Child Support Intricacy: Tax credits

The Court of Appeals addresses the treatment of a couple of different tax credits in determining income for child support calculations in the to be published decision Brausch v. Brausch, 2007-CA-002198-ME (Sept. 12, 2008). The appellant, James Brausch, argued that the Earned Income Credit and the additional Child Tax Credit that his ex-wife, Tracy, received in 2006 should count as income for her.

One would have to have all the income figures and plug them into the Kentucky child support worksheet to know how exactly James would benefit from the inclusion of these tax credits. Adding income to either side of the equation can raise the overall support obligation, but also changes the percentage each party would be responsible to pay. So, one can assume that James percentage would be lowered enough to decrease his obligation.

The Kentucky child support definition of income in KRS 403.212 is very broad, but benefits from means-tested public assistance programs are specifically excluded as income. The Court determined that the Earned Income Tax Credit is a public assistance benefit because it is treated as a dollar for dollar payment of tax. Rather than just reducing one’s tax liability, it could actually result in a refund. They also determined it was means-tested because it is directed towards the neediest of families. For example, it is phased out for families with two or more qualifying children at just $11,600.00 earned income. So, the Court held that the Earned Income Credit should not be included as income.

The Child Tax Credit received different treatment by the Court. They point to the $110,000.00 ceiling for receiving this credit so it cannot qualify for exclusion from income as a means-tested public assistance benefit. However, the Court determined that because the Child Tax Credit is determined by and tied to the dependent child exemptions, it is not income. Basically, the Court treated the Child Tax Credit as an extension of the dependent child exemptions which have traditionally been within the discretion of the trial court to allocate between parents. In this particular matter, Tracy had already been awarded the dependent child deductions for the year in question, so she was allowed to keep the $3000.00 she recieved but not include the amount as income.

In going forward in this case and as a guide for others, the Court favors equally dividing such deductions in a simple and straightforward manner. This can be accomplished with an even number of children by assigning each parent one-half of the deductions each year or by rotating the deductions from year to year.

Hanging out at the intersection of divorce and business

The Supreme Court of Kentucky recently issues it decision in Medical Vision Group, PSC v Philpot, 2008-SC-000017-MR (Aug. 21, 2008)(to be published) which technically creates no case law, but is instructional regardless. The appeal was dismissed because at the time it came before the Supreme Court, the receivership issue was resolved and so the matter was moot.

The short version is that the Judge Philpot, Fayette Family Court Judge, put two companies under receivership because the sole owner of the companies, Dr. Dudee, abandoned the businesses. Dr. Dudee had refused to pay court ordered maintenance and other property distribution from his divorce and so he was jailed for contempt. While in jail, he refused to participate in work release, so his businesses were not generating revenue. Bottom line, Dr. Dudee refused to honor his obligations ordered in the divorce from his wife. Whether he was a conscientious objector or a had just been hijacked by a really bad attitude, I will let the public decide based on the facts in the case should you choose to read it.

The Kentucky Court of Appeals ruled in favor of the trial court by asserting that the judge did the right thing because the two companies were essentially “alter egos” of Dr. Dudee. However, since the trial court judge entered no findings of fact or conclusions of law in his decision regarding “alter ego” doctrine that would allow for the piercing of the corporate veil, the Supreme Court said that could not be the basis of upholding Judge Philpot’s decision. They did opine, though, that Judge Philpot was well within his discretion to enjoin the two companies in the divorce action pursuant to KRS 403.150(6) as proper parties to allow the court to exercise its judicial authority. The Court went on to point out that no third party was harmed by enjoining the businesses because Dr. Dudee was the sole owner. They also elaborated on the obligations that Dr. Dudee was refusing to honor and then added that he initially agreed to the receiver while stating he did not believe the court had jurisdiction to do so (kind of a half-hearted objection meant to move things along, but hoping to preserve an appeal – not terribly effective).

A few lessons emerge. First, if you want to preserve an appeal, be clear on the record rather than ambivalent. Second, if you are the sole owner of a company, it is ineffective to hide or divert assets into that company to keep them out of a divorce situation. Third, other parties can be brought into an action for a dissolution of marriage action, including a company that one of the parties has ownership interest in even if they are not the only owner. Lastly, no one emerges from a divorce unscathed emotionally, spiritually, or financially, but the extent of the injury can be mitigated or worsened by the attitude one adopts in the proceedings.

De Facto Custodian and Guardianship

The Court of Appeals of Kentucky recently rendered its opinion in McCary v. Mitchell, 2007-CA-000322-DG (Aug. 1, 2008)(to be published) which clarifies a point of law regarding the status of de facto custodian. A de facto custodian is a person who has provided the primary car of a child and the primary financial support of that child for a certain period of time (6 months for children under 3 years or 1 year if 3 years and older or placed by the Cabinet for Health and Family Services). See KRS 403.270 for a more detailed definition.

In the McCary case, a four year old little girl’s (B.E.M.) mother had been killed by her father, Samuel. Sam was indicted for the 2001 murder, but he did not plead guilty until 2005. During those four years, Sam had guardianship of B.E.M. but the case alludes that she actually resided with paternal aunt and uncle McCary. The maternal aunt and uncle Mitchell had sought custody of B.E.M. early on, but the Graves County District Court had determined it was a guardianship action and left that in the hands of Sam because of the presumption of innocence. The Mitchells resumed their guardianship action once Sam was sentenced.

At first glance, it appears that the de facto custodian provision would apply and give the McCarys equal standing as a parent because B.E.M. had lived with them for the requisite time and, presumably, she had received primary financial support from them. The Court never reaches those factual inquiries because they state that the entire de facto custodian status does not apply in this case. The Court appears to offer two bases for this holding. First, they say that KRS 403.270(1)(b) expressly limits application to dissolution of marriage situations. The second basis is that the de facto custodian provision applies to disputes between a parent or parents and a third party care provider. This makes sense because when a dispute is between two non-parent care providers there is no presumption giving one a superior right. The de facto custodian provision was created to address situations where a non-parent care provider nearly always lost to a parent even if that parent had never been in a caretaker role of the child.

I suspect there would have been an entirely different result had the McCarys sought custody of B.E.M. after caring for her for a year. Had they initiated an action then, they would have been fighting against dad and been on equal footing with dad who was indicted for murder. I also suspect that had they been found to be de facto custodians in that custody action, they would have been in a superior position when the Mitchells pursued their action.

This case highlights some of the vagaries of family law and the need for developing alternate strategies in any particular matter. The various laws that impact family life do not mesh well together leaving open many possible results and surprises.