Defining Income for Child Support Purposes

It has become important to keep track of national trends with respect to the definition of income for support purposes. More often than not, your state will not have decided the specific question with which you are struggling, ie, whether or not a particular item constitutes income. The odds are increasing that other states will have dealt with the issue. Here are some examples of cases over the last few years:

Nonrecurring Income

One troublesome area is nonrecurring income. Technically, it is income and should be considered as such. It may, however, be inequitable to do so. Circumstances change, and large items can make a huge difference in the support computation. In Orofino v. Orofino, 627 N.Y.S.2d 460 (N.Y. App. Div. 1995) the court held that while a portion of nonrecurring income, such as capital gains, can be considered for child support, 'Income on 'paper only,' as is the case herein, may properly be excluded.'

The Illinois appellate court reached a similar conclusion in In re Marriage of Miller, 595 N.E.2d 1349 (Ill. Ct. App. 1992). The court held that while nonrecurring income can be included in calculating net income for the purpose of child support, this is not an inflexible rule, and the trial court has the discretion to exclude such income. The court reasoned, 'To hold otherwise could lead to absurd results, as where a party's income is artificially inflated by a large capital gain on the sale of a residence. We believe that such determinations are best left to the sound discretion of the trial court.' 595 N.E.2d at 1352. This view seems to make sense. Based on the evidence, you may be able to show that these items may or may not be likely to recur. A gain on the sale of a residence should be treated differently from the gain on the sale of stock, for example.

Passive Income and Gifts

On the one hand, whether or not an item is taxable should not control its designation as 'income.' On the other hand, it seems more important to deal with whether or not the income is actually something that can be used by the parties.

In In re Marriage of Harmon, 568 N.E.2d 948 (Ill. Ct. App. 1991) the court held that, while passive income from bonds or securities would be considered when determining income, 'When the unrefuted testimony is that the party does not actually receive the income from such passive sources, regardless of whether it is reported for federal income tax purposes, it is not error for the trial court to refuse to consider the additional reported amounts when calculating net income.' That case also indicated that money received as a gift cannot be considered income, nor should the possibility of future financial resources be considered. However, a case recently decided by the Supreme Court of Illinois turned this rule topsy-turvy, and Harmon was overruled. In In re Marriage of Rogers, 802 N.E.2d 1247 (Ill. Ct. App. 2003) the trial court not only included gifts received as income (or were not deducted from income), but also considered loans as income. The appellate court affirmed the trial court. It was noted that whether or not income is taxable under the tax code, does not affect whether or not income is net income for the purposes of child support.

In Rogers, the Supreme Court of Illinois accepted a Petition For Leave To Appeal, but just recently affirmed the appellate court and the trial court, Docket 97833, Opinion filed Nov. 18, 2004. On the gift issue, Harmon was overruled. The court used the Black's Law Dictionary definition of income, which includes 'gifts and the like.' Black's Law Dictionary 778 (8^th ed. 2004) The reasoning was that the gifts as found by the court represented a steady source of dependable annual funds that the father has received each year of his adult life. The court criticized the Harmon court's ruling that there was no guarantee that these funds would continue to be paid. The court stated that 'This rationale is also untenable. Few, if any, sources of income are certain to continue unchanged year in and year out. People can lose their jobs, interest rates can fall, business conditions can wipe out profits and dividends.' The court also noted that the nonrecurring nature of an income item is not irrelevant. It must be included; evidence that it is unlikely to continue is a possible reason to deviate from the guidelines once net income is determined. Furthermore, if the payment should stop sooner than the court anticipates, that constitutes grounds for modification of the support order. With respect to the issue of loans, the court stated that it did not actually have to determine whether or not loan proceeds are properly regarded as an element of income because, in the case at hand, they were loans in name only. Based on the evidence, the father had never been required to pay any of them, and therefore, they were really the same as gifts. Therefore, the court left for another case the determination of whether actual loans that had to be repaid would constitute income.

Business Income

A substantial amount of case law has been developed where the noncustodial parent operates a business. This can be a most difficult area, and it may be necessary to resort to the decisions in other states. In that event, it is important to pay attention to each state's definition of income.

