Show Me the Money – Imputation of Income and the Earnings Capacity Rule
You file a motion to modify alimony and child support pursuant to a prior court order. The other party (hereinafter referred to as the supporting party) was employed as a vice president at a bank earning $175,000 per year. However, not long after the supporting party was served with your motion, you learn that the supporting party is no longer employed by the bank. Instead, they are now employed as a golf course groundskeeper at a local golf course earning $27.50 per hour.
Supporting party contends that s/he has been unsuccessful in finding employment with compensation commensurate to that earned under the former employment, that s/he cannot earn more than $27.50 per hour, and that s/he has it on good authority that their alimony and child support obligation will be based on the actual income from working as a golf club groundskeeper and not on income earned in the past as a bank executive.
The supporting party files a motion to modify, seeking a reduction of the child and spousal support.
It does not seem fair to you to base the supporting party’s obligation on current income because you suspect the supporting party voluntarily terminated their bank job.
What will the trial court do?
Earnings capacity rule
Pursuant to North Carolina law, in determining a party’s financial obligation for child or spousal support, the court must base that obligation on the parties’ actual incomes determined as of the date of the support award. There is an exception to this mandate. In Brady v. Brady, a 2022 Court of Appeals decision, the appellate court discussed when it is appropriate to apply the earning capacity rule:
Unless the supporting spouse is deliberately depressing their income or indulging in excessive spending because of a disregard for the marital obligation to provide support for the dependent spouse, the ability of the supporting spouse to pay is ordinarily determined by their income at the time the award is made. If the supporting spouse is deliberately depressing income or engaged in excessive spending, then the capacity to earn, instead of actual income, may be the basis of the award. Brady v. Brady, 282 N.C. App. 420, 424, 871 S.E.2d 565, 569 (2022).
In other words, the court can calculate the support obligation based on the supporting party’s ability or capacity to generate income and is not constrained from using the lower amount of actual income.
Note that according to Brady, the earnings capacity rule is applicable both to situations where the supporting payor party deliberately terminates or depresses their income as well as when the supporting party engages in excessive spending. It is common practice in support cases to critically examine and challenge a supporting party’s living expenses, which affects the net income. Therefore, to the extent that an expense of the supporting party is found to be unreasonable, that frees up more net income available to pay spousal and child support. Disallowing the living expenses of the supporting party does not include the imputation of income.
Whether imputation of income is appropriate in your case depends on the intent of the supporting party in voluntarily reducing their income. For example:
- Was the decision of supporting spouse to quit, change jobs or cut back work hours prompted by their health?
- Was the reduction in income a deliberate attempt to avoid their support obligation?
- What efforts were expended by the supporting party to replace the income that was lost from the termination of employment? Were those efforts made in good faith?
- Is there a history of avoidance of family financial responsibilities by the supporting party?
- Was the employer/employee relationship in good standing at the time the employment was ended?
- Was the employment terminated with or without cause?
Obviously, there are additional questions that can be pursued.
Hereinbelow are two North Carolina appellate cases tendered as examples of the type of evidence the court can consider regarding bad faith:
Brady v. Brady, 282 N.C. App. 420, 424, 871 S.E.2d 565, 569 (2022) (on appeal from the North Carolina Court of Appeals) Defendant was a self-employed dentist, and his wife taught yoga. Husband’s expenses which were challenged as not being reasonable included a $25,000 dining table; over $10,000 for first-class seating accommodations on air flights and staying at the Ritz Carlton; over $9000 during a two-month period on guns and gun paraphernalia; $6,300 for trips to Utah (the parties were Mormon); $5,800 to take the children on vacation one year via first class air flight; and over $13,000 for visits with his second wife “in foreign locations.”
Yeun-Hee Juhnn v. Do-Bum Juhnn, 242 N.C. App. 587, 775 S.E.2d 310 (2015)
The facts found evidencing the defendant’s deliberate attempts to depress his income in bad faith included his intentionally shutting down his brokerage business and intentionally understating the business’s income; the defendant’s tax returns for 2007 and 2008 were found to be “spurious” and contained falsified and inaccurate information; defendant forged his wife’s signature on the tax returns; defendant provided support for his paramour and her children while refusing to provide support to plaintiff and his children; and since plaintiff filed her claim for divorce, the defendant has “engaged in voluntary unemployment or underemployment.”
Remember that in order to use the earnings capacity rule, simply quitting one’s employment and taking a lower-paying job is not sufficient to warrant the application of the earning capacity rule. It is not enough to show that the supporting party’s income has been depressed voluntarily. Resigning from one’s job voluntarily without a showing of bad faith does not automatically result in the application of the earnings capacity rule. You must also show that the depression of income through termination of employment was deliberate and motivated by bad faith, that the decision to change or end employment was an attempt to deliberately suppress one’s income to avoid having to pay support. Without that evidence, as well, the trial court is without the power to impute income.
Having qualified, knowledgeable attorneys by your side is essential to the protection of your rights. Offit Kurman’s attorneys, who practice in the area of family law, are experienced in handling support matters, including child support, post-separation support and alimony. OK’s attorneys also can and do handle other family law issues. Our attorneys are available for consultation.
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