Under what circumstances will a court impute income to a parent when determining child support?

(a) The annual gross income of each parent means income from whatever source derived, except as specified in subdivision (c) and includes, but is not limited to, the following:

(1) Income such as commissions, salaries, royalties, wages, bonuses, rents, dividends, pensions, interest, trust income, annuities, workers' compensation benefits, unemployment insurance benefits, disability insurance benefits, social security benefits, and spousal support actually received from a person not a party to the proceeding to establish a child support order under this article.

(2) Income from the proprietorship of a business, such as gross receipts from the business reduced by expenditures required for the operation of the business.

(3) In the discretion of the court, employee benefits or self-employment benefits, taking into consideration the benefit to the employee, any corresponding reduction in living expenses, and other relevant facts.

(b) The court may, in its discretion, consider the earning capacity of a parent in lieu of the parent's income, consistent with the best interests of the children, taking into consideration the overall welfare and developmental needs of the children, and the time that parent spends with the children.

(c) Annual gross income does not include any income derived from child support payments actually received, and income derived from any public assistance program, eligibility for which is based on a determination of need. Child support received by a party for children from another relationship shall not be included as part of that party's gross or net income.

The consideration of earning capacity was a natural accompaniment to the adoption of the complex child support formula now embodied in Family Code section 4055. Just before the adoption of the Family Code—the last time "earning capacity" language was seen in the Civil Code—it was in the same statute, Civil Code former section 4720.2, which set forth both the algebraic formula (in subdivision (a)). The statute contained language giving the court discretion (the word "shall" that first appeared in the 1984 version dropped out along the way) to "consider the earning capacity of a parent in lieu of that parents income, consistent with the best interests of the child" (in Civil Code, former section 4720.2, subdivision (g)(1)(C)(2)). When the Family Code was enacted, Civil Code former section 4720.2 subdivision (g)(1)(C)(2) appeared as a section in its own right, as Family Code section 4058, subdivision (b).

(1) However, it is readily apparent that the authority to impute income based on earning capacity exists in some tension with the goal of uniform standards for families with similar circumstances and resources. Without evidence of ability or opportunity to earn the money, the power to impute income would easily devolve into a trial judge's power to arbitrarily establish a support order at any given level, plucked from midair, just as long as it is over the level otherwise required by the payor parent's actual, taxable income. Appellate courts have countered that danger with what might be

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termed the "Regnery rule," after In re Marriage of Regnery, supra, 214 Cal.App.3d 1367, 1372-1373.

The "Regnery rule" is essentially a judicial gloss on the words "earning capacity" as they appear in Family Code section 4058, subdivision (b).⁸ Citing from a digest of words and phrases and a workers' compensation case, the Regnery court announced a "three-prong test before the capacity to earn standard may be applied." The three tests are: "ability to work," "willingness to work," and "opportunity to work which means an employer who is willing to hire." (Regnery, supra, 214 Cal.App.3d at p. 1372, citing 14 Words and Phrases (1952) Earning Capacity, pp. 27-28 and West v. Industrial Acc. Com. (1947) 79 Cal.App.2d 711, 722 [180 P.2d 972].)

Later courts, recognizing that the second element, willingness to work, should be taken for granted, recast Regnery's three-prong test as a simple two-prong test: ability and opportunity. (E.g., In re Marriage of Destein (2001) 91 Cal.App.4th 1385, 1392 [111 Cal.Rptr.2d 487] ["So long as a parent has an earning capacity, that is, the ability and the opportunity to earn income, the trial court may attribute income."]; State of Oregon v. Vargas (1999) 70 Cal.App.4th 1123, 1126 [83 Cal.Rptr.2d 229] ["This rule has been modified to include only the first and third prongs; thus, the definition of earning capacity is satisfied when the payer has both the ability and opportunity to work."].)⁹

Thus, the court no longer has the broad discretion in ordering child support it had prior to adoption of the support guideline in 1992. (In re Marriage of Carter (1994) 26 Cal.App.4th 1024, 1028, 33 Cal.Rptr.2d 1.) "[The] determination of a child support obligation is a highly regulated area of the law, and the only discretion the trial court possesses is the discretion provided by statute or rule." (In re Marriage of Butler & Gill (1997) 53 Cal.App.4th 462, 465, 61 Cal.Rptr.2d 781; see also In re Marriage of Drake (1997) 53 Cal.App.4th 1139, 1159, 62 Cal.Rptr.2d 466.)

