Opinion
No. FST FA 05-4004889 S
August 11, 2006
The evidentiary hearing on the above motions commenced on June 6, 2006 and continued on June 7, June 16, June 28, July 18, and concluded on July 19, 2006. The court makes the following findings of facts and legal conclusions:
The parties were married on August 19, 1995. The plaintiff commenced an action seeking a decree of legal separation by a complaint dated May 12, 2005 returnable May 31, 2005. At the commencement of this litigation both parties were residing in the marital home at 272 Hillspoint Road, Westport, Connecticut. There are four minor children issue of this marriage, currently ages nine, seven, five and four. No other court filings were made by either party in May, June and July 2005. On August 3, 2005 a series of motions were filed by the plaintiff, some seeking ex-parte relief. Since August 3, 2005 over 450 filings have been coded in by the Clerk of the Superior Court.
Both parties filed pendente lite motions for custody in August 2005. These competing custody motions were resolved by a Stipulation dated September 7, 2005 entered as a court order (#163.10). According to the terms of that Stipulation the four children would continue to reside at 272 Hillspoint Road, Westport. The plaintiff was permitted to continue to reside at the marital home. The defendant was granted the right to reside in the marital home on designated weekdays and evenings during the week and on certain days on alternate weekends. This Stipulation further required that a childcare adult be present with the children at all times. The parties continued to co-occupy the marital home in accordance with the September 7, 2005 order.
Both parties thereafter requested a modification of the September 7, 2005 order. On March 15, 2006 this Court commenced evidentiary hearings on these Parenting Plan issues. On May 25, 2006, prior to the conclusion of the evidentiary hearings, the parties entered into a Stipulation Concerning Parenting, Pendente Lite. The court entered an order in accordance with that May 25, 2006 Stipulation (#424.10). The children were permitted to reside in the marital home. A schedule was established for the plaintiff to occupy the marital home to the exclusion of the defendant and for the defendant to occupy the marital home to the exclusion of the plaintiff. Designated child supervisors were to be present at all times. The order further stated: "In the event that only one supervisor is present, the plaintiff shall ensure that another adult is present to assist with the children, except when transporting the children." An identical order entered as against the defendant.
The May 25, 2006 Stipulation also covered finances and stated: "The defendant shall pay immediately to the plaintiff the sum of fifty thousand dollars ($50,000) as an advance against equitable distribution and for which the defendant shall receive a credit against any property division or lump sum alimony order. The defendant shall be reimbursed that amount from the garnished funds." In addition, a sum certain was to be paid to the parties attorneys from the garnished funds.
In August 2005, the plaintiff obtained a prejudgment remedy against the defendant and certain investment accounts in the name of the defendant were attached. They remain attached. Some withdrawals from the attached funds (also referred to as garnished funds) have occurred to date by court order. The defendant's Motion to Vacate Order Re: Ex-Parte Prejudgment Remedy Pendente Lite dated August 15, 2005 (#129.00), was argued before the court contemporaneously with these pendente lite motions. This Motion to Vacate requested that certain family expenses be paid from the attached funds.
The May 25, 2006 Stipulation stated as follows: "The court shall conduct a temporary alimony and child support hearing on June 6, 2006 and the defendant's motion to release the garnished funds only for the purpose of payment of any alimony and/or child support obligation or the defendant's living expenses and neither party shall object to or seek to delay that hearing. On or before, June 2, the parties shall exchange sworn financial affidavits and bank account and credit card documentations previously requested." The six days of hearings conducted by this Court was in accordance with this provision of the May 25, 2006 Stipulation (#424.10).
Although previous pendente lite motions for alimony and/or child support were filed, there were no hearings held nor any court orders entered for pendente lite financial relief.
The plaintiff is unemployed and is a full-time homemaker. The defendant was employed for years in a family-owned business, Tauck, Inc. a/k/a Tauck World Discovery. He is no longer employed. He claims he is no longer an officer or director of the business. He submitted a resignation letter in February 2006. Exhibit 2. In 2005 he received his last salary from Tauck, Inc. Tauck, Inc. is a subchapter S corporation and the defendant owns 27.9% of the stock. The defendant received payments from Tauck, Inc. in 2006; Subchapter S earnings of $4,210,939.20 gross.