The Supreme Court of Montana has held that monies withdrawn from a business for personal use should be included in computing child support, even though the distributions were noted as shareholder loans. In re Marriage of Griffin, 909 P.2d 707 (Mont. 1996). The decision was based on a reading of the Montana statute that included expense reimbursements from employment if they reduce living personal living expenses.

In Fennell v. Fennell, 753 A.2d 866 (Pa. 2000) the Pennsylvania high court held that the father's proportional share of retained earnings of a Sub Chapter S-Corporation was not to be deemed income for child support purposes, and the trial court was reversed. The father owned 19% of the corporation. The other owners were his brother, his father and an unrelated individual. An important part of the court's reasoning was that the father did not have a controlling interest in this company, and therefore, he could not control whether net profits would be retained or distributed. The trial court, therefore, erred in considering his annual share of retained earnings as income. It was warned that a per se rule was not to be created.

In Boudreau v. Benitz, 827 S.W.2d 732 (Ct. App. Mo. 1992), the Missouri appellate court properly pierced the corporate veil of the father's corporation to determine his support obligations. The court properly considered as income amounts listed as retained earnings and loans from himself, as well as a percentage of profits reflected by large cash deposits. In this case the corporation was wholly owned by the father and his new wife.

In In re Marriage of Heil, 599 N.E.2d 168 (Ill. Ct. App. 1992), the court held that a self-employed father, who had a hunting lodge, would have one-half of the mortgage payment, taxes and insurance on the lodge, added to his net income. The husband testified that the lodge was used for corporate customers. However, he admitted that he and his family did use the lodge at least half of the time; therefore, to the extent of one-half, these were not reasonable or necessary expenditures for the production of income.

Recently, in Tebbe v. Tebbe, 815 N.E.2d 180 (Ind. App. Ct. 2004), the Court of Appeals in Indiana held with respect to a minority shareholder of an S-Corporation: 1) pass-through income that was not distributed to the shareholder should not be included in child support calculations, unless the trial court finds that the corporation is being used to shield income, and 2) pass-through S-Corporation income that is merely disbursed to offset shareholder tax liability, and which is not actually available to the shareholder, should also not be included in child support calculations. The court reasoned that if the marriage had not ended, this money would not have been available to support the children.

In Cauble v. Cauble, 515 S.E.2d 708 (N.C. App. Ct. 1999), the appellate court held that, with respect to a C-Corporation of which the husband owned 51%, the trial court properly included as gross income, profits of the corporation corresponding to his corporate interest, rather than the income he actually received from that corporation. The court did so even though the corporation used the accrual accounting method. The court found that the husband had the authority to make disbursements. The relevant statute included as gross income money received from a business, minus necessary and ordinary expenses required to operate the business.

The Indiana appellate court held that one-half of the father's retained earnings from his pharmacy could be included in the support computation. In re Marriage of Merrill, 587 N.E.2d 188 (Ind. App. Ct. 1992). A percentage was used because the trial court recognized that an entrepreneur does need a certain amount of retained earnings to replace depreciated assets and withstand economic cycles and unexpected expenses.

In Ochs v. Nelson, 538 N.W.2d 527 (S.D. 1995), the South Dakota Supreme Court held that retained earnings were properly added as income for child support purposes. In addition, the court also attributed half of the father's 80% interest in the company but did not add back depreciation, although it had the discretion to do so. An accountant testified that retained earnings do not necessarily translate into an equivalent amount of cash, because the company needs these earnings to maintain growth. Further, the company's banker testified that due to company debt, it had agreed not to draw out the retained earnings. However, the husband had borrowed nearly $80,000 from the company for which there had been no repayment in over 3 years.

A Tennessee appellate court also held that retained earnings can be considered in determining income available to a sole shareholder. Sandusky v. Sandusky, 1999 WL 734531 (Tenn. App. Ct. 1999) The court reasoned, 'An obligor parent cannot avoid a support obligation by simply arranging a smaller salary while a solely-owned business prospers.' Courts will often employ equitable considerations and consider the degree of control the party has or does not have over business income, in determining a fair amount of child support.