Among other things, the statute gives the court the discretion, in applying the guideline formula, to impute income to a parent based on his or her "earning capacity," in lieu of considering the parent's actual income. (§ 4058, subd. (b).) Historically, prior to adoption of the guideline, the exercise of this discretion was limited to situations where the parent was found to be deliberately shirking family responsibilities by refusing to seek or accept gainful employment. (In re Marriage of Hinman (1997) 55 Cal.App.4th 988, 994-995, 64 Cal.Rptr.2d 383; In re Marriage of Regnery (1989) 214 Cal.App.3d 1367, 1371, 263 Cal.Rptr. 243.) No such limitation exists under the present scheme, however. (In re Marriage of Hinman, supra, 55 Cal.App.4th at p. 998, 64 Cal.Rptr.2d 383; In re Marriage of Padilla (1995) 38 Cal. App.4th 1212, 1218, 45 Cal.Rptr.2d 555.) "While deliberate avoidance of family responsibilities is a significant factor in the decision to consider earning capacity [citation], the statute explicitly authorizes consideration of earning capacity in all cases," consistent with the child's best interests. (In re Marriage of Has (1993) 12 Cal. App.4th 1630, 1638, 16 Cal.Rptr.2d 345; see also Moss v. Superior Court (1998) 17 Cal.4th 396, 424, 71 Cal.Rptr.2d 215, 950 P.2d 59.)

Although the guideline expanded the circumstances under which the court may consider a parent's earning capacity, it did not change the accepted

[90 Cal.App.4th 82]

meaning of the term.

"Earning capacity is composed of (1) the ability to work, including such factors as age, occupation, skills, education, health, background, work experience and qualifications; (2) the willingness to work exemplified through good faith efforts, due diligence and meaningful attempts to secure employment; and (3) an opportunity to work which means an employer who is willing to hire. [Citations.] [¶] ... When the ability to work or the opportunity to work is lacking, earning capacity is absent and application of the standard is inappropriate.

[108 Cal.Rptr.2d 542]

When the payor is unwilling to pay and the other two factors are present, the court may apply the earnings capacity standard to deter the shirking of one's family obligations." (In re Marriage of Regnery, supra, 214 Cal.App.3d at pp. 1372-1373, 263 Cal.Rptr. 243.)

Thus, "`the only limitations against imputing income to an unemployed or underemployed parent is where the parent in fact has no "earning capacity" ... or relying on earning capacity would not be consistent with the children's best interests.'" (In re Marriage of Hinman, supra, 55 Cal.App.4th at p. 998, 64 Cal.Rptr.2d 383.)

The "opportunity to work" exists when there is substantial evidence of a reasonable "likelihood that a party could, with reasonable effort, apply his or her education, skills and training to produce income." (In re Marriage of Cohn (1998) 65 Cal.App.4th 923, 930, 76 Cal.Rptr.2d 866.) "[F]igures for earning capacity cannot be drawn from thin air; they must have some tangible evidentiary foundation." (Id. at p. 931, 76 Cal.Rptr.2d 866.) "To calculate support based on the hypothetical procurement of a job which the evidence showed was not available to [the parent] would effectively write the `opportunity' element of earning capacity out of existence." (Id. at p. 930, 76 Cal.Rptr.2d 866.)

In setting child support in this case, the trial court imputed earning capacity to Iris, who is the custodial parent and payee spouse. Iris challenges

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the court's decision to impute income to her, on the ground that the court's decision is not in the children's best interests. David counters that the court's decision is supported both by evidence and by legal authority.

"It has long been the rule in this state that a parent's earning capacity may be considered in determining spousal and child support. [Citations.]" (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 642, 183 Cal.Rptr. 508, 646 P.2d 179). "[F]or purposes of determining support, `earning capacity' represents the income the spouse is reasonably capable of earning based upon the spouse's age, health, education, marketable skills, employment history, and the availability of employment opportunities." (In re Marriage of Simpson (1992) 4 Cal.4th 225, 234, 14 Cal. Rptr.2d 411, 841 P.2d 931.)

Certainly, the record in this case contains substantial evidence of Iris's earning capacity, including expert testimony on the factors set forth above. (See, e.g., In re Marriage of LaBass & Munsee (1997) 56 Cal.App.4th 1331, 1338-1339, 66 Cal. Rptr.2d 393; In re Marriage of Hinman (1997) 55 Cal.App.4th 988, 999-1000, 64 Cal.Rptr.2d 383. Compare, Marriage of Flaherty, supra, 31 Cal.3d at p. 645, 183 Cal.Rptr. 508, 646 P.2d 179.) Iris concedes that the evidence supports the court's factual determinations of her earning capacity.

Where a factual basis exists for imputing income based on earning capacity, as it does here, there is legal authority to do so. By express statutory provision, trial courts have discretion to impute income to a parent based on earning capacity. (§ 4058, subd. (b).) Case law also recognizes that discretion. (In re Marriage of Simpson, supra, 4 Cal.4th at p. 232, 14 Cal.Rptr.2d 411, 841 P.2d 931; In re Marriage of Hinman, supra, 55 Cal.App.4th at pp. 998-999, 64 Cal.Rptr.2d 383. See also, Moss v. Superior Court (1998) 17 Cal.4th 396, 424, 71 Cal.Rptr.2d 215, 950 P.2d 59.) Recent decisions have even allowed courts to impute income to a payee spouse based on earning capacity. (In re Marriage of Paulin (1996) 46 Cal.App.4th 1378, 1384-1385, 54 Cal.Rptr.2d 314; In re Marriage of LaBass & Munsee, supra, 56 Cal. App.4th at p. 1334, 66 Cal.Rptr.2d 393.)

