Opinion
No. E2005-02469-COA-R3-CV.
May 22, 2006 Session.
Filed July 31, 2006.
Appeal from the Circuit Court for Bradley County; No. 91-124; John B. Hagler, Judge.
Judgment of the Circuit Court Affirmed in Part and Reversed in Part; Case Remanded.
John T. Rice, Chattanooga, Tennessee, for the appellant, Nora Elizabeth Kilby Moore.
Roger E. Jenne, Cleveland, Tennessee, for the appellee, Ronnie Dale Moore.
Charles D. Susano, Jr., J., delivered the opinion of the court, in which D. Michael Swiney and Sharon G. Lee, JJ., joined.
OPINION
Nora Elizabeth Kilby Moore ("Mother") and Ronnie Dale Moore ("Father") were divorced in 1991. Father's child support obligation was set at $100 per week. As part of a divorce settlement, Father was awarded all of his common stock in Ed's Cycles, Inc. — Father's employer at the time of the divorce. Mother filed a petition to modify in 1999, which petition was settled upon Father's payment to Mother of $4,000. In June, 2001, Father sold all of his stock in Ed's Cycles, Inc., to his sister for $687,550, plus an additional $100,000 for a covenant not to compete for five years. Father received 20% of the total sale price at the 2001 closing, with the remainder, including interest, to be paid over time in sixty monthly installments of $11,758.66 each. Mother filed a second petition to modify in December, 2001, claiming a significant variance in Father's income and asserting that her child support should be increased. Mother also claimed that the settlement of the 1999 petition to modify was not valid. The trial court determined that the settlement of the first petition to modify was valid, and that the capital gain realized by Father as a result of the sale of his stock in Ed's Cycles, Inc., was a "one-time capital gain" and, as such, should not be considered in calculating Father's income for child support purposes. The trial court denied Mother's petition in toto. She appeals, raising issues with respect to the trial court's treatment of Father's capital gain and other matters. We affirm in part, reverse in part, and remand with instructions.
I.
The parties were divorced in May, 1991. They have two children, who were ages two and seven at the time of the divorce. The parties entered into a "Separation and Property Settlement Agreement"; it was approved and adopted by the trial court. As pertinent to this appeal, the agreement designated Mother as the primary residential parent of the two then-minor children. Father was ordered to pay child support of $100 per week. The agreement also recited as follows:
[Father] owns a substantial amount of stock in Ed's Cycles. [Father] shall have and retain, as his own, all stock interest in Ed's Cycles, with [Mother] being divested of all interest therein. [Mother] shall execute any necessary instrument or document required to divest herself of any interest in said stockholdings.
In June, 1999, Mother filed a petition for modification. Mother alleged there was a significant variance in Father's income and that his child support should be increased. Mother also claimed that, due to Father's erratic payment of child support, she was unable to determine whether there was an arrearage. Finally, Mother alleged that Father was improperly claiming one of the children as an exemption for federal income tax purposes and, as a consequence, that she was exposed to an additional tax assessment.
The next document in the record is a second petition for modification filed by Mother two and a half years later, i.e., on December 18, 2001. As in the earlier petition, Mother sought an increase in Father's child support obligation. Mother alleged as follows:
[Mother] would aver that her son . . . has reached the age of 18 and that as hereafter stated the petition seeks to collect and force collection of certain child support, which should have been increased, based on income and/or earnings of [Father].
Further, [Mother] seeks back child support for her daughter . . . and increase in future child support, consistent with the applicable guidelines. . . .
Father responded to the second petition to modify, claiming he was current in his child support obligation. He claimed that he was then unemployed with no earnings. In an amended response to the second petition, Father stated that after Mother filed the first petition for modification in 1999, the parties entered into a settlement agreement wherein Father paid Mother $4,000 in full and final settlement of the claims brought by Mother in the earlier petition.
Trial took place on March 21, 2003. Father testified that for many years and up until June, 2001, his primary source of income had been his employment at Ed's Cycles, a company started by his father. Father had acquired 30 shares of stock in Ed's Cycles, Inc., as a gift from his father in 1978. Following the death of his father in 1982, he received an additional 45 shares from his father's estate.