Reimbursements

Very recently, in the case of In re Marriage of Mellott, 93 P.3d 1219 (Kan. App. Ct. 2004), a Kansas statute was interpreted not to include tuition reimbursements as income. 'Reimbursements from an employer should only be included as income if they reduce a person's living expenses. Tuition reimbursements do not reduce a person's living expenses. As the name implies, the reimbursement is to cover the cost of tuition, not the cost of living expenses. The expense of adult college education does not fall into the same category as expenses for housing, food, and transportation, which are included as imputed income if reimbursed.' 93 P.3d at 1221. On the other hand, in Illinois it was held that per diem allowances for travel expenses generally constituted income, subject to reduction to the extent the payor could prove that the per diem was used for actual travel expenses and not for his or her economic gain. The payor has the burden of proving the expenses. In re Marriage of Worrall, 778 N.E.2d 397 (Ill. App. Ct. 2002).

Stock Options

In the recent case of Heller-Loren v. Apuzzio, 853 A.2d 997 (N.J. App. Ct. 2004), a New Jersey court held that under the specific language of a settlement agreement, the sale and exercise of stock options acquired after the divorce could not be deemed part of income for purposes of child support. It was noted, however, that this particular settlement agreement contained its own definition of income. Parties can, in effect, redefine income in their settlements and rewrite the statute.

Injury Settlements

In In re Marriage of Wolfe, 699 N.E.2d 190 (Ill.App.Ct. 1998) the appellate court held that with respect to a settlement of a Structural Work Act claim, a personal injury settlement constituted net income only to the extent that it reimbursed the injured party for lost earnings. In this case, there was a portion of the settlement that represented future wage loss, a portion represented future and past medical expenses, and a portion represented pain and suffering. It was ruled that the portion of the settlement representing damages for medical expenses and pain and suffering, should have been deducted in determining net income prior to the allocation of child support.

Retirement Income

The trial court was held to have erred by imputing income to the noncustodial parent's Individual Retirement Account. Carmichael v. Siegel, 754 N.E.2d 619 (Ind. Ct. App. 2001). The court assumed that half of the IRA would be withdrawn and taxes paid on it. An additional $20,000 per year was considered income. To the extent that the dividends and income were automatically reinvested into the IRA, they should not have been considered income. It was recognized that IRAs are created pursuant to federal statute to encourage savings. The court noted that in this situation there was no indication of previous withdrawals; a different result might ensue if retirement funds had actually been drawn down previously. The court stated that in some other jurisdictions, IRA earnings may be counted as income. See Dunn v. Dunn, 952 P.2d 268 (Alaska 1998); Tessmer v. Tessmer, 903 P.2d 1194 (Colo. Ct. App. 1995).

Resources Defined

In In re Marriage of Drysch, 732 N.E.2d 125 (Ill. App. Ct. 2000) a college contribution case, the Illinois court interpreted the statute's definition of 'financial resources.' One of the factors considered when dividing college expenses is the financial resources of each party. The appellate court, citing Black's Law Dictionary, defined resources as ' 'money or any property that can be converted to meet needs' as well as the 'available means or capability of any kind.' ' The court concluded that by using the word resources rather than a more narrow term, such as income or salary, 'We believe that the legislature intended that the trial court consider all the money or property to which a parent has access. This may include that parent's income, her property and investment holdings, as well as money or property that could be available to her through her new spouse.' 732 N.E.2d at 129.

While Drysch involved college expenses, it defined 'financial resources,' which is the same term contained in the Illinois Child Support Statute, so the result should be the same in a child support case. Other case law in Illinois suggests that the income and assets of a new spouse can be considered in child support cases.

Conclusion

As can be seen, different statutes throughout the country can net different results. However, a clever application of another state's precedent may persuade your court to follow your adjudication request.

Paul L. Feinstein, a Chicago sole practitioner and a member of this newsletter's Board of Editors, concentrates his practice in family law, with emphasis on divorce litigation, custody and visitation, and appeals. In 1993, Feinstein was successful in overturning Illinois' automatic domestic relations asset freeze law in the Supreme Court of Illinois.