But no authority permits a court to impute earning capacity to a parent unless doing so is in the best interest of the

[111 Cal.Rptr.2d 780]

children. By explicit statutory direction, the court's determination of earning capacity must be "consistent with the best interest of the children." (§ 4058, subd. (b). And see, e.g., In re Marriage ofLaBass & Munsee, supra, 56 Cal.App.4th at pp. 1339, 1340, 66 Cal.Rptr.2d 393; In re Marriage of Hinman, supra, 55 Cal.App.4th at p. 1000, 64 Cal.Rptr.2d 383; In re Marriage of Catalano, supra, 204 Cal.App.3d at p. 555, 251 Cal.Rptr. 370.)

In this case, the trial court made no express or implied finding that imputing earning capacity to Iris would be in the children's best interest. We

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find it difficult to imagine how the children's interests are served by doing so, since the imputation of earning capacity to Iris effectively reduces overall monetary support for the children.¹⁹ But we need not speculate on that question here, since the determination is properly left to the trial court on remand.

In the three months after her layoff, Julie conducted a job search which eventually yielded one offer: a marketing management job for a biotech company at $125,000. She declined that job because, when the offer arrived, she had already started a pet healthcare membership insurance program modeled after a similar business run by her mother in Arizona, and because the job would require considerable travel and not allow her to be home evenings with the two children. At least the start-up pet insurance business would allow her to do that.

The evidence is uncontroverted that Julie has worked full time at her pet insurance business since its inception, “probably working very hard” as the trial judge put it. The business, however, has not yet made any money; Julie has been living off loans from her mother and past savings. Thus, at the time of trial, Julie's hard money income was only $251 month. However, Greg presented evidence in the form of a vocational examination report that Julie was highly marketable and employable in the marketing end of various biotech industries, and could have (at least as of November 2010) found employment in marketing management in such industries at low, mid and high ranges of $120,000, $155,000, and $185,000 a year, respectively.

[...]

Even so, the court imputed a whopping $13,333 a month income to Julie. The figure was based on the “income she would have earned had she taken the position that was offered to her.” ⁵ The statement of decision justified the imputation by saying, without elaboration, that imputation was “a fair method

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to use for these calculations.” In open court, when Julie's trial counsel challenged the imputation, the trial judge seemed apologetic about using “phantom” income but did not attempt to justify the imputation. ⁶

More than a decade and about 100 volumes of the California Official Appellate Reports passed after LaBass before Justice Moore's insightful opinion in Mosley, supra, 165 Cal.App.4th 1375, 82 Cal.Rptr.3d 497 recognized the best reason to take the otherwise counterintuitive course of imputing income to a custodial parent: To allow the noncustodial parent to spend more time with the children: “However, we agree with Paul's assertion that, here, the trial court did not consider all of the evidence before it in evaluating the best interests of the children. The court stated there was a ‘total lack of evidence’ that Dawn's returning to work would be in the children's best interests. However, Paul testified that if Dawn contributed to the support of the children, he would not need to spend as much time at work trying to maximize his bonus and would be able to spend more time with the children himself. We cannot disagree with his assertion that it is in the best interests of the children to receive nurturing from both parents. Indeed, sometimes ‘the “best interests of the children” are promoted when parents [reduce their work hours] so as to be able to spend more time with their children.’ ” (

[217 Cal.App.4th 22]

Mosley, supra, 165 Cal.App.4th at p. 1390, 82 Cal.Rptr.3d 497, quoting In re Marriage of Bardzik, supra 165 Cal.App.4th at p. 1311, 83 Cal.Rptr.3d 72, first italics added.)

In the case before us now, however, there was no finding imputation would be in the children's best interests. Nor was there any finding Greg needs any monetary break to increase his visitation time. And in fact, what evidence there is all points to an affirmative detriment to the children resulting from imputation. First, obviously, imputation has the objective effect of making less money available for the children. Second, imputation under the circumstances of this case means giving the custodial parent an incentive to leave two teenagers alone on evenings and weekends. Here, Julie turned down the job with the biotech firm because she knew it would involve travel and lost evenings, which would be costs in time that she would not have to incur running a nascent pet insurance firm. The trial judge gave Julie an incentive to go back to the high pressure world of being a corporate marketing director, which would have meant less time with the children, particularly in the high learning curve early months of any new job. While there might have been abstract justice in penalizing Julie for not putting her own time to its most monetarily efficient Gradgrindian use, there was – to use a monetary metaphor – no “percentage” in it for the children. It did not prioritize the needs of the children, and therefore, with regard to child support, does not pass muster under section 4058, subdivision (b).¹⁰

