Defining Income for Child Support Purposes

Liquidated Assets

An important child support appeal in the Supreme Court of Illinois clarifies the law in this area. (The author was the winning attorney in the case.) McGrath v. McGrath, 2012 IL 112792, May 24, 2012. It was a case of first impression, decided by a unanimous supreme court.

In the child support trial, the Judge noted that the father contributed approximately $1,600 a month in “direct pays” toward his daughters' daycare, medical, educational and extracurricular activity expenses. The legal issue focused on determining what his income was for purposes of paying child support to the mother. In Illinois, a support obligor's income must first be determined; then the statutory factors are considered to decide whether or not the child support award should be more or less than the guidelines. In this case, the father was unemployed and had no income except for less than $200 per month in investment income. The evidence indicated that he paid approximately $8,500 a month for various expenses including the $1,600 a month for the benefit of his children as well as other voluntary expenses for the benefit of his children. In addition, he paid his regular living expenses and maintained his house where the children sometimes stayed because he had joint custody. The trial court ruled that the $8,500 a month expenses constituted his income. Accordingly, the trial court ordered him to pay $2,000 a month child support in addition to the $1,600 a month contribution.

The father appealed to the First District Appellate Court. Without hearing oral argument and in a mere five pages, the appellate court affirmed the trial court's order. The appellate court ruled that there were no provisions in the child support law that excluded the monthly withdrawals from the definition of income. Consequently, in Illinois child support cases, spending was considered income.

The father then appealed to the Supreme Court of Illinois, which is not required to accept cases and generally accepts approximately 5% of all submissions. The court accepted the case. Justice Robert Thomas, spoke for a unanimous court, which reversed both the trial court and the appellate court. The high court stated the issue as follows in '1 of its decision: “At issue is whether money that an unemployed parent regularly withdraws from a savings account may be included in the calculation of net income when setting child support under section 505 of the Illinois Marriage and Dissolution of Marriage Act ' We hold that it may not.” The court reasoned, “The appellate court's analysis went off track when it stated that 'there are no provisions in the Act excluding Martin's monthly withdrawals from the definition of net income, ' ' for it is the term 'income' itself that excludes respondent's savings account withdrawals. The appellate court should not have been looking for savings account withdrawals in the statutory deductions from income, because those withdrawals were not income in the first place. We note that, although petitioner's attorney (the wife's lawyer) believed that the ultimate amount of child support arrived at by the trial court was appropriate, he conceded at oral argument that the appellate court's analysis was problematic and, when pressed, agreed that he was not going to the mat in defense of that analysis.” ('15)

In In re Marriage of Eberhardt, 900 N.E.2d 319 (Ill.App.Ct. 2008), the trial court was affirmed for treating a former husband's withdrawals from his IRA as income, following the holding in In re Marriage of Lindman, 824 N.E.2d 1219 (Ill.App.Ct. 2005). The key sentence in the Lindman decision states, “IRA disbursements are a gain that may be measured in monetary form ' defining an IRA as a tax-deferred retirement account for an individual ' with earnings tax-deferred until withdrawals begin.” 824 N.E.2d at 1223. The fallacy is that it is not a gain, except for actual earnings (income, dividends or increase in value). It is not a gain because it already belonged to the father.

One appellate court in In re Marriage of O'Daniel, 889 N.E.2d 254 (Ill.App.Ct. 2008), ruled that IRA withdrawals should not be included as income for purposes of child support. The appellate court in O'Daniel analyzes the Lindman case, and also Rogers, and states as follows:

It would appear from the above quote that the Second District would find that any IRA disbursement would constitute income. We disagree and do not find Rogers supports this proposition. The Second District's decision does not adequately take into account that IRAs are ordinarily self-funded by the individual possessing the retirement account. Except for the tax benefits a person gets from an IRA and the penalties he or she will incur if he or she withdraws the money early, an IRA basically is no different than a savings account, although the risks may differ. The money the individual places in an IRA already belongs to that individual. When an individual withdraws money he placed into an IRA, he does not gain anything as the money was already his. Therefore, it is not a gain and not income. The only portion of the IRA that would constitute a gain for the individual would be the interest and/or appreciation earnings from the IRA. 889 N.E.2d at 258. (emphasis supplied)

But see In re Marriage of McLauchlan, 2012 IL App (1st) 102114 (liquidated IRA is not income for maintenance purposes, distinguishing child support cases). O'Daniel is the best reasoned case on the IRA issue.