The court has examined the tax returns filed by the defendant since 2000. They indicate W-2 income from Tauck, Inc. in 2000 of $1,417,982; in 2001 of $1,441,113; in 2002 $589,859; in 2003 $298,908; in 2004 $78,449. In addition, the defendant was and is paid dividends and sub S distribution interest from Tauck, Inc. He was and is paid tax-exempt interest taxable interest, capital gains distributions and dividends from his other investments. According to his tax returns in evidence the defendant's total gross annual earnings from all sources was: 2000-$4,485,675; 2001-$2,110,543; 2002-$2,853,885; 2003-$721,956; 2004-$1,226,954. In addition he received non-taxable annual family gifts of $22,000.
He was not employed in 2006 and thus he earned no salary or wages. For 2005 he was entitled to subchapter S distributions from Tauck, Inc. They totaled $4,210,939.20 and were paid in two installments in 2006.
Based upon the defendant's current passive income from Tauck, Inc. and his other investment income, the Court finds that the defendant has sufficient income in order to pay the needs of himself, his four children and his wife. The Court finds that the defendant has a current substantial borrowing capacity. Therefore this Court need not determine the defendant's employability, earning capacity, or imputed income by reason of expenses paid for by others. This is a pendente lite proceeding. Those issues may be further explored at trial.
The defendant claims that the plaintiff's expenses, as indicated in her financial affidavit and as documented by her checks and credit card statements, are inflated and she has an extravagant lifestyle. The plaintiff testified she is currently impoverished and has been so during these dissolution proceedings. For example: she chartered a commercial jet in the summer of 2005 for $6,000 and traveled to Myrtle Beach, South Carolina despite the fact the family had never previously traveled by chartered commercial airline and during May 2006 she stayed in a luxury Arizona resort, went shopping at exclusive stores and went horseback riding; spending thousands of dollars on those pursuits. The plaintiff counters by stating that the purpose of pendente lite orders is to maintain the status quo. The plaintiff argues that her current expenses are less than they were before the commencement of this dissolution action. The parties' lifestyle during their marriage was extravagant and she is entitled to such pendente lite relief as supports that pre-filing status quo. She notes that the defendant has sufficient earnings to make the requested payments. The defendant states that this litigation has cost the Tauck family $3,000,000 to date and his available liquid funds have been depleted. The defendant further notes that the majority of his assets are non-liquid: the marital house, the Lake Placid family vacation house, his 27.9% interest in Tauck Inc., and other assets that are currently attached by the plaintiff's August 2005 PJR. This matter has been referred to the Regional Family Trial Docket where it is waiting an assignment for a Special Masters Pretrial.
In order for this Court to enter an order of periodic alimony and child support, this Court must make a determination of the net income earned by the defendant. Bishop v. Freitas, 90 Conn.App. 517, 522 (2005). This issue was hotly contested. The plaintiff is claiming that the defendant prepaid a number of expenses thus reducing his disposable net income. This Court agrees. Examples of those prepaid expenses are: (1) a large retainer paid to his attorney that has not yet been expended and is still on deposit in the attorney's trustee account, (2) a $379,000 payment of a loan to Tauck, Inc. in excess of what his historical payments on that loan had been; no loan repayments were made in 2004 and 2005. Ex. 29, (3) a repayment of a $100,000 discretionary loan to the defendant's father, and (4) the likely overpayment of income taxes for both 2005 and 2006. In prior tax years the defendant has received hundreds of thousands of dollars in tax refunds. He received income tax refunds in the last five years in excess of $2,600,000. Despite these prepayments the defendant is entitled to deduct from his 2006 investment income and subchapter S distribution, the actual state and federal income taxes due for 2006.
Tauck, Inc., is a subchapter S corporation. Usually sub S corporations do not pay any corporate income taxes. It is a "pass through entity." The sub S corporation prepares an information income tax return and the income is passed through to the individual stockholders who are required to attach the appropriate tax form to their personal tax returns and personally pay the income taxes due. For example, if a sub S corporation has capital gains, the capital gains are taxed to the individual stockholders at the capital gains tax bracket of that stockholder. The same is true for dividends and interest. If the sub S stockholder is paid wages by the sub S corporation, a W-2 is issued.
No expert testimony was furnished to this Court about the exact nature of the 2006 sub S distribution already made to the defendant. His accountant did testify that the withholding for 2006 as stated on his financial affidavit are the projected federal taxes that the defendant will pay in 2006; $1,496,000.
