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Hilderbrand v. Hilderbrand (8/14/98), 962 P 2d 887
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Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
BENJAMIN JOSEPH HILDERBRAND, )
) Supreme Court No. S-7937
Appellant, )
) Superior Court No.
v. ) 2BA-92-125 DR
)
DEBORAH LYN HILDERBRAND, ) O P I N I O N
)
Appellee. ) [No. 5023 - August 14, 1998]
______________________________)
Appeal from the Superior Court of the State of
Alaska, Second Judicial District, Barrow,
Michael I. Jeffery, Judge.
Appearances: Kenneth Kirk, Anchorage, for
Appellant. Allison E. Mendel, Mendel & Associates, Anchorage, for
Appellee.
Before: Matthews, Chief Justice, Compton,
Eastaugh, Fabe, and Bryner, Justices.
EASTAUGH, Justice.
I. INTRODUCTION
Benjamin Joseph Hilderbrand (Joe) appeals from the
superior court's property division and child support order. He
argues that the superior court erred in three ways in computing his
and Deborah Lyn Hilderbrand's respective incomes for child support
purposes: (1) by imputing as income to Joe the value of rent for
the apartment that he owned and lived in; (2) by disallowing Joe's
proposed depreciation deduction for the apartment that he owns; and
(3) by failing to include in Deborah's income the interest that Joe
will pay her on the money that he owes her.
We reverse the child support order and remand for a
recalculation of Joe's income available for child support without
imputing to him as income the rental value of the apartment. We
affirm with respect to the depreciation and interest issues.
II. FACTS AND PROCEEDINGS
Joe and Deborah married in 1981. Their two daughters
were born in 1982 and 1983. The family resided in one apartment in
a triplex that Joe and Deborah owned in Barrow.
In October 1992 Joe and Deborah filed a petition for
dissolution of their marriage. The dissolution agreement awarded
Joe two of the units in the triplex, and awarded Deborah the third.
They planned to live in separate units in the triplex after the
dissolution. The parties agreed to share custody of the children.
The parties requested a waiver of child support, which the court
granted based on its written findings that the parents would live
in the same building (albeit in separate units) and would share the
children's expenses. The court entered a dissolution decree in
March 1993.
In March 1994 Joe moved to modify the dissolution decree.
He asked for sole legal and physical custody of the children, for
Debra to pay child support, and for revision of the property
division.
In May 1995 the superior court vacated the original
dissolution decree under Alaska Civil Rule 60(b). The superior
court ordered the value of the triplex to be split between the
parties, awarded title to the triplex to Joe, and ordered Joe to
pay Deborah for her interest in the triplex. In 1996 the superior
court entered a child support order and final judgment for past-due
child support. The court awarded shared custody, and required Joe
to pay child support under Alaska Civil Rule 90.3(b).
Joe appeals.
III. DISCUSSION
A. Standard of Review
"A court's modification of a child support award 'will
not be overturned absent a finding of a clear abuse of
discretion.'" Nass v. Seaton, 904 P.2d 412, 414 (Alaska 1995)
(quoting Eagley v. Eagley, 849 P.2d 777, 778 n.1 (Alaska 1993)).
"We will disturb an award only if our review of the entire record
leaves us with a 'definite and firm conviction that a mistake has
been made.'" Id. (quoting Eagley, 849 P.2d at 778 n.1).
B. Imputing Income for the Rental Value of the Apartment
In order to calculate child support, the superior court
established the rental-income stream from the triplex, less
reasonable and necessary expenses incurred for the rental units.
Joe argues that the superior court erred by imputing as income to
him the rental value of the unit in which he resides. We agree.
Ogard v. Ogard, 808 P.2d 815 (Alaska 1991), controls. We
there held that the rental value of an owner-occupied apartment
should not be imputed as income to the owner, absent good cause
under Civil Rule 90.3(c). See id. at 818-19. The child support
obligor in Ogard occupied one apartment of a multiplex apartment
building that he owned. See id. The superior court imputed the
value of the apartment occupied by the obligor as part of his
income for purposes of calculating child support. See id. We
reversed, stating that,
As owner of the property [Ogard] should not be
required, in effect, to pay to live there. Imputing rental income
raises difficult valuation problems. It is not called for in Rule
90.3 nor is it suggested by the committee commentary to the rule.
In unusual cases special circumstances may justify imputing rental
income under the good cause exception set out in subparagraph (c)
of the rule.
