Defining a child-support payor's "net income": this article looks at the statute and more than a decade's worth of cases to determine what does and does not constitute "net income" for purposes of calculating a payor's child-support obligation.
The deductions include federal and state income tax, FICA payments, mandatory retirement contributions, union dues, health insurance payments, prior support and maintenance obligations, and repayment of expenses "reasonable and necessary ... for the production of income," necessary medical expenses, and expenditures for the child's benefit. (2)
In In re Marriage of Rogers, the Illinois Supreme Court went further to define the word "income" in the child-support context as follows: 1) "something that comes in as an increment or addition ... a gain or recurrent benefit that is usu[ally] measured in money...the value of goods and services received by an individual in a given period of time;" (3) and 2) "[t]he money or other form of payment that one receives, usu[ally] periodically, from employment, business, investments, royalties, gifts and the like." (4)
While the statutory and the court's definitions provide the foundational definition of net income, a substantial body of case law provides further guidance. This article examines the case law defining "net income" for child-support purposes and highlights a recent second district appellate court case that refines the definition.
A decade of case law
Over the past decade, case law has fleshed out the definition of net income. The statutory and Illinois Supreme Court definitions of net income are not so exhaustive that they encompass every alternative that comes before the courts. In some instances, case law has defined net income more restrictively than the statute, in other cases more expansively.
Income from all sources. With that in mind, here is a list of "income" as determined by the courts for purposes of setting a payor's child-support obligation.
* Unexplained personal spending by the payor that exceeds net income. (5)
* A monthly draw by the payor, even if it is an advance on commissions. (6)
* Nonrecurring bonuses. (7)
* Nontaxable bimonthly automobile allowances that may be applied to either automobile or other expenses. (8)
* A nonrecurring disbursement from an individual retirement account, even though it was awarded to the payor as part of the parties' property settlement. (9)
* The realized stock distribution of unrealized stock options, which was previously allocated to the parties as marital property. (10)
* Gifts the payor receives from his or her parents. (11)
* Payments that would otherwise qualify as income under the statute, even though like payments might not be forthcoming in the future. (12)
* Proceeds from a loan. (13)
* Per diem allowances for travel expenses (note, however, that this is subject to reduction to the extent the payor can prove it was used for actual travel expenses). (14)
* Loans withheld by an employer from the payor's bonuses pursuant to an employment agreement and for which the payor received seven-percent interest (the court found this analogous to a short-term deferred compensation agreement and thus includable as income). (15)
* Military allowances, even though they are exempt from federal income tax and cannot be reached by garnishment. (16)
* Pension funds at the time they are paid out. (17)
* Income from accounts receivable when actually received, regardless of whether the accounts were originally classified as marital or nonmarital property. (18)
* A Federal Employers Liability Act (FELA) settlement award, to the extent it is for lost wages (note that the burden of proving the award is not for lost wages is on the party claiming it is not income--i.e., the payor). (19)
* A personal injury settlement to the extent it represents reimbursement for lost wages/ earnings. (20)
* A tax refund attributable to maintenance payments. (21)
* Overwithholding and overpayment of federal income tax. (22)
This list represents a wide range of examples for determining income. But determining income is just the beginning of the process of determining net income. Perhaps more difficult is determining what is deductible from income.
Allowable and precluded deductions. The statutory deductions listed above (state and federal income tax, FICA, etc.) have been strictly construed by the courts where possible.
However, the statutory deduction for "reasonable and necessary expenses for the production of income" has proven especially difficult to apply. "Necessary" has been defined to be "those expenses outlaid by [the payor] with a good-faith belief his or her income would increase as a result, and which actually did act to increase income, or would have done so absent some extenuating circumstance." (23)
"Reasonable" refers to the "relationship between the amount of the expense and the amount by which income is in good faith expected to increase as a result" of the investment. As the court observed in Gay v Dunlap, "this definition implies the same expense could be reasonable in one context and not in another." (24)
Courts have approved the following deductions from income for purposes of calculating net income in setting child support.
