In the recent decision of Reichert v. Hornbeck, (No. 213, September Term 2012, filed March 20, 2013; http://mdcourts.gov/opinions/cosa/2013/0213s12.pdf), the Court of Special Appeals of Maryland (the State’s intermediate appellate court) addressed issues relating to the computation of child support and the proof necessary to determine a parent’s income, while also expanding the trial court’s authority to allocate the tax dependency exemption between parents.
Jeffrey Reichert and Sarah Hornbeck were only married for approximately 18 months, but they did have a young son when they divorced. They were awarded joint physical and legal custody of their child. Sarah was denied alimony. Jeffrey was ordered to pay child support of $1,651 per month. Jeffrey appealed the trial court’s decision regarding calculation of his child support obligation, as well as the court’s order that the parents alternate the tax dependency for their son.
Jeffrey asserted that the court erred by including “unrealized income” as part of his monthly salary which resulted in an artificially higher income and monthly child support obligation. At the heart of the issue was the trial court’s conclusion that Jeffrey failed to present expert testimony concerning his participation in an incentive investment plan through his employment, even though Jeffrey testified regarding his income and produced tax returns, current pay stubs, and a copy of the incentive investment plan at
issue. The appellate court, relying upon the statutory language of Maryland’s Child Support Guidelines, noted that in determining a parent’s “actual income” for child support purposes, the trial court must “verify” the income with documentation of current and past actual income. The Court of Special Appeals reviewed its 2006 decision in Walker v. Grow, 170 Md. App. 255, 907 A.2d 255 (2006), a case involving unrealized income of a minority shareholder in an S Corporation. Although the Walker case involved expert testimony from the corporation’s accountant regarding the shareholder’s unrealized income, no such evidence was offered on behalf of Jeffrey Reichert in the instant case. However, the appellate court explained that a parent who seeks to exclude pass-through or unrealized income from “actual income” in the calculation of child support award is not required to present expert testimony to support the documentation used to verify his or her income, particularly when that parent offers a variety of suitable documentation of actual income into evidence. Thus, the trial court’s decision was reversed and the case was remanded with instructions to recalculate child support.
Because the trial court awarded the parties shared physical custody of their child on an equal schedule of time, the court believed they should also share the right to claim the tax dependency exemption. Jeffrey argued that, in accordance with Internal Revenue Code provisions, when a child resides equally with both parents, the parent with the higher adjusted gross income is entitled to the dependency exemption. On the other hand, Sarah argued that the trial court’s decision that the parties alternate the exemption was a proper exercise of discretion and consistent with Maryland law. The Court of Special Appeals, however, found Jeffrey’s argument to be more persuasive and remanded the decision for further consideration. The appellate court found that its earlier decision in Wassif v. Wassif, 77 Md. App. 750, 551 A.2d 935 (1989) only addressed the permissibility of the Maryland court to allocate the dependency exemption, without considering “the nature of the exemption within the greater scheme” of the divorce.
The Court of Special Appeals concluded that the tax dependency exemption may be allocated to the non-custodial parent only if it enhances the child’s best interests. This requires the trial court to perform an “on record analysis,” consider which parent has a higher tax bracket, and whether there is inconsequential unrealized or pass-through income. If the non-custodial parent’s income places him or her in the higher tax bracket, the court should allocate the exemption to that parent and include a portion of the tax savings (after-tax spendable income) as part of the child support award. The appellate court further held that the trial court’s order should direct the custodial parent to execute a yearly waiver of the right to claim the exemption, contingent upon the non-custodial parent remaining current with his or her support obligation.
Thomas C. Ries is a shareholder in the family law practice firm of Kaufman, Ries & Elgin, P.A. in Baltimore, Maryland. He is a Fellow of the American Academy of Matrimonial Lawyers, and is a past President of the AAML Maryland Chapter.