Imputed Income for Support (and Alimony): When is it a Voluntary Reduction?

I was recently asked by a woman from Rochester Hills, Michigan what would happen with regards to child support or alimony if her husband quit his job or voluntarily reduced his income.

The Issue       

When and why will the Michigan divorce courts impute income to a person for the purpose of support?

The Answer

The Michigan Child Support Formula Manual and the Court of Appeals decision in Carlson v Carlson, decided June 28, 2011, provides some answers.

The first step in determining child support (and spousal support) is to ascertain each parent’s net income by considering all sources of income.  The court will not only consider the actual income (from all sources, not just employment) but imputed income.  This means the court may treat a party as having income or resources that the individual does not actually have.  If a spouse voluntarily reduces his or her income or eliminates income, the court may impute additional income to that person when it finds the person has a voluntary unexercised ability to earn.

The Child Support Formula Manuel sets forth the following criteria that must be considered when determining whether to impute income. (1) prior employment experience; (2) education level; (3) physical and mental abilities; (4) the presence of parties’ children in the individual’s home and its impact on the earnings; (5) availability of employment in the local geographical area; (6) the prevailing wage rates in the local geographical area; (7) special skills and training or (8) whether there is any evidence that the individual in question is able to earn the imputed income.

If a person simply quits his or her job, switches to a lower paying job or voluntarily takes a position earning less income, then in most cases the court will impute income after evaluating the above factors.  It becomes more difficult where the person is self-employed.  One instance of such a case is the Carlson case.  In that case, the divorce trial court imputed income to the defendant.  The defendant appealed claiming that his reduction in income was involuntary, and even if the reduction was voluntary, it was an abuse of discretion to impute income to him for the purposes of determining support.

The defendant was an engineer and president of Flint Surveying and Engineering Co. (FSE).  In 2006, FSE had gross receipts of $1,198,860 and paid defendant $123,209.  In 2007; FSE had gross receipts of $608,226 and paid defendant $67,591.  In 2008; FSE reduced 20 employees from payroll, took a $50,000 line of credit and paid employee salaries with loan funds.  When half of the line of credit had been expended the defendant, his father and brother elected to reduce the defendant’s income to $250 per week and lay off additional employees.

The trial court found the reduction in income was voluntary and set child support based upon an average of the defendant’s last two years of income and calculate support based upon $95,000 as the defendant’s gross income.  The defendant also later claimed that the only available civil engineering position he could find was in Alaska.

The Michigan Court of Appeals determined that while the income was voluntary, it was an abuse of discretion to impute income to the defendant in the amount of $95,000.  The court of appeals stated that the trial court never evaluated the factors set forth in the manual for the imputation of income.  More importantly it failed to assess whether defendant possessed an actual ability and likelihood of earning the $95,000 imputed income.

The appellate court stated the evidence clearly indicated that FSE’s revenues precipitously dropped 50 percent from 2006 to 2007, and by 2008 the company had lost 70 percent of its employees.  There was no evidence to suggest that defendant could remain at FSE and earn the same amount of income that he earned in 2006 or 20078.  Further, there was no evidence presented that he could have gained outside employment earning $95,000.  The appellate court reversed the decision of the trial court and granted the Defendant his costs of the appeal.

Summation

If one voluntarily reduces their income, then the court may impute income to that person depending upon the circumstances and a showing that the reduction was voluntary.  It is also wise to present evidence that the person could have remained employed with the same employer earning the same income but for his or her voluntary act. Finally, it is also wise to present evidence that the person could obtain employment at another location in the same geographical area earning the income one is attempting to have the court impute.  It is not enough to claim the person could earn the same income by moving to another state.