Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Appeal from a judgment of the Superior Court of Orange County, Nancy A. Pollard, Judge, Super. Ct. No. 99D008403
Arnold Blumenthal, in pro. per., Appellant.
No appearance for Plaintiff and Respondent.
OPINION
SILLS, P. J.
In In re Marriage of Loh (2001) 93 Cal.App.4th 325, 327 (Loh), this court held that an income determination cannot be “plucked from thin air.” In that case, we also pointed out that income tax returns are presumptively correct determinants of income. (Id. at pp. 332-333.)
In In re Marriage of Riddle (2005) 125 Cal.App.4th 1075 (Riddle), this court, in accord with its previous decision in In re Marriage of Rosen (2002) 105 Cal.App.4th 808 (Rosen), held that the “sample” used to determine income when it fluctuates must be “realistic” under the circumstances. (Id. at p. 1083.) In Riddle, unfortunately, the trial judge had selected an “embarrassingly short period” of time (a mere two months!) on which to predicate a determination of income where the husband worked as a commissioned salesperson in the financial markets. That fact forced another panel of this court to conclude that the sample had been chosen to “as the Rosen court might have put it, ‘inflate’ the supporting spouse’s monthly income.” (Riddle, supra, 125 Cal.App.4th at p. 1083.)
The trial judge in the case before us today repeated the same mistake made in Riddle (in using an unrepresentative year as the basis for an income determination) and added to it the mistake also made in Loh, which was to confuse “cash flow” with income. (In a word, just because you take money out of a checking account does not establish that it is to be included in “annual gross income” as the phrase is used in Family Code section 4058.) We must reverse for a re-determination of income.
All further statutory references in this opinion will be to the Family Code.
I. FACTS
The last visitation of this case to this court was in 2006 -- the year’s important -- when, as the case was proceeding toward an initial family law judgment, the trial judge declared a mistrial because she was scheduled to go to another panel other than the family law panel (the domestic violence panel), and she didn’t feel she had enough time to finish hearing the trial. (See Blumenthal v. Superior Court (2006) 137 Cal.App.4th 672.) Noting the extra and needless expense that would be visited on the parties because of the essentially gratuitous mistrial, this court granted the wife’s petition for writ seeking an order commanding the trial court to vacate the mistrial, and then set the matter for further proceedings to conclude the trial. (Id. at p. 687.)
We now pick up the story in medias res, that is, in this appeal from the August 2007 judgment on reserved issues rendered after the case was returned to the trial court. That judgment predicates child and spousal support orders based on a determination that husband Edward Blumenthal (“Husband”) had an income of $23,378.75 a month.
Husband asserts in his brief that “There is simply no way, based upon the evidence and testimony given in this trial to reach . . . or . . . even to . . . reasonably fabricate such a number.” However, we have deconstructed the record and the statement of decision, and can provide a precise answer as to where the $23,378.75 a month figure came from:
Back in 2002, the court appointed Dennis Sperry to do a gross known “controllable cash flow” analysis of Husband. Sperry issued his final report on August 18, 2003, opining that Husband’s gross known controllable cash flow in 2002 was $8,214 a month.
In a hearing conducted in January 2004, Sperry testified as to certain withdrawals Husband made from his bank accounts in 2002 for non-business related expenses. Sperry testified that these totaled $18,795.43 a month.
At the same hearing, Sperry was shown a check he’d never seen before. It was for $55,000, written to cash. Sperry testified that he had not considered that check in his analysis.
Now segue into the years 2004 and 2005: Trial in the case continued in fits and starts during those years, until, as explained in Blumenthal I, it was aborted in late 2005. After Blumenthal I, it was recommenced again in August of 2006.
By August 2006, the trial court now had before it all of Husband’s tax returns from 1993 through 2005, plus Husband’s income and expense declaration for 2005 as well.
The trial court took the court-appointed expert’s testimony concerning the withdrawals made from Husband’s bank accounts back from the year 2002 ($18,795.43 a month), then it took the $55,000 withdrawal and divided that amount by 12 to arrive at a monthly figure ($4,583.33). When one adds $18,795.43 to $4,583.33, the result is $23,378.76, one penny off the figure the trial court used as Husband’s income.