Father testified that, at any given time, he never was more than two or three months behind in his child support. He stated that he was unsure if he was in arrears when Mother filed her first petition for modification in 1999. At the time of the most recent hearing below, Father was continuing to pay child support of $100 per week, even though the parties' oldest child had been emancipated for almost two years. Father testified that during 1999, the oldest child was staying with him the "vast majority" of the time. Father claimed that, in 2000, in addition to paying child support to Mother, he paid roughly $3,000 for the children's food and clothing. Father indicated that he also paid all of the tuition for the oldest child to attend a private high school at a total cost of approximately $10,000. Father claimed that over the years, he and his family were the primary caregivers for the children. However, according to Father, ever since Mother filed the first petition in 1999, she had tried to thwart any assistance from Father and his family.
Father claimed he had kept track of the days that his children were with him. He stated that beginning in 1997 and continuing through 2002, both children were with him for extended periods of time.
Father was unable to locate his records for 1998.
Father testified that when he was served with the 1999 petition, he called Mother inquiring as to why she was seeking an increase in support when the oldest child was with Father "all of the time" and in view of the fact Father paid for about "everything" anyway. According to Father, Mother told him that she filed the petition because she was being audited by the IRS as a result of the fact both parents had claimed the oldest child as a dependent on their respective income tax returns. Father discussed the matter with his accountant who told Father that he properly claimed the oldest child as an exemption and not to "back down." Father then described the following conversation with Mother:
Well, I just — I said, Hey, look, . . . what is the deal here? I said, How much do you owe on your income tax? And she — I don't know that I got a specific answer, but it was — must have been $2,800, $2,900, and so . . . I threatened to get an attorney. I said, Hey, I'm going to get one and fight it, if I want to, but why don't we just settle this? I said, How about I write you a check for $4,000, and I'll go on and continue paying child support just like I'm doing right now. And she said, Yes. And I wrote the check and it was over.
Father identified the check he wrote Mother for $4,000. On the memo portion of the check Father wrote "To settle docket V-91-124." Father testified that after writing Mother the check for $4,000, he continued to pay $100 per week in child support. Mother never questioned the amount of child support being paid by Father until he received the second petition to modify in December, 2001.
Father's gross income as stated in his income tax return for 1998 was $52,389, which included $6,726 in interest income. Father's gross income from wages in 1999 increased to $135,552, and was significantly higher that year because Ed's Cycles had a successful year and Father received a substantial end-of-the-year bonus. Father's gross income in 2000 was $151,519.
Father testified that he entered into a stock redemption agreement with his sister in June, 2001, pursuant to which he sold all of his stock in Ed's Cycles, Inc., to her. She was the only other stockholder. Father's income tax return for 2001 reflects that the stock sale, including the covenant not to compete, was for a total of $787,550. Father received $687,550 from the sale of the stock and an additional $100,000 for signing a covenant not to compete for five years. At closing, Father received twenty percent of the entire sale price up front, which equaled $157,510. The remaining $630,040, plus interest at the rate of 4.66%, was to be paid in sixty equal monthly installments of $11,758.66. Father testified that his cost basis in the stock was $325,000. The monthly payments of $11,758.66 commenced in July, 2001. Father's income tax return for 2001 shows that he was paid a total of $209,843 that year as a result of the stock redemption agreement; but part of these proceeds was not taxable income as it represented a recovery of a portion of his cost. Father also pointed out that the income tax returns introduced at trial were joint returns and that the gross income on the returns also included interest income attributable to his current wife's investments.
Father was unemployed from June, 2001, until January, 2002, at which time he began working for a Ford dealership. In 2002, Father earned $24,503 from the dealership.
Father's accountant, William B. Kirksey, a certified public accountant, also testified at trial. Kirksey stated that all of the $100,000 paid to Father for the covenant not to compete was considered taxable income and was taxed as a capital gain. Kirksey allocated all of the capital gain from the sale transaction on a pro rata basis over the period of time Father had owned the stock. Kirksey determined that for the 23 years Father owned the 30 shares of stock gifted to him by his father, Father's gain averaged $7,114 per year. With respect to the 45 shares of stock Father received from his father's estate, Father owned that stock for 19 years and the gain averaged $12,918 per year.
Mother testified that the original divorce decree required Father to pay $100 per week in child support and to provide health insurance for the children. The divorce decree also provides that each parent is to pay one-half of health care costs not covered by health insurance. Mother claimed that Father provided insurance up until the time he ceased working for Ed's Cycles in June, 2001. After June, 2001, and until January, 2003, Father did not provide any health insurance for the children. Mother claims she paid for the children's health care with her credit card.
