by Robert R. Burch and Brooke L. Archibold

Family law practitioners routinely deal with cases where one of the parties has had income that varies substantially, whether it is a result of employment that is heavily commissioned or overtime based or whether it is a result of self-employment in a volatile industry. Also common are the cases where the income of the supporting spouse suddenly declines around the dissolution filing. The question the court and counsel must solve in these cases is how to fairly project future income in order to arrive at an equitable support order.

The 4th District Court of Appeal recently provided guidance on how to answer this conundrum in Marriage of Pletcher, 68 Cal. App. 5th 906 (2021). Pletcher comes from the same appellate district that decided Marriage of Riddle, 125 Cal. App. 4th 1075 (2005) and Marriage of Rosen, 105 Cal. App. 4th 808 (2002). The Pletcher case extends the holdings from Riddle and Rosen while also distinguishing Marriage of Sorge, 202 Cal. App. 4th 626 (2012) and providing guidance on how to treat business losses when determining an equitable support order.

To understand the Pletcher case and its reasoning, a discussion of In re Marriage of Riddle, and the facts involved in that case, must be had. In Riddle, the husband was employed as a commissioned financial advisor in a major investment firm with various components to his income including a commission component that fluctuated from month to month. At a hearing on temporary child and spousal support, various time periods for Mr. Riddle’s income were presented to the trial court, including a two-month YTD ($21,950 per month); the previous calendar year ($6,611 per month); the previous twelve-month period ($8,394 per month); and a fourteen-month period ($7,591 per month). The trial court made orders for support predicated on the two-month period. The court of appeal reversed determining that the two-month period used by the trial court (which was 60-72% higher than the other three time periods presented) was arbitrary and that the court used an “unjustified sample” in determining income for the child support order.

Riddle started its analysis by examining two child support statutes: Family Code sections 4060 and 4064. Section 4060 says that the court should use a twelve-month time period in calculating income for child support purposes unless the result does not accurately reflect actual or prospective income in which case the court may “adjust the amount appropriately.” Section 4064 provides that: “The court may adjust the child support order as appropriate to accommodate seasonal or fluctuating income of either parent.”

The Riddle court then emphasized that while sections 4060 and 4064 give courts discretion, such discretion must be exercised reasonably, taking into consideration the circumstances of the parties, their necessities, and the financial ability of the supporting spouse. Riddle then looked to common law principles regarding support orders involving fluctuating income, citing Marriage of Hall, 81 Cal. App. 4th 313 (2000), for the proposition that the court must arrive at a “stable number” in order to make a support order and citing County of Placer v. Andrade, 55 Cal. App. 4th 1393 (1997) for the proposition that the figure used for income must be a “reasonable predictor” of what each spouse will make in the immediate future.

The ultimate holding of Riddle was that when dealing with fluctuating income, the courts should attempt to predict likely income for the immediate future as distinct from extraordinarily high or low income in the past. Citing to Marriage of Rosen, the Riddle court held the time period upon which income is calculated must be long enough to be representative as distinct from extraordinary. The Riddle Court then stated, in dicta, that Family Code sections 4060 and 4064 appeared to create a presumption that the prior twelve months is an appropriate representative period in most cases, but went on to state, “[a] longer period could, of course, be conceivably used under section 4060 if it were more representative of a party’s income.” However, going back too far could be problematic in some circumstances where the overall economy might have impacted past earnings such that it is not reflective of what a party’s income will be in the immediate future.

The court of appeal, in Marriage of Pletcher, was confronted with a distinctly different set of facts and issues than was presented with in Riddle. Whereas Mr. Riddle was a W-2 employee and his case involved child support and spousal support, Mr. Pletcher was self-employed and his case solely involved spousal support. The Pletcher court extended and clarified its holdings in Riddle to a self-employed spouse where only spousal support was at issue.

In Pletcher, the husband owned an investment firm. He had base income of $240,000 but his primary income was his bonus income which varied significantly with the variation in the stock market. His income from 2014-2019 was as follows: 2014: $1,130,000; 2015: $540,000; 2016: $490,000; 2017: $505,500; 2018: $1,097,000; and 2019: $1,590,000.

The wife’s expert presented several different time periods in determining income, including one period that just used the most recent twelve-month period ($132,500 per month). The husband’s expert subtracted business losses from an unrelated theatre business and then averaged income from the investment firm over a ten-year period, which included the years of the Great Recession in 2008 and 2009. Mr. White calculated monthly income at $58,000 per month, less than half what the wife’s expert determined. The trial court adopted the wife’s approach of using the most recent year’s income, and issued a guideline support order. The trial court rejected the husband’s ten-year period approach and also rejected his expert’s consideration of business losses from the theatre business, reasoning that the theatre business was not related to the investment business. The husband then filed a motion for reconsideration in which he, for the first time, suggested an Ostler-Smith approach should be used. The motion was denied, and the husband appealed.

