Officially released April 30, 2019.
In Short: As defined by the separation agreement in this case, the term “earned income” included all W-2 income, regardless of available business deductions or inclusions for loan forgiveness.
The Facts. The parties’ 15-year marriage was dissolved by incorporation of a separation agreement in 2012. Husband was ordered to pay unallocated support at a minimum of $3,000 per month with an additional amount based on a percentage of his annual earnings above certain thresholds. The separation agreement also specifically contemplated that a loan to Husband would be forgiven and income imputed on his W-2 over a series of years.
In 2017, Wife filed a post-judgment motion for contempt alleging refusal to pay based on 2016 earnings as required in the decree. Husband calculated his earned income excluding income imputed to him from the forgiveness of debt and deducted certain business and medical expenses. The trial court agreed with Wife regarding the earnings and ordered additional payment from Husband. Husband appealed and Wife cross-appealed arguing only that the trial court incorrectly calculated the amount due based on those earnings.
The First and Primary Issue was whether the trial court improperly found that “earned income” was the amount shown on form W-2. Husband argued that the trial court should have deducted (1) business expenses provided on his 2016 tax return as they were necessary to his compensation and unreimbursed, and (2) excluded non-cash earnings such as the forgiven debt obligation.
The standard of review for interpretation of a separation agreement is the same as for a contract. If the contract is unambiguous within its four corners it is a matter of law and review is plenary. Where the contract is ambiguous it is a question of fact and subject to reversal based on the clearly erroneous standard.
The Appellate Court Held that the term “earned income” as used in the separation agreement is unambiguous and was intended to be the amount on Husband’s W-2 form based on language stating “W-2 and/or 1099’s reflecting earned income.” The term “earned income” as set forth in 26 U.S.C. § 32(c)(2)(a) also persuaded the court that earned income is the gross earnings as received from compensation from employment and net earnings received from self-employment. However, Husband was employed by Royal Bank and receives his compensation as an employee along with a W-2 form. The fact that Husband was permitted deductions for calculating his income tax liability did not affect the Appellate Court’s application of this definition of earned income. The cases cited by Husband for the permissibility of business deduction in calculating support obligations were inapposite to interpretation of a settlement agreement.
As an ancillary issue, the Appellate Court agreed with Wife regarding the trial court’s error in calculating the amount due under the unambiguous separation agreement. The matter was reversed and remanded with direction to correct that error and otherwise upheld.