Imputation of Income: The Great Equalizer in New York Divorces

When providing information that will form the basis of calculations for spousal maintenance and child support obligations, soon-to-be-ex-spouses may try to game the system. By inadequately disclosing documents and information that accurately and fully establish their true income or income potential, they can increase or decrease—at least on paper—the amount of spousal maintenance or child support they would owe or be owed once a court enters an order establishing those obligations. A spouse can also try to manipulate the outcome and drive down their obligations by intentionally becoming unemployed or underemployed.

These attempts to skew support calculations to their advantage are often made by soon-to-be-ex-spouses who are high-net-worth individuals, have several income-creating assets or income streams, and have the means to retain counsel, accountants, and other advisors who can paint a picture to the court and the other spouse of much less income than a full accounting would suggest.

Spouses on the receiving end of such maneuvering are not helpless. By imputing income to a spouse, a court can level the playing field by using the higher overall income figure as the basis for its calculation of spousal maintenance or child support to be paid.

New York courts may impute income when a spouse’s submitted financial information fails the smell test

New York courts do not have to rely on a spouse’s account of their finances when calculating spousal maintenance and child support. They certainly will not when a spouse’s Statement of Net Worth, the compulsory financial disclosure affidavit spouses must provide during a New York matrimonial action where support is an issue, raises red flags about their income.

For example, a spouse could report expenses that exceed their income without a corresponding increase in debt load or proof of other sources of money to fund those expenses. In that case, the court might suspect that the spouse is intentionally hiding income and impute the amount of income necessary to support the identified expenses.

On the other hand, courts may assume, based on several factors I describe in the next section, that an “out of the workforce spouse” can earn a certain amount of income through employment, which will be imputed to them following submission of appropriate proof (e.g., past work/employment history, through a vocational expert, or other evidence of earning capacity).

For spouses who own (or whose family owns) a business, or are self-employed, courts may become suspicious when their business income drops right before the divorce process begins without a reasonable business-related explanation. When a court sees an unsubstantiated or suspicious drop in a business’s revenue, it may suspect that a party has intentionally reduced its income and may impute a higher amount of income to that spouse in line with the historical income of the business.

Generally, courts may impute income to a spouse when:

• A spouse’s prior earning capacity, employment experience, and education/job training indicate they can earn a higher income;
• The evidence suggests that a spouse failed to make a good-faith effort to find employment consistent with their education/training and job experience;
• A spouse’s financial records lack credibility or are incomplete;
• A spouse’s expenses exceed their income;
• A spouse receives gifts from or has ordinary expenses paid by third parties; or
• A spouse appears to have used their business to disguise income.

On a related note, under the New York Child Support Standards Act, codified at Domestic Relations Law § 240, a court has discretion to impute income from non-income-producing assets, employment perquisites (more commonly known as “perks”) to the extent they constitute expenditures for personal use, fringe employment benefits, and “money, goods, or services provided by relatives and friends.”

New York courts rely on a variety of evidence when determining how much income to impute

In most divorces, courts have no shortage of evidence they can rely on to determine that a spouse can earn more income than they’ve disclosed they’ve earned, and to decide how much income to impute to that spouse as a result.

As I alluded to above, a common first piece of evidence is the Statement of Net Worth. A careful analysis—often conducted first by counsel for a spouse based on guidance from their client about what information seems suspect—could turn up expenses that exceed income. When this is the case, a court may determine that the spouse is earning income at least equal to their expenses, and impute that income.

Vocational exams and expert testimony are another form of evidence. Courts may order a spouse to submit to an exam administered by a vocational expert. The expert would evaluate the spouse’s physical capacity and consider their educational background, job skills, and employment history to identify jobs they could readily obtain and a range of compensation they would likely receive. This evidence may be useful when a spouse has not worked for a while or has changed jobs, employers, and/or industries frequently over their career.

Even without a vocational exam or expert testimony, a court may look at a spouse’s educational background, employment history, previous job, previous salary, and prospects for future employment and impute income they would expect to bring in through a job. A court may be more likely to conduct this inquiry on its own in situations where a spouse had a steady income over a long time and only recently left the workforce.

When considering whether to impute income to a business-owning spouse and how much to impute, courts will look to business records and testimony from forensic accountants. Creative accounting may have helped a business owner minimize their tax burden, but forensic accountants hired by counsel for their soon-to-be-ex-spouse will look closely to determine if the other spouse attempted to reduce the income of a pass-through entity or hide their personal income through the business. Perks enjoyed by the business owner (e.g., cell phones, cars, club memberships paid for by the business) would also serve as a source of income to be added back in when computing the total income of that party for purposes of determining spousal and/or child support.

