Nonrecurring Gains Count as Income for Child Support

Child support payments in New Hampshire are determined based on the parents' incomes according to Child Support Guidelines established by state law (RSA 458-C). In November, 2001, the New Hampshire Supreme Court affirmed a Superior Court order that treated the gain from stock options received and exercised after a divorce as income for the purpose of recalculating an ongoing child support obligation even though such income may be nonrecurring. In the Matter of Robert P. Dolan and Cathy L. Dolan, 147 N.H. 218 (2001). And in February 2003, the Court reaffirmed Dolan in upholding a Superior Court order that considered a $3.4 million patent infringement settlement as income for purposes of calculating child support. In the Matter of Frederick J. Feddersen and Shelley Cannon, 816 A2d. 1033 (2003).

These cases establish a clear rule in New Hampshire that nonrecurring income must be included for the purpose of calculating child support. This is important not only because such income can be substantial, but also because such a windfall might give rise to a "substantial change of circumstances" that could create a ground for a Modification of Order under the Guidelines (RSA 458-C:7).

The first case involves Robert P. Dolan and Cathy L. Dolan who divorced in 1996 and share legal custody of their three children. Cathy has physical custody, and Robert is required to pay child support. In April 1998 Cathy petitioned the court for an increase in the amount of child support, alleging that since their divorce Robert's salary had increased and he had received and exercised certain stock options. The Superior Court ordered increased support payments based in part on the exercise of those options. Robert appealed the order to the New Hampshire Supreme Court.

The Court first addressed the question of whether gains from such options count as income for calculating child support. For the purposes of calculating a parent's child support obligation, RSA 458-C:2, IV (Supp. 2000) defines "gross income" as "all income from any source, whether earned or unearned, including but not limited to, wages, salary, commissions, tips, annuities, social security benefits, trust income, lottery or gambling winnings, interest, dividends, investment income, net rental income, self-employment income, alimony, business profits, pensions, bonuses, and payments from other government programs . . . ." Under this broad definition, we hold that the exercised stock options must be included as income for the purposes of calculating child support.

The Court noted that "even though stock options are not explicitly mentioned in the statute, they are analogous to a bonus". Kenton v. Kenton, 571 A.2d 778, 782 (Del. 1990). More instructive, perhaps, is the Court's holding that "Categorizing the exercised stock options as income serves the policy goal of minimizing the economic consequences of divorce to children. See RSA 458-C:1 (1992)".

The Court turned aside Robert's argument that stock options do not represent a consistent or predictable income stream. "The statutory definition of income specifically includes other types of nonrecurring income, such as lottery or gambling winnings, and bonuses. See RSA 458-C:2, IV. Furthermore, the legislature has provided the means for addressing this issue by giving trial courts the discretion to adjust the award where applying the uniform child support guidelines would result in a "confiscatory support order". RSA 458-C:5, I(j) (Supp. 2000)."

The more recent case involves Frederick J. Feddersen and Shelley Cannon, who divorced in 1995. Frederick is sole shareholder of a corporation. Shelley has custody of their son, who turned sixteen in January 2003. In May 1998 she petitioned for increased child support.

Following a March 2002 hearing, the master ruled that a $3.4 million settlement paid to Frederick's corporation was income for child support purposes and ordered him to pay $7,000 per month in child support until the child turned eighteen. Frederick appealed to the New Hampshire Supreme Court, which affirmed the lower court's order and specifically declined to overrule Dolan.

"The petitioner also asks that we adopt a new rule to accommodate him and others like him with fluctuating incomes" wrote the Court. "Under this new rule, a trial court would use nonrecurring income to calculate a party's child support obligation only for the year in which the party received it and for no other years. The petitioner argues that this rule complies with the "spirit" if not the letter of Dolan."

But the Court refused his request. "In this case, having properly determined that the petitioner's present income included the $3.4 million settlement, the trial court committed no error by calculating the petitioner's child support obligation based upon his present income."

The Court wrote "The petitioner and respondent may move to modify the child support order should the petitioner's income change substantially." In other words, the order for increased payments would remain in force unless either party moves successfully to change it later.

Family Law Letter Comment. Parents who pay or receive child support and their attorneys need to be aware of Dolan and Feddersen. Under New Hampshire law (RSA 458-C:7), either party to a child support order may move for modification after three years, or sooner "based on substantial change of circumstances". If the income of an obligor increases, even as the result of an extraordinary gain, it may be appropriate for the custodial parent to move for an increase in support. Likewise, if the obligor's income falls or a windfall fails to recur he or she may wish to move for a reduction. Parties in such cases should seek counsel experienced in family law, especially if the amounts involved are substantial.

Finally, we note that while some kinds of nonrecurring gains, like lottery winnings, may come as complete surprises, other variable components of income, like sales commissions, bonuses, and stock options are foreseeable in certain cases. Over years of practice in family law, our firm has developed proactive methods for handling such variable items that are fair to all parties and regularly approved by the courts. We believe we serve the interest of children far better by creating a foundation for future cooperation between their divorcing parents than by setting the stage for future litigation.