Effect of Stock Options on Child Support in Arizona

Under Arizona law, a parent can ask the court to modify child support obligations upon a showing of changed circumstances.  The case of Engel v. Landman, 212 P.3d 842 (Ariz. Ct. App. 2009) presented a host of legal issues, both big and small, related to such a motion. One such issue was the effect of stock options on child support in Arizona.

Devon Engel and Julie Landman divorced in 2004, and Devon – with gross income assessed at $20,000 per month — was ordered to pay $2,000 a month in child support.

In 2008, Devon moved to modify child support. He cited as changed circumstances to modify child support the fact that Julie had received a large inheritance, bringing her income, excluding support, to $15,000 per month. He also sought to attribute income to her, since he claimed that she was voluntarily unemployed, and might have worked as an accountant. Last, he sought to have his own assessed income reduced because he claimed that the manner in which his stock options had been valued was unfair.

Although Devon filed the appeal early, the Court of Appeals considered his supplemental notice of appeal as timely. The Court declined to consider Julie’s cross appeal, which was also filed early, since she did not file a supplemental notice of appeal.

Hypothetical Income and Childcare Expenses

Arizona law requires that each parent contribute financially to the care of minor children. The divorce court combines the total monthly income of each parent and uses this to calculate the child support amount required. Then, by comparing the income of the parents, it allocates a percentage of the monthly support to each.

If one parent is able to work but chooses not to, the court can assess that person income that she could have made but didn’t, called hypothetical income. However, if that parent would then have to hire someone to look after the children, the court can also add hypothetical childcare costs into the equation.

In Engel v. Landman, the divorce court attributed hypothetical income to Julie. This did not increase the total child support available for the children, since the maximum amount of combined income considered under the child support law is $20,000 per month, and Devon’s monthly income, taken alone, was $20,000. Therefore, assessing Julie hypothetical income did not increase the amount of child support.

However, when the court assessed hypothetical income to Julie, it did reduce Devon’s share of child support, initially set at 100%. But when hypothetical child care expenses of $900 per month were added into the expenses, Devon’s share of child support, rather than decreasing, increased.

The Court of Appeals found this result unfair, and contrary to the intent of the law. Therefore, it reversed the divorce court’s allocation of hypothetical income and childcare expenses.

The Calculation of the Income from Devon’s Stock Options

Devon received stock options as part of his compensation for 2004, 2005, and 2006. The options were vested but he had not exercised them. All agreed that the fact that he owned the vested options should impact his gross income for child support, but valuation became an issue.

Devon proposed various methods of valuation but the divorce court rejected them. Instead, it calculated the total number of shares (20,200) and multiplied that number by the price per share increase ($13.88) that had occurred in 2006, and added the resulting figure to Devon’s gross income for 2006 for child support purposes.

Devon argued that this was unfair, as it included the value of options earned during three years in his income for 2006.

The Court of Appeals agreed that the valuation method was not consistent with the purpose of the child support law. That is, it did not establish a standard of support for children consistent with their needs and the ability of parents to pay, and to make child support awards consistent for persons in similar circumstances.

Rather, the valuation approach used made the child support amount depend on market fluctuations that had no actual effect on the money available to support the children. It also led to an unfair calculation of Devon’s income, one based upon the present value of years of accumulated wealth, rather than the rate of return of those assets.

The Court of Appeals sent the issue back to the lower court to resolve. It did not order that a particular valuation method be used, but suggested that the valuation Devon’s employer placed on the stock options might be a starting point.

Once a new valuation is placed on the options, the divorce court must recalculate Devon’s gross income and the child support amount.

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