As to the agreement settling the 1999 petition for $4,000, Mother described the conversation with Father as follows:
The parts of the agreement were that he would pay what the IRS was telling me I had to pay at that time, which was around — over $3,000. We agreed that between us, he said that he — there was no need of us involving attorneys, that he would start paying on time, paying his child support on time, he would not claim the child unless the child was with him the majority of the time. I'm trying to remember what the other things were. That he would start helping out more with the necessities and the needs of the child, in terms of helping to pay for shoes and clothes and medical bills, he would start paying his half of the medical bills more readily.
Mother then added that, contrary to his promises, Father did not start helping out more with the children's necessities and did not make his payments for half of the medical bills in a more timely fashion. Mother testified that the IRS accepted a reduced amount; that she cashed Father's check for $4,000; and that she called her attorney and told the attorney to "hold off."
Mother testified that she maintained Day Timers at work on which she indicated some of the time the children were in her care. This testimony was inconsistent with Mother's deposition testimony in which she stated that she had not maintained records regarding when the children were with her. At trial, Mother claimed that, notwithstanding her deposition testimony and contrary to her previous recollection, that information had been noted by her on her Day Timers. When Father objected to the admission of what his counsel referred to as "miraculous" evidence, Mother's counsel responded:
Your honor, at the time, as she candidly said, she did not have any documents and was surprised when she saw the calendars produced by [Father]. And I said — I asked her to go back and see if you can find anything that documents some of these times, because she felt like she did not have anything. It turns out it's sitting on her desk all the time.
The trial court overruled Father's objection.
Father testified that he maintained a journal in which he detailed when the children were in his care. The calendars introduced at trial by him were created using the information from the journal. Over Mother's objection, the trial court allowed Father to testify using the calendars even though the journal was not brought to trial by Father. When the trial court overruled Father's objection to Mother's testimony which relied on the Day Timers, the trial court stated "I'll allow her to give her reconstruction, the same as I allowed him to give his reconstruction."
Mother testified that the overall amount of time Father claimed the children were in Mother's care was too "low." Even though Mother claimed the children were in her care more than what was claimed by Father, she did not offer any testimony as to how often the children actually were in her care. In other words, she simply stated that the children were in her care more often than claimed by Father. Mother admitted, however, that there was a period of time when the oldest child was living with Father a majority of the time, that Father paid all of the oldest child's private school tuition, and that Father paid for some but not all of the clothes and food for the children. Mother acknowledged that during the summer months, the youngest child spent 85% to 90% of her time in Father's care or the care of one of Father's relatives. Mother admitted having several boyfriends over the years who would spend nights at her house, but she denied this was the reason the children wanted to spend more time with Father.
Mother quit her job in 1997 after becoming ill with acute thyroiditis and acute arthritis and becoming very depressed. Mother began working part-time for Unum Provident in 1998 and gradually increased to full-time in March of 1999. Mother's income for 1999 was approximately $37,000. Mother's annual income at the time of trial was $47,000 to $48,000.
When questioned about a child support arrearage, Mother claimed Father was in arrears on four child support payments. Mother added that she and Father had been disputing for a "few years" over whether these four weeks of payments actually were paid by Father. Mother asked the trial court to increase Father's child support retroactive to when the first petition was filed in 1999. While Mother requested that the trial court increase Father's child support payments for both children, she acknowledged she was not entitled to child support for the oldest child after he became emancipated in June, 2001.
In May, 2005, the trial court filed a comprehensive memorandum opinion which provides, in relevant part, as follows:
The first issue is which of the mother's two petitions is properly before the court for modification of support. . . . The court is of the opinion that the latter petition only is properly before the court, the former petition having been resolved by an agreement which the court belatedly approves.
There is no doubt, and the court so finds, that the parties, each with the assistance of their original 1991 divorce attorneys, put the 1999 petition to rest by the father's payment of $4,000 . . . and promises to meet certain other conditions. The mother's case, at its best, proves that there was an agreement but that the father allegedly failed to carry out the conditions of the agreement thereby causing the petition now before the court.