Other Decisions

In New York, while an unrealized paper increase in investment value is not income, capital gains are included in income, particularly where a large portion of the income derives from gains realized from the liquidation of investments. In In re Matter of Cupkova-Myers v. Myers, 880 N.Y.S.2d 736 (App. Div. 2009), the father regularly liquidated his investments and used the substantial proceeds to pay miscellaneous expenses.

Recently another district of the Illinois Appellate Court decided In re Marriage of Anderson and Murphy, 938 N.E.2d 207 (Ill.App.Ct. 2010) where the issue was whether a forced sale of company stock as part of a reverse stock split constituted income to the shareholder. The husband received over $192,000.00 as a result of the forced sale. He used those proceeds to purchase gold coins. The court, reviewing the statute de novo, utilized the definition of income cited in Rogers. The court also followed the reasoning of the Appellate Courts in O'Daniel and Baumgartner. It reasoned:

In this case, the proceeds from the reverse stock split of Michael's AEC shares did not involve a gain or recurring benefit or employment compensation. Michael received the proceeds as a result of an involuntary purchase of stock he owned, which resulted in a capital loss. In reality, the forced sale reduced Michael's wealth because he no longer received the yearly dividends the stock generated. While the dividends or earnings the stock produced constituted income under section 505(a)(3), the sale of the stock did not. The cash proceeds took the place of the former shares of stock. Michael then used those proceeds to purchase gold coins. The asset already belonged to Michael, and the proceeds were used to purchase another investment asset. Accordingly, the proceeds do not qualify as income for child support purposes.

38 N.E.2d at 213.

Property Settlement Payments

In Brotherton v. State Department of Revenue, Child Property Settlement, 201 P.3d 1206 (Alaska 2009), the issue was whether a payment made pursuant to a property settlement judgment should be included as income for child support purposes. The Supreme Court of Alaska concluded that the trial court properly excluded from its calculation the value of the mother's share of the divided marital real property. But it was held that the trial court's calculation of income should have included the portion of post-judgment interest attributable to that property settlement payment on a pro rata basis for the year in question (because if the payment had been made in a timely fashion she could have invested the money and generated interest).

Reimbursements and Credits

The Court of Appeals in Oregon in In re Marriage of Stokes, 228 P.3d 701 (Or.Ct.App. 2010), ruled that the husband's military allowance for housing and food although not income taxable should have been included for the purpose of child support. The statute in Oregon provides that income includes expense reimbursements or in-kind payments received in employment if they are significant and reduce personal living expenses. Since these military allowances are available to the father to spend as he desires, there was no reason not to include them as income.

Vermont has a somewhat similar statute, but in the case of Kelly-Whitney v. Kelly-Whitney, 15 A.3d 138 (Vt. 2011), it was held that a tuition credit was not income because it was not a personal living expense such as a housing, food, clothing and transportation. It was held that the credit was available to the mother if she chose to send the children to her employer's school, but it otherwise did not impact her personal living expenses. Also, there was no evidence that tuition benefit was negotiated in lieu of salary.

Gifts

In In re Marriage of Alter, 89 Cal.Rptr.3d 849 (Cal.App. 2009) it was held that regular monthly payments from the support payor's mother of $6,000 per month were properly considered income for child support purposes. The Rogers child support case discussed above held in the same manner and was cited in Alter. See Kevin Q. V. Lauren W., 124 Cal. Rptr.3d 676 (Ct.App. 2011), where it was held that regularly received gifts from the payor's father were deemed income for purposes of an attorney's fee award.

Conclusion

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

Paul L. Feinstein, a member of this newsletter's Board of Editors, is a Chicago sole practitioner with more than 30 years of experience. He concentrates his practice in family law, with emphasis on divorce litigation, custody and visitation, and appeals.

The use of guideline child support throughout the nation has made vital the threshold definition of income for support purposes. More often than not, your state will not have decided the specific question with which you are struggling, i.e., whether or not a particular item constitutes income. The good news is, the odds are increasing that other states will have dealt with the issue. Here are some examples of some of the more recent cases.

Illinois has been at the forefront in these “income” cases. 750 ILCS 5/505 provides for a presumption that various percentages of a payor's “net income” shall be used. Unfortunately, Section 505 does not define “gross income,” requiring definitions to be established through caselaw. Some other states are more specific in their statutory definitions.