It has become important to keep track of national trends with respect to the definition of income for support purposes. More often than not, your state will not have decided the specific question with which you are struggling, ie, whether or not a particular item constitutes income. The odds are increasing that other states will have dealt with the issue. Here are some examples of cases over the last few years:

Nonrecurring Income

One troublesome area is nonrecurring income. Technically, it is income and should be considered as such. It may, however, be inequitable to do so. Circumstances change, and large items can make a huge difference in the support computation. In Orofino v. Orofino , 627 N.Y.S.2d 460 (N.Y. App. Div. 1995) the court held that while a portion of nonrecurring income, such as capital gains, can be considered for child support, 'Income on 'paper only,' as is the case herein, may properly be excluded.'

The Illinois appellate court reached a similar conclusion in In re Marriage of Miller, 595 N.E.2d 1349 (Ill. Ct. App. 1992). The court held that while nonrecurring income can be included in calculating net income for the purpose of child support, this is not an inflexible rule, and the trial court has the discretion to exclude such income. The court reasoned, 'To hold otherwise could lead to absurd results, as where a party's income is artificially inflated by a large capital gain on the sale of a residence. We believe that such determinations are best left to the sound discretion of the trial court.' 595 N.E.2d at 1352. This view seems to make sense. Based on the evidence, you may be able to show that these items may or may not be likely to recur. A gain on the sale of a residence should be treated differently from the gain on the sale of stock, for example.

Passive Income and Gifts

On the one hand, whether or not an item is taxable should not control its designation as 'income.' On the other hand, it seems more important to deal with whether or not the income is actually something that can be used by the parties.

In In re Marriage of Harmon, 568 N.E.2d 948 (Ill. Ct. App. 1991) the court held that, while passive income from bonds or securities would be considered when determining income, 'When the unrefuted testimony is that the party does not actually receive the income from such passive sources, regardless of whether it is reported for federal income tax purposes, it is not error for the trial court to refuse to consider the additional reported amounts when calculating net income.' That case also indicated that money received as a gift cannot be considered income, nor should the possibility of future financial resources be considered. However, a case recently decided by the Supreme Court of Illinois turned this rule topsy-turvy, and Harmon was overruled. In In re Marriage of Rogers, 802 N.E.2d 1247 (Ill. Ct. App. 2003) the trial court not only included gifts received as income (or were not deducted from income), but also considered loans as income. The appellate court affirmed the trial court. It was noted that whether or not income is taxable under the tax code, does not affect whether or not income is net income for the purposes of child support.

In Rogers, the Supreme Court of Illinois accepted a Petition For Leave To Appeal, but just recently affirmed the appellate court and the trial court, Docket 97833, Opinion filed Nov. 18, 2004. On the gift issue, Harmon was overruled. The court used the Black's Law Dictionary definition of income, which includes 'gifts and the like.' Black's Law Dictionary 778 (8^th ed. 2004) The reasoning was that the gifts as found by the court represented a steady source of dependable annual funds that the father has received each year of his adult life. The court criticized the Harmon court's ruling that there was no guarantee that these funds would continue to be paid. The court stated that 'This rationale is also untenable. Few, if any, sources of income are certain to continue unchanged year in and year out. People can lose their jobs, interest rates can fall, business conditions can wipe out profits and dividends.' The court also noted that the nonrecurring nature of an income item is not irrelevant. It must be included; evidence that it is unlikely to continue is a possible reason to deviate from the guidelines once net income is determined. Furthermore, if the payment should stop sooner than the court anticipates, that constitutes grounds for modification of the support order. With respect to the issue of loans, the court stated that it did not actually have to determine whether or not loan proceeds are properly regarded as an element of income because, in the case at hand, they were loans in name only. Based on the evidence, the father had never been required to pay any of them, and therefore, they were really the same as gifts. Therefore, the court left for another case the determination of whether actual loans that had to be repaid would constitute income.

Business Income

A substantial amount of case law has been developed where the noncustodial parent operates a business. This can be a most difficult area, and it may be necessary to resort to the decisions in other states. In that event, it is important to pay attention to each state's definition of income.