If the entirety of the 2006 sub S distributions to the defendant was dividends and long-term capital gains, the gross federal tax rate would be $15%. At $4,326,450 taxable income his federal taxes for 2006 would be $648,967. If interest or other forms of taxable income, the defendants tax rate would be based on two other factors: his tax filing status and his tax bracket based on the level of income. For example, if he filed in 2006 as single and he earned $4,326,450 taxable income, he would pay $94,727 plus 35% over $326,450 for a total federal tax of $1,494,727. If he filed married filing jointly with $4,326,450 taxable income in 2006, he would pay $88,320 plus 35% over $326,450 for a total federal tax of $1,488,320. If he filed married filing separately with $4,326,450 of taxable income in 2006, he would pay $44,160 plus 35% over $163,225 for a total federal tax of $1,501,288. If he filed as head of household with 2006 taxable income of $4,326,450 he would pay $91,819 plus 35% over $326,450 for a total federal tax of $1,491,819. Thus, under these hypothetical scenarios his federal tax would vary from $648,967 to $1,501,288. This would not include his Connecticut income taxes. This range of possible taxes is too large for the court, with its limited information, to determine the actual federal and state taxes due for 2006.
The Court also has insufficient evidence of the income that the defendant will receive in 2006 from other investments. His June 28, 2006 financial affidavit lists $50,000 in dividends, $6,552 taxable interest and $190,000 tax-exempt interest as 2006 annual earnings from other investments. In 2004 that income was $600,000. The Court therefore rounded off the defendant's taxable income to $4,326,450, a figure that is found in the IRS tax rate schedules and thus making the federal tax calculation easier. Even assuming the highest federal tax of $1,501,288 and $216,322, the highest Connecticut tax of 5.0% on $4,326,450, his gross income of $4,326,450 would be reduced by $1,717,610 to a net annual income of $2,608,840. The Court concludes that the defendant's net income for 2006, would be no less than $2,608,840 and this sum is sufficient to pay the orders set forth in this Memorandum of Decision.
Both parties have considered the impact of IRS Code, which permits this Court to enter periodic orders that are non-taxable. The defendant is requesting that the pendente lite order be non-taxable. The plaintiff is requesting either taxable or non-taxable relief. If the payment is taxable, an additional sum should be awarded in order that the plaintiff have additional money to pay the income taxes incurred.
Since the parties were living together at the commencement of this litigation, continued to live together in the marital home until May 25, 2006 and were permitted to co-occupy the marital home in a bird-nesting arrangement after May 25, 2006, the Court is leery of entering an order that would be taxable. The current bird-nesting order dated May 25, 2006, although giving exclusive possession to one party and then to the other, in effect treats both parties as co-occupying the marital home. The IRS may consider that the parties are members of the same household. This Court is not confident that the IRS would permit the payments ordered herein to be deductible to the defendant as periodic alimony and taxable to the plaintiff. This Court therefore will order that the monies paid as per this order be non-taxable. The sums ordered to be paid by the defendant directly to the plaintiff and indirectly on account of the plaintiff and the children will not be deductible to the defendant nor taxable to the plaintiff.
The defendant has been paying most of the expenses of the marital home. The defendant proposes that specific itemized expenses continue to be paid directly by the defendant and that the defendant keep accurate and detailed records of those expenditures. Those itemized expenses will not be paid to the plaintiff by the defendant but to the providers. In addition the defendant will pay a certain sum per month directly to the plaintiff. The Court finds that such an order is appropriate.
After considering all the statutory factors set forth in General Statutes § 46b-82 as to alimony, § 46b-84 as to support of minor children, § 46b-215a-1, et seq., Regs. Conn. State Agency as to child support, together with O'Neill v. O'Neill, 13 Conn.App. 300 (1988), applicable case law as well as the evidence, testimony, claims of law and claims of fact presented here, the Court hereby grants motions #314.01 and #315.01 and enters the following ORDERS:
I. The defendant shall pay directly the following expenses and shall maintain all documentation, checks, payment records, contracts, invoices and correspondences in order to be able to account for the payment of said expenditures: All these expenses listed in the MONTHLY LIVING EXPENSES section of the defendant's June 28, 2006 financial affidavit on file in this court, without an asterisk and contained in pages 3-7, also known as Section IIA through M of said June 28, 2006 affidavit, excepting therefrom the three items listed in said MONTHLY LIVING EXPENSES Section II Subparagraph K. Help, since these expenses are included in paragraph W of this Memorandum of Decision. This order is subject to the retroactivity order in paragraph VII hereof
II. The defendant shall pay to the plaintiff the sum of $30,000 per month as a non-taxable contribution toward her other expenses. The first payment shall be due September 1, 2006 and on the first day of each calendar month thereafter. This order is subject to the retroactivity order in paragraph VII hereof.