Id. (citing Daniel Q. Posin, Federal Income Taxation of Individuals
16 n.17 (1983)). "Good cause"under Rule 90.3(c) requires proof by
clear and convincing evidence that manifest injustice would result
if the award were not varied. See Alaska R. Civ. P. 90.3(c)(1).
The property division in this case presented significant
conceptual difficulties, and we appreciate the superior court's
thoughtful efforts to resolve these difficulties within the terms
of the good-cause exception noted in Ogard. The superior court
concluded that the "unusual situation"posed by the division of the
triplex constituted good cause to depart from Rule 90.3 under
Ogard and to impute as income the rental value of Joe's apartment.
[Fn. 1] We conclude, however, that this case is not
distinguishable from Ogard and that the division of the triplex did
not constitute good cause under Rule 90.3(c).
We provided in Ogard one example of a situation that
might constitute good cause to impute rental income, stating that
"[o]ne such case would be where an obligor parent has reduced his
or her income by liquidating income-producing assets and applying
the proceeds to the mortgage on his or her dwelling." Ogard, 908
P.2d at 819 n.6. This example directs courts to scrutinize the
obligor's actions when looking for good cause and suggests that the
rental value may be imputed if an obligor acts, perhaps in bad
faith, to shield his or her income. Here, however, the superior
court made no findings that Joe was acting in bad faith by living
in the triplex or was living there solely to reduce his income
available for child support.
Deborah asks us to limit the application of Ogard and
hold that a trial court has discretion to impute as income the
rental value of a rental apartment occupied by the owner. She
argues that setting the rental value of an owner-occupied rental
apartment in a multiplex does not raise the valuation problems that
are raised by imputing as taxable income to homeowners the value of
living in their own home. Cf. Posin, Federal Income Taxation of
Individuals 16 n.17 (considering the difficulty of setting the
rental value of owner-occupied housing for purposes of imputing as
taxable income the value of living in the home). We are
unpersuaded. The policy reasons supporting Ogard are valid and
well illustrated here, given the complexity of the transaction and
the difficulty of accounting for all potentially offsetting
credits.
We therefore decline to limit or overrule Ogard, and
conclude that, because there was no good cause under Rule 90.3 to
depart from Ogard, the rental income may not be included in Joe's
income. Accordingly, we reverse and remand for recalculation of
Joe's child support obligation.
C. Joe's Proposed Depreciation Deduction
Joe next argues that the superior court failed to give
him credit for depreciation on the triplex. Depreciation is used
to account for the "decline in value of property caused by wear or
obsolescence and is usually measured by a set formula which
reflects these elements over a given period of useful life of
property." Black's Law Dictionary 441 (6th ed. 1990). As we noted
in Eagley:
"The concept of depreciation, as an expense,
is a recognition of the fact that certain fixed assets, which are
used in a business, wear out gradually and will eventually need to
be replaced.". . . The annual depreciation "expense"is most
simply calculated by dividing the difference between the original
cost of the asset and its scrap value by the estimated useful life
of the asset. This calculation yields the "straight line
depreciation."[ [Fn. 2]]
We have held that courts should allow a deduction for the
straightline depreciation of an obligor's business real estate in
the context of a Civil Rule 90.3 adjusted-income determination.
[Fn. 3]
Joe asked that depreciation on the triplex be deducted
from his adjusted income. The superior court denied Joe's proposed
deduction, reasoning that "the appraiser had used a stream of
income methodology in valuing the triplex and the building would
not be replaced at some time in the future." We affirm.
An obligor's ability to deduct depreciation for child-
support purposes is typically linked to his or her ability to
deduct depreciation for tax purposes. [Fn. 4] Although Joe seeks
to deduct nearly $7,000 from his income available for child support
each year, he has not shown that he could deduct this amount from
his income for tax purposes. Joe concedes that he could not apply
his proposed method to depreciate the value of the triplex under
the federal income tax law.
In addition, Joe provides no authority to support his
proposed method of depreciation. Although Nass, Eagley, and Ogard
endorse deductions from an obligor's income based on straightline
depreciation of business property or equipment, these cases do not
support Joe's theory that an obligor's property basis for purposes
of calculating income for child support can differ from the basis
used for tax purposes. See Nass, 904 P.2d at 416-17; Eagley, 849
P.2d at 780-82; Ogard, 808 P.2d at 819.