II. DISCUSSION
As another panel of this court explained in Loh, tax returns are the presumptive source of determination of “annual gross income” as the phrase is used in section 4058. (Loh, supra, 93 Cal.App.4th at pp. 332-333.) To be sure, there are times when a trial court may depart from an income tax figure, but even then there must be substantial evidence to support an income determination, as for example when income is “imputed” based on capacity to earn (see generally In re Marriage of Bardzik (2008) 165 Cal.App.4th 1291, 1299 (Bardzik)) or there is some reason, essentially rooted in an estoppel, to use another source (see In re Marriage of Calcaterra and Badakhsh (2005) 132 Cal.App.4th 28, 32-33 (Calcaterra)).
This is not, like Bardzik, an imputation case. The trial court’s statement of decision gives no indication that the $23,378.75 figure was at all the product of a determination that Husband had the ability to earn that figure. And for what it is worth, we have encountered no evidence in our review of the record to suggest any basis for imputation. Husband works full time for Singpoli Corporation. While the exact nature of his “job title” was the subject of some disagreement at trial -- he calls himself a “consultant,” the company’s website lists him as the chief operating officer -- there is no evidence that he is avoiding work to artificially lower his income.
Nor, importantly, is this, like Calcaterra, an estoppel case, though one detects in the trial judge’s statement of decision an attempt to predicate a high income figure on an estoppel rationale. Let us explain.
First, in Calcaterra, the father applied for a loan in late 2002, in which he said his income was a few dollars short of $15,000 a month, plus he claimed a net worth of over $1.3 million. (Calcaterra, supra, 132 Cal.App.4th at p. 33.) On his tax returns for 2002, however, he claimed a total gross income of $28,267, which works out to $2,355.58 a month -- that is, more than $12,000 shy of $15,000. He was obviously lying to somebody. When the trial court used what the father told the lender, as distinct from what he told the IRS, to calculate monthly income, the father challenged it on appeal. The appellate court, acknowledging the rule from Loh that tax returns are presumptively correct, concluded that the correctness of the tax returns had been rebutted by the loan application. It was a case, as we would later characterize Calcaterra in Bardzik, of “liar liar pants on fire.” (See Bardzik, supra, 165 Cal.App.4th at p. 1301, fn. 7.) In essence, the father’s loan application in Calcaterra estopped him from asserting that his tax returns represented his true income.
Now to this case: We have nothing like the facts in Calcaterra before us. What we have is this: Back in 2003, Husband provided tax returns for 2002 to Sperry, the court-appointed expert. Those tax returns listed $34,347 as Husband’s total itemized deductions. However, the tax returns provided by the Husband to the trial court as part of the trial -- provided, we note, back in 2003 -- listed $31,233 as total itemized deductions. (The $3,114 difference, of course, translated into different figures for taxable income.) Based on this discrepancy, the trial judge decided -- in 2007 -- that none of Husband’s tax returns -- including the latest available at the time, a return for 2005 -- could be the basis for an income determination. At trial, the difference in 2002 returns was explained by Husband as simply having missed a deductable expense, though he was not quite certain of the reason for the discrepancy.
On the last day of trial, when he was asked if he could explain why the numbers were different, Husband responded, “It would appear that the income sections remain the same, and it may have been after putting this in, it all comes out of the computer program, you put in the numbers, I may have noticed that I had missed an expense. I may have actually completed one and then reviewed it and reentered numbers from income down or made a change and completed a new return and filed that. [¶] As we sit here today, that is the only thing I can understand that would have happened. And then in the process would have forwarded one to [the court-appointed expert] assuredly, and in going back through documents to give to my attorney for preparation of this …. It could have gone into my file and given her a copy of the one that I didn’t send. I don’t know. There is no flat-out straight explanation for the differences.”
Our own review of the record has turned up nothing to suggest that the 2003, 2004 or 2005 returns were in any way inaccurate or understated Husband’s income. In her statement of decision, the trial judge declared that “said returns for calendar years 2003, 2004, and 2005 are neither accurate nor consistent” but that is only an ipse dixit. The trial court identified nothing in the returns themselves to say they were inaccurate. Rather, the trial court cited two items of evidence as its reasons to totally disregard the 2003 through 2005 tax returns:
(1) A discrepancy in the description of Husband’s occupation in the testimony. During cross-examination, at one time Husband described himself as a “consultant” for Singpoli who gave “legal counsel” to the company. However, Wife introduced evidence that the company’s website described him “chief operating officer.”
(2) Joint returns prior to 2000 were signed only by Husband.
And that was it.