* Day-to-day operating expenses, to the extent the payor can establish they were legitimate for the production of income. (25)
* Loan proceeds, to the extent they allow the payor to earn a living or enhance his/her production. (26)
* Student loan debt payments--they are partially deductible to the extent they represent an expense reasonable and necessary for the production of income. (27)
* Per diem allowances, to the extent they are actually applied to the expenses for which they were allocated (i.e., travel). The burden is on the payor to prove appropriate use. (28)
* Straight-line depreciation expense from net income where it has been shown to be a "reasonable and necessary expense for the production of income" and "subject to a specified repayment schedule." (29)
* Personal injury settlement to the extent it does not represent reimbursement for lost wages/earnings. (30)
These deductions are in addition to those listed at 750 ILCS 5/505(a)(3). The statute and cases combined represent an extensive list of allowable net-income deductions to the payor.
Precluded deductions. on the other hand, courts over the past decade have disallowed the deductibility of the following expenses for purposes of calculating net income in setting child support.
* Ongoing medical expenses, except those that constitute the "repayment of debt." (31)
* Expenditures for the production of income, unless they represent the repayment of a debt. (32)
* Depreciation expenses, unless they are "expenditures for repayment of debts that represent reasonable and necessary expenses for the production of income;" (33)
* Payments of principal on operating loans taken to cover annual operating expenses, when the expenses for which the borrowed funds are to be used are deductible from net income themselves--otherwise, the payor spouse could take the same deduction twice. (34)
* Nonreimbursed business expenses (i.e., meals, entertainment, in-car related expenses for purposes of gas, auto repairs, and insurance premiums). (35)
While these deductions are precluded for purposes of determining net income, they still can be a factor in the court's determination of a payor's child support obligation. Under the right circumstances, the courts may deviate from the statutory guidelines in 750 ILCS 5/505(a) and consider precluded deductions, at least to the extent they diminish the financial resources of the payor. (36)
In re Marriage of Tegeler
The Tegeler court is worth a close look, largely because it underscores the importance of honoring the statutory guidelines even as it approved a deduction from net income not specifically enumerated in the statute.
The facts. In In re Marriage of Tegeler, Mr. Tegeler's sole source of income was his farming operation. (37) his federal tax returns reported income that included deductions for the day-to-day operating expenses of the farming operation and significant depreciation expense. (38) he also borrowed yearly against a line of credit, and his personal spending exceeded his net income. (39)
Three issues relating to the determination of net income were before the court. 1) Could Mr. Tegeler deduct his day-to-day operating expenses from his net income? 2) Should his lines of credit have been included as income? 3) What effect should his personal spending, which exceeded his declared income, have on the calculation of his support obligation? (40)
Day-to-day operating expenses. Mrs. Tegeler contended on appeal that the trial court should not have deducted Mr. Tegeler's day-to-day operating expenses when determining his net income. She argued that the amount did not represent reasonable and necessary expenses for the production of income (41) and that he failed to produce receipts substantiating his day-to-day operating expenses. (42) She noted that his business operation was ongoing, he was self-employed, and depreciation was not included as a deduction or day-to-day operating expense. (43)
The appellate court held that day-today operating expenses are allowable deductions from net income. Mr. Tegeler presented prima facie evidence by producing schedule F of his federal tax return showing itemized totals of expenses, as well as bank account books showing a detailed list of expenditures complete with dates, check numbers, payees, descriptions of items and amounts paid. (44)
Lines of credit. Mr. Tegeler received annual loans from a bank for his farming operation, and Mrs. Tegeler contended they should be included as income. (45) After recognizing at least one case (46) holding that loan proceeds constituted income, the court ruled that loans generally should not be considered income. (47)
The court reasoned that to the extent the loan proceeds allowed Mr. Tegeler to earn a living or enhance his production, his farming income had already been included in his income calculation. (48) The court found that while it might be unfair to allow a deduction for the repayment of loans while not counting annual loans as income, neither the loans nor repayments were considered and thus no error had occurred. (49) The court did say in dicta that there may be situations where it would be appropriate to consider loans as income. (50)
Personal spending that exceeds net income. The respondent's bank records showed his personal expenