In the context of spousal support and child support orders, how do courts assess a spouse’s income when the income is based on commission and fluctuates significantly from year to year?

The court may adjust the child support order as appropriate to accommodate seasonal or fluctuating income of either parent.

The monthly net disposable income shall be computed by dividing the annual net disposable income by 12. If the monthly net disposable income figure does not accurately reflect the actual or prospective earnings of the parties at the time the determination of support is made, the court may adjust the amount appropriately.

(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.

In ordering spousal support under this part, the court shall consider all of the following circumstances:

(a) The extent to which the earning capacity of each party is sufficient to maintain the standard of living established during the marriage, taking into account all of the following:

(1) The marketable skills of the supported party; the job market for those skills; the time and expenses required for the supported party to acquire the appropriate education or training to develop those skills; and the possible need for retraining or education to acquire other, more marketable skills or employment.

(2) The extent to which the supported party's present or future earning capacity is impaired by periods of unemployment that were incurred during the marriage to permit the supported party to devote time to domestic duties.

(b) The extent to which the supported party contributed to the attainment of an education, training, a career position, or a license by the supporting party.

(c) The ability of the supporting party to pay spousal support, taking into account the supporting party's earning capacity, earned and unearned income, assets, and standard of living.

(d) The needs of each party based on the standard of living established during the marriage.

(e) The obligations and assets, including the separate property, of each party.

(f) The duration of the marriage.

(g) The ability of the supported party to engage in gainful employment without unduly interfering with the interests of dependent children in the custody of the party.

(h) The age and health of the parties.

(i) All documented evidence of any history of domestic violence, as defined in Section 6211, between the parties or perpetrated by either party against either party's child, including, but not limited to, consideration of:

(1) A plea of nolo contendere.

(2) Emotional distress resulting from domestic violence perpetrated against the supported party by the supporting party.

(3) Any history of violence against the supporting party by the supported party.

(4) Issuance of a protective order after a hearing pursuant to Section 6340.

(5) A finding by a court during the pendency of a divorce, separation, or child custody proceeding, or other proceeding under Division 10 (commencing with Section 6200), that the spouse has committed domestic violence.

(j) The immediate and specific tax consequences to each party.

(k) The balance of the hardships to each party.

(l) The goal that the supported party shall be self-supporting within a reasonable period of time. Except in the case of a marriage of long duration as described in Section 4336, a "reasonable period of time" for purposes of this section generally shall be one-half the length of the marriage. However, nothing in this section is intended to limit the court's discretion to order support for a greater or lesser length of time, based on any of the other factors listed in this section, Section 4336, and the circumstances of the parties.

(m) The criminal conviction of an abusive spouse shall be considered in making a reduction or elimination of a spousal support award in accordance with Section 4324.5 or 4325.

(n) Any other factors the court determines are just and equitable.

So what was implicit in Rosen as regards a goodwill calculation we will now make explicit as regards to support orders: It is a manifest abuse of discretion to take so small a sliver of time to figure income that the determination essentially becomes arbitrary. And under the facts of this case, no other word but "arbitrary" properly describes the trial court's selection of the last two months to determine Husband's income. A mere two months is an embarrassingly short period on which to predict the annual income of a commissioned salesperson who works in the financial markets. And it is particularly too short under the record before us, where Husband's income for the previous 14 months, previous calendar year, and immediately preceding 12 months were all (a) pretty consistent in themselves ($7,591.12, $6,611.05, and $8,394, and if you used W-2 medicare wages, $5,429) but (b) wildly inconsistent with the two month period January-February 2003 ($21,950).

We also recognize, of course, that, as in Rosen, longer time samples are appropriate for measuring "average annual income" for purposes of goodwill valuations. However, as regard support, we may say that statutes appear to create a presumption that the most recent 12 months is certainly an appropriate period in most cases.

The expert's own report shows Bruce to have had net income in 1992 of

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$72,667, in 1993 of $101,067, and in 1994 of $71,362. Bruce's net income for 1995 alone is neither an average nor "reasonably illustrative" of his earnings. A reasonable trier of fact could not help but conclude the expert chose to use Bruce's net income from 1995—one of Bruce's highest earning years—solely to inflate the value of goodwill.

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Pat argues that under In re Marriage of Garrity and Bishton, supra, 181 Cal. App.3d 675, 226 Cal.Rptr. 485, the trial court was not bound to use any particular time period over which to average income for calculating goodwill.The problem is that Bruce's net income for 1995 alone is not illustrative of Bruce's rate of earnings in light of the fluctuations in Bruce's income. Pat's expert admitted that had he averaged Bruce's income over any period of years he considered, goodwill value would be nominal or nothing.

[223 Cal.App.3d 48] Clyde's argument that spousal support cannot exceed the amount necessary to maintain the standard of living acquired during the marriage is similarly infirm. The standard of living is only one circumstance to be considered. (In re Marriage of Watt, supra, 214 Cal.App.3d at pp.

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351-352, 262 Cal.Rptr. 783.) ¹¹ But even if it were the limiting factor in setting the amount of support, we would find it difficult to apply in this case. The trial court used an average of the family's expenses over the seven years before the parties' separation on January 1, 1986 (1979-1985), to arrive at an average figure of $6,000 per month for the family of six. This is a distorted figure because it gives little or no weight to the upward mobility of the family. In 1985, the year before the separation, Clyde's fixed salary was $140,004, and the bonus earned the previous year, but not paid until 1985, was $75,000, for a total income in 1985 of $215,004, or $17,917 per month gross plus dividends. At the time of the hearing in 1988, Clyde's total gross income for the year was $300,000 in salary and bonus plus $18,500 in dividends, for a total of $26,542 per month. To leave the custodial parent and the two minor children at a significantly lower plateau of living while the noncustodial parent enjoys a significantly increased income is unjust. (§ 4801, former subd. (a)(8) [now subd. (a)(10)].) The trial court was well aware of this inequity when it stated, "I can't ignore the bonus income as you [Clyde] suggest ... and that's being chintzy. I'll have to consider it."

Rather than looking only to need and standard of living, the trial court here considered all the circumstances and appropriately gave great weight to the factors set out in subdivision (a) of section 4801. We do not have to dwell long on the extent to which Vicki contributed to Clyde's attainment of an education and highly successful career position. She undertook all the domestic duties and, more importantly, was the prime caretaker for the four children of the marriage for 21 years while Clyde devoted time and effort to his career. As a result, he now has substantially enhanced earning capacity and a secure financial future, which admittedly benefits not only him but also the other family members.

[...]

Although patterns in marital breakups emerge, each couple has such a diverse mix of circumstances that trial courts must have broad discretion in weighing and balancing the various factors in each particular marriage before making a suitable support award. A trial court will not be reversed absent an abuse of that discretion. An abuse "occurs when, after calm and careful reflection upon the entire matter, it can be fairly said that no judge would reasonably make the same order under the same circumstances." (In re Marriage of Lopez (1974) 38 Cal.App.3d 93, 114, 113 Cal.Rptr. 58; In re Marriage of Bukaty, supra, 180 Cal.App.3d at p. 147, 225 Cal.Rptr. 492.) Because trial courts have such broad discretion, appellate courts must act with cautious judicial restraint in reviewing these orders. (In re Marriage of Aufmuth, supra, 89 Cal.App.3d at p. 458, 152 Cal.Rptr. 668.) Here, the record reflects that the court weighed and considered each circumstance required under section 4801, subdivision (a), and the record supports the

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trial court's exercise of discretion. The court's balancing of factors is particularly evident when we consider the award of a percentage of the bonus and the step-down of support in three years. We find no abuse of discretion in the award of spousal support.

The Agnos Act provides in part that when a court is called upon to determine minimum child support and monthly child support payments, it must first compute the annual gross income of each parent. "... The annual gross income means income from whatever source derived ... and includes ... [p] (1) ... commissions, salaries, royalties, wages, bonuses, rents, dividends, pensions, interest, trust income, annuities, workers' compensation benefits [and the like]." (§ 4721, subd. (a)(1), emphasis added.) Thus the trial court has a clear statutory direction to consider the future bonuses of a parent in determining income for purposes of fixing child support.

[...]

Neither party asked for specific findings on the amount needed for child support. (See Code Civ.Proc., § 634.) Nor did they avail themselves of section 4700, subdivision (a)(1), which provides in part that "[a]t the request of either party, the court shall make appropriate findings with respect to the circumstances on which the order for the support of a minor child is based...." Thus, in the absence of specific figures, we assume the trial court determined the reasonable needs of the two minor children, taking into consideration their right to share in their father's higher standard of living. The principles set forth by the Legislature in the Agnos Act make it very clear that the child is entitled to share his or her parents' standard of living. (§§ 4720, subd. (e), 4724, subds. (a), (b); In re Marriage of Hubner, supra, 205 Cal.App.3d at pp. 667-668, 252 Cal.Rptr. 428; In re Marriage of Catalano (1988) 204 Cal.App.3d 543, 552, 251 Cal.Rptr. 370; White v. Marciano (1987) 190 Cal.App.3d 1026, 1032, 235 Cal.Rptr. 779.) The trial court followed this mandate.

Clyde's arguments that the court failed to assure that the children were the actual beneficiaries of the support and that the court should be required to make a finding that the large amount of support was in the children's best interests are intertwined. Both arguments assume that Vicki is irresponsible about teaching the children values and that she cannot be trusted to manage the child support for the benefit of the children. We find nothing in the record to support those assumptions. It is also apparent that if Clyde had been willing to consider his bonuses in determining the amount of support, he may very well have had a greater say in the purposes for which the child support is to be spent.

The amount of child support rests in the sound discretion of the trial court, and an appellate court will not interfere with the trial court order unless as a matter of law an abuse of discretion is shown. (In re Marriage of Aylesworth (1980) 106 Cal.App.3d 869, 876, 165 Cal.Rptr. 389.) Here, we find no such abuse in the award of child support.

The inquiry into a party's ability to pay is prospective in nature. Although the evidence is necessarily historical, the court is attempting to forecast what the party will be able to pay as the litigation progresses. In most cases, this is not particularly challenging. A review of the payor's income over a 12-month period is normally adequate, as most people's income does not fluctuate dramatically from year to year. (In re Marriage of Riddle, supra, 125 Cal.App.4th at p. 1083, 23 Cal.Rptr.3d 273 ["as regard [to] support, we may say that statutes appear to create a presumption that the most recent 12 months is certainly an appropriate period in most cases"].)

Mitchell, however, is not most people. The evidence was clear and undisputed that Mitchell's income varied wildly from year to year. Between 2014 and 2019 he made, on the low end, $490,000 in a year, and on the high end, $1,590,000. Moreover, the evidence was clear as to why this was the case; for his profit-based clients, he had to beat his previous high watermark in order to make any money.

For this reason, it was error to conclude that having earned $1,590,000 in 2019, Mitchell would continue making that amount throughout the remainder of the litigation (which, if the temporary spousal support hearing is any indication, could go on for many years). As another panel of this court once cautioned, " ‘The theory is that the court is trying to predict likely income for the immediate future, as distinct from extraordinarily high or low income in the past. ’ [Citation.] We must be

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wary of ‘the logical fallacy of extrapolation, in which some series of events in the past is necessarily assumed to continue in exactly the same way into the future.’ " (In re Marriage of Mosley (2008) 165 Cal.App.4th 1375, 1386, 82 Cal.Rptr.3d 497.) The court ran afoul of these principles.

The court made essentially the same error that was reversed in In re Marriage of Riddle, supra, 125 Cal.App.4th 1075, 23 Cal.Rptr.3d 273. That case likewise involved an order of pendente lite spousal support from a husband whose income fluctuated due to monthly sales commissions. (Id. at pp. 1077-1078, 23 Cal.Rptr.3d 273.) The trial court had utilized a sample size of just two months in calculating support payments. (Id. at p. 1078, 23 Cal.Rptr.3d 273.) Had the trial court used a full 12 months, the income would have been approximately 38 percent of the trial court's two-month calculation. (Id. at p. 1079, 23 Cal.Rptr.3d 273.) The court held this was error. It reasoned that "the time period on which income is calculated must be long enough to be representative, as distinct from extraordinary. " (Id. at p. 1082, 23 Cal.Rptr.3d 273.) The Riddle court held that a 12-month period is "an appropriate period in most cases" (id. at p. 1083, 23 Cal.Rptr.3d 273), but acknowledged that "[a] longer period could"—and we say should —" be conceivably used ... if it were more representative of a party's income" (id. at p. 1084, 23 Cal.Rptr.3d 273). Here, due to the significant fluctuation in Mitch's income from year to year, we encounter a case that required a longer time period to generate a representative sample.

Riddle relied heavily on the case In re Marriage of Rosen (2002) 105 Cal.App.4th 808, 130 Cal.Rptr.2d 1 (Rosen), a case where, like the present case, one year's worth of income did not provide a representative sample. The issue in Rosen was slightly different than the issue here, though the rationale is equally applicable. There, in dividing the community property, the court was required to calculate the value of the goodwill in husband's law practice. (Id. at p. 814, 130 Cal.Rptr.2d 1.) His income fluctuated, and over the previous three years his income had been as low as roughly $71,000 per year, and as high as roughly $139,000. (Id. at pp. 819-820, 130 Cal.Rptr.2d 1.) In calculating the goodwill of the business, the court relied on wife's expert's testimony, who utilized the highest income figure. The Court of Appeal reversed, concluding the court had failed to calculate the average income: "A reasonable trier of fact could not help but conclude the expert chose to use [husband's] net income from 1995—one of [husband's] highest earning years—solely to inflate the value of goodwill." (Id. at p. 820, 130 Cal.Rptr.2d 1.) "Picking one year's net income, where income rises or falls from year to year, is not a reasonable basis for determining value." (Id. at p. 821, 130 Cal.Rptr.2d 1, italics added.)

Likewise, here, Mitchell's income fluctuates, and the court abused its discretion in calculating his average income based on a single year of income, which happened to be his highest grossing year on record.

For purposes of guiding the parties and the court on remand, we suggest two possible approaches the court might take.

First, it could expand its data set to include additional years that capture the volatility in Mitchell's income. We are sympathetic to the fact that the court here was confronted with expert testimony on opposite extremes. On the one hand, Mitchell's expert based his recommendation on income data going all the way back to 2008. The court reasonably concluded that incorporating the years of the great recession artificially depressed Mitchell's income. On the other hand, Jill's expert

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swung to the opposite extreme; he incorporated only one year of data, which artificially exaggerated Mitchell's income. The underlying premises of both expert opinions were unreliable. In such circumstances, the court's equitable duty is to issue a support award based on its own determination of what constitutes a representative time period for calculating income, to the extent the underlying evidence permits it. (See In re Marriage of White (1987) 192 Cal.App.3d 1022, 1026, 237 Cal.Rptr. 764 [noting that "spousal support is a consideration of equity"]; Darsie v. Darsie (1942) 49 Cal.App.2d 491, 494, 122 P.2d 64 ["A divorce action is in the nature of an action in equity"].) Under the specific circumstances of this case, for example, incorporating five years of income data would have been one option within the court's discretion.

The second option is to employ a tool well suited for this scenario: a Smith/Ostler component to the support award. (See In re Marriage of Ostler & Smith, supra, 223 Cal.App.3d 33, 272 Cal.Rptr. 560.) "An Ostler & Smith percentage is assessed ... for ‘any discretionary bonus actually received.’ [Citation.] It was originally justified on the ground that future bonuses are not guaranteed, and it would be unfair to require the obligor to file motions for modification every time a bonus is reduced." (In re Marriage of Samson (2011) 197 Cal.App.4th 23, 27, 127 Cal.Rptr.3d 857.) That would allow the court to establish a base level of spousal support in reliance on the $240,000 Mitchell reliably earned each year, plus add a percentage of Mitch's annual bonus up to the amount necessary to maintain the marital standard of living. This approach would obviate much of the need for the court to forecast Mitchell's income, relying instead on the amount actually earned.³

Accordingly, we will remand for the court to recalculate temporary spousal support.⁴

Nevertheless, there are a few things that do manage to make themselves plain from the text, the primary one for purposes of the case before us is (as Robert's letter to the trial judge argued) that the formula does not admit one parent's income to be a fluctuating variable while the other parent's income is assumed to be static. The formula is always predicated on knowing what both parents' income is in nominal static dollars

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at the time the order is made.³

Now, of course, a court can differ from the guideline formula. Section 4057, subdivision (b) expressly permits the court to make an order where application of the guideline

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formula is "unjust or inappropriate in the particular case." But if the court is going to do that, it must comply with the requirement in section 4056 that any deviation from the formula amount be justified either in writing or on the record. Information required includes what the guideline formula is, the reasons for differing from the guideline, and the reason the amount is "consistent with the best interests of the children." (§ 4056, subd. (a)(1)(3).)

Family Code section 4055 ² provides a formula for determining the amount of child support based on the net disposable incomes of the parents. The court must calculate the "annual gross income" of the parent, defined in [55 Cal.App.4th 1396] section 4058 ³ as "income from whatever source derived," except as specified, including "but not limited to" wages and bonuses. ⁴ From this is derived the parent's monthly net disposable income. ⁵ Overtime is not excluded from the definition of "annual gross income" and the definition is broad enough to include overtime either under the term "wages" or within the inclusive "income from whatever source...." Bonuses are specifically included in the definition of "annual gross income."

