Labar v. Labar

• Decision Date: 08 June 1999
• Citation: 557 Pa. 54,731 A.2d 1252
• Parties: Mary Jo LABAR, Appellant, v. Thomas S. LABAR, Appellee.
• Court: Pennsylvania Supreme Court

557 Pa. 54

731 A.2d 1252

Mary Jo LABAR, Appellant, v. Thomas S. LABAR, Appellee.

Supreme Court of Pennsylvania.

Argued December 10, 1996.

Decided June 8, 1999.

April L. Cordts, Bethlehem, for Mary Jo Labar.

Peter C. Layman, Bangor, for Thomas S. Labar.

Before FLAHERTY, C.J., and ZAPPALA, CAPPY, CASTILLE, NIGRO and NEWMAN, JJ.

OPINION

ZAPPALA, Justice.

This is an appeal by allowance from an order of the Superior Court, vacating the Northampton County Common Pleas Court's order of support entered against Appellee, Thomas S. Labar. At issue is the calculation of Appellee's income for purposes of determining his support obligation. For the following reasons, we affirm.

Mary Jo Labar (Wife) and Thomas S. Labar (Husband) were married on April 21, 1979, and separated on July 31, 1992. Two children were born of the marriage, who were ten and seven years old on the date of separation. On November 4, 1992, Wife filed a petition for support on behalf of herself and the children.

A domestic relations hearing conference was held on November 30, 1992. At the conference, Husband, who holds a fifty percent equity interest in a bowling alley, Blue Valley Lanes, Inc., a Subchapter S Corporation, presented his 1991 federal income tax return in support of his claim that his 1991 disposable income¹ was $32,068, calculated as follows:

Interest income $ 2,527.00 Salary from Blue Valley 26,000.00 ½ of Blue Valley's taxable income² 3,541.00 __________ Disposable income $32,068.00

Wife countered that Husband's one-half share of Blue Valley's taxable income did not accurately reflect the value of Husband's interest in Blue Valley. Wife therefore sought to add to Husband's disposable income: (1) one-half of the depreciation deduction taken by Blue Valley on its 1991 federal income tax return; (2) Blue Valley's 1991 entertainment expense; and (3) Blue Valley's 1991 amortization expense.

The hearing officer agreed with Wife and recalculated Husband's disposable income as follows:

Interest income $ 2,527.00 Salary from Blue Valley 26,000.00 ½ of Blue Valley's taxable income 3,541.00 ½ of Blue Valley's depreciation 34,066.00 Blue Valley's entertainment expense 1,914.50 Blue Valley's amortization expense 560.00 __________ Disposable income $68,608.50

After crediting Husband for two loans related to the marital residence and his support obligation for a third child, the hearing officer recommended a support order in the amount of $474 per week. By order dated January 11, 1993, the trial court adopted the recommendation.

Husband filed timely objections and on April 1, 1993, the trial court held a de novo hearing focusing on the issue of whether the depreciation deduction was properly included in Husband's disposable income calculation.³ The trial court determined that the depreciation deduction was properly included in the calculation and by order dated May 28, 1993, Husband's objections were dismissed. Husband's subsequent Motion for Reconsideration was denied.

On appeal, the Superior Court vacated and remanded for a recalculation of support. Labar v. Labar, 434 Pa.Super. 612, 644 A.2d 777 (1994). Husband contended before both the trial court and the Superior Court that it was error to include in his 1991 income calculation one-half of Blue Valley's 1991 depreciation deduction. Husband is correct in this contention, but not for the reasons he puts forth, or for the reasons advanced by the Superior Court in its opinion.

The sole issue in this case concerns the proper calculation of Husband's disposable income for use in determining his support obligation. In Commonwealth ex rel. Gitman v. Gitman, 428 Pa. 387, 237 A.2d 181 (1967), this Court held that in determining a husband-father's financial obligation to his wife and children, a court must make a thorough appraisal of the husband-father's actual earnings and perquisites, and the true nature and extent of his property and financial resources.

At the April 1, 1993 de novo hearing before the trial court, Husband, relying on Cunningham v. Cunningham, 378 Pa.Super. 280, 548 A.2d 611, alloc. denied, 522 Pa. 576, 559 A.2d 37 (1989), asserted that the hearing officer improperly included one-half of the depreciation deduction taken by Blue Valley on its Subchapter S Corporation tax return in his disposable income calculation.

