Cunningham v. Cunningham

CIRILLO, President Judge,

dissenting:

I respectfully disagree with the majority on the issue of the determination of Mr. Cunningham’s net disposable income as it relates to the inclusion of one hundred percent of the depreciation deduction and depletion allowance shown on his 1984 federal tax return. While the court did not necessarily err in using the 1984 return as the primary basis for its determination of Mr. Cunningham’s income or earning capacity, the fact remains that the reasons given for the court’s determination of Mr. Cunningham’s net income are not legally adequate. I agree with appellant that the arbitrary inclusion of one hundred per cent of these deductions unfairly impacted upon the equitable distribution order and the alimony award.

I question whether the master, and hence the court, had enough information to make the necessary assessment of Mr. Cunningham’s true financial situation. A review of the record indicates that specific data that would have aided the master and the trial court in assessing Mr. Cunningham's true financial situation was not before the court. The lack of such data and the resulting hazy financial picture should not accrue to the benefit of either party at the expense of the other. This court traditionally takes with a grain of salt a divorcing breadwinner’s claim of his “pathetic financial plight,” Commonwealth v. Miller, 202 Pa.Super. 573, 578, 198 A.2d 378, 375 (1964), and has long recognized that some husbands approach the divorce process with something less than total financial candor. Williams v. Williams, 175 Pa.Super. 409, 412, 104 A.2d 499, 501 (1954). Nevertheless, the lack of concrete information does not excuse the feeble *287analysis indulged in by the trial court in support of its determination.

To say, as the trial court did, that “[t]he income of Defendant is, indeed, extremely difficult to ascertain,” that “[t]he evidence presented at the Master’s hearing regarding Defendant’s income was quite vague and inconclusive,” and that “[t]he Court agrees with the Master that the term “business expense” [of which Mr. Cunningham had claimed a “substantial amount” on the one income and expense statement filed] is entirely too broad and vague to be useful in determining Defendant’s true income,” and then to conclude that a monthly income of $2,000.00 was “reasonable under the existing circumstances” is not grounded in sound legal reasoning. The only financial data cited by the court was an admitted monthly income of $1135.00, a 1984 net profit of $6188.52 and the depreciation and depletion deductions for the same year of $17,997.00. Beyond the statement that “depreciation and depletion are accounting terms which may not reflect Defendant’s actual expenditures in a given year,” the trial court gave no justification for including all of both allowable deductions. It appears to have focused on Mr. Cunningham’s “actual expendable income” to the exclusion of other considerations.

It is manifestly unreasonable to presume that, because there is no evidence that actual contemporaneous expenditures were made in the year the depreciation and depletion were claimed, that the amount of those deductions can fairly be attributed to disposable income. To reason as the trial court did here would mean that, if the monies represented by depreciation and depletion allowances were not spent in the same year they are claimed, those monies are then available for figuring support, alimony and equitable distribution. There is no requirement that the allowances made for replacing equipment and acquiring new income-producing resources be spent for those ends in the same year the deductions are taken. To the contrary, these deductions are allowed to make certain that businesses can *288set aside monies to make these expenditures as needed in the future. The fact that, by virtue of these deductions, Mr. Cunningham, a sole proprietor, may indeed have realized more net income than was reflected on his 1984 return does not translate into the conclusion that all of this net income is available for alimony or should be considered for equitable distribution purposes. It is not equitable to force a businessman to spend monies set aside for replacement of the tools and raw materials of his business in making alimony payments, nor is it equitable to reduce his share of marital assets because he has such funds available for the business.

Some portion of these monies must be viewed as business assets, allocated to the replacement of worn out equipment and exhausted natural resources, regardless of the form of the business. Mrs. Cunningham has no right to alimony drawn from, or to equitable distribution of, the business assets or funds; her rights are only with regard to those available to Mr. Cunningham personally, after the business has been taken into account. It must be remembered that it is the business which supports them both. Its continued existence is crucial to Mr. Cunningham’s ability to earn income and, not coincidentally, to his ability to pay the alimony awarded.