The essential issue here is whether such agreement is valid or whether the children's right to support was contracted away by the mother contrary to law and public policy as enunciated by the Supreme Court in Berryhill v. Rhodes, 21 S.W.3d 188 (Tenn. 2000). The court is of the opinion that the parties [sic] agreement was not contrary to Berryhill and is consistent with Tenn. Code Ann. § 36-5-101(h). . . .
The case at bar is completely different [from Berryhill ]. Certainly, the guideline amount would have been easy to determine (as the father was then primarily a wage earner) and a substantial increase would have been appropriate if all things were as set forth in the divorce decree. However, all things were not as the decree required. The parties [sic] agreement was clearly prompted by a de facto change of residence of the son which had begun as early as 1997 and lasted until the end of 2000. Moreover, the daughter was visiting with the father more than the standard (120 days) co-parenting time. In fact, it was the father's claiming the son as a tax exemption which precipitated the 1999 petition.
Under this arrangement, the mother, who also had a career, needed less, and the children, particularly the son, were benefitting from the father's significantly increased income. This agreement undoubtedly would have been approved by the court at the time. . . . This is not the type of agreement designed to circumvent child support but rather one simply to acknowledge the parenting plan which had developed.
(Underlining in original).
After concluding that the December 18, 2001, petition was the petition properly before it, the trial court set about to determine whether the capital gain realized as a result of the stock redemption agreement should be used in determining Father's child support obligation. After discussing various appellate decisions, many of which the trial court determined were factually distinguishable, the court concluded that the stock redemption agreement was a "one-time capital gain" and should not be considered in calculating Father's gross income for the purpose of determining the amount of his child support. The trial court then directed Father's attorney to submit information detailing Father's income (excluding the sale of the stock) for 2001 through 2003. After the trial court received and examined this information, the trial court concluded that there had not been a "significant variance" as defined in the statute. The court then dismissed Mother's petition by order entered September 13, 2005. Mother appeals.
II.
Mother raises five issues. The two most significant issues are her claims that (1) the trial court erred in finding that the 1999 petition was not properly before the court, and (2) that the court erred when it concluded that Father's capital gain from the stock sale should not be considered as gross income for the purpose of calculating child support. Mother's next two issues are evidentiary. Mother claims the trial court erred when it admitted into evidence the calendars relied upon by Father when testifying as to how often the children were in his care. Mother also claims the trial court erred in admitting certain testimony by Kirksey. Mother's final issue is her claim that the "trial court's delay of two years and three months in rendering a decision was prejudicial" to Mother.
III.
In this non-jury case, our standard of review is de novo upon the record of the proceedings below; however, the record comes to us with a presumption of correctness as to the trial court's factual determinations — a presumption we must honor unless the evidence preponderates otherwise. Tenn. R. App. P. 13(d); Wright v. City of Knoxville , 898 S.W.2d 177, 181 (Tenn. 1995). Our review of questions of law is de novo with no presumption of correctness attaching to the trial court's conclusions of law. Campbell v. Florida Steel Corp. , 919 S.W.2d 26, 35 (Tenn. 1996). In applying our standard of review, we are mindful of the well-established principle that the trial court is in the best position to assess the credibility of the witnesses; accordingly, such determinations are entitled to great weight on appeal. Massengale v. Massengale , 915 S.W.2d 818, 819 (Tenn.Ct.App. 1995); Bowman v. Bowman , 836 S.W.2d 563, 567 (Tenn.Ct.App. 1991).
IV. A.
The first issue before us is whether the trial court erred when it concluded the 1999 petition was no longer before the court. It is important to note that Mother does not deny that she settled the matters raised by the 1999 petition for $4,000. Rather, Mother argues that the settlement was invalid because it was a contract which, in her opinion, had the effect of reducing Father's child support obligation below that which was mandated by the Child Support Guidelines ("the Guidelines"). Mother relies heavily upon the case of Berryhill v. Rhodes , 21 S.W.3d 188 (Tenn. 2000).
As previously noted, the first petition was filed on June 28, 1999. Father wrote the $4,000 settlement check to Mother on July 27, 1999, and the check cleared Father's bank on August 3, 1999.
Father was asked by Mother's counsel whether his income tax return for 1998, which was a joint tax return, showed gross income of $52,389, and Father responded that it did. However, Father also noted that the 1998 return showed $6,726 in interest income, some or all of which was income attributable to the investments of Father's second wife. Thus, the most that can be said is that Father's gross income for 1998 was at least $45,663, but less than $52,389.