Various Illinois rulings have inconsistent holdings. In In re Marriage of Tegeler, 848 N.E.2d 173 (Ill.App. Ct. 2006) Section 505 was interpreted and the court concluded that a line of credit offered to the father for his farm operations did not constitute income. The appellate court looked at the Illinois Supreme Court's 2004 decision in In re Marriage of Rogers (820 N.E.2d 386) and determined that a line of credit was not an increment, addition or a gain because it had to be repaid. The decision noted, “This court has stated that income represents a gain or profit that is generally understood to be a return on an investment of labor or capital, thereby increasing the recipient's wealth. In re Marriage of Worrall, 334 Ill.App.3d 550,553-54, 268 Ill. Dec. 411, 778 N.E.2d 397 (2002).” 848 N.E.2d at 179. In In re Marriage of Baumgartner, 890 N.E.2d 1256 (Ill.App.Ct. 2008) which also quoted Tegeler, the court held that mortgage loan proceeds were not income because they did not increase an individual's wealth as they had to be repaid. That court concluded, “Such loans do not meet the definition of 'income' as set forth in Rogers II as they do not share similar features with the examples set forth in the definition cited therein.” 890 N.E.2d at 1269.

Liquidated Assets

An important child support appeal in the Supreme Court of Illinois clarifies the law in this area. (The author was the winning attorney in the case.) McGrath v. McGrath , 2012 IL 112792, May 24, 2012. It was a case of first impression, decided by a unanimous supreme court.

In the child support trial, the Judge noted that the father contributed approximately $1,600 a month in “direct pays” toward his daughters' daycare, medical, educational and extracurricular activity expenses. The legal issue focused on determining what his income was for purposes of paying child support to the mother. In Illinois, a support obligor's income must first be determined; then the statutory factors are considered to decide whether or not the child support award should be more or less than the guidelines. In this case, the father was unemployed and had no income except for less than $200 per month in investment income. The evidence indicated that he paid approximately $8,500 a month for various expenses including the $1,600 a month for the benefit of his children as well as other voluntary expenses for the benefit of his children. In addition, he paid his regular living expenses and maintained his house where the children sometimes stayed because he had joint custody. The trial court ruled that the $8,500 a month expenses constituted his income. Accordingly, the trial court ordered him to pay $2,000 a month child support in addition to the $1,600 a month contribution.

The father appealed to the First District Appellate Court. Without hearing oral argument and in a mere five pages, the appellate court affirmed the trial court's order. The appellate court ruled that there were no provisions in the child support law that excluded the monthly withdrawals from the definition of income. Consequently, in Illinois child support cases, spending was considered income.

The father then appealed to the Supreme Court of Illinois, which is not required to accept cases and generally accepts approximately 5% of all submissions. The court accepted the case. Justice Robert Thomas, spoke for a unanimous court, which reversed both the trial court and the appellate court. The high court stated the issue as follows in '1 of its decision: “At issue is whether money that an unemployed parent regularly withdraws from a savings account may be included in the calculation of net income when setting child support under section 505 of the Illinois Marriage and Dissolution of Marriage Act ' We hold that it may not.” The court reasoned, “The appellate court's analysis went off track when it stated that 'there are no provisions in the Act excluding Martin's monthly withdrawals from the definition of net income, ' ' for it is the term 'income' itself that excludes respondent's savings account withdrawals. The appellate court should not have been looking for savings account withdrawals in the statutory deductions from income, because those withdrawals were not income in the first place. We note that, although petitioner's attorney (the wife's lawyer) believed that the ultimate amount of child support arrived at by the trial court was appropriate, he conceded at oral argument that the appellate court's analysis was problematic and, when pressed, agreed that he was not going to the mat in defense of that analysis.” ('15)

In In re Marriage of Eberhardt, 900 N.E.2d 319 (Ill.App.Ct. 2008), the trial court was affirmed for treating a former husband's withdrawals from his IRA as income, following the holding in In re Marriage of Lindman, 824 N.E.2d 1219 (Ill.App.Ct. 2005). The key sentence in the Lindman decision states, “IRA disbursements are a gain that may be measured in monetary form ' defining an IRA as a tax-deferred retirement account for an individual ' with earnings tax-deferred until withdrawals begin.” 824 N.E.2d at 1223. The fallacy is that it is not a gain, except for actual earnings (income, dividends or increase in value). It is not a gain because it already belonged to the father.