The Supreme Court of Montana has held that monies withdrawn from a business for personal use should be included in computing child support, even though the distributions were noted as shareholder loans. In re Marriage of Griffin, 909 P.2d 707 (Mont. 1996). The decision was based on a reading of the Montana statute that included expense reimbursements from employment if they reduce living personal living expenses.

In Fennell v. Fennell, 753 A.2d 866 (Pa. 2000) the Pennsylvania high court held that the father's proportional share of retained earnings of a Sub Chapter S-Corporation was not to be deemed income for child support purposes, and the trial court was reversed. The father owned 19% of the corporation. The other owners were his brother, his father and an unrelated individual. An important part of the court's reasoning was that the father did not have a controlling interest in this company, and therefore, he could not control whether net profits would be retained or distributed. The trial court, therefore, erred in considering his annual share of retained earnings as income. It was warned that a per se rule was not to be created.

In Boudreau v. Benitz , 827 S.W.2d 732 (Ct. App. Mo. 1992), the Missouri appellate court properly pierced the corporate veil of the father's corporation to determine his support obligations. The court properly considered as income amounts listed as retained earnings and loans from himself, as well as a percentage of profits reflected by large cash deposits. In this case the corporation was wholly owned by the father and his new wife.

In In re Marriage of Heil, 599 N.E.2d 168 (Ill. Ct. App. 1992), the court held that a self-employed father, who had a hunting lodge, would have one-half of the mortgage payment, taxes and insurance on the lodge, added to his net income. The husband testified that the lodge was used for corporate customers. However, he admitted that he and his family did use the lodge at least half of the time; therefore, to the extent of one-half, these were not reasonable or necessary expenditures for the production of income.

Recently, in Tebbe v. Tebbe , 815 N.E.2d 180 (Ind. App. Ct. 2004), the Court of Appeals in Indiana held with respect to a minority shareholder of an S-Corporation: 1) pass-through income that was not distributed to the shareholder should not be included in child support calculations, unless the trial court finds that the corporation is being used to shield income, and 2) pass-through S-Corporation income that is merely disbursed to offset shareholder tax liability, and which is not actually available to the shareholder, should also not be included in child support calculations. The court reasoned that if the marriage had not ended, this money would not have been available to support the children.

In Cauble v. Cauble , 515 S.E.2d 708 (N.C. App. Ct. 1999), the appellate court held that, with respect to a C-Corporation of which the husband owned 51%, the trial court properly included as gross income, profits of the corporation corresponding to his corporate interest, rather than the income he actually received from that corporation. The court did so even though the corporation used the accrual accounting method. The court found that the husband had the authority to make disbursements. The relevant statute included as gross income money received from a business, minus necessary and ordinary expenses required to operate the business.

The Indiana appellate court held that one-half of the father's retained earnings from his pharmacy could be included in the support computation. In re Marriage of Merrill, 587 N.E.2d 188 (Ind. App. Ct. 1992). A percentage was used because the trial court recognized that an entrepreneur does need a certain amount of retained earnings to replace depreciated assets and withstand economic cycles and unexpected expenses.

In Ochs v. Nelson , 538 N.W.2d 527 (S.D. 1995), the South Dakota Supreme Court held that retained earnings were properly added as income for child support purposes. In addition, the court also attributed half of the father's 80% interest in the company but did not add back depreciation, although it had the discretion to do so. An accountant testified that retained earnings do not necessarily translate into an equivalent amount of cash, because the company needs these earnings to maintain growth. Further, the company's banker testified that due to company debt, it had agreed not to draw out the retained earnings. However, the husband had borrowed nearly $80,000 from the company for which there had been no repayment in over 3 years.

A Tennessee appellate court also held that retained earnings can be considered in determining income available to a sole shareholder. Sandusky v. Sandusky, 1999 WL 734531 (Tenn. App. Ct. 1999) The court reasoned, 'An obligor parent cannot avoid a support obligation by simply arranging a smaller salary while a solely-owned business prospers.' Courts will often employ equitable considerations and consider the degree of control the party has or does not have over business income, in determining a fair amount of child support.