As to (1), it is clearly an insufficient basis on which to discard hard evidence of income. Husband explained that the description on the website was an effort by the company to present him as someone “working with” the company’s CEO, and maintained that functionally he was still a consultant. We also note that he described his own occupation on his income and expense declaration as “self-employed” lawyer.
None of that amounted to an inconsistency worth beans. Given the procrustean nature of the word “consultant,” it can include an outside counsel working as a corporate counsel, and given the ambiguity in the phrase “chief operating officer,” it does not necessarily suggest that it couldn’t include a firm’s chief legal counsel. Besides which, there was no proof that Husband bestowed upon himself the high-fallutin’ appellation “chief operating officer” -- and he gave a perfectly good explanation as to why his client might want to indulge in such title inflation.
Moreover, the discrepancy provides no objective basis to throw out wholesale Husband’s tax returns. Regardless of his job description (there are CEOs who also double as their own janitors!), income is income. We note there is nothing in the discrepancy in Husband’s job description that indicates that his tax returns, submitted to the IRS and subject to criminal penalties for misrepresentation, were inaccurate no matter what his job title was.
Further, and most importantly, unlike Calcaterra, there is no alternative objective and reasonable basis on which to predicate an income figure. Essentially the trial court’s rationale was this: If there is a discrepancy in a case where the court could find a party was in any way inaccurate, it could throw out tax returns wholesale and make up an income figure based on simple cash flow.
Now let’s turn to the basis of income the trial court actually did use. The constituents of the $23,378.75 was (a) a court-appointed expert’s testimony showing average withdrawals of $18,795.43 a month plus the court’s own addition of another $4,583.33 a month, based on yet another (previously undiscovered) withdrawal.
How was this wrong? Let us count the ways. There was no basis to depart from tax returns (Loh), no valid basis for income based on estoppel (Calcaterra), and the year was unrepresentative to boot (Riddle). Moreover, cash flow, as we noted in Riddle, is not a “sloppy synonym” for income (Riddle, supra, 125 Cal.App.4th at p. 1080), and in any event the Legislature did not say “cash flow” in sections 4055 and 4058. It said “income” in such a way as to exactly track the definition of income in the Internal Revenue Code. (In re Marriage of Schulze (1997) 60 Cal.App.4th 519, 529.) Cash flow can reflect any number of things, including taking money out of savings, non-taxable gifts, or borrowings -- none of which really constitute income. (See id. at pp. 528-530 [non-taxable “freebies” should not be included in section 4055 income calculation].) If a supported party wants to impute income based on a large amount of assets, see Bardzik, supra, 165 Cal.App.4th at page 1302, footnote 9, that’s a different story, but it’s clear that the trial court did not treat this as a high-asset imputation case.
And, finally, most obviously -- why use 2002 for a hearing in 2006, when tax returns for 2005 were available and a current income and expense declaration was also available? There is no reason at all, except the trial court’s evident displeasure with Husband and its apparent determination to “inflate” his income by basing it on withdrawals made four years previously. There is nothing in the record to indicate that, at the point of the 2006 judgment, the 2005 tax returns were not representative. It appears that this case has turned into Riddle redux.
The income for the child support figure was incorrect, and that, of course, affected the constituent factors on which the trial court predicated its spousal support figure, since income is among several relevant factors in fixing spousal support (Fam. Code, § 4320, subd. (c)). It goes without saying that a court cannot properly exercise its discretion on spousal support if it begins with a wholly erroneous income figure used to calculate child support.
III. DISPOSITION
The child and spousal support provisions of the judgment on reserved issues are reversed. The matter is remanded to the trial court for further proceedings.
A bit of explaining is now required as to the practicalities on remand. We recognize that economic circumstances have changed during the pendency of this appeal. The upshot is that on remand the focus will be on the income determination that should have governed the order that should have been in effect for the past two years. Hence, in the further proceedings, the trial court will base its assessment of Husband’s income for purposes of the judgment based on his 2005 tax returns unless the court finds, on the record as it existed in 2006, substantial evidence of fraud in those returns (and we have found none in our review of that record in this appeal), or unless there is good cause for concluding that 2005 was not a representative year for the 2006 trial, in which case some period longer than 2005 (say 2003 through 2004, or 2003 through 2005) should be used.
As to changes in the interim, we simply note that either party may also seek, on the heels of the judgment, a modification based on current circumstances (e.g., based on tax returns filed for 2007 or, if available, for 2008).
Husband as sole party appearing shall bear his own costs on appeal.
WE CONCUR: RYLAARSDAM, J., FYBEL, J.