Stock options provided by an employer to workers may be a valuable
part of the overall compensation package. In recognition of this
reality, the New Hampshire Supreme Court on November 21, 2001
determined that exercised options must be included as income for
purposes of calculating child support under the New Hampshire Child
Support Guidelines.
The Court decided in a post-divorce child support case that part of
the gross income used in the statutory formula to determine the child
support obligation of the non-custodial parent includes exercised
stock options.
In this case, the father of the children contested the marital
master's decision to increase his child support obligation based upon
exercised stock options arguing a variety of positions including that:
(a) his exercised stock options are assets and therefore should not be
included in income for child support purposes; and (b) exercised stock
options do not and cannot provide a reliable, consistent, predictable,
or customary source of revenues.
The Court stated that exercised stock options are of a dual nature.
The Court found that stock options have characteristics of income
because they permit the owner to capture appreciation and value of the
stock prior to actual purchase and stock options are given to the
worker in the form of compensation. Unlike most assets, stock options
are often not transferable.
The Court further noted that while exercised stock option income
may be sporadic, the legislature included in a non-exhaustive list of
examples of gross income that are to be used in child support
calculations such items as lottery or gambling winnings and bonuses
all of which are also likely to be sporadic.
The Court held that it is for that reason that the legislature gave
the trial court discretion to adjust child support awards when
application of New Hampshire Child Support Guidelines would result in
a confiscatory support order.
The trial courts and marital masters will in the first instance
determine what factors the trial court should consider in its
discretion to determine whether a deviation from the Child Support
Guidelines is necessary to prevent a confiscatory support order.
For instance, some possible examples are: (a) sales restrictions on
shares obtained through exercised stock options whether by agreement,
SEC regulations, marketability of shares of a closely held
corporation, or otherwise; (b) paper gains but actual losses, or at
least lesser actual gains upon share sale; and (c) tax consequences.
As child support is always modifiable based upon a substantial change
of circumstances, more litigation regarding calculation of income as a
result of exercised stock options is likely to occur.
