Pennsylvania

In Balicki v. Balicki, 2010 PA Super. 134 (July 30, 2010), the Superior Court considered the husband’s argument that the alimony order provided more income to his ex-wife than she could spend (as shown by her budgetary expenses). The trial court in its opinion justified the alimony award by noting that the wife would pay income tax on her alimony award, thereby reducing the after-tax dollars available to her. The trial court presented a seemingly reverse-engineered analysis of available income sources to prove that the income nearly matched wife’s claimed budgetary needs, thereby vindicating the result.

An important element of the trial court’s opinion was its calculation of the ex-wife’s income tax liability arising from her alimony award. The trial court held, and the Superior Court agreed, that a tax “gross-up” may be warranted under 23 Pa.C.S. § 3701(b)(15), one of the 17 statutory criteria for judging alimony claims. The trial court’s tax gross-up was triple the provision recommended by the master, but the trial court also disapproved the master’s inflated budget. These two adjustments offset each other, and the trial court affirmed the result reached by the master on different grounds.

The husband argued that the trial court had no right to reconsider the tax gross-up since neither party raised the issue in their exceptions from the master’s report. The Superior Court agreed that the trial court was not limited to the issues specifically raised on exceptions. Ironically, the Superior Court dismissed all of the husband’s allegations of error pertaining to specific items on wife’s budget, holding that they were waived because they were not specifically identified in the § 1925 statement.

All of the ex-wife’s issues on appeal, most of which seemed to be calculated to counter-balance husband’s appeals, were dismissed by the Superior Court, which affirmed the rationale of the trial court.

The Jon and Kate divorce provided another example this week of what to do – and what not to do – in divorce situations. The Gosselins were ordered this week to attend mandatory co-parenting classes in Berks County.  Allegheny County and most surrounding counties in Western Pennsylvania have a similar program. In Allegheny County, it is known as the “Generations” program.

The Generations program, part of the Child Custody Department, is a mandatory two-part process for individuals involved in a custody dispute. This alternative dispute resolution program includes an educational seminar for adults, an interactive group for children ages six through fifteen, and a mediation orientation session.

The adult education seminar of the Generations program is approximately three hours in length and offers parents/caregivers the skills to reach their own resolution on custody issues. The following topics are addressed:

• How to build a co-parenting relationship
• How to communicate and problem-solve
• How to help children cope effectively with their changing family
• Identify how parent/caregiver conflict can affect the behavior of children
• Understand that most children do best when they have the opportunity to know and love both parents
• General overview of the mediation session

The children’s group serves children between the ages of six and fifteen years old. Children are appropriately grouped by age so that they can identify and share with peers similar experiences in their families. These groups are facilitated with activities, discussions, art, music and play.

Later in the week, after being ordered to attend parenting classes, Jon Gosselin was spotted in a mall bookstore, reviewing a copy of Kate Gosselin’s latest book, “I Just Want You to Know: Letters to My Kids on Love, Faith and Family.” Perhaps he was looking for dirt to use against Kate in the mediation.

I generally advise clients not to go to the Generations mediation with a chip on their shoulders. It is really not productive to enter mediation with a laundry list of “wrongs” perpetrated by the other parent. It does not impress the mediator. Remember that even if the other parent confesses to a murder during the mediation, the mediator cannot be called to testify. Concentrate instead on telling the mediator what custody arrangements you want, focusing on how your plan will benefit the children. If you keep your focus on the kids and why your proposal is best for them, you are much more likely to get good results.

In Murphy v. Murphy, a recent Superior Court decision, the father appealed a support order entered in absentia because he claimed that he never received notice of the June 2008 support hearing. The father argued that the notice mailed to him was too late (less than 20 days before the hearing, contrary to Rule 1910.6) and was not adequately proven to have been mailed at all, since the only evidence was the notation “Service Type M” on the scheduling order.

For her part, the mother argued that the father’s appeal was untimely. Father did not appeal the resulting support order, claiming that he never knew of the hearing and was not served with the support order. Instead he filed a Motion to Relist Hearing approximately 39 days after the hearing, on which the trial court did not rule for six months. Father eventually appealed the December 2008 order denying his Motion to Relist, but solely pertaining to the court’s alleged failure to serve notice of the June 2008 hearing. The Superior Court held that the appeal should have been taken from the June 2008 hearing, and that the trial court lost its jurisdiction to act upon the Motion to Relist because it was untimely under 42 Pa.C.S. 5505 (30 day limit on modification or rescission of court orders).

