When Is Income Not Income Available for Support? A Look at the Pearlstein Case

checking stocksAs we’ve mentioned many times over on this blog, support (both child support and spousal support) can be very complicated in California. In some instances, the relevant statutes provide the Court with vast discretion that needs to be clarified in subsequent court cases. One of those Court cases is the Pearlstein case which deals with the determination of income resulting from capital gains.

In Pearlstein, Husband sold a substantial amount of shares in a business. In consideration for the sale of his shares, Husband received shares of another business and cash. What Husband ended up doing with the stock and cash he received from the sale is the key to the case: he did not sell the shares and he reinvested the cash.

Husband argued that since he did not sell his newly acquired stock and reinvested the cash, he was merely switching out one capital asset for another. He cited Mejia v. Reed, the California Supreme Court case that held that the sale of preexisting assets usually should not be factored in determining support. The trial court determined that the value of the stock that Husband received in the sale of his company and the cash he received would all be considered income available for support. In support of its determination that the value of the stock Husband received could be considered as income, the trial court cited the Cheriton case providing that the value of stock options could be considered by a Court in determining support.

The Court of Appeal agreed with Husband and reversed the trial court’s order. The Court of Appeal held that realized capital gains (the profit from the sale of investments that are actually sold) can be considered income available for support but only to the extent that those gains are not reinvested. In this case, since Husband received shares in a new business and reinvested the cash proceeds he received, neither the value of the shares nor the cash could be considered income available for support. The Court also held that the value of unrealized gains (the increase in the value of an asset not yet sold) could not be considered income available for support.

The distinction between the facts in the Pearlstein case and the Cheriton case is important and was explained by the Court of Appeal. It is a common practice for employees to receive stocks or (more commonly these days) restricted stock units as part as their overall compensation package. When this compensation is earned as a result of a party’s labor, the value of that compensation is immediately income available for support, regardless of whether or not that party liquidates the stock received. This is what happened in Cheriton, as the Husband in that case had received stock options incident to his employment. In Pearlstein, the stock and the cash was not received in exchange for Husband’s labor: it came about as the result of the sale of a preexisting asset.  Therefore, the proceeds were not considered income available for support.

Both child support and spousal support can be complex in California. You are advised to seek competent counsel.

Please contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child support. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.

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