The Pletcher court began its analysis by observing that, under Riddle, a court must project future income upon which the support order would be based by using a representative sample of past income. The Pletcher court stated that a trial court should not forecast future income based on the most recent year if that year is not a representative sample. Reversing the trial court, the Pletcher court found that it was an abuse of discretion to calculate income based on an unrepresentative sample period and further found that the trial court should have considered the income losses from the unrelated theatre business and not excluded them solely because they were not related to the investment business.

The Pletcher court emphasized that trial courts have broad discretion in determining temporary spousal support and emphasized that generally there is nothing wrong with applying a computer guideline to the past twelve months income in determining temporary spousal support. In fact, Pletcher stated that such an approach should be encouraged in most cases because it promotes consistency and predictability in results. However, the Pletcher court held that “the ultimate yardstick” is a party’s ability to pay and a court should not just punch numbers into a computer without considering the circumstances in a particular case that would make that order unjust or inequitable. The court reasoned that the inquiry into a party’s ability to pay is prospective in nature and that the trial court is tasked with determining or forecasting what the supporting party will be able to pay. Pletcher stated that use of the last twelve months to make this projection is typically adequate as most people’s income does not dramatically fluctuate; however, the court said that this approach should not be used where the evidence is clear that a spouse’s income varied wildly from year to year. Citing Marriage of Mosley, 165 Cal. App. 4th 1375 (2008), the Pletcher court held that the trial court should be determining likely income for the immediate future as distinct from high or low income from the past.

The Pletcher court ultimately found that the trial court made the same mistake as was made in Riddle. Whereas in Riddle, a two-month period was not long enough to be representative and a twelve-month period was suggested as more reasonable, likewise, under the facts of Pletcher, the twelve-month period was not long enough to be representative of future income upon which support would be paid.

Pletcher, like Riddle, cited to In re Marriage of Rosen, 105 Cal. App. 4th 808 (2002), to support its holding. Rosen involved an appeal related to the court’s determination of goodwill in a law practice. In Rosen, the husband was a self-employed lawyer whose income over the prior four years varied significantly: $72,667 in 1992; $101,067 in 1993; $71,362 in 1994; and $136,000 in 1995. In determining goodwill, the wife’s expert applied the excess earnings method. Citing to In re Marriage of Garrity and Bishton, 181 Cal. App. 3d 675 (1986), the Rosen court stated that the first step in applying the excess earnings method requires that a practitioner’s average annual net income be determined by reference to any period that seems reasonably illustrative of the current rate of earnings. However, in determining whether there were excess earnings, Ms. Rosen’s expert based his analysis solely on Mr. Rosen’s highest year’s income: $136,000 and not an average of multiple years. The wife’s expert admitted that had any number of years been averaged there would not be excess earnings or goodwill. The Rosen court found that picking one year’s net income when the evidence showed that income was volatile is not a reasonable basis for determining value.

Recognizing that Rosen was a business valuation case, the Pletcher court nevertheless stated that the rationale in Rosen is equally applicable to support cases. Pletcher cited Rosen for the proposition that where income rises or falls from one year to the next, picking one year’s income as the basis for determining income is not reasonable.

Pletcher remanded to the trial court for determination of the representative time period to be used in determining income available for support, but provided the trial court guidance in suggesting two possible approaches: (1) use of a longer time period to capture the volatility of the husband’s income; and (2) application of an Ostler-Smith formula.

Significantly, the Pletcher court said that at the initial trial both experts’ opinions were unreliable. In such a circumstance, the court had an “equitable duty” to issue a spousal support award based on its own determination of what constituted a representative time period. The Pletcher court found that “spousal support is a consideration of equity” (citing In re Marriage of White, 192 Cal. App. 3d 1022 (1987)) and that a divorce action is in the nature of an action in equity (citing Darsie v. Darsie, 49 Cal. App. 3d 491 (1942)). Interestingly, in providing guidance on remand, the Pletcher court stated that five years of income would have been within the court’s discretion.

The Pletcher court then addressed the business loss issue, stating that the trial court erred by not considering business losses from the unrelated theatre company. Pletcher states that losses should not be treated differently because they come from an unrelated business. Pletcher distinguished In re Marriage of Sorge, 202 Cal. App. 4th 626 (2012), holding that “nowhere in Sorge do we find authority for the principle that losses from a business can be excluded if they are ‘not related to’ a primary business nor do we view that as a workable legal standard.” The Pletcher court reasoned:

Why does it matter if the businesses are in the same industry or completely unrelated industries? If they were both profitable, we undoubtedly would consider all of the profits as income available for support. It is not clear to us why losses should be any different. Instead, the principal lesson from Sorge is that where business expenses create a distorted picture of a party’s ability to pay support, the court may impute income to offset those expenses.