An interesting side note: in Murphy, the trial court imputed an earning capacity for father based upon tax documents issued to the father years ago. The father failed to appear at several hearings or produce evidence of his income, so the trial court felt free to make adverse inferences.

In the recent Superior Court decision, Castadi v. Castaldi, the Domestic Relations Section mailed notices to the child’s mother inquiring whether child support should terminate in January 2007, when the child would be eighteen years old. Mother did not respond to the inquiries, and the Domestic Relations Section terminated child support. Unbeknownst to the DRS, the child had not yet completed 12th grade.

In the summer in 2007, the mother contacted DRS and notified them that the child had not graduated high school until June 2007. The DRS administratively amended the support arrears, adding an additional 6 months of arrears for which the father was responsible. The father filed a petition seeking to rescind the additional arrears, which was denied by the trial court. The Superior Court affirmed.

In its opinion, the Superior Court first confirmed that the child support order should have continued until the later of the child’s 18th birthday or high school graduation. The Court distinguished Style v. Shaub, in which the DRS administratively terminated child support after the child had turned 18 and graduated from high school. The Court held that DRS had continuing jurisdiction pursuant to Section 4352(e) to amend the arrears and was authorized to correct its error in terminating child support prematurely. The Court held that the mother was not estopped by failing to respond to the DRS inquiries.

An issue that befuddles some business owners during the course of their divorce litigation is how to regulate the operation and management of their businesses. In cases where both spouses own interests in the business, they may struggle for control of important business and financial decisions.

Some issues may be resolved under the company’s partnership agreement, shareholders’ agreement, limited liability company (LLC) agreement, or corporate by-laws. Yet, these agreements are often too vague to deal effectively with disputes between divorcing spouses who own businesses together.

Early in the evolution of the Divorce Code, the Superior Court of Pennsylvania authorized the Courts to appoint receivers or trustees to prevent the dissipation of an ongoing business concern. Mayhue v. Mayhue, 485 A.2d 494 (Pa.Super.1984). The Superior Court in Mayhue held that 23 Pa.C.S. § 3505(a) and 23 Pa.C.S. § 3323(f) authorized the Courts to enter an injunction to prevent a spouse from continuing a course of conduct calculated to defeat his wife’s property rights in the business. The Superior Court in Mayhue approved the trustee’s powers to liquidate assets to pay business debts, pay delinquent taxes, and satisfy intercompany debts.

The appointment of a receiver is not practical in every case because the expense of paying a receiver may not be justified. Still, there are some cases in which third party supervision of the business might be the only practical way t0 ensure continued smooth operation of a business caught in the middle.

For each of the past four years, I have been privileged to teach lawyers about the latest developments in child support as one of the hosts of Family Law Update, a satellite broadcast presentation sponsored by the Pennsyvlania Bar Institute. Since I joined the panel in 2005, several important decisions have influenced the direction of Pennsylvania child support law. Here is my summary of the six most important cases (and one change in the law itself) since 2005:

#6 – Reinert v. Reinert, 926 A.2d 539 (Pa.Super.2007). The Superior Court in this case affirmed the continuing viability of the “nurturing parent doctrine,” a policy in which the courts may excuse the mother of a young child from working to contribute toward the support of the child. Prior to this decision, it was established that a mother may refrain from working even to raise the child of a subsequent relationship. Yet, in Reinert, the Superior Court took the policy to its extreme. The Court terminated the support obligation of a mother who did not have custody of her eldest child when she gave birth to twins by a subsequent relationship and elected to stay at home to raise them.

#5 – Murphy v. McDermott, 2009 WL 2365992 (2009). The question of whether a parent must pay private school tuition may be raised in child support proceedings, but it is also a legal custody issue. The problem is: the legal standards to answer that question are different in support and custody proceedings. The Murphy case demonstrates how important “status quo” can be, compelling a parent to pay tuition even if he or she objected at the time when the child was enrolled in private or parochial school. The lesson: parents must get involved in the choice of schooling before the question of paying comes up.

#4 – Berry v. Berry, 2006 Pa.Super. 98 (2006). When child support becomes an issue between divorcing parents, the courts must decide whether certain income sources – such as pensions, rental properties and businesses – should be considered as marital property or income for support purposes. Generally, they cannot be both. In Berry, the Superior Court held that severance pay would be counted as marital property if acquired before separation or income if acquired after separation.