 (7) We start with the best interests of the children. Where child support is concerned, the trial court in the case before us correctly cited In re Marriage of Cheriton, supra, 92 Cal.App.4th 269 for the proposition that "no authority permits a court to impute earning capacity to a parent unless doing so is in the best interest of the children. By explicit statutory direction, the court's determination of earning capacity must be `consistent with the best interest of the children.' (§ 4058, subd. (b); [citations].)" (In re Marriage of Cheriton, supra, 92 Cal.App.4th at p. 301.) As indicated in Cheriton, with regard to the

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determination of annual gross income for the purposes of child support, section 4058, subdivision (b) provides: "The court may, in its discretion, consider the earning capacity of a parent in lieu of the parent's income, consistent with the best interests of the children." Contrary to Paul's suggestion, we see no error in characterizing this statute as meaning that the best interests of the children must be considered in determining whether to impute income to a parent for the purposes of child support. (In re Marriage of LaBass & Munsee (1997) 56 Cal.App.4th 1331, 1340 [66 Cal.Rptr.2d 393].)

[...]

However, we agree with Paul's assertion that, here, the trial court did not consider all of the evidence before it in evaluating the best interests of the children. The court stated there was a "total lack of evidence" that Dawn's returning to work would be in the children's best interests. However, Paul testified that if Dawn contributed to the support of the children, he would not need to spend as much time at work trying to maximize his bonus and would be able to spend more time with the children himself. We cannot disagree with his assertion that it is in the best interests of the children to receive nurturing from both parents. Indeed, sometimes "the `best interests of the children' are promoted when parents [reduce their work hours] so as to be able to spend more time with their children." (In re Marriage of Bardzik, supra, 165 Cal.App.4th 1311.)

Also, Dawn complains that the amount Paul currently pays in child and spousal support is insufficient for the children and herself to live according to the marital standard of living. It follows, then, that any additional income Dawn could provide would only increase the level of support available to the children, and thus promote their best interests.

Paul provided a vocational evaluation summary demonstrating that Dawn had a substantial earning capacity. He also provided the testimony of the vocational expert who had prepared the summary, and who had interviewed Dawn as part of the evaluation process. The vocational expert testified that Dawn, as an attorney, had an approximate earning capacity of $95,000 per year to start, although it might take her about 26 weeks to find a position. He also testified that Dawn could earn $16 to $20 per hour as a paralegal.

This testimony notwithstanding, the court concluded that the imputation of income would be improper because it had not been shown that a job was actually available to Dawn. However, as Paul points out, he "bore no burden to convince the court that [Dawn] would have secured a ... job had she applied." (In re Marriage of LaBass & Munsee, supra, 56 Cal.App.4th at p. 1339; accord, In re Marriage of Bardzik, supra, 165 Cal.App.4th at pp. 1305-1306.) Furthermore, it is difficult to disagree with the suggestion that Dawn is likely employable as an entry-level attorney and that substantial salaries are generally available to entry-level attorneys with Dawn's academic standing. It is even more difficult to disagree with the assertion that a licensed attorney with some amount of experience at a law firm the stature of Latham & Watkins would be unable to find employment even as a paralegal.

(9) Finally, we agree with Paul's assertion that In re Marriage of LaBass & Munsee, supra, 56 Cal.App.4th 1331 offers important guidance in this case. As that case makes clear, "`[e]ach parent should pay for the support of the children according to his or her ability,'" inasmuch as "both parents are equally responsible for the support of their children." (Id. at pp. 1337, 1340.) Furthermore, "[a] parent does not `"`have the right to divest himself [or herself] of his [or her] earning ability at the expense of ... minor children.'"' [Citation.] When a parent decides not to seek employment to the best of his or her ability, the court must retain discretion to impute income— otherwise `one parent by a unilateral decision could eliminate his or her own responsibility to contribute to the support of the child[ren], causing the entire burden of supporting the child[ren] to fall upon the ... employed parent.' [Citation.]" (Id. at p. 1339.)

While the marriage was one of long duration and the parties' original long-term plans were for Dawn to parent the children, Paul has aptly demonstrated a change in circumstances. Furthermore, at the time of the ruling at issue, three of the children had left home and two teenagers remained in Dawn's care. On remand, the trial court shall consider the change in circumstances, Dawn's obligation to provide support for her children, and her ability to do so. It shall also bear in mind the interests of the children, in the manner and to the extent described above, and also their current ages. Finally, the court must also consider the stated goal that supported spouses ultimately become self-supporting. (§ 4320, subd. (l).)