No Capital Gains Included In Plaintiff’s Income For Child-Support Purposes

The trial court did not err when computing the parties’ incomes - particularly capital gains - for purposes of determining child support, the Michigan Court of Appeals has ruled.

In Sabatine v Sabatine (Docket No. 361074), the defendant claimed, among other things, that the Michigan Child Support Formula (MCSF) refers to “net capital gains” as income and the trial court should have included “unrealized” capital gains associated with the plaintiff’s inheritances as part of his income.

The Court of Appeals refuted the defendant’s argument, affirming the Leelanau County Circuit Court’s decision.

“[T]he financial experts clearly explained the nature of capital gains,” the Court of Appeals said.

“Given the common-sense notion of ‘capital gain’ as testified to by the expert witnesses, the trial court properly concluded that no capital gains were to be included in plaintiff’s income.”

Judges Douglas B. Shapiro, Stephen L. Borrello and Christopher P. Yates were on the panel that issued the unpublished opinion.

No Capital Gains

Addressing the defendant’s argument, the Court of Appeals examined MCL 552.605(2). That statute says, in relevant part: “Except as otherwise provided in this section, the court shall order child support in an amount determined by application of the child support formula developed by the state friend of the court bureau as required in section 19 of the friend of the court act, MCL 552.519.”

The Court of Appeals noted the defendant referenced several provisions in the MCSF to support her arguments:

• MCSF 2.01(A) - “The term ‘net income’ means all income minus the deductions and adjustments permitted by this manual. A parent’s ‘net income’ used to calculate support will not be the same as that person’s take home pay, net taxable income, or similar terms that describe income for other purposes.”

• MCSF 2.01(B) - “The objective of determining net income is to establish, as accurately as possible, how much money a parent should have available for support. All relevant aspects of a parent’s financial status are open for consideration when determining support.”

• MCSF 2.01(C) - “Income includes, but is not limited to, the following: … (6) Net capital gains are included as income. When attributable to a single event or year, or when cash may not be immediately available to the parent, consider them to the extent they can be used to represent income over several years. To the extent that a party proves that a portion of the capital gain was considered in the property division of the judgment of divorce between the parties, that portion should not be included as income.”

• MCSF 2.01(H) - “Interest earned or potentially earned on inheritances and gifts … should be considered as income. Impute a reasonable rate when determining the potential investment return that could be earned.”

Here, the defendant “contends that the trial court erred by not considering plaintiff’s inheritance money when calculating his income for purposes of child support,” the Court of Appeals observed. “However, the record reveals that the trial court did take plaintiff’s inheritance into account.”

The Court of Appeals explained that Jason Bodmer, an income assessment expert, was asked about “interest income, dividends and capital gains” related to “a number of Wells Fargo accounts” related to the plaintiff’s separate property. “Bodmer took the income from these accounts into account when determining plaintiff’s three-year average income for child-support purposes. The average total of the ‘interest income, dividend income, and net capital gains was [approximately] $35,700’ a year. He said that there was no need to impute any income on investments in this case because the amount was known. … As evidenced by the record, the trial court took the amount into account when computing plaintiff’s income.”

The defendant also asserted that because the MCSF mentions “net capital gains” as income, the trial court should have included “unrealized” capital gains associated with the plaintiff’s inheritances as part of his income. “But the financial experts clearly explained the nature of capital gains,” the Court of Appeals stated.

Here, Chris Bott, the defendant’s expert, said the plaintiff had “no realized capital gains for tax year 2020,” the Court of Appeals noted. “He stated, ‘Unrealized gains, which would be representative of the growth and the value of the investments over their basis are not reported in a given year until there’s a taxable event, i.e., they are sold.’ He indicated that unrealized capital gains fluctuate continually. The measurement date for the amount would be ‘the date that you sold it.’”

Meanwhile, the Court of Appeals said Bodmer testified that capital gains “do not include the change in value of capital assets. It seems silly to say this, but the very definition of a capital gain is such that a capital gain can only be realized if a … capital asset is sold for a gain. I say that because it would be impossible to assign income associated with a change in value of a capital asset and also include income associated with capital gains. Those two concepts are mutually exclusive, you can’t include both, right? If you were to include both, you would in effect be double counting value.”

In addition, Bodmer testified that “the change in value of an investment doesn’t actually represent cash income” and is “not an amount that an individual has access to,” the Court of Appeals pointed out. “He explained that ‘net capital gains’ means ‘capital assets that are sold at a gain, as well as capital assets that are sold at a loss, the net number of those two.’ He said that one does not look at the beginning value of a brokerage account at a certain date and compare it to the value at another date and impute the difference as income, ‘because when the asset is actually sold it will trigger an actual capital gain, which would capture that change in value.’ Bodmer explained that it would be an ‘absolute nightmare’ to try to continuously capture the value of a brokerage account and use it for imputation of income.”

Bodmer added that investment accounts “change in value constantly,” the Court of Appeals said, noting that he also said, “I don’t think anybody would suggest that the individual should be paid back if their investment in Apple stock decreased in value. Rather the way it’s handled in the child support formula is to capture the income when the asset is actually sold in the form of a capital gain or capital loss.”

According to Bodmer, “if one were to look at ‘unrealized capital gains in addition to net capital gains … you will by definition be capturing the same dollar point,’” the Court of Appeals emphasized. “He stated, ‘To include both would be such that you would be capturing the increase in value as it occurs and then recapturing it when they sell it.’ Importantly, he explained that ‘net capital gains … by definition can only occur when a capital asset is sold for a gain.’”

Bodmer explained that “calculating unrealized gains would be nearly impossible because of the continuously changing nature of large numbers of ‘investments and equities,’” the Court of Appeals added. “He further explained that the number on an account pertaining to an unrealized capital gain referred to the gain over the entire life of the investment and was not an annual amount.”

Therefore, given the experts’ “common-sense” explanations of capital gains, the trial court “properly concluded that no capital gains were to be included in plaintiff’s income,” the Court of Appeals held.