#3 – Estate of Johnson, 970 A.2d 433 (Pa.Super.2009). While this decision might be limited to its unique factual circumstances, the Superior Court certainly affected settlement practice by holding the estate of a deceased parent responsible for the payment of child support. The deceased parent had entered into a marital settlement agreement with his ex-wife, promising to pay child support until the youngest child was 18 years of age. The agreement did not specify whether the obligation would terminate upon the death of a parent, so the court held that it did not. The estate ended up owing nothing, however, because the Social Security derivative benefits received by the child as a result of the parent’s death satisfied the child support obligation. This case has prompted many lawyers to specify death as cause for terminating child support in their agreements, and has also motivated support recipients to demand life insurance as a security device.

#2 – Krebs v. Krebs, 944 A.2d 487 (Pa.Super.2008). The Superior Court fortified its prior admonitions warning support payors to report increases in their income. In cases where a payor fails to report an increase, even an increase not precipitated by a job promotion or change in employers, the court may increase child support retroactively to the date when the income increase occurred, even years later. The Superior Court in Krebs granted such a retroactive increase in child support even after the custodial parent

#1 – The 2010 Amendments to the Pennsylvania Child Support Guidelines. The 2010 amendments eliminated the Melzer formula, which was a budget-based method of calculating child support in high-income cases. The uppermost limits of the child support guidelines have been extended to $30,000 per month combined net income, and an income-based formula has been promulgated to calculate child support in high-income cases.

Pittsburgh ranks #325 and Philadelphia ranks #360 in a recent survey of the wealthiest American cities, conducted by Portfolio.com, a website operated by American Business Journals, publisher of the Pittsburgh Business Times. Allentown ranks #392, Erie ranks 412, and Reading ranks dead last at #420 in the survey.

A quick glance at the statistics cited by the survey reveals serious flaws. In its ranking of Pittsburgh, for instance, the survey lists the population as 297,187. This means that the survey completely overlooked the population of suburban communities like Fox Chapel, Upper St. Clair, Sewickley and Mt. Lebanon. Only City boroughs such as Shadyside and Squirrel Hill were considered in the wealth survey.

Presumably, the Philadelphia survey only included the City of Philadelphia and not the affluent suburban communities in Bucks County, Montgomery County, Chester County, or Southern New Jersey. Again, these flaws would cause one to question the validity of the rankings.

The Portfolio.com survey claims that the median home value was $86,000 and the median household income was $36,709 in Pittsburgh. Yet these statistics only include the City proper. In Sewickley, the 2008 median home value was $169,960 (from city-data.com) and the median household income was $50,414. In Fox Chapel, the 2008 median home value was $574,280 and the medial household income was $187,530. In Upper St. Clair, the median home value was $243,880 and the median household income was $111,502.

It is not possible to understand the economics of Pittsburgh or Philadelphia without considering their suburban communities.

What factors inflence a spouse’s eligibility for alimony after divorce under Pennsylvania law?

Under Pennsylvania law, post-divorce alimony “is a secondary remedy . . . available only where economic justice and the reasonable needs of a party cannot be achieved by way of an equitable distribution award and development of an appropriate employable skill.” These are the well-known words of the Superior Court of Pennsylvania in its Opinion in Nemoto v. Nemoto, 620 A.2d 1216 (Pa.Super.1993). Most of the important concepts in alimony jurisprudence are covered in this sentence. First, the trial courts must attempt to divide marital property in a way that avoids the need for post-divorce alimony. Why? Because the courts encourage a complete cessation of financial ties between divorcing spouses. If enough property (particuarly income-generating property) can be conveyed to a divorcing spouse, then that property can fulfill all of the spouse’s economic needs without the financial “umbilical cord” of alimony.

• The value of the assets and liabilities distributed to each of the parties must be considered before awarding alimony. 23 Pa.C.S. § 3701(b)(10), (16); Fee v. Fee, 496 A.2d 793 (Pa.Super. 1985).
• In its determination of alimony, the trial court must consider the income generated by a spouse’s marital and nonmarital assets. Ressler v. Ressler, 644 A.2d 753 (Pa.Super. 1994).

Second, our Courts encourage spouses to maximize their earning capacity and income potential through appropriate employment. In the first decade of the Divorce Code, enacted in 1980, the law provided that alimony could be awarded only for rehabilitative purposes, such as paying for college or vocational training. Alimony was not permitted in Pennsylvania prior to 1980, and the legislators who enacted the  Divorce Code worried that spouses would lose their incentive to become self-supporting if they could easily receive post-divorce alimony. The alimony law has been revised since 1980, allowing alimony for other reasons, such as meeting the budgetary shortfall of a spouse who is incapable of self-support. Still, the old law remains a strong influence among judges and lawyers in Pennsylvania. Several attempts to modernize the alimony law have failed, primarily because they might reduce a spouse’s incentive to go back to work. 23 Pa.C.S. § 3701(b)(1), (9), (17).