Father made substantially more money in 1999, with gross income from wages of $135,552, which amount does not take into account any interest income attributable to Father or his present wife. Father's unrefuted testimony, however, was that the significant increase in his income for 1999 was due to a year end bonus from Ed's Cycles, which company had a very successful year in 1999. Although we do not know exactly when that bonus was received, we believe it is highly unlikely that a year end bonus for the year 1999 would have been paid in the summer of that year. This leads us to conclude that Father's income through August 3, 1999, was likely very close to what he earned through the same period of time in 1998, i.e., a pro rata share of at least $45,663, but less than $52,389. Mother certainly offered no proof to the contrary. Mother's gross income for 1999 was $37,000.
Mother admitted, and the trial court so found, that the parties' oldest child spent substantially more time with Father than Mother beginning in 1997 and continuing past 1999.
As previously noted, Wife relies upon the Supreme Court's decision in Berryhill. In that case, a sexual relationship resulted in the birth of a child. 21 S.W.3d at 189. The parties were not married to each other. Id. After the child was born, the father paid the uninsured portion of the delivery-related charges and initially paid the mother $200 per month. Id. He later increased this to $300 and continued to make these payments until the child turned 18. Id. Shortly thereafter, the mother filed a paternity action and sought child support. Id. The juvenile court, and later the Court of Appeals, held that the parties had an "implied agreement" as to the amount that the father would pay as child support during the child's minority. Id. at 189-90. On appeal, the Supreme Court held that such private agreements — defined by the court to be those "entered into by the parties without court approval," see id. at 190 n. 4 — "used to circumvent the obligations set forth in the statutes [for the establishment of paternity and support] and [child support] guidelines contravene . . . [the] policy [that fathers will support their children]." Id. at 192. The High Court remanded the case to the trial court to hold a hearing at which the lower court was directed to determine the child support that would be due under the Guidelines "as well as the appropriateness of any deviation." Id. at 193.
The holding in Berryhill is not implicated by the facts of the instant case. Wife's 1999 petition raised a number of issues — a possible child support arrearage; a dispute as to who was entitled to claim one of the children as an exemption for income tax purposes; and, finally, Mother's claim that she was entitled to more child support going forward. Mother agreed not to pursue her petition in exchange for $4,000. It appears that this settlement was related to the income tax issue and was primarily designed to make Mother whole in the event she had to pay — as she eventually did — additional federal income tax growing out of the fact that each party had claimed an exemption for the same child.
The law favors compromise and settlement of disputed claims. See Team Design v. Gottlieb , 104 S.W.3d 512, 517 (Tenn.Ct.App. 2002) ("Public policy strongly favors resolving disputes between private parties by agreement."). All of Mother's claims in her 1999 petition were seriously disputed by Father. The facts of the instant case do not establish that had the parties not settled Mother's 1999 petition, Mother would have been entitled to more child support than the $5,200 being paid by Father annually. Given the time that the children were spending with their Father and his expenditures on their behalf, along with the parties' respective levels of income in the summer of 1999 when the first petition was filed and settled, we conclude that the evidence preponderates in favor of a finding that child support would not have been modified in the summer of 1999 had the issue then been presented to the trial court. Thus, had Mother's petition not been settled, there is absolutely no reason to believe that Mother would have been entitled to an increase in child support. Accordingly, we cannot say that the settlement deprived the children of child support to which they would otherwise have been entitled. Simply stated, there was an existing order providing for the payment of child support both before Mother filed her 1999 petition and after the parties settled that petition. Unlike Berryhill , there was no "private agreement" respecting support and certainly nothing in the parties' 1999 settlement to indicate that they, or either of them, was attempting to circumvent the statutes and Guidelines pertaining to child support.
We find no error in the trial court's determination that the 2001 petition — and not the 1999 petition — was the operative pleading before the court at the time of the hearing that led to the order presently on appeal.
B.
The next issue for resolution is whether the trial court erred when it determined that Father's stock redemption agreement resulted in a one-time capital gain and that the income from that transaction should not be considered in determining Father's gross income for the purpose of calculating child support. The Guidelines in effect at the time Mother filed her second petition for modification defined an obligor's "gross income" as follows:
Gross income shall include all income from any source (before taxes and other deductions), whether earned or unearned, and includes but is not limited to, the following: wages, salaries, commissions, bonuses, overtime payments, dividends, severance pay, pensions, interest, trust income, annuities, capital gains, benefits received from the Social Security Administration, i.e., Title II Social Security benefits, workers compensation benefits whether temporary or permanent, judgment recovered for personal injuries, unemployment insurance benefits, gifts, prizes, lottery winnings, alimony or maintenance, and income from self-employment. . . .
