Wyman v. Whitson

          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 ...