• The Court imputed an earning capacity to a dependent spouse who devoted her time to an unproductive start-up business instead of seeking gainful employment. Thomson v. Thomson, 519 A.2d 483 (Pa.Super.1986).
• An award of alimony for ten years was deemed excessive when a college education leading to a self-supporting job would require just four years. Barrett v. Barrett, 614 A.2d 299 (Pa.Super.1992).
• In cases where there is no evidence of an impediment that would prevent a spouse from becoming self-supporting, the court is authorized to limit an alimony award. Adelstein v. Adelstein, 553 A.2d 436 (Pa.Super.1989).
• In cases where a spouse’s earning capacity was limited by a medical disability or the disability of a custodial chid, Soncini v. Soncini, 612 A.2d 998 (Pa.Super.1992), the court may decline to impose a full time earning capacity upon a dependent spouse, justifying an award of alimony.

Finally, the law looks to the reasonable needs of a spouse. After a divorce, each spouse must have sufficient cash flow to meet his/her monthly household expenses. Yet, judges realize that two households cannot exist as cheaply as one combined household. The marital standard of living is just one of the seventeen statutory criteria for alimony awards, and in practice, it is one of the least influential. The expenses associated with custody of a child is more influential in an ex-spouse’s request for alimony. Just as important is the ability of a dependent spouse to become self-supporting through appropriate employment and the financial hardship that alimony may cause to the payor. When determining the amount and duration of an alimony award, the courts scrutinize the budget of a spouse seeking alimony carefully. 23 Pa.C.S. § 3701(b)(7), (8), (13).

• The Court will not allow an award of alimony that would divert twice as much income to the alimony recipient as the payor, which would allow her to enjoy a better standard of living than she had enjoyed during the marriage Ressler v. Ressler, 644 A.2d 753 (Pa.Super.1994).

Marital misconduct is just one of the seventeen factors in awarding alimony, and it has remained one of the least influential since the enactment of the Divorce Code. 23 Pa.C.S. § 3701(b)(14); Nuttal v. Nuttal, 562 A.2d 841 (Pa.Super.1989).

Parents who are paying or receiving child support under the Melzer formula for high-income cases (where the parents’ combined net incomes is over $20,000 per month) should contact their lawyers immediately. The new Pennsylvania child support guidelines (which eliminated the Melzer formula, effective May 1, 2010) will almost certainly result in a child support decrease for most of those high-income cases. Rather than considering the custodial parent’s household budget to determine the proper amount of child support, the new guidelines are income-based at all income levels. The child support guidelines chart has been extended upward to $30,000 per month combined net income. For cases where the parents’ combined income is greater than $30,000 per month, the new guidelines start with a base amount and adds a percentage of the parents’ combined income over $30,000 per month.

So, if nothing but the guidelines have changed, can a parent file a petition for modification? Yes, probably. A new Guideline amount resulting from new or revised support guidelines may constitute a material and substantial change in circumstances.  Pa.R.C.P. 1910.19(a).

Parents whose combined net income is less than $20,000 per month might have grounds for modification if the amount of child support under the new guidelines is materially different from the current support order. At some income levels, the amount of child support has increased. At other income levels, it has decreased. Parents are urged to contact their lawyers to find out whether they are entitled to modification.

This time each year, divorce lawyers everywhere face the same question from clients: are my legal fees are tax-deductible? For guidance on the subject, I turn to the definitive treatise: Divorce Taxation by Melvin B.  Frumkes. The main principal to keep in mind, when considering whether legal expenses are deductible, is whether they are paid or incurred for the production or collection of taxable income. IRC § 212. Legal fees incurred to collect alimony, for instance, are deductible, but legal fees related to child support are not. Legal fees related to marital dissolution are not tax-deductible, but fees for a spousal support modification proceeding are. The fees related to a divorce lawyer’s advice about tax issues – such as alimony issues, valuation and division of retirement plans, allocation of dependency exemptions, deductibility of mortgage interest, taxpayer filing status, and innocent spouse relief – are likely to qualify as deductible expenses.

Incidentally (and ironically), this post is not intended as tax advice and should not be used by any person to avoid any penalties under the Internal Revenue Code. Readers are urged to contact their divorce lawyers and qualified professionals for advice specifically suited to their factual circumstances.