TODD P. WYMAN, Appellant,
v.
RICHELLE WHITSON, Appellee.
Appeal
from the Superior Court of the State of Alaska, First
Judicial District, No. 1 SI-11 -00186 CI, Sitka, David V.
George, Judge.
Anthony M. Sholty, Faulkner Banfield, P.C., Juneau, for
Appellant.
Corrie
J. Bosman, Law Office of Corrie J. Bosman, Sitka, for
Appellee.
Before: Stowers, Chief Justice, Winfree, Maassen, Bolger, and
Carney, Justices.
STOWERS, CHIEF JUSTICE.
I.
INTRODUCTION
Todd
Wyman and Richelle Whitson have joint legal custody over
their child, and shared physical custody alternating every
two years. Each parent has a child support obligation while
the child is in the primary custody of the other parent. In
the superior court, the parties resolved all aspects of the
child support determination but one: whether Wyman could
apply tax deductions for amortization of his commercial
fishing permits and quota shares to his adjusted income as
the basis for calculating his child support obligation. The
superior court found that Wyman's assets were perpetual
intangible assets which do not decline in value over time and
that Wyman had failed to show that amortization of these
assets would reflect an ordinary and necessary cost of
income. Thus, the superior court concluded that this
amortization was not deductible from Wyman's income.
Wyman
appeals, arguing that the superior court erred in not
allowing the amortization deduction in light of our prior
decisions allowing similar deductions for depreciation
expenses. We conclude, however, that because Wyman's
fishing permits and quota shares are perpetual assets with an
indefinite useful life, amortization of these assets does not
reflect an ordinary and necessary cost of producing income
and is not deductible from income for child support purposes.
We therefore affirm the superior court's child support
order. However, we limit our holding to perpetual intangible
assets similar to those in this case and do not address the
question whether amortization of an intangible asset with a
finite useful life can be deductible as an ordinary and
necessary cost of income.
II.
FACTS AND PROCEEDINGS
A.
Facts
Todd
Wyman is a self-employed commercial fisherman. As part of his
business he owns several fishing permits and individual
fishing quota (IFQ) shares. Each year Wyman makes a deduction
on his federal income tax return for amortization of these
intangible assets.
Wyman
and Richelle Whitson had a child in 2008. Wyman and Whitson
separated in 2010. After separating, the parties negotiated a
written custody and support agreement which was incorporated
into a Child Custody and Child Support Order by the superior
court in Sitka in October 2011. In March 2013, the parties
notified the court that Whitson would be moving to Alabama
with her husband in July of that year and Wyman sought to
modify the custody order. The parties stipulated, and the
court concluded, that Whitson's move constituted a
substantial change of circumstances requiring a custody
modification.
B.
Proceedings
After
hearings in May and June 2013, the court granted primary
custody to Whitson from July 2013 to July 2016, with custody
alternating every two years thereafter. The court ordered
both parties to pay child support, to be calculated based on
the primary custody formula of Alaska Civil Rule 90.3,
[1]
with each parent as the obligor while the child is in the
custody of the other parent. A dispute arose regarding how to
calculate Wyman's income for child support purposes; at a
hearing in April 2015, the parties advised the court they had
resolved all of their disagreements but one. The remaining
issue was whether Wyman could apply substantial tax
deductions for amortization of his commercial fishing permits
and quota shares - ranging from $22, 142 in 2012 to $26, 133
in 2014 - to his income for purposes of calculating child
support. Wyman argued that the deductions should be allowed,
asserting that they reflect "ordinary and necessary
expenses required to produce the income" as described in
the commentary to Rule 90.3. He also argued that the
amortization deductions he sought "are no different than
depreciation deductions" permissible under our decision
mEagley v. Eagley.[2]
The
superior court concluded that amortization of intangible
assets is not deductible for child support purposes because
it does not reflect a cost at all:
Amortization derives from the capital cost of an intangible
asset such as a permit or IFQ. Depreciation reflects a
decline in usefulness (value) of a tangible asset that must
eventually be replaced. In actuality, the annual deduction
for depreciation of a tangible item reflects a budgeted
allocation of capital for a future expenditure - the
replacement of the tangible asset at the end of its useful
life.
Unlike depreciation, there is no inherent loss in usefulness
or value of an intangible asset over time. There is no
inherent need to replace an intangible asset in the future,
as is the case with a tangible one. The rights conferred are
perpetual, though potentially volatile, in nature. The useful
value of a limited entry permit or IFQ today, does not depend
on how many years have passed since it was issued. The permit
or IFQ is intangible and does not "wear out."