Tenn. Comp. R. Regs. § 1240-2-4-.03(3)(a)(1)(2003) (Emphasis added)
The new Guidelines which became effective in 2005 implemented an income shares model which replaced the previous flat percentage model. The new Guidelines definition of what constitutes gross income is, for all intents and purposes, the same as that which existed in the previous flat percentage model. See Tenn. Comp. R. Regs. § 1240-2-4-.04(3)(a)(2005).
At the outset, it is important to note that Father's child support payment cannot be modified retroactively prior to the point in time when Mother filed the second petition for modification. See Tenn. Code Ann. § 36-5-101(f)(1) (2005); see also Alexander v. Alexander , 34 S.W.3d 456, 460 (Tenn.Ct.App. 2000) ("[A] court has no power to alter a child support award as to any period of time occurring prior to the date on which an obligee spouse files his or her petition."). When Mother's second petition was filed on December 18, 2001, the parties' son was emancipated. Mother alleged in her second petition that Father was behind in his child support payments. She testified at trial that the parties had been arguing for years over whether Father was four weeks behind, but that Father was otherwise current. The trial court made no finding that Father was in arrears with respect to the subject four weeks and Mother does not raise this matter as an issue on appeal. We also note that, in Mother's brief, she indicates that Father should be given credit for paying $5,200 each year in child support, which certainly is a tacit acknowledgment that Father was current on his payments of $100 per week. Since the oldest child was emancipated well before the trial date, we will treat Father's child support obligation with respect to the oldest child as being fully paid and ended.
In their briefs on appeal, both parties cite various cases addressing whether a capital gain should be considered when calculating an obligor parent's child support obligation. Father relies heavily upon the case of Hall v. Hall , No. 03A01-9701-GS-00030, 1997 WL 404258 (Tenn.Ct.App. E.S., filed July 21, 1997), no appl. perm. appeal filed, wherein this Court held that a capital gain of $3,592 was an isolated capital gain and the Guidelines did not require that it be included in calculating the obligor parent's gross income. Following Hall , litigants have not been very successful with the "isolated capital gain" argument. For example, in Stacey v. Stacey , No. 02A01-9802-CV-00050, 1999 WL 1097975, at *4 (Tenn.Ct.App. Oct. 6, 1999), no appl. perm. appeal filed, we stated:
The Court in Hall and Father both cite to a memorandum opinion which appears to be the genesis for the "isolated capital gain" line of reasoning. However, Rule 10 of the Rules of the Court of Appeals unequivocally provides that memorandum opinions "shall not be published, and shall not be cited or relied upon for any reason in a subsequent unrelated case." (Emphasis added). We should not have cited the memorandum opinion in our decision in Hall. We regret that the trial court was led into error by our erroneous citing of a memorandum opinion.
[I]t is undisputed that Husband received stock option income of $18,600 in 1996 and $48,437.50 in 1997 that he has not been required to pay child support out of. It is clear that Husband received a substantial increase in the amount of his disposable income as a result of the exercise of his stock options, and there is nothing in the record to suggest that he will not continue to receive this in the future. The guidelines do not allow the trial court to ignore income from the exercise of stock options in setting child support. Smith v. Smith, No. 01A-01-9705-CH-00216, 1997 WL 672646, at *3 (Tenn.Ct.App. Oct. 29, 1997). In addition, Husband's exercise of these options is not an isolated capital gains transaction.
We reached a similar result in Smith v. Smith , No. 01A-01-9705-CH-00216, 1997 WL 672646, at *3 (Tenn.Ct.App. Oct. 29, 1999), no appl. perm. appeal filed, in which we stated that
[w]e believe that the guidelines do not permit the trial court to ignore capital gains in calculating child support, and despite a somewhat tentative argument to the contrary by Mr. Smith, we see no reason to characterize his income from the stock sale as anything other than capital gains.
We therefore hold that in calculating a definite monthly amount of child support, the trial court must consider Mr. Smith's 1995 capital gains. . . .