III. The defendant shall pay for the food for the minor children during the defendant's parenting time as established by the May 25, 2006 Stipulation (#424.10).
IV. The plaintiff shall not pay any child supervisors, including those hired to supervise on behalf of the plaintiff and on behalf of the defendant. The defendant shall hold the plaintiff harmless from all costs related to all child supervisors, including but not limited to wages, bonuses, employment withholding taxes, unemployment compensation, travel, vacation, paid holidays and/or insurance.
V. The defendant shall pay all expenses for the child supervisors, including but not limited to wages, bonuses, employment withholding taxes, unemployment compensation, travel, vacation, paid holidays and/or insurance. The defendant shall solely determine the amount and method of said payments consistent with the May 25, 2006 Order. Said sum paid by the defendant for the child supervisors shall be reimbursed to the defendant from the YHB Investment Advisors, Inc., account, which is currently under attachment. The attachment shall be released for the purpose of paying for said sum. The defendant shall submit a written claim for reimbursement to the plaintiff along with sufficient documentation. The plaintiff shall immediately therewith affirm her consent for reimbursement in writing and send that written consent to the defendant. The defendant shall then submit the written claim together with the plaintiff's written consent to YHB Investment Advisors, Inc., c/o Gary Youell or his designee. YHB shall then release said requested funds from the attachment and pay the defendant the requested funds. YHB shall furnish documentary evidence of said payment to the plaintiff. In the event that both parties do not consent in writing, the Court will render a decision thereon upon a proper motion filed by either party. The Court has of even date herewith, issued a Memorandum of Decision granting the Defendant's Motion to Vacate Order (#129.00). Thus the defendant does not have to pay under paragraph I of this order, the three expenses listed in Section IIK. Help: "one-half housekeeper, Parenting supervisors and Unemployment compensation." These three expenses are already included in paragraph V of this order. This paragraph V order shall not be retroactive.
VI. By signing the May 25, 2006 Stipulation the parties agreed that the court has jurisdiction to invade the attached funds for the purpose of paying certain family expenses. The child supervisor expenses ordered are in accordance with the May 25, 2006 Stipulation. Rathblott v. Rathblott, Superior Court, judicial district of Stamford/Norwalk, docket number FA-97-0162348-S, (Tierney, J., August 11, 1998) ( 22 Conn. L. Rptr. 656).
VII. In accordance with General Statutes § 46b-83 the orders in paragraphs I and II shall be effective from "filing of an application therefore," February 2, 2006, and are retroactive to February 2, 2006. The defendant shall pay any arrears on said retroactive order immediately.
VIII. The presumptive amount of child support is $765.00 per week. The Court has deviated from the Child Support Guidelines since the guidelines are inequitable and inappropriate for the following reasons: (1) Due to the effect of the tax code, the payments are non-taxable thus it would not be appropriate to allocate a sum for child support. (2) The parties are the primary caretakers of the children half of the time according to the bird-nesting court order and (3) The family assets and income far exceed the guidelines.
IX. In accordance with the Internal Revenue Code and IRS Publication 504, all of the payments set forth herein are to be made by the defendant either directly to the plaintiff or indirectly for the benefit of the plaintiff, the minor children and the jointly owned property, as non-deductible to the defendant and non-taxable to the plaintiff. The parties shall immediately execute a joint statement to that effect.
X. Parties are to attach a copy of said signed joint statement to any income tax return filed in accordance with the IRS procedure outlined in Publication 504.
XI. The defendant is entitled to credit for all expenditures made for those stated purposes as well as cash payments made to the plaintiff by the defendant since February 2, 2006 to date. In no event shall the plaintiff owe the defendant any sums after said credits are calculated.
XII. The payment of $50,000 made to the plaintiff pursuant to the May 25, 2006 Stipulation and order is excluded from this credit since the $50,000 is "a credit against any property division or lump sum alimony order" and these orders cannot be so characterized.
XIII. This Court retains jurisdiction to conduct an accounting of all expenditures, payments and credits set forth in this court order.