Bialik v. Bialik, 215 Conn. App. 559 (2022) (treatment of PPP funds as income, non-deductible biz expenses & alimony modification)
Officially released: October 4, 2022.
In Short: In an alimony modification (1) PPP funds that uncontrovertedly qualified for forgiveness and which were intended as replacements for business income (but with tax advantage) were erroneously excluded from the separation agreement’s definition of “adjusted gross earnings” by the trial court. (2) It was error to treat non-deductible expenses as deductible expenses and fail to add them back in for purposes of income.
The Bialik’s were divorced in 2016 pursuant to separation agreement. Husband was to pay alimony of $2,769/week for a non-modifiable term of ten years, death of either party, or remarriage of Wife. The amount of alimony was non-modifiable downward unless Husband earned less than $350k “annual adjusted gross earnings.”
The separation agreement defined “adjusted gross earnings” as “gross business receipts less business expenses, less straight-line depreciation of business equipment…” and provided “add-backs” for numerous specific forms of expenses and certain types of payments to Husband.
In 2018, Husband filed a motion to modify alimony alleging a substantial decrease in income as a substantial change in circumstances. The parties resolved that motion with a stipulation which provided that no modification would enter, but any future modification would still be compared with income from date of Judgment.
In 2020 Wife filed a motion for contempt alleging that Husband was $17k in arrears on alimony. Husband filed a motion to modify alleging that his annual income had decreased substantially and was less than $350k/year due to the impact of Covid-19. Wife filed a second motion for contempt regarding Husband’s refusal to pay the prior arrearage until days prior to the hearing on the first motion for contempt, and Husband’s renewed failure to pay periodic alimony.
The trial court held an evidentiary hearing on the three pending motions in April of 2021. Both parties testified and each party provided the testimony of a CPA as expert witness. Husband’s expert acknowledged in his testimony that (1) the $10,000 Husband received in EIDL funds in 2020 increased Husband’s business cash flow but were not taxable income, and (2) the $75,000 in PPP funds received by Husband in 2020 were a loan for which proof must be submitted to obtain forgiveness, but that he expected that it would be forgiven and it would not reduce Husband’s business expenses nor be taxable. Husband testified about loss of income to his business due to Covid-19, resulting in a claimed drop from $411k at time of dissolution to $240k in 2020.
Wife argued that the PPP and EIDL funds should be included, plus a premium in consideration that they were effectively tax-free income. Wife’s expert testified that Husband would meet the criteria for the 2021 PPP funds as well.
The trial court issued a memorandum of decision finding a substantial change in circumstances in that Husband had annual adjusted gross earnings of $240k in 2020. The trial court determined that the Covid-19 relief consisted of one-time emergency loans and should not be considered as ordinary income. The trial court reduced Husband’s alimony obligation to $1,038/week retroactive to date of service, resulting in an overpayment of $34,853. The trial court found that Husband had acted in good faith and that his violation of the orders was not wilful. Wife sought articulation with regard to the trial court’s treatment of PPP funds received by Husband, and the trial court denied the articulation and Wife’s motion to reargue.
Wife appealed, arguing that the trial court (1) failed to consider the impact of funds received by Husband’s dental practice from the federal government’s PPP and EIDL programs in calculating annual adjusted gross earnings as defined by the separation agreement, and (2) erred in treatment of disability insurance premiums paid by Husband’s business.
The Appellate Court set forth the relevant law regarding modification as set forth in § 46b-86(a). The Appellate Court noted that Wife did not claim that Husband failed to reach the agreed upon $350k threshold for modification. However, breaching a safe harbor does not relieve the moving party of the obligation to show a substantial change in circumstances. At issue in this appeal was: whether, based on Wife’s two arguments, the trial court erred in finding that Husband sustained his burden of demonstrating a substantial change in circumstances.
Regarding Wife’s first claim on appeal that the trial court failed to consider the Covid-19 relief funds, the Appellate Court applied plenary review as to whether those grants should have been considered under the clear and unambiguous language of the separation agreement. The Appellate Court analyzed whether the grants at issue constituted “gross business receipts” under the separation agreement and found that they did. The Appellate Court did not consider the monies as loans as there was no evidence that they would be required to be repaid. The Appellate Court found that the grants were intended by the federal government to be replacement business income. Because the trial court improperly calculated Husband’s “adjusted gross earnings” as set forth in the separation agreement and relied on such in finding a substantial change in circumstances, the alimony modification was reversed and remanded for a new hearing.
With regard to Wife’s second claim on appeal the Appellate Court addressed it (despite the prior claim being dispositive) because it anticipated the issue would arise on remand. Wife claimed the trial court erred in accepting the calculations of Husband’s expert regarding deduction of disability insurance as a business expense, because it was not deductible. The trial court accepted Husband’s expert’s assessment, which included the deduction for disability income (the disability income, which was not deductible, was not broken out from the portion of the coverage for business overhead, which was deductible). The Appellate Court determined that the trial court’s acceptance of the disability insurance as a legitimate deduction was not supported by the evidence and clearly erroneous. This entire paragraph can be summed up with: non-deductible expenses should not be treated as deductible expenses.
The Judgment was reversed as to the alimony modification and remanded for a new hearing.