Other cases include Eldridge v. Eldridge , 137 S.W.3d 1, 22 (Tenn.Ct.App. 2002) (one time capital gain of $340,000 from the sale of a residence should be included in gross income for child support purposes); and Ellis v. Ellis , No. E2003-01327-COA-R3-CV, 2004 WL 1102416 (Tenn.Ct.App. May 17, 2004) (one time capital gain of $65,100 from the sale of a residence properly included in gross income for child support purposes). We conclude that there is no legal basis for an "isolated capital gain" rule.
In Alexander v. Alexander , 34 S.W.3d 456 (Tenn.Ct.App. 2000), the obligor father argued that it was improper to consider income he earned prior to the petition for modification being filed when setting his prospective child support obligation. During the two years before the petition in that case was filed, the father there had experienced substantial gains from the sale of stock. We rejected the father's argument and concluded that, under the facts of Alexander , capital gains from the sales of stock which occurred two years preceding the filing of the petition should be included when calculating the father's gross income. We stated as follows:
[Tenn. Code Ann. § 36-5-101(a)(5)] is designed to prohibit the retroactive modification of child support. Rutledge v. Barrett, 802 S.W.2d 604, 606 (Tenn. 1991). In other words, a court has no power to alter a child support award as to any period of time occurring prior to the date on which an obligee spouse files his or her petition. However, the subject statute does not prevent a court from factoring into the new-income side of the equation, pre-filing income earned by an obligor if, in the court's discretion, the inclusion of such income is appropriate in order to accurately calculate an obligor's new income level.
The Guidelines recognize that a court, in some cases, will have to average an obligor's income in order to eventually determine the net income upon which the percentages set forth in Tenn. Comp. R. Regs., ch. 1240-2-4-.03(5) should be applied. In this case, we believe it is appropriate to average Father's income for the years 1995-1998 in order to determine if there has been a "significant variance."
Alexander , 34 S.W.3d at 460.
Another argument advanced by Father is his claim that since he was awarded all of the stock in the divorce settlement, any money realized from the sale of that stock cannot be considered as gross income. Father's argument is partially correct, but only with respect to the value of the capital asset — here, the stock in Ed's Cycles, Inc. — at the time of the divorce. Tenn. Code Ann. § 36-4-121(b)(1)(E) (2005) delineates between the value of an asset at the time of divorce and any income — which, under the Guidelines, would include capital gains — that is earned on that asset after the divorce:
Property shall be considered marital property as defined by this subsection (b) for the sole purpose of dividing assets upon divorce or legal separation and for no other purpose; and assets distributed as marital property will not be considered as income for child support or alimony purposes, except to the extent the asset will create additional income after the division. (Emphasis added).
The language of the statute clearly dictates that any portion of the sales price of Father's stock in Ed's Cycles, Inc., that represents appreciation in value, i.e., capital gain, since the divorce, is income that should be considered in the calculation of child support. The trial court erred when it concluded that all of the capital gain on the sale of Father's stock in Ed's Cycles, Inc., should not be considered in calculating Father's child support for the year 2002 and following years. Clearly, some of that capital gain was gross income to Father under the Guidelines.
Such a conclusion is at odds with Tenn. Comp. R. Regs., ch. 1240-2-4-.02(2003), in which one of the "goals in the development of [the] guidelines" is "[t]o ensure that . . . to the extent either parent enjoys a higher standard of living, the child(ren) share(s) in that higher standard." Id. at subsection (e).
C.
On remand, the trial court is instructed to determine what portion of the total capital gain is applicable to the years and partial years prior to the date of divorce in May, 1991. The portion of the gain so determined should not be considered in calculating Father's child support obligation. For the purpose of this determination, the court should assume the appreciation in value — the capital gain — was earned equally over the period of time that Father owned the stock.
In calculating child support for the year 2002, the court should average Father's income for 2001 and 2002. See Alexander , 34 S.W.3d at 460. For years 2003, 2004, and 2005, the court should only consider, for each of these years, Father's income, including the pro rata share of the subject capital gain, in that year. For the year 2006, child support should be calculated based upon Fathers income, again including the pro rata share of the capital gain, in 2006. The court is encouraged to consider other aspects of our "capital gains" analysis and other reasoning set forth in Alexander to the extent that the analysis and reasoning is applicable to the facts of this case. Of course, the trial court should also consider all provisions of the Guidelines, in effect with respect to any given year, to the extent that they are implicated by the facts of the case at bar. It is obvious from the record that there has been a "significant variance" in child support in this case justifying an increase in child support effective January 1, 2002.