The court cannot deduct predictable overtime and bonuses in determining Andrade's prospective earnings merely because they occur sporadically. The [55 Cal.App.4th 1397] mechanism for calculating Andrade's net disposable income is a monthly average. (§ 4060.) The question is whether the bonuses and overtime are likely to reoccur. Absent a determination that "the monthly net disposable income figure does not accurately reflect [Andrade's] ... prospective earnings," it was error for the court to exclude overtime and bonuses in its calculation.

We conclude the trial court abused its discretion when it used the parties’ 2013 taxable income as the sole measure of their respective incomes when modifying 2014 temporary child and spousal support, when 2014 tax returns were in evidence.

When a court initially fixes child and spousal support, it is required to use past income figures to project likely future income. Because no court has a crystal ball, it must rely on past income data to project future income, and income tax returns usually are the most reliable source. The relevant statutes appear to create a presumption that, under ordinary circumstances, the most recent annual income tax return would be an appropriate source for predicting future income. (See In re Marriage of Riddle (2005) 125 Cal.App.4th 1075, 1083–1084, 23 Cal.Rptr.3d 273 ["annual" income in §§ 4059–4060 as a benchmark for calculating "net monthly disposable income" makes sense in most cases and corresponds with income taxes which are calculated on an annual basis.].) Of course, in cases where a spouse’s annual income fluctuates, a longer period might be more appropriate. (Id. at p. 1084, 23 Cal.Rptr.3d 273.) Modification of a temporary "spousal support order may be made only on a showing of a material change in circumstances," and where the modification involves payment of support into the future, a party seeking modification must provide current income and expense data from which the court can predict future needs and ability to pay. (In re Marriage of Tydlaska, supra, 114 Cal.App.4th at p. 575, 7 Cal.Rptr.3d 594.)

Because the trial court was engaged in a retrospective modification of past support awards, governing 2014 only, no guesswork was required, however. Reliable 2014 income data was contained in the parties’ 2014 tax returns.

We are guided by In re Marriage of Rosen (2002) 105 Cal.App.4th 808, 824–827, 130 Cal.Rptr.2d 1. In that case, at the time of trial in January 1999, the trial court erroneously calculated the husband’s prospective income based on trial exhibits and expert testimony proving the husband’s cash flow in 1996. The husband testified to a much lower income in 1998, and that testimony was corroborated by the husband’s 1998 federal tax return. Nevertheless, the trial court based spousal support on the higher 1996 figure. The

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Court of Appeal reversed, and ordered the trial court, on remand, to use the husband’s 1998 taxable income when recalculating spousal and child support awards for the period up to January 31, 1999 (approximately the time of the first trial). For the period January 31, 1999 to the date on which the trial court, on remand, determined the new amount of support, however, the trial court was ordered to consider evidence of the husband’s "ability to pay during that time period ." (Id. at p. 827, 130 Cal.Rptr.2d 1, italics in original.) Presumably that would include 1999 and later tax returns, to the extent available.

Accordingly, we remand for the limited purpose of recalculating pendente lite 2014 child and spousal support. The court should consider 2014 income as established by 2014 tax returns or other authoritative evidence in the record of 2014 income. We recognize that, "[i]n practice, the precise definition of a party’s ‘gross’ and ‘net’ income is subject to considerable court discretion (exercised within legal lines)." (Hogoboom & King, supra, at ¶ 6:196, p. 6-128.) On remand, the trial

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court may exercise its discretion, and "may properly consider the ‘big picture’ concerning the parties’ assets and income available for support in light of the marriage standard of living. [Citation.]" (In re Marriage of Wittgrove, supra, 120 Cal.App.4th at p. 1327, 16 Cal.Rptr.3d 489.)" ‘Ability to pay encompasses far more than the income of the spouse from whom temporary support is sought; investments and other assets may be used for ... temporary spousal support. [Citations.]’" (Ibid.) Similar information is relevant when assessing the supported spouse’s needs. Thus, in modifying the temporary spousal and child support orders on remand, the trial court may include other relevant factors in addition to income shown on the parties’ 2014 tax return, including DeeDee’s 2013 capital gain and other assets available to the parties at the time, if deemed appropriate by the trial court. But it must also consider 2014 income, as revealed by the 2014 tax returns.