There are several important principles discussed in Pletcher that can be helpful to family law practitioners. First, the reasoning in Riddle (a child support case based on child support statutes) was extended to temporary spousal support cases. Second, whereas Riddle dealt with a salaried employee, Pletcher applied the Riddle reasoning to a self-employed spouse. Third, the twelve-month time period presumption discussed in Riddle was clarified as appropriate depending on the facts of a case. In fact, Pletcher rejected the use of a twelve-month time period based on the specific facts presented to trial court and opined that the trial court would have been within its discretion in using a sixty-month period. This expanded time period provides family law lawyers with greater flexibility, allowing us to present evidence showing as long as a five-year period may be appropriate in some cases. The Pletcher court made clear that the facts will determine which time period is representative.

There are some other interesting principles found in the Pletcher opinion. Pletcher followed Riddle in approving the use of business valuation case law in temporary spousal support cases, stating explicitly that the rationale from the goodwill cases applied with equal force to support issues. Arguably, the Pletcher court opinion opens the door to creative lawyers citing to the revenue rulings often used in determining normalized income for goodwill determinations to support their arguments in support of the appropriate time periods for determining cash flow available for support. In re Marriage of Hewitson, 142 Cal. App. 3d 874, 888 (1983) approved the use of revenue ruling 59-60 in business valuation cases. Pletcher arguably opens the door to the use of revenue rulings or at least their rationale for determining income available for support.

Revenue Ruling 68-609 states “The past earnings to which the [excess earnings] formula is applied should fairly reflect the probable future earnings. Ordinarily, the period should not be less than five years, and abnormal years, whether above or below the average, should be eliminated.” Likewise, Revenue Ruling 59-60 section 3.02(d) states in part:

Detailed profit and loss statements should be obtained and considered for a representative period immediately prior to the required date of appraisal, preferably five or more years . . . all information concerning past income which will be helpful in predicting the future should be secured. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five- or ten-year averages without regard to current trends or future prospects will not produce a realistic valuation. If, for instance, a record of progressively increasing or decreasing net income is found, then greater weight may be accorded the most recent years’ profits in estimating earning power.

Are these revenue rulings now fair game in arguments on temporary support determinations? Can 68-609 be used to justify exclusion of an abnormal recent year? Can both revenue rulings, when combined with the Pletcher court’s approval of a five-year period, now be used to support five-year periods in appropriate cases? Could 59-60 be cited to support the weighting in a cash flow report of certain years in the time period differently based on “current trends or future prospects?” All these are fair questions to ask in light of the Pletcher decision.

Another important principle discussed by Pletcher is its emphasis on family law being a court of equity and the trial court having an “equitable duty” to determine what time period would be most representative in determining cash flow available for support. The Pletcher court seems to suggest that the trial court may sometimes have a duty to disregard both parties’ experts where the experts’ positions are “unreliable” and determine for itself the appropriate time period to be utilized.

This emphasis on the equitable nature of family courts has appeared frequently in recent case law, including most recently in Marriage of Ramsey and Holmes, 67 Cal. App. 5th 1043 (2021). In Ramsey, the trial court dealt with a Moore/Marsden claim asserted by the wife on the husband’s pre-marital home. The husband argued that the wife had not met her burden of showing the community paydown of the mortgage and that the trial court should have thus denied the claim. The appellate court held that although Evidence Code section 500 generally places the burden of proof on the party asserting a claim, “the family law court was obligated to determine the value of [the community property] interest and divide it equally,” and that when the family court determined there was not sufficient evidence to establish the claim, “the court should have required the parties to furnish the additional evidence it needed to make the determination.” The Pletcher court’s discussion of family law court being a court of equity and having independent duties to determine an equitable support outcome appears to be an extension of other similar case precedents emphasizing family law as a court of equity.

At the end of the day, these seminal cases teach us that where there are significant fluctuations in income, a fair representative period for calculating a party’s income available for support cannot be determined based on a bright line rule, but rather is to be made based on the underlying facts and circumstances of each particular case. The takeaway here is to be well acquainted with the facts of your case and be prepared to present evidence regarding the underlying reasons for a party’s fluctuating income. Being prepared to present this evidence will help to ensure that a fair representative period is used to obtain substantial justice between the parties when calculating support.

Robert B. Burch is founder and managing partner at Burch Shepard Family Law Group in Newport Beach, and is a certified specialist in family law. He can be reached at robert@ocdivorce.net. Brooke L. Archbold , an associate, also is a certified specialist in family law at Burch Shepard Family Law Group.