Ruling addresses stock options and the calculation of child support

Family law attorneys recognize that a parent's obligation to support their children is considered of paramount importance as a matter of public policy. For this reason, the definition of "income" for child-support purposes is broad.

For example, the net profits of a wholly owned company, regardless of whether the obligor takes those profits, constitute income. Family Code Section 4058(a)(2). Similarly, an employer's forgiveness of debt is also "income" for purposes of child support. In re Marriage of Riddle, 125 Cal. App. 4th 1075, 1080 (2005).

Moreover, many gains that are not taxable income nevertheless constitute income for child support purposes. In re Marriage of Alter, 171 Cal. App. 4th 718, 735 (2009).

Also considered income for child support purposes is gains derived from stock options. What was not clear until now, is at what point do stock options constitute income for child support purposes?

In a case of first impression, the court in In re Marriage of Macilwaine, 18 DJDAR 8490 (Cal. App. 1st Dist., Aug. 28, 2018), ruled that stock options become income for child support purposes when all impediments to sale are removed. A parent's investment preferences cannot affect "income" for purposes of child support.

The parties in Macilwaine married in 1996. They had four children together. In June 2012, John, the husband, became chief technology officer for the Lending Club. His compensation consisted of a base salary, an annual performance bonus at around half of his base pay, and stock option grants. A judgment of dissolution incorporating the parties' marital settlement agreement was entered in December 2012. John's stock options started to vest in July 2013. When an option vested, John obtained the right to purchase shares at the designated strike price. Lending Club had its initial public offering in late December 2014. John's income, as reported on his tax return, more than tripled from 2012 to 2014, when it was almost $2.6 million. As a result, in 2014, John paid approximately $32,000 per month in child support. Just before trial, John disclosed that the proceeds of options he exercised and sold in the first nine and one-half months of 2015 approached $1 million.

In August 2014, John sought to cap the judgment's bonus child support provision due to his extraordinarily high earnings. His former wife, Patricia, opposed, arguing that there had been no material change in circumstances; although John's income had increased, he anticipated this would occur once his stock options vested.

The trial court granted John's request to modify child support under the extraordinarily high earner provisions of Family Code Section 4057(a)(3). The wife appealed.

The Court of Appeal looked to In re Marriage of Berger, 170 Cal. App. 4th 1070 (2009), where the court held that a court may not exclude from "income" compensation that is available to the supporting parent simply because the parent has voluntarily elected to defer acceptance of it. The Macilwaine court ruled that applying an "exercise and sale" rule to determine whether the options may be considered income is error. Instead, the court said a "vest and mature rule" is the proper approach.

Macilwaine is an important case for family law attorneys for a number of other reasons in addition to its discussion of when stock options may be considered income available for child support purposes. The case also discusses the "needs" of children of wealthy parents, holding that "needs" are determined by the standard of living attainable by the income available, not by an objective standard or by the manner in which the parents' income is expended and their resulting lifestyle.

Furthermore, the court indicated when deviating from guideline child support, the trial court cannot issue conclusory findings. Instead, it must state why it believes the guideline amount exceeded the child's needs and why the deviation from the guideline amount is in the child's best interests. To deviate from guideline, the trial court need only determine guideline support exceeds the children's needs, not that guideline support would be detrimental to their interests.

The Court of Appeal also held that the trial court did not abuse its discretion in finding John an exceptionally high earner for child support purposes based upon income statistical information provided. Furthermore, a dramatic increase in income can be a change of circumstances and children's needs must be independently determined, not "reverse engineered" from a parent's income and expense declaration or from expenditures.

Macilwaine is a carefully reasoned case that will help family law attorneys having to address the complex area of child support, including determining what constitutes income available for support and who qualifies as an extraordinarily high earner.