Alimony is often a hotly contested issue in a New Mexico divorce. The Second Judicial District Court in Albuquerque has established alimony guidelines. However, disputes still arise. The most common disputes involve the calculation of income and the duration of spousal support.
The recent New Mexico Court of Appeals case of Clark v. Clark addressed just these issues. In that case, the Court had to decide whether non-W-2 revenue from a Subchapter-S corporation is included when calculating spousal support, and whether limited-duration spousal support was appropriate here.
Income Calculations With Family Owned Subchapter S Corporation
In the Clark case, the husband and wife were married in California in 1998. The wife didn‘t work outside the home during the marriage. However, she did receive income as an officer in her husband‘s separate property business, a Subchapter-S corporation.
The Albuquerque district court judge had to determine the husband‘s income for the purposes of spousal support. According to the district court, the husband received regular income from his corporation (W-2 income), and he also received non-W-2 income from the corporation.
Here, all profits and losses (K-1 allocations) from the corporation were passed to the husband. He deposited everything into a community bank account.
Because of some inconsistencies between the husband‘s income and the K-1 allocations, the court had difficult calculating the husband‘s “significant income” from the corporation. Ultimately, the court determined that his pre-tax income for purposes of spousal support was $35,284 per month. In short, the court didn‘t include the non-W-2 income into this determination of monthly income.
In deciding spousal support, the court also took into account that the husband planned to retire soon. The husband was 66 years old, and the wife was 60 years old. The court emphasized that the husband‘s job was physically demanding, and he only remained employed because of the ongoing divorce proceedings.
Evidence of the wife‘s earning capacity wasn‘t introduced, and the parties didn‘t anticipate the wife‘s “return to work as a viable option under the circumstances.” In other words, the parties seemed to anticipate that the spousal support would be indefinite.
The wife submitted a budget that defined her “reasonable support needs” as totaling $20,078 per month. The court said the budget was unreasonable, citing specific unreasonable costs such as $200 per month for a psychic and $1,000 per month for vacations. As a result, the court only awarded the wife transitional support for 18 months, in the amount of $6,500 per month.
Factors to Be Considered in Alimony Calculation
The Court of Appeals first explained the appropriate way to determine spousal support. A district court is supposed to consider: 1) the needs of the proposed recipient, 2) the proposed recipient‘s age, health, and means of self-support, 3) the proposed payor‘s earning capacity and future earnings, 4) the duration of the marriage, and 5) the amount of property owned by the parties.
Burden of Proof on W-2 Income
The Court next emphasized that the primary issue before it was whether the district court erred when it failed to consider the husband‘s non-W-2 income when it determined the amount of spousal support.
The Court looked specifically to the nature of the cash distributions and the non-W-2 income in order to decide the issue. The Court reasoned that, because the funds were actually received by the husband, deposited in a community bank account, and used to pay the couple‘s living expenses and other needs, the funds look like income for purposes of calculating spousal support.
The Court thus determined that Subchapter-S corporation funds that are “actually distributed to the share-holder spouse must be attributed to the shareholder-spouse as income for spousal support purposes unless and until the shareholder-spouse can demonstrate what portion of the corporate distribution was used for business purposes or to offset the payment of income taxes resulting from any K-1 allocations.”
In other words, the burden in this case was on the husband to prove that the non-W-2 income was used for business purposes and not part of his pre-tax income.
The Court emphasized that it wouldn‘t make presumptions in favor of a shareholder-spouse (here, the husband) when deciding whether corporate funds are actually part of the shareholder-spouse‘s income.
The Court explained that important equity principles are at stake here. It wouldn‘t be fair to allow a share-holder spouse like the husband in this case to shield himself from spousal support obligations by suggesting that some of his assets are actually part of corporate funds and decisions.
If he wants to exclude those funds from his income for the purposes of spousal support, then the burden is upon the husband to prove that the funds truly are used for business purposes and aren‘t actual income.
The Court went on to reason that, when looking at the financial figures from the husband‘s income and the tax payments for the corporation, it just didn‘t make sense to think that all of the non-W-2 income could be used to pay income tax increases. As a result, the Court determined that the district court abused its discretion when it failed to include the husband‘s non-W-2 income in its calculation of spousal support.
Duration of Spousal Support
The Court then turned to the question of the duration of spousal support. Looking to prior New Mexico case law, the Court explained that limited-duration spousal support typically involves younger spouses who will find ways to adequately support themselves in time after the divorce.
Further, even in cases where courts determine that a spouse will ultimately become self-sufficient, the “proper course is to order such support for an indefinite time,” until the recipient spouse “has in fact become more self-sufficient.”
The Court then turned to the specific facts of this case. It reasoned that the wife was a 60-year-old homemaker with no known prospects for employment or any future earning capacity. It then emphasized that the husband had the financial ability to continue paying spousal support indefinitely.
The Court reasoned that a limited-duration award of spousal support for the wife would only be appropriate if, after that time, the wife‘s income would be able to support her reasonable needs. Since the district court didn‘t make any findings about the wife‘s “future employability or potential income,” it couldn‘t have known whether a mere 18 months of support would be sufficient. As such, the Court found that the district court abused its discretion when it limited the duration of spousal support to only 18 months.
Back to District Court
Based upon its findings, the case was sent back to District Court for purposes of addressing the non-W-2 income as well as the duration of the alimony to be paid.