security as a substitution for loss of earned income. When a contract is silent principles of good faith fill the gap not to block the use of the terms but to fulfill the intent of the parties. The parties' agreement as to escalation/de-escalation of alimony payment to [wife] clearly inferred that [husband] would work full time to maximize the profit of his business. In all agreements there is an obligation of good faith implying an undertaking in a way that clearly was contemplated at the time of entering into the agreement. In this case [husband's] inability to work full time to maximize both parties' financial rewards under the agreement severely prejudiced [wife's] alimony allocation.

As a consequence, rather than imputing income to husband for 2002 and 2003, the court halved the cost of goods sold in those years as reported on husband's tax returns, "representing an inferred six month period" that husband was not working.

The court also imputed earned adjusted gross income to husband of $84,300 for 2004, without explanation, and required him to pay wife one-third of that amount as alimony for the year. The parties were to be "guided by [the court's] opinion in determining [husband's] future alimony obligation to [wife] under their [PSA]." Husband's recalculated alimony obligation from l999 through 2002, totaling about $29,000, was required to be paid by July 30, 2004. On September 23, 2004 we issued a stay of the June 15, 2004 order, conditioned on husband depositing $29,215.28, with accrued interest, into his attorney's trust account.

Husband argues on appeal that the trial court had no legal or factual basis for disallowing the deduction of the parties' business expenses when their PSA specifically contemplated that actual expenses were deductible in computing adjusted earned income for alimony purposes. According to husband, in the absence of evidence that the PSA was unconscionable or the result of fraud or overreaching in its negotiation, the court had no basis to modify its terms. Husband further argues the court had no legal or factual basis to reduce the cost of goods sold figures as reported on Schedule C of his 2002 and 2003 tax returns, and thereby increase his alimony obligation for those years. Husband also asserts as error the court's imputation of income to him for the 2004 year, absent a finding he was voluntarily underemployed.

Both parties are self-employed and enjoy the financial advantage of being able to deduct living expenses such as home office, cleaning and maintenance, utilities, automobile and travel, as well as paper write-offs such as depreciation, as business expenses for determining taxable income. Under the circumstances of this case, we conclude the court did not abuse its broad equitable powers in disallowing these types of deductions in the calculation of each party's adjusted earned income for alimony purposes. However, we discern no basis for applying this formula retroactively to l999, particularly since wife could have requested copies of husband's tax returns under the PSA and did not object to the calculations until her alimony was drastically reduced in 2003. The recalculation will apply retroactively only to the date that wife's motion was filed.

In their PSA the parties provided a specific formula for calculation of alimony based on one-third of husband's adjusted gross earned income. Both parties had families from which they expected significant inheritances, and intended to avoid income derived from any inheritances received by either party from being part of the support calculation. Accordingly, the parties expressly excluded from the adjusted gross earned income any "unearned income and/or capital gains, interest income or dividends" and intended that alimony would be based on income husband earned from his business.

Wife understood that husband was in a fluctuating business. His projected 1999 income was $60,000 and her anticipated alimony was $1,400 a month. Pursuant to the negotiated escalation clause, wife received a benefit if husband's income increased, but, as is clear from the explanation on the record and written judgment, if he earned less, there would be a downward adjustment in alimony. It is undisputed that from 1999 to 2003, husband regularly paid the amount of alimony calculated by the parties' mutual accountant, even when his obligation exceeded his earnings and he had to take funds from savings. It was only when his business income dropped so dramatically that the deduction of business expenses permitted by the IRS became an issue in calculating adjusted earned income for alimony purposes.

Husband acted in good faith in operating his business, and his decreased income in 2002 and 2003 was medically justified. That husband's income was unpredictable, however, does not mean that at the time the parties negotiated their PSA they had any expectation that it would have plummeted to the extent it did. The significant reduction in alimony as of the time of the post-judgment proceedings was a sufficiently changed circumstance to justify judicial intervention. In interpreting the escalation clause of the PSA, the Family Part judge appropriately concluded it was no longer fair, just and equitable to allow the deduction of a large amount of living expenses as a business expense for purposes of calculating earned income and alimony. Petersen v. Petersen, 85 N.J. 638 (1981). As equity mandated some modification, the court appropriately sought guidance from the rationale of the child support guidelines pertaining to "[i]ncome from self-employment or operation of a business" in determining the type of business expenses that should be excluded and only permitting direct, actual business operational expenses to be deducted for purposes of calculating adjusted earned income for alimony purposes. Child Support Guidelines, Pressler, Current N.J. Court Rules, Appendix IX-B at 2327, 2345 (2006).

The court, however, had insufficient factual or legal basis to halve husband's claimed costs of goods sold for 2002 and 2003 in calculating husband's business income for alimony purposes. Under the PSA, husband was not required to obtain disability insurance and had no obligation to obtain someone else to run the business while he was medically incapacitated. Thus, there was no basis to find a breach by husband or impute income to him during that period. Additionally, reducing this figure by half appears to be arbitrary as there was no evidential correlation between the costs of goods sold by husband in his business and the amount of time he worked during the year. Moreover, the court did not consider the cost of hiring a temporary employee to run the business or the cost of disability insurance when imputing income in this manner.

We also reverse the court's imputation of $84,300 in earned adjusted gross income to husband for 2004, and the corresponding alimony calculation of $476 per week. The court provided no findings of fact or explanation for that number as required by Rule 1:7-4. More critically, there were no proofs presented or a finding made by the court that husband was voluntarily underemployed for 2004. Dorfman v. Dorfman, 315 N.J. Super. 511, 516 (App. Div. 1998).

 
In summary, we reverse the trial court's adjustment of husband's income for 2002 and 2003 by halving the amounts he claimed for the cost of goods sold or otherwise imputing income to him for those two years. We also reverse the court's fixing of husband's income for 2004 at $84,300 and requiring payment of one-third alimony based on that amount. We affirm the trial court's ruling on business deductions for calculating adjusted earned income for alimony purposes, but conclude the methodology shall not be applied retroactively, and shall commence applicability on July 7, 2003, the filing date of wife's motion for modification. We remand for recalculation of husband's alimony obligation consistent with this opinion.

The court also added these types of expenses back into wife's income, but it did not impact the alimony obligation, except for 2002, when she earned more than $30,000, for which husband received a credit.

Husband had received an inheritance from his mother at the time of the motion, but wife's mother was still alive at the time.

(continued)

(continued)

15

A-6547-03T3

November 22, 2005