The trial court erred as a matter of law in limiting its determination of Mr. Cunningham’s net income to the factors it recites and in failing to take into account the other factors identified by our case law as important to this determination. For example, in Commonwealth ex rel. Maier v. Maier, 274 Pa.Super. 580, 418 A.2d 558 (1980), we recognized that only the portion of depreciation representing monies actually available to the defendant for his personal use should be taken into account when making a support award. Id., 274 Pa.Superior Ct. at 585, 418 A.2d at 561. In Commonwealth v. Miller, supra, we stated:

In ascertaining the earning capacity of a defendant, the net income ordinarily should not be increased by the *289entire amount of depreciation claimed in the tax return but by a part of it as determined from all the circumstances including the amount of depreciation claimed and the property depreciated.

Id. 202 Pa.Super. at 577, 198 A.2d at 375. In the case of real estate, for example, depreciation is more likely to represent truly available cash since real estate does not wear out to the point of needing to be replaced in order to maintain the viability of the investment. It generally increases in value, and depreciation allows an owner to maintain and improve the property, thereby insuring its market value, and to recover, over time, the investment capital. In Mr. Cunningham’s case, however, it is equipment essential to his business that is being depreciated and the deductions allowed are more fairly viewed as going to the eventual replacement of that equipment. See Lyday v. Lyday, 360 Pa.Super. 16, 519 A.2d 967 (1986) and cases cited therein. Similarly, a portion of the depletion allowance may be justifiably excluded from Mr. Cunningham’s net income. When his current coal reserves have been completely mined, he must be in a position to purchase new land or coal rights.

It may be that the $2000 per month attributed to Mr. Cunningham is reasonable; it may even be that it is too little notwithstanding the fact that there appears to be some evidence that Mr. Cunningham’s business was experiencing a decline which began after the parties’ separation. As we stated in Commonwealth ex rel. Caplan v. Caplan, 236 Pa.Super. 605, 346 A.2d 822 (1976), “[tjhis Court has been careful to scrutinize an alleged decrease in salary or earnings where a defendant is in business for himself.” Id. However, the trial court’s determination cannot stand based on this record. I agree with appellant that the court proceeded to make its determination without sufficient facts and without taking into account all of the pertinent factors. Commonwealth ex rel. ReDavid v. ReDavid, 251 Pa.Super 93, 380 A.2d 398 (1977) (failure to inquire into business interests and transactions resulted in not properly evaluat*290ing all factors necessary to determine reasonableness of support order); Parkinson v. Parkinson, 354 Pa.Super. 419, 512 A.2d 20 (1986) (court should consider the full nature and extent of financial situation).

We have recognized that “income must reflect the actual available financial resources and not the ofttime fictional financial picture which develops as the result of depreciation deductions taken ... as permitted by the federal income tax laws.” Lyday, supra 360 Pa.Super. at 22, 519 A.2d at 970. It is just as much an endorsement of a “fictional financial picture” to disregard one hundred per cent of depreciation and depletion as it is to allow them one hundred per cent. In every case, the true income lies somewhere in between.

In conclusion, I believe that the trial court erred in determining Mr. Cunningham’s net income and that this error may have negatively impacted upon the equitable distribution order and the alimony award. I would remand for a corrected determination of Mr. Cunningham’s disposable income and, if necessary, a corresponding adjustment in the equitable distribution scheme and the alimony award. Further, in doing so, I would advise Mr. Cunningham that it serves the best interests of both parties for him to make available the information the court needs to make its determination and fashion appropriate relief. I would encourage him to provide past tax returns, business expense information, data on how much of the money represented by these deductions is being held aside and how much is, or will be, needed to replace equipment and to acquire new coal reserves in the future so that he can continue to operate what is and has been a viable business. As this court has previously recognized,

Although depreciation must not be treated as an expense, neither can it be treated in the same category as net profit. If, for the purpose of complying with a court order, a man is compelled to expend or exhaust his capital, without opportunity to maintain and preserve that *291which makes his business possible, it will eventually work to the detriment of both the parties.

Williams, supra 175 Pa.Super. at 413, 104 A.2d 499.