In setting the support obligation, courts are to consider
the amount of income available for support, and the amount of money
necessary to support the child. See Alaska R. Civ. P. 90.3(a).
Joe should pay child support out of his available income; his
argument ignores this fundamental proposition.
The problem with permitting a deduction in this case
arises in part from the method by which the value of the triplex
was calculated. The superior court adopted the appraiser's $80,500
valuation of the triplex. The Hilderbrands did not own the land on
which the triplex sits. The land is leased from a third party, and
the lease will expire in 2003. The appraiser's valuation
represented the present value of the expected rental-income stream
over the remainder of the lease, plus the building's salvage value.
The court then treated the triplex as if it were owned by Joe from
the date of dissolution, and determined that Joe was entitled to a
credit for the rental value of the apartment in which Deborah lived
following the dissolution decree.
Given the facts of this case, we conclude that the
superior court correctly disallowed the depreciation deductions.
See In re Marriage of Gaer, 476 N.W.2d 324, 326 (Iowa 1991)
(adopting the view that the decision to include or exclude
depreciation expenses in calculating child support should depend on
the circumstances of each case rather than a categorical rule of
inclusion as income or deduction as expense). Accordingly, we
affirm on this issue.
D. Interest Income
Joe also argues that the superior court failed to
calculate interest income on Deborah's receipts from the buy-out.
Joe claims that the superior court underestimated Deborah's income
by failing to include the interest that she will receive in the
future when he finally pays her the money he owes her.
We decline to consider this argument because Joe did not
raise it in the superior court. See, e.g., Doyle v. Doyle, 815
P.2d 366, 372 (Alaska 1991) (stating that issues raised for the
first time on appeal will not be considered by this court). Joe's
argument is also problematic on the merits. Joe's approach would
convert a cash-basis calculation to an accrual-basis calculation.
Moreover, when Deborah receives the interest, it may then be
included in her income for purposes of calculating child support
under Rule 90.3.
IV. CONCLUSION
For the foregoing reasons, we REVERSE the child support
order and REMAND for a recalculation of Joe's income available for
child support without imputing the rental value of the apartment.
We AFFIRM on the issues of the depreciation deduction and the
exclusion of interest income from Deborah's income.
FOOTNOTES
Footnote 1:
The superior court stated that,
Joe's income calculation must include imputed
rent for the value of the apartment occupied by Joe. Since the
triplex was valued based on the stream of income from all units in
the building, this case represents the unusual situation in which
a parent owning a building must include imputed rent as part of his
income. See Ogard, 808 P.2d at 819 (such rental value may be
imputed to owner of apartment upon showing of special circumstances
pursuant to Civil Rule 90.3(c)(1)(A)). The free apartment is a
benefit to Joe provided by his business interest in renting out the
triplex. This imputed rent is to be included with the cash rents
received.
(Emphasis added.)
Footnote 2:
Eagley v. Eagley, 849 P.2d 777, 780 n.3 (Alaska 1993) (quoting
Turner v. Turner, 586 A.2d 1182, 1187 (Del. 1991)). See also Ogard
v. Ogard, 808 P.2d 815, 819 (Alaska 1991) ("Depreciation is a means
of reflecting on an annual basis the costs of capital equipment.").
Footnote 3:
See Nass v. Seaton, 904 P.2d 412, 416-17 (Alaska 1995)
(holding that the superior court erred, in determining obligor's
adjusted income, by disallowing straightline depreciation for that
portion of the residence that obligor used in his machinery
business); Eagley, 849 P.2d at 781 (allowing a deduction for
straightline depreciation of the parent's business real estate as
an ordinary and necessary business expense; rejecting argument that
Civil Rule 90.3 cmt. III.B categorically disallowed all
depreciation of real estate); see also Ogard, 808 P.2d at 819
(allowing a deduction for straightline depreciation of business
equipment).
Footnote 4:
See, e.g., Lawrence v. Tise, 419 S.E.2d 176, 181 (N.C. App.
1992) (holding that the trial court had discretion to deduct from
a parent's monthly gross income the amount of straightline
depreciation allowed by the Internal Revenue Code, 26 U.S.C.
sec.sec.
167, 168 (1990), for a reasonable allowance for the exhaustion and
wear and tear of certain property over its useful life). See
generally Frank J. Wozniak, Annotation, Treatment of Depreciation
Expenses Claimed for Tax or Accounting Purposes in Determining
Ability to Pay Child or Spousal Support, 28 A.L.R. 5th 46 (1995).
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