By: Laura Wish Morgan
A determination of a parent’s income drives a calculation of child support. Income is every possible source of funds of a parent considered in the calculation. Recently, the question has arisen as to whether stock options are considered income.
What are Stock Options?
Stock options have become a progressively popular benefit at all levels of the corporate employment ladder. Former low-level employees have become millionaires because of stock options. But, what are stock options? Stock options are the ability to buy a specific number of stock shares at today’s price, sometime in the future. The date the stock options may be exercised is considered the date of vesting. So, if the price of a share of stock today is $10, and on the day of vesting the price is $20, an employee who exercises his option to purchase instantly makes a $10 profit.
In Equitable Distribution of Property, Brett R. Turner described stock options as “another type of employee benefit frequently involved in divorce cases.” These stock options give employee the right to buy stock at a price lesser than fair market value. Many times the restrictions placed on such options are regulated so that a person is unable to exercise the options immediately upon receipt. Instead, the employee has to remain with the company for a minimum amount of time before such options vest.
The reason for such restrictions is to encourage and incentivize the employee to continue working for the employer. Employees generally prefer this form of compensation because it lends itself to potentially making them a lot of money. The only loss to the employee is compensation he gave up to receive the option, such as more salary or a bonus. Most employees don’t miss what they don’t see.
The Income Realized from Exercising Stock Options is Capital Gains, and Thus Income to the Extent that Capital Gains are Income
When an employee exercises a stock option, he receives a capital gain. If the capital gain is recognized as income under the support guidelines, the profit received by an employee by such exercise will be considered income. Generally, capital gains are considered as income when they are recurring. One-time gains are not considered income, and the same applies for stock options.
The Possible Income Realized from Unexpected Stock Options is Income
Murray v. Murray was a case of first impression in Ohio that dealt with whether a person’s unexercised stock options would be considered in his or her gross income, and if so, how to value the stock options. The court concluded that unexercised stock options are considered as part of a person’s gross income. The court specifically compared unexercised options to a corporation’s saved earning where the principal company owned most of the stock in the corporation.
As it related to the value of the unexercised stock, the court decided that the best way to value the options was to account for their appreciation in values as determined by the grant and exercise date of the options falling in the income of the year at issue. Through this method, the options are valued according to the underlying stock price on the date most important to the options’ holder, the date the options may be exercise and income realized. Murray v. Murray relied on cases concluding that earnings were income to the owner if the owner had the ability or discretion to withdraw the funds.
On the contrary, if a parent owns a minority share, or if his/her earnings are essential the business’ continued existence, the retained earnings cannot be considered income.
Consideration Income from Stock Options is Not “Double Dipping”
Although an item may be classified as “property” for purposes of dividing assets between the parties, it does not mean that same item cannot be classified as “income” for child support purposes. In child support cases, “double dipping” is not allowed because the child never received any property when the assets were divided. Additionally, the child support guidelines definition of income includes veterans’ benefits, insurance benefits, workers’ compensation benefits, pensions, annuities, capital gains, lottery or gambling winnings, and prizes or awards, which are all property interests that can be divided equally between spouses. The case, In re the Marriage of Hokin, reaffirmed this principle when the court stated that it was proper to include income retirement benefits a spouses receives as part of the equitable distribution award, or division of assets determination. In this instance, there are no double dipping issues because between the parent and child, a retirement pension is taken into consideration for the first time; the child is not a party to the distribution award. Just because a particular item may be considered “property” for purposes of equitable distribution does not mean that same item cannot be considered “income” for purposes of child support. In the case of child support, there can be no “double dipping,” because the child never received any property in the equitable distribution award. Moreover, the income definition in the child support guidelines includes veterans’ benefits, insurance benefits, workers’ compensation benefits, pensions, annuities, capital gains, lottery or gambling winnings, and prizes or awards, all of which are property interests that may be equitably divided between the spouses.
The court considering retirement benefits as income for child support simultaneously while considering property for division between the spouses is not double dipping. There are a number of cases, like In re Marriage of Klomps that supports such a conclusion. In this case, the court specifically considered double dipping and settled that a military pension could be considered income for child support purposes. The court said there could be no double dipping because when it comes to child support, the child never dipped into the pension for equitable distribution purposes. The court in Loving v. Sterling also came to the same conclusion.