Consequently, no annual allocation of capital is necessary to
preserve the asset and no deduction for the annual allocation
of capital justified.
On that
basis, the court held that Wyman "failed to prove that
amortization reflects an ordinary and necessary cost of
income" and ordered him to recalculate his income
without the deduction. Wyman appeals.
III.
STANDARD OF REVIEW
"The
proper method of calculating child support is a question of
law, which we review de novo, adopting the rule of law that
is most persuasive in light of precedent, reason, and
policy."[3] "Whether the superior court applied
the correct legal standard to its child support determination
is a question of law that we review de
novo."[4] "[Interpretation of the civil rules
presents a question of law that we review de
novo."[5] "We review the superior court's
factual findings regarding a party's income for purposes
of calculating child support for clear
error."[6] A finding is clearly erroneous when our
review of the entire record leaves us with a definite and
firm conviction that a mistake has been made.[7]
IV.
DISCUSSION
A.
The Parties Do Not Contest The Superior Court's Finding
That Fishing Permits And Quota Shares Are Perpetual
Assets.
The
superior court denied Wyman's amortization deductions
based on its finding that intangible assets like fishing
permits and quota shares are "perpetual, " do not
decline in value over time, and do not "wear out."
Neither party challenges this finding. Both in the superior
court and on appeal, Wyman concedes that his assets do not
inherently lose value over time, and argues only that this is
not legally relevant. Therefore, we consider it established
that Wyman's fishing permits and quota shares are
perpetual assets.
That
said, the superior court's description of intangible
assets is too broad. It characterizes the perpetual nature of
fishing permits and quota shares as common to all intangible
assets, and thus as a distinguishing factor between
depreciation and amortization generally. This is not entirely
accurate. Some intangible assets - such as patents,
copyrights, and many contractual rights-expire after a
certain amount of time, and thus will gradually lose value as
a business asset just as tangible assets do.[8] However, because
these assets are intangible, the term
"amortization" rather than "depreciation"
is still used to account for this gradual
decline.[9] It would be clearly erroneous to find, for
example, that a patent is "perpetual" and that its
value "does not depend on how many years have passed
since it was issued." Under current patent law, a U.S.
patent has a strict lifespan of 20 years from the date it was
filed, [10] so that patent will almost certainly
decline in value as the expiration date draws closer and will
be entirely worthless after 20 years have passed. As such, we
limit the superior court's finding, and the conclusions
of law that follow therefrom, to the types of assets in
question here.
B.
The Superior Court Did Not Err In Concluding That
Amortization Of Perpetual Assets Is Non-Deductible From
Income For Child Support Purposes As A
Matter Of Law.
Civil
Rule 90.3 provides that child support shall be calculated as
a specified percentage of "the adjusted annual income of
the non-custodial parent."[11] In the case of
self-employment income, the commentary to Civil Rule 90.3
defines income as "gross receipts minus the ordinary and
necessary expenses required to produce the income" but
notes that "[o]rdinary and necessary expenses do not
include amounts allowable by the IRS for the accelerated
component of depreciation expenses, investment tax credits,
or any other business expenses determined by the court to be
inappropriate."[12] Wyman argues that because (1) his
amortization deductions are permissible for income tax
purposes, (2) amortization is "closely related" to
depreciation, and (3) we have on several occasions allowed
deductions for straight-line depreciation, deductions for
amortization should also be permitted. He argues that, like
depreciation, amortization accounts for the cost of
"capital assets necessary to produce business income,
" so amortization deductions reflect an "ordinary
and necessary business expense."
Responding
to the superior court's conclusion that there is "no
inherent loss in usefulness or value of an intangible asset
over time" and "no inherent need to replace an
intangible asset in the future, " and that "no
annual allocation of capital is necessary to preserve the
asset, " Wyman points out that the same objections can
be made for depreciation of business real estate, which
"does not inherently lose value over time" and
"may not wear out or need to be replaced." Thus, he
argues, "[t]here is no meaningful difference for child
support purposes between the amortization of fishing permits
and quota shares and the straightline depreciation of
business real estate." Because we have on several
occasions allowed depreciation deductions from income for
child support purposes, [13] Wyman argues the same deductions
should be available for amortization of his fishing permits
and quota shares. For the reasons discussed below, we
disagree.
1.
Deductions are not automatically permitted for child
support purposes merely because they are allowed by the
IRS.
Wyman's
proposed deduction is based on a tax deduction for
amortization of intangible assets contained in the Internal
Revenue Code.[14] Wyman argues that "expenses shown
on the parent's tax return are evidence that the expenses
were actually incurred and were ordinary and necessary."
Wyman concedes, however, that a claimed ...