Dad Can't Deduct Loan for Stock Purchase From Income

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By Julianne Tobin Wojay

May 25 — A father who borrowed money from his employer to purchase stock under its employee stock incentive plan may not deduct the principal and interest paid on those loans from his income for support purposes, because the voluntary purchases were in the nature of an investment rather than compensation, the Washington Court of Appeals, Division One, held May 23 ( In re Aiken, 2016 BL 164190, Wash. Ct. App., No. 73257-9-I, 5/23/16 ).

Thus rejecting the father's claim that the loans were “normal business expenses” under the support guidelines, the court said that any income from the stock is included in the support calculation. Only if the purchase “is a form of compensation for employment” are the payments necessary to protect that aspect of the compensation deductible from income, it explained.

Here, it said, the stock purchases were voluntary acquisitions of an income-producing asset, and were neither a requirement of the father's employment nor a portion of his compensation.

The father is the chief financial officer of Sellen Construction. The mother quit her job as an attorney when their special needs son was born in 2004. He has Down syndrome and autism, and requires constant supervision. The parties also have two daughters.

The mother was granted primary custody of all three children in the parties' 2010 divorce. The father agreed to pay $3,000 in monthly child support.

The support order also provided that they would equally share the costs of the children's extraordinary expenses, including “agreed” extracurricular activities. Their parenting plan granted them joint decision-making authority regarding the children's education and non-emergency health care.

The mother reentered the workforce in 2014, and as a result had difficulty finding time to focus on the daughters and her personal needs while caring for the son in her non-working hours.

In addition, because the son's situation “is becoming more problematic as he gains size and physical strength,” his doctor recommended daily behavior therapy and more physical activities such as skiing and swimming.

In light of these changes, the mother moved to modify the support order. The father agreed that support should be adjusted based on their current incomes. However, an issue arose regarding the calculation of his income.

The father participates in Sellen's voluntary employee stock incentive plan. To purchase common stock in the company, he borrows money from Sellen and executes promissory notes payable to Sellen.

He contended that the trial court should deduct those loan payments as “normal business expenses” under the support guidelines. See Wash. Rev. Code 26.19.071(5)(h). However, finding that the payments constituted “debt voluntarily incurred,” the court declined to deduct them.

Thus determining that the father's monthly net income was $21,903 and that the mother's was $9,237, it ordered them to proportionally share the children's extraordinary activity expenses, with the father paying 70%.

Additionally, the court revised the description of the son's extraordinary activities to include expenses for educational (field trips, tutoring) and physical activities as recommended by his education and healthcare providers, and 14 hours of respite care per month in the mother's household during her non-working hours and six hours in the father's. The father appealed.

Loan Payments

Noting that the term “normal business expenses” is not defined in the support statute or rules, Chief Judge James Verellen looked to In re Mull, 812 P.2d 125, 17 FLR 1481 (Wash. Ct. App. 1991).

Mull applied the plain meaning of that term in finding that a parent, who as a partner in Perkins Coie was required to make partnership payments to the law firm, could deduct those mandatory contributions as normal business expenses for support purposes because they were necessary to retain his partner status and maintain his source of income/compensation.

Here, Verellen pointed out, the father was not required to purchase Sellen stock to remain CFO of the company. The stock purchases are entirely voluntary and the receipt of distributions on the stock is not the equivalent of the “income” at stake in Mull, he added.

Recognizing that Sellen's stock incentive plan states that its purpose is to provide officers and directors the chance to “acquire a proprietary interest in the company,” he said that “[h]olding a proprietary interest [in a closely-held business] is not necessarily a form of compensation” but may be “an opportunity to benefit from potential appreciation.”

Had the father borrowed funds to purchase stock in a publicly-traded company or to purchase rental property that would generate income and potentially appreciate in value, “our analysis would the same,” Verellen said, explaining that income from either of those investments would still be considered for child support purposes, but his cost in acquiring either investment would not be deducted from his gross income.

As to the father's underlying argument that it is inequitable to consider income without accounting for the costs of generating that income, Verellen observed that “this premise is not recognized in the child support statute.”

Activities; Respite Care

Going on to reject his claim that the requirement that the parties proportionately share the expense of the son's extraordinary activities improperly undercut their joint-decision making authority, Verellen said, however, that the trial court should have made findings regarding the necessity for and reasonableness of those expenses. He remanded on this issue. See In re Daubert, 99 P.3d 401 (Wash. Ct. App. 2004).

Finally, Verellen rebuffed the father's argument that the court erred in ordering the parties to share the expense of respite care because such care “is intended to support the parent, not the child.” Verellen pointed to its findings that respite care “is directly related to support of [the son] in light of [his] significant impairments,” and helps protect him from harm.

Valerie A. Villacin and Catherine Wright Smith, of Smith Goodfriend PS, Seattle, and Shannon M. Ellmers, of Strata Law Group, PLLC, Seattle, represented the father. The mother was represented by Carl T. Edwards, Seattle, and Shelby R. Frost Lemmel, of Masters Law Group PLLC, Bainbridge Island.

To contact the reporter on this story: Julianne Tobin Wojay in Washington at jwojay@bna.com

To contact the editor responsible for this story: David Jackson at djackson@bna.com