Finally, courts may consider lay witness testimony regarding a spouse’s income and expenses when deciding whether to impute income. For example, a financial adviser might testify about a couple’s non-liquid assets that were not listed in one spouse’s financial disclosures. Or, a family member might testify about ongoing financial assistance a spouse receives from that individual. Additionally, a third party could testify about the ordinary expenses, like housing or food, that they regularly pay on behalf of one or both spouses.

The direct connection between imputed income and spousal maintenance and child support

When a court imputes income to a spouse during a divorce proceeding, the amount imputed is used as that spouse’s actual income when (a) evaluating statutory spousal support factors to determine the amount and duration of spousal maintenance and (b) determining the particular parent’s child support obligations.

In spousal support proceedings, for example, when income is imputed to an obligor spouse, the court will often increase the amount of the obligation based on that higher figure. Conversely, when a beneficiary spouse has a higher imputed income, the court may determine that such spouse (a) is no longer a candidate for spousal maintenance or (b) may reduce the obligation based on the imputed income.

Depending upon the facts and circumstances presented, particularly the lifestyle enjoyed by the parties’ children during the intact marriage, where the monied spouse’s income increases based upon imputation, it may result in a larger child support award, such that the child(ren)’s lifestyle approximates (but not necessarily replicates) that of the monied (payor) parent. This will not apply in lower income cases which are subject to the applicable combined income cap for child support of $163,000 through December 31, 2023 (i.e., in cases where the total combined income is $163,000 or less).

In cases involving higher earners, while imputed income may not necessarily change a party’s basic child support obligation, it will still impact that individual’s percentage share of a child’s add-on expenses, which are determined based on each party’s percentage share of the total combined parental income.

Imputed income in the real world

There’s no shortage of real-world examples of imputed income in New York case law. An exhaustive list would rival the thickness of Black’s Law Dictionary. Here are just a few examples of instances where courts imputed income in a divorce proceeding:

• $151,000 of income was imputed to the wife based on rental income from separate property investment income she received from her equitable distribution award, and her access to over $500,000 in trust assets that were her separate property. (Gorman v. Gorman, 187 A.D.3d 636 (1st Dep’t 2020))
• $100,000 of income was imputed to the husband where the expenses he listed in his Statement of Net Worth far exceeded his income as reported on his tax returns and he lived in a two-bedroom apartment in a luxury apartment building. In addition, after his job for 12 years at a “major bank” was eliminated, he did not demonstrate that he “diligently sought new employment commensurate with his qualifications and experience.” (DeSouza-Brown v. Brown, 71 A.D.3d 946 (2d Dep’t 2010))
• Income of $78,000 per year was imputed to the wife based on evidence at trial that showed she could earn that sum due to her degree and her nurse practitioner license, which was further supported by facts adduced at trial and expert testimony. (Spreitzer v. Spreitzer, 40 A.D.3d 840 (2d Dep’t 2007))
• $46,609 of income was imputed to the husband “based upon his prior income, his training, his choice to pursue only part-time employment, and his current living arrangement, in which he did not pay rent.” (Matter of Napoli v. Koller, 140 A.D.3d 1070 (2d Dep’t 2016))
• $45,000 of income was imputed to the husband based on a brokerage agreement he signed identifying his income as $50,000 per year, documentation showing he held an ownership interest in a trucking business, and the testimony of his ex-wife who worked in the trucking business and had personal knowledge of the company’s payroll. (Matter of Henry v. Bell, 2020 WL 3847620 (3d Dep’t 2020))

Imputed income rebalances the support scales

When one or both spouses in a divorce fail to properly account for their income and expenses, or pursue unemployment or underemployment in an attempt to inflate or deflate their or the other’s support obligations, the concept of imputed income can serve to rebalance the scales.

Through the imputation of income, courts can ensure that the proper amount of support is awarded, even in instances where the financial disclosure provided is deemed unreliable or suspect.

Peter R. Stambleck is a founding partner of Mosberg Sharma Stambleck Gross LLP, a leading Manhattan matrimonial law firm specializing in representing high-net-worth individuals and other professionals in their divorces. He can be reached at stambleck@mssglaw.com.

Reprinted with permission from the June 28, 2023, edition of the New York Law Journal © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.