S.L.S. (Wife) and T.J.D. (Husband) were married for 15 years. During their marriage, Wife and Husband agreed that Wife would stay home and care for their four children while several businesses that Husband owned would be the primary source of the family’s income. The financial success of Husband’s businesses allowed Husband and Wife to open and deposit marital funds into a TD Ameritrade investment account that grew to become a substantial asset of the parties’ marriage.
Husband and Wife also owned several properties that were used as rentals and produced rental income for their family. While Wife sometimes helped with Husband’s businesses, she last worked outside the home in 2007. She later enrolled in an online program to earn a master’s degree in library science.
The Divorce Case and Entry of Permanent Orders
The parties decided to end their marriage, and a dissolution of marriage (divorce) action was filed in a Colorado district court. Because Wife and Husband were unable to settle all of the disputed issues in their case, they participated in a permanent orders hearing (trial) before a district court judge who entered the following permanent orders:
- Husband would receive $6,703,173.22 of the marital estate, including their real estate and all of the rental properties;
- Wife would receive assets worth $2,782,365.80, which included the assets held in their TD Ameritrade investment account; and
- Wife would receive a payment of $1,960,403.71 from Husband to “equalize this uneven division.”
To determine how much Husband should pay Wife in spousal maintenance and child support, the district court judge calculated Husband’s monthly income at $57,662 and Wife’s monthly income at $19,666 ($16,666 of which the district court considered as “unrealized monthly gains from the parties’ investment account”). The court then ordered Husband to pay Wife maintenance in the amount of $5,000 per month for 48 months while Wife finished her graduate school program. The court also ordered Husband to pay Wife $132 per month in child support.
Wife’s Appeal to the Colorado Court of Appeals
Wife disagreed with the district court’s permanent orders and appealed the court’s maintenance and child support awards to the Colorado Court of Appeals. Wife argued that the district court incorrectly calculated both Husband and Wife’s incomes when considering how much Husband should pay Wife in maintenance and child support each month. In particular, Wife claimed in part that the district court incorrectly included the unrealized capital gains on the TD Ameritrade account as part of her income.
The court of appeals agreed with Wife and remanded the case back to the district court.
The district court had arrived at the $16,666 figure by accepting the testimony of Husband’s expert witness who testified that a hypothetical $4,000,000 investment account could generate $200,000 per year (or $16,666 per month) with a 5% rate of return. Although the district court found Husband’s expert’s testimony credible, it seems suspect from the start considering that the district court valued the parties’ TD Ameritrade account at $2,199,506.07. Further, the court of appeals concluded that the district court erred by including in Wife’s income calculation the hypothetical $16,666 in monthly returns on the TD Ameritrade account because
unrealized capital gains in an investment account are not income for maintenance and child support purposes.
In re Marriage of Schaefer, 2022 COA 112, ¶ 14.
The Calculation of Gross Income for Child Support and Maintenance
When calculating child support and maintenance, a court must consider a party’s “gross income,” which is defined by the Colorado maintenance and child support statutes as “income from any source.” C.R.S. § 14-10-114(8)(c)(I) (“gross income” for determination of spousal maintenance); C.R.S. § 14-10-115(5)(a)(I) (“gross income” for determination of child support). “Income from any source” includes dividends, interest, and capital gains. It also includes “the amount of income an asset generates or even the principle of the asset if it is used as income.” In re Marriage of Schaefer, 2022 COA, ¶ 15. But Colorado’s maintenance and child support statutes do not define whether unrealized gains in an investment account constitute “income,” and no Colorado appellate court had ever addressed this.
The Colorado Court of Appeals was persuaded by some decisions from out-of-state appellate courts–including New York and Arkansas–that concluded that unrealized increases in the value of investment accounts are “paper only” income and should be excluded when determining income for the purposes of calculating child support.
The court of appeals also looked at what it considered to be “analogous Colorado cases” that “generally agree that an unrealized compensation source not expressly defined by the maintenance and child support statutes is only ‘income’ if it is available to the party to meet living expenses or to increase their standard of living.” This led the court of appeals to conclude that
the unrealized “paper only” gains in an investment account are not income for maintenance and child support purposes unless the gains are realized and therefore can be used to meet living expenses, pay discretionary expenses, or increase the recipient’s standard of living.
In re Marriage of Schaefer, 2022 COA, ¶ 20.
It was important to the Colorado Court of Appeals’ decision that there was no evidence presented in Husband and Wife’s case in the district court that they “ever received income from the TD Ameritrade account during the marriage.” Instead, the evidence presented to the district court judge “showed only that the TD Ameritrade account had grown and had significant income-earning potential.” Moreover, the court of appeals noted that “there is an appreciable difference between what an account provides to a party as actual income and what it is capable of providing if invested differently.”
How Consideration of Unrealized Gains in an Investment Account May Be Allowed
The Colorado Court of Appeals acknowledged that “[a]lthough unrealized investment gains in an investment account are not income, maintenance and child support are inherently equitable determinations, and the court has discretion to make those awards based on the specific facts of the case.” In re Marriage of Schaefer, 2022 COA, ¶ 22 (emphasis added). By providing a district court judge with this type of discretion permits the judge to counter a party’s attempt to “use an investment strategy to shield income to avoid a maintenance or child support obligation.” But in this case, the district court erred because
the court [incorrectly] considered unrealized gains as income rather than exercising its discretionary authority to determine whether the investment strategy limited child support or maintenance obligations to an extent that was inequitable, unjust, or inappropriate.
Therefore, the Colorado Court of Appeals instructed the district court judge to determine on remand “what portion, if any, of the TD Ameritrade account is income to [W]ife….” To accomplish this, the district court “may have to allow the parties to present additional evidence on remand to allow it to determine whether [W]ife receives any actual income from the TD Ameritrade portfolio.” Id., ¶ 24.