One appellate court in In re Marriage of O'Daniel, 889 N.E.2d 254 (Ill.App.Ct. 2008), ruled that IRA withdrawals should not be included as income for purposes of child support. The appellate court in O'Daniel analyzes the Lindman case, and also Rogers, and states as follows:

It would appear from the above quote that the Second District would find that any IRA disbursement would constitute income. We disagree and do not find Rogers supports this proposition. The Second District's decision does not adequately take into account that IRAs are ordinarily self-funded by the individual possessing the retirement account. Except for the tax benefits a person gets from an IRA and the penalties he or she will incur if he or she withdraws the money early, an IRA basically is no different than a savings account, although the risks may differ. The money the individual places in an IRA already belongs to that individual. When an individual withdraws money he placed into an IRA, he does not gain anything as the money was already his. Therefore, it is not a gain and not income. The only portion of the IRA that would constitute a gain for the individual would be the interest and/or appreciation earnings from the IRA. 889 N.E.2d at 258. (emphasis supplied)

But see In re Marriage of McLauchlan, 2012 IL App (1st) 102114 (liquidated IRA is not income for maintenance purposes, distinguishing child support cases). O'Daniel is the best reasoned case on the IRA issue.

Other Decisions

In New York, while an unrealized paper increase in investment value is not income, capital gains are included in income, particularly where a large portion of the income derives from gains realized from the liquidation of investments. In In re Matter of Cupkova-Myers v. Myers , 880 N.Y.S.2d 736 (App. Div. 2009), the father regularly liquidated his investments and used the substantial proceeds to pay miscellaneous expenses.

Recently another district of the Illinois Appellate Court decided In re Marriage of Anderson and Murphy, 938 N.E.2d 207 (Ill.App.Ct. 2010) where the issue was whether a forced sale of company stock as part of a reverse stock split constituted income to the shareholder. The husband received over $192,000.00 as a result of the forced sale. He used those proceeds to purchase gold coins. The court, reviewing the statute de novo, utilized the definition of income cited in Rogers. The court also followed the reasoning of the Appellate Courts in O'Daniel and Baumgartner. It reasoned:

In this case, the proceeds from the reverse stock split of Michael's AEC shares did not involve a gain or recurring benefit or employment compensation. Michael received the proceeds as a result of an involuntary purchase of stock he owned, which resulted in a capital loss. In reality, the forced sale reduced Michael's wealth because he no longer received the yearly dividends the stock generated. While the dividends or earnings the stock produced constituted income under section 505(a)(3), the sale of the stock did not. The cash proceeds took the place of the former shares of stock. Michael then used those proceeds to purchase gold coins. The asset already belonged to Michael, and the proceeds were used to purchase another investment asset. Accordingly, the proceeds do not qualify as income for child support purposes.

38 N.E.2d at 213.

Property Settlement Payments

In Brotherton v. State Department of Revenue, Child Property Settlement , 201 P.3d 1206 (Alaska 2009), the issue was whether a payment made pursuant to a property settlement judgment should be included as income for child support purposes. The Supreme Court of Alaska concluded that the trial court properly excluded from its calculation the value of the mother's share of the divided marital real property. But it was held that the trial court's calculation of income should have included the portion of post-judgment interest attributable to that property settlement payment on a pro rata basis for the year in question (because if the payment had been made in a timely fashion she could have invested the money and generated interest).

Reimbursements and Credits

The Court of Appeals in Oregon in In re Marriage of Stokes, 228 P.3d 701 (Or.Ct.App. 2010), ruled that the husband's military allowance for housing and food although not income taxable should have been included for the purpose of child support. The statute in Oregon provides that income includes expense reimbursements or in-kind payments received in employment if they are significant and reduce personal living expenses. Since these military allowances are available to the father to spend as he desires, there was no reason not to include them as income.

Vermont has a somewhat similar statute, but in the case of Kelly-Whitney v. Kelly-Whitney , 15 A.3d 138 (Vt. 2011), it was held that a tuition credit was not income because it was not a personal living expense such as a housing, food, clothing and transportation. It was held that the credit was available to the mother if she chose to send the children to her employer's school, but it otherwise did not impact her personal living expenses. Also, there was no evidence that tuition benefit was negotiated in lieu of salary.

Gifts

In In re Marriage of Alter, 89 Cal.Rptr.3d 849 (Cal.App. 2009) it was held that regular monthly payments from the support payor's mother of $6,000 per month were properly considered income for child support purposes. The Rogers child support case discussed above held in the same manner and was cited in Alter. See Kevin Q. V. Lauren W. , 124 Cal. Rptr.3d 676 (Ct.App. 2011), where it was held that regularly received gifts from the payor's father were deemed income for purposes of an attorney's fee award.

Conclusion

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

Paul L. Feinstein, a member of this newsletter's Board of Editors, is a Chicago sole practitioner with more than 30 years of experience. He concentrates his practice in family law, with emphasis on divorce litigation, custody and visitation, and appeals.