In the world of business, if a company is profitable typically salaries of employees will rise. If they don’t rise, yet rather drastically fall, suspicions arise as to what is really going on in the company. What if you are the owner of your own business though? What if your business is consistently profiting year to year and you are on the verge of a divorce? If you start paying yourself less in salary, will the reduced income figure be taken into consideration by the court when determining alimony and child support awards? As an experienced divorce attorney, I am well aware that that the paramount case in New Jersey divorce court is Platt v. Platt. Let’s Explore.
In Platt, the parties were married in 1980 and divorced in November 2001. Two children were born of the marriage. When the plaintiff and defendant first got married, the plaintiff husband was working for General Motors. In 1988 he left his job to start his own business, Platt’s Performance Plus, a car repair shop. In order to start the new business, however the plaintiff used $15,000 of marital funds. In the mid-1990s, Platt’s Performance Plus started to rent more property a little bit down the road, which contained a garage capable of holding seven cars. When the trial began in 2004, the plaintiff employed three technicians and he was the manager and service writer. At most, Platt’s Performance Plus employed six people. Additionally, the plaintiff owned 70% of the stock in his company while the defendant owned 30%.
The defendant, on the other hand, was employed as a nurse. While married to the plaintiff, the defendant worked full-time. However, when the parties’ first child was born in 1994, the defendant began working part-time until 2002. At the time of the trial, the defendant was earning around $65,000. The major issue at the trial and on appeal though was the plaintiff’s income. Since he controlled Platt’s Performance Plus, he was able to determine his salary on a yearly basis as well. The plaintiff looked annually at his gross profit in addition to total income before deductions for salaries, rents, and depreciation. He then based his salary off of the profitability of the business, as seen in the chart below. However, the plaintiff decreased his salary at a substantially disproportionate rate. For example and most importantly, for 2001 the profitability of the business declined by 3.3%, but the plaintiff decreased his salary by 23.5%. Additionally, in 2002 the profitability of the business rose by 4.6%, but the plaintiff decreased his salary by an additional 38.2%.
Plaintiff’s W-2 Income
At the trial, the plaintiff was questioned as to why he kept disproportionately decreasing his salary. He stated that he not only lost a trucking account, but also municipal work. Furthermore, after the 9/11 terror attacks, countless zero finance deals were being offered and people were incentivized to buy new cars, rather than repair their old ones. After considering the totality of the circumstances, the trial judge determined that the plaintiff was not properly reflecting his income based on the profitability of his business. As a result, the trial court judge averaged from 1999 to 2003 of the plaintiff’s W-2 income, which equaled approximately $100,000, and determined that as the true measure of his income from the business. Essentially, the judge had imputed the plaintiff’s income by averaging historic earnings. Thus the judge awarded the defendant alimony of $250 per week and child support of $123 per week.
On appeal, the plaintiff argued that the trial judge erred in imputing his income and determining alimony and child support based upon $100,000 in annual income. The New Jersey Family Court Judge stated that she used the term “impute” to signify an averaging of the plaintiff’s historical income where there was significant fluctuation. The plaintiff relied on the case of Lanza v. Lanza, 268 N.J. Super. 603 (Ch. Div. 1993), arguing that income averaging was only proper where an individual’s income varied from year to year, as reflected by peaks and valleys.
The Appellate Division affirmed the findings of the lower court and held that it was reasonable to average the plaintiff’s income over the five-year period. Importantly, the average included the most recent two years after the divorce complaint was filed when the plaintiff decided to reduce his personal income substantially despite the profitability of his business. While the New Jersey Appellate Division noted that typically, income is averaged over a three- year period, five years was logical and reasonable given the unique facts of the case.
If you have any questions about averaging income to determine alimony or child support obligations, please do not hesitate to contact my office today. Thank you.