See pages 462-64 of the Alexander opinion.
D.
Mother's next two issues involve her claim that the trial court improperly admitted certain evidence. First, Mother claims the trial court erred when it admitted into evidence Father's "reconstructed" calendars. Mother claims this evidence should not have been admitted because Father did not bring to court the actual journal on which he originally made his notations. Mother states very little in her brief about this issue, other than giving the reason she objected to the evidence and then simply claiming the trial court erred.
We hold that the trial court erred in permitting the use of, and in receiving into evidence as an exhibit, Father's reconstructed calendars. As we understand Father's testimony, the proffered calendars were not those upon which Father originally made his notations regarding the children's time with him. The original entries — which presumably were made "when the matter was fresh in the witness's memory," see Tenn. R. Evid. 803(5) — were noted on a journal that was not produced at trial. In preparing the proffered calendars, Father simply copied the information from the "missing" journal and put it on the proffered calendars. As previously noted, he did not bring the original document to trial.
Under Tenn. R. Evid. 801(a) the proffered calendars fall into the category of a "statement." Furthermore, Tenn. R. Evid. 801(c) provides that "`[h]earsay' is a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." (Emphasis added). Under this definition, the reconstructed calendars are properly classified as hearsay. They were not statements of Father made while he was testifying and they were certainly "offered in evidence to prove the truth of the matter asserted," i.e., the periods of time that the children were with Father.
The proffered calendars do not fall within the Tenn. R. Evid. 803(5) "recorded recollection" exception to the hearsay-is-not-admissible rule found at Tenn. R. Evid. 802. This is because the proffered calendars — being copied from the journal — were not "shown to have been made or adopted by the witness when the matter was fresh in the witness's memory." See Tenn. R. Evid. 803(5). They obviously were made at some later time.
Even if the proffered calendars satisfied the Tenn. R. Evid. 803(5) exception — which we have held they do not — they should not have been received into evidence as an exhibit. Rule 803(5) clearly provides that if the "memorandum or record" can be shown to be a "recorded recollection," it can only be "read into evidence"; it cannot "be received as an exhibit unless offered by an adverse party." Rule 803(5). The trial court erred (1) in allowing the material to be read into evidence, and further erred (2) in allowing the proffered calendars to be received into evidence as an exhibit.
While we have noted the trial court's error with respect to the calendars, we do not find that this error "more probably than not affected the judgment." See Tenn. R. App. P. 36(b). The evidence in question only has a bearing on the issue of whether the 1999 petition was still before the trial court. Even at that, the time the children were spending with their father does not have a critical bearing on our analysis regarding whether the 1999 petition was properly disposed of by settlement. This is to say that if we completely ignore the children's time with their Father, we still find no error in the trial court's conclusion that the operative pleading before it was the 2001 petition to modify, and not the 1999 petition.
With regard to the challenged testimony of CPA Kirksey, Mother's brief is difficult to understand. It appears that her primary disagreement goes to Kirksey's testimony regarding what is considered a capital gain for IRS purposes. We again turn to Alexander , supra, where we stated:
Father argues that "there is no indication that the term `capital gains' [as used in the Guidelines] is analogous to the term used in the Internal Revenue Code." While this correlation is not expressly stated in the Guidelines, we find and hold that it is logical to equate these two concepts. Speaking rhetorically, if we cannot use the definition of a capital gain adopted by the Internal Revenue Service, to what source should we resort? Father does not suggest an alternative definition.
Alexander , 34 S.W.3d at 462-63 (Bracketing in original). We do not believe the trial court erred when it allowed Kirksey's testimony on this issue.
Mother's final issue is her claim that the "trial court's delay of two years and three months in rendering a decision was prejudicial." Mother states at the beginning of the argument section in her brief, in conclusory fashion, that the delay was prejudicial. She then launches into her argument about whether Father's capital gain was an isolated capital gain. Mother does not state how she was prejudiced and, more importantly, what relief she is seeking from this Court with respect to this matter. This issue is without merit.
V.
The judgment of the trial court is affirmed in part and reversed in part. This cause is remanded to the trial court with instructions. Costs on appeal are taxed to the appellee, Ronnie Dale Moore.