Although instructive, Cunningham is not on point with this case. In Cunningham, Mr. Cunningham's most recent individual federal income tax return showed a gross income of $24,000, with over $17,000 in depreciation and depletion expenses claimed, for a net taxable income of approximately $7,000. Mr. Cunningham asserted that this net taxable income of $7,000, as reflected on his individual federal income tax return, was the proper measure of his disposable income for purposes of calculating his support obligation. The Superior Court disagreed, stating:

It is well established that depreciation and depletion expenses, permitted under federal income tax law without proof of actual loss, will not automatically be deducted from gross income for purposes of determining awards of alimony and equitable distribution. In determining the financial responsibilities of the parties to a dissolving marriage, the court looks to the actual disposable income of the parties:

[T]hat income must reflect actual available financial resources and not the oft-time fictional financial picture which develops as a result of depreciation deductions taken against . . . income as permitted by the federal income tax laws. Otherwise put, "cash flow" ought to be considered and not federally taxed income.

Commonwealth ex rel. Hagerty v. Eyster, 286 Pa.Super. 562, 568-69, 429 A.2d 665, 668-69 (1981) (citations omitted). Accord, Flory v. Flory, 364 Pa.Super. 67, 527 A.2d 155 (1987)

; Parkinson v. Parkinson, 354 Pa.Super. 419, 512 A.2d 20 (1986).

Depreciation and depletion expenses should be deducted from gross income only when they reflect an actual reduction in the personal income of the party claiming the deductions ....

378 Pa.Super. at 282, 548 A.2d at 612-613 (emphasis added). The Superior Court determined that the depreciation and depletion deductions claimed by Mr. Cunningham did not represent actual reductions in his personal income; they were therefore not to be considered in the calculation of Mr. Cunningham's income for support purposes.

Thus, Cunningham stands for the proposition that deductions allowed under the federal tax laws, that do not represent actual reductions in a support obligor's personal income, will not be allowed in the disposable income calculation. Such reasoning is sound.

However, in this case, Husband received $26,000 from Blue Valley in 1991; he has not sought to reduce this actual net income received by claiming a depreciation deduction on his federal tax return. Instead, it is Wife who seeks to include in Husband's disposable income calculation one-half of the depreciation deduction Blue Valley took in determining the amount of taxable income passed on to its shareholders for federal income tax purposes. Wife seeks to do so because it is her basic contention that Husband should have received more remuneration from Blue Valley in 1991 than he actually did, implying that Husband was using Blue Valley to shelter income from the support obligation calculation.

While it is possible that a person could use a corporation to shelter income from the support obligation calculation by improperly retaining cash flows within the corporation rather than disbursing them to the shareholders, the mere fact that Blue Valley took a depreciation deduction against gross income in calculating net taxable income passed on to shareholders does not establish the presence of sheltered cash flows. This is because depreciation does not generate cash flow.

Depreciation and cash flow are not equivalents. Depreciation is an accounting mechanism which allocates the original cost of an asset to the periods in which the asset is used. Depreciation does not result in income. Rather, when depreciation expense is claimed, taxable income is decreased by the amount so claimed, resulting in a "marginal income tax savings," not an increase in income.⁴

The presence of a depreciation deduction (on a federal income tax return) or a depreciation expense (on consolidated financial statements) simply signals that a corporation has made capital expenditures, the costs of which it seeks to allocate to the periods in which the assets underlying the capital expenditures are being used. Only by asserting that the capital expenditures, for which depreciation deductions are currently being claimed, were made with cash flows that should have instead been disbursed to the shareholders, can it be argued that a corporation is improperly sheltering cash flows.

The absurdity of the proposition that the depreciation deduction taken by Blue Valley in 1991 generated a cash flow that should be considered income to Husband in 1991 is further demonstrated by an examination of the business transactions underlying Blue Valley's 1991 depreciation deduction. In 1990,⁵ Blue Valley borrowed $840,000 from United Penn Bank, approximately $430,000 of which was used to pay off the existing property mortgage and a loan incurred in acquiring a liquor license. The remaining money, approximately $410,000, was used to make capital expenditures for a computerized scoring system and pinsetters. In 1991, Blue Valley's capital expenditures consisted of $26,299 for a new lane machine. (N.T. 4/1/93 at 19).⁶

By asserting that the depreciation deduction taken by Blue Valley in 1991 should be considered additional income to Husband, Wife is necessarily arguing that all of the funds used for capital expenditures should not have been used for capital expenditures, but should have instead been disbursed to the shareholders as income.

This argument fails because it assumes without evidence of record that the funds used for the...