What To Do If The Tax Return Shows A Loss

Last month I wrote about Marriage of Sorge (2012) – CA-and its holding that a fiduciary duty to update material changes in income did not continue past the entry of the judgment of dissolution. This article addresses another holding in that case, that the trial court, in calculating a child support, could properly exclude certain losses claimed by Mr. Sorge with respect to investments.

The parties were married 17 years and commenced a divorce in 2000. That divorce concluded with a judgment of dissolution in 2003. Mr. Sorge was found to have annual earnings of about $800,000 and child support was set at $8,500. The judgment was later registered in California and Mrs. Sorge sought to modify child custody and support. She also sought an award of attorney’s fees.

In about 2007, Mr. Sorge sold his former business for about $100 million and made a number of investments in various start-up companies. As is frequently the case, those start-ups experienced significant losses. Mrs. Sorge was no light weight either, showing assets of $14.2 million and expenses of more than $43,000 per month. Litigation ensued between the parties.

The parties agreed to retain a joint forensic accountant to opinion on the parties’ assets and income. The expert, approved by the court, prepared a final report detailing the operating losses and showing that for 2007, husband had a net monthly loss of $9,100 and a monthly loss of $35,600 for 2008. The report also stated that if the losses were excluded, husband’s monthly income for 2007 was $320,800 and $229,100 for 2008. In addition, husband was found to have interest and dividend income in excess of $200,000 per month for both 2007 and 2008.

The trial court judge did not consider the losses incurred by husband with respect to the start-up companies and set child support at $18,000 per month. Husband appealed saying it was error for the court not to consider the losses as his actual reported income each year was a loss.

The Court of Appeal did not agree with husband. The Court noted that a parent’s first and principal obligation is to support his or her minor children according to the parent’s circumstances and station in life. Family Code, Section 4053(a). The California guidelines are mandatory and produce a presumptively correct child support. Family Code, Sections 4053 (k); 4052. The guideline may be rebutted by evidence showing the guideline amount is unjust or inappropriate due to special circumstances in the particular case. Family Code, Section 4057 (b) 5.

Husband argued that Family Code, Section 4058, dictated finding that his income was, in fact, a loss. The Court of Appeal pointed out that the court has the discretion to consider earnings capacity of a parent in lieu of actual income consistent with the best interests of the children. Family Code, Section 4058 (b).

Husband, despite his significant capital losses and negative monthly income, appeared to continue to lead a wealthy-to-lavish lifestyle and that using husband’s argument, the guideline would require mother to pay father who had many times the assets of mother and absent the investment losses a greater income.

What this may mean for the ordinary cases is that the court exercising discretion in favor of a higher child support award is likely to be approved, if challenged, by the higher court and that losses, while reportable and deductible from income for tax purposes, may be disregarded by the court in calculating your child support.