Reimbursements

Very recently, in the case of In re Marriage of Mellott, 93 P.3d 1219 (Kan. App. Ct. 2004), a Kansas statute was interpreted not to include tuition reimbursements as income. 'Reimbursements from an employer should only be included as income if they reduce a person's living expenses. Tuition reimbursements do not reduce a person's living expenses. As the name implies, the reimbursement is to cover the cost of tuition, not the cost of living expenses. The expense of adult college education does not fall into the same category as expenses for housing, food, and transportation, which are included as imputed income if reimbursed.' 93 P.3d at 1221. On the other hand, in Illinois it was held that per diem allowances for travel expenses generally constituted income, subject to reduction to the extent the payor could prove that the per diem was used for actual travel expenses and not for his or her economic gain. The payor has the burden of proving the expenses. In re Marriage of Worrall, 778 N.E.2d 397 (Ill. App. Ct. 2002).

Stock Options

In the recent case of Heller-Loren v. Apuzzio , 853 A.2d 997 (N.J. App. Ct. 2004), a New Jersey court held that under the specific language of a settlement agreement, the sale and exercise of stock options acquired after the divorce could not be deemed part of income for purposes of child support. It was noted, however, that this particular settlement agreement contained its own definition of income. Parties can, in effect, redefine income in their settlements and rewrite the statute.

Injury Settlements

In In re Marriage of Wolfe, 699 N.E.2d 190 (Ill.App.Ct. 1998) the appellate court held that with respect to a settlement of a Structural Work Act claim, a personal injury settlement constituted net income only to the extent that it reimbursed the injured party for lost earnings. In this case, there was a portion of the settlement that represented future wage loss, a portion represented future and past medical expenses, and a portion represented pain and suffering. It was ruled that the portion of the settlement representing damages for medical expenses and pain and suffering, should have been deducted in determining net income prior to the allocation of child support.

Retirement Income

The trial court was held to have erred by imputing income to the noncustodial parent's Individual Retirement Account. Carmichael v. Siegel , 754 N.E.2d 619 (Ind. Ct. App. 2001). The court assumed that half of the IRA would be withdrawn and taxes paid on it. An additional $20,000 per year was considered income. To the extent that the dividends and income were automatically reinvested into the IRA, they should not have been considered income. It was recognized that IRAs are created pursuant to federal statute to encourage savings. The court noted that in this situation there was no indication of previous withdrawals; a different result might ensue if retirement funds had actually been drawn down previously. The court stated that in some other jurisdictions, IRA earnings may be counted as income. See Dunn v. Dunn , 952 P.2d 268 (Alaska 1998); Tessmer v. Tessmer , 903 P.2d 1194 (Colo. Ct. App. 1995).

Resources Defined

In In re Marriage of Drysch, 732 N.E.2d 125 (Ill. App. Ct. 2000) a college contribution case, the Illinois court interpreted the statute's definition of 'financial resources.' One of the factors considered when dividing college expenses is the financial resources of each party. The appellate court, citing Black's Law Dictionary, defined resources as ' 'money or any property that can be converted to meet needs' as well as the 'available means or capability of any kind.' ' The court concluded that by using the word resources rather than a more narrow term, such as income or salary, 'We believe that the legislature intended that the trial court consider all the money or property to which a parent has access. This may include that parent's income, her property and investment holdings, as well as money or property that could be available to her through her new spouse.' 732 N.E.2d at 129.

While Drysch involved college expenses, it defined 'financial resources,' which is the same term contained in the Illinois Child Support Statute, so the result should be the same in a child support case. Other case law in Illinois suggests that the income and assets of a new spouse can be considered in child support cases.

Conclusion

As can be seen, different statutes throughout the country can net different results. However, a clever application of another state's precedent may persuade your court to follow your adjudication request.

Paul L. Feinstein, a Chicago sole practitioner and a member of this newsletter's Board of Editors, concentrates his practice in family law, with emphasis on divorce litigation, custody and visitation, and appeals. In 1993, Feinstein was successful in overturning Illinois' automatic domestic relations asset freeze law in the Supreme Court of Illinois.