Superior Court Finds Income is Income Until it Isn’t
For time immemorial Pennsylvania’s appellate law has held that people who have children have a duty to deploy their resources to see that those children are adequately support. Child support is a “priority” obligation. “The duty to support one’s child is absolute, and the purpose of child support is to promote the child’s best interests.” McClain v. McClain, 872 A.2d 856, 860 (Pa.Super. 2005)(quoting Depp v . Holland, 636 A.2d. 204, 206 (Pa. Super. 1994). “Child support is a shared responsibility; both parents must contribute to the support of their child in accordance with their relative incomes and ability to pay.” Depp , 636 A.2d at 213 (quoting DeWalt v . DeWalt, 529 A.2d 508 (Pa. Super. 1987)). A.J.Z. v. H.A.K.S. 1024 & 1052 WDA 2017
When the General Assembly passed a statutory support law in 1985 it adopted what is termed the “income shares” model of imposing child support and defined income consistent with Section 61 of the Internal Revenue Code. It left one exception to that definition, viz., alimony. 23 Pa.C.S. 4301.
While casting the “net” of income for available support to be essentially consistent with income subject to federal income tax, the courts have acknowledged some exceptions created others. The May 8 ruling in Moser v. Knaub creates a new one.
Both Section 4302 of the Support Law and 26 U.S.C. 61 include in the definition of income “gains from dealings in property.” The usual context in which this is considered is the 500 shares of Merck stock we bought last November for $100 and sold yesterday for $130. We made $30 a share or $15,000 pre tax and Uncle Sam and his Pennsylvania Revenue Department cousin will be coming to see us for their “contribution” in 2025 when we file our 2024 income tax returns. We used a modest example but in recent years we have worked with clients who had tens of thousands of founder’s stock or options granted at $5 a share which were worth $60 a share when the company went public. Those are treated as compensation and can yield a W-2 with millions of dollars of income on it. Readers familiar with the Hanrahan case decided in 2017 by the Supreme Court know that while Mr. Hanrahan made $1million in 2010 and $2.3million in 2011 his $15million wages in 2012 still counted as income even though the bump in income was the product of a fee based on a single transaction.
So, if you sell your Merck you can bank on that $15,000 gain factoring into your child support. If your 25,000 founding stock options granted at $5 a share hit the market at $60 you will have income from dealings in property of $1,375,000 which will be counted as available for support.
In Moser v. Knaub it is clear the mother of the child is someone in very poor health with little ability to earn income. In 2011 her parents gifted her a home (actually a sale for $1.00) which she later sold in 2021 to net $118,000. Mr. Moser sought a modification of support premised upon that sales transaction and the income it yielded. The trial court denied the request and on May 8, 2024 the Superior Court affirmed.
The Superior Court memorandum seems to indicate that the courts have the power to ignore this gain from the sale of real estate without specifying an identifiable reason. They cite to K.J.P. v. R.A.P., a 2013 case in which they denied an obligor’s claim to offset other income with a $115,000 capital loss from the sale of an investment property. The trial court found it to be a personal residential transaction rather than investment transaction. 213 Pa. Super. 126.
Until 2013 and K.J.P. there was no precedent related to how to address transactions involving capital losses. The statute is silent on this point. That is not the case with gains associated with transactions in property. Section 4302 is explicit in finding that to be “income” under the Support Law. The appellate opinion relies on the Supreme Court opinion in Humphreys v. DeRoss which held than while an inheritance might be a reason to deviate from guideline support it was not itself “income available for support.” 790 A.2d 281 (Pa. 2001). But, whether you agree with Humphreys or not, an inheritance is not income under 23 Pa. C.S. 4302, a principle consistent with longstanding federal tax law. The Court here states, without authority, that the sale of a personal residence does not result in income which is subject to a support obligation. (Slip at p.7). It next cites another memo decision from April 1, 2024 where the gain on a personal residence was not income available for support because a party credibly testified that she used the proceeds from the sale to buy another residence.
The clear message from this case seems to be that a good story can be a means to avoid a clear statute. That is not to say that there are not times when equity might make it unreasonable to construe the statute strictly. In this case, Ms. Knaub’s parents acquired the real estate at some unknown date for $33,000. Again, in 2011 they sold the property to their daughter for $1.00. Obviously, the import of the transaction was a gift but in 2011 the gift tax exclusion was $26,000 ($13,000 per parent). Thus, a gift tax return was due from which the size of the gift could be measured. The opinion says nothing about a gift tax return. Under Humphreys the gift itself was subject to exclusion from income. In theory, it could be that in trying to keep the property, Ms. Knaub borrowed heavily against it such that there were no proceeds at sale. That might justify a deviation but it does not convert “income” to “not income” from dealings in property. Moreover, that’s not what occurred here from the facts presented. Rather Ms. Knaub received the proceeds but spent the majority on a substitute home, medical and legal expenses. Are home, medical and legal expenses an offset again any other form of income for support? No. If her parents had given her securities in 2011 which appreciated by $130,000 in the next decade, are those gains subject to federal and state tax but exempt from support? The answer seems to be clear; maybe.
The wish to help someone who appears to have some health and economic challenges in a child support proceeding is understood. But the decision ignores the law. And that’s not what courts are supposed to do.
Moser v. Knaub
