Friday, August 24, 2018
Court of Appeal:
Stocks Options Are Deemed to Be Income for Child Support Purposes When Vested
By a MetNews Staff Writer
The First District Court of Appeal has held, in a case of first impression, that for the purposes of calculating income for child support orders, stock options are income when vested and available to the parent, regardless of whether the parent exercises the option.
The opinion, filed Wednesday, was written by Presiding Justice J. Anthony Kline of Div. Two.
The respondent was John MacIlwaine, who had requested a modification to his child support obligations based on his status as an “extraordinarily high earner.” MacIlwaine, who was in the top one-fifth of one percent of all California taxpayers in 2012, was the chief technology officer for publicly traded peer-to-peer lending company LendingClub until January 2017, when he moved to Braintree, a division of payment processing giant PayPal.
As part of his LendingClub compensation, MacIlwaine was afforded stock options by the company. When those options vested, he was permitted to purchase the shares at a pre-determined price and then sell them for market value.
San Francisco Superior Court Judge Edward G. Weil granted MacIlwaine’s request for modification, but in so doing determined that the stock options were not income under Family Code §4058 until MacIlwaine exercised and sold them.
Family Code §4052 sets forth:
“The court shall adhere to the statewide uniform guideline and may depart from the guideline only in the special circumstances set forth in this article.”
The statewide uniform guideline, a mathematical formula found in Family Code §4055, is based in part on each parent’s gross income under §4058.
Kline looked to the 2009 Fourth District Court of Appeal opinion in In re Marriage of Berger for guidance. In it, Div. Three held that voluntarily deferred salary is income under §4058, even assuming the deferring parent’s good faith motivation for declining immediate pay.
“Once restrictions on exercise and sale are removed, John’s stock options are not materially distinguishable from the salary voluntarily deferred (and reinvested in the employer) in Berger; a vested, mature stock option makes objectively measurable compensation immediately available to John. In deciding to hold the options, rather than exercise and sell them, John invests this compensation in the employer, in hopes of increased future returns. While John is free to make whatever investment choices he desires, his choices do not alter the fact that, once an option is vested and mature, his employer has made actual compensation available to him.”
Needs of Children
The opinion also holds that Weil erred in construing the extraordinary earner exception to the guidelines, enumerated in Family Code §4057(b)(3). That section allows a parent to rebut the presumption that the §4055 guideline is correct by showing that he or she “has an extraordinarily high income and the amount determined under the formula would exceed the needs of the children.”
Weil looked to the historic expenditure by both MacIlwaine and his ex-wife on their four children in determining their needs. Kline rejected this method, noting that children of wealthy parents have greater “needs” under the Family Code than children of less affluent parents.
“Children are entitled to the standard of living attainable by the parent’s income….While a child’s needs are not definitively measured by parental income, it is an important consideration, as the court must ascertain their needs based upon their parents’ financial circumstances.”
The case is In re Marriage of MacIlwaine, 2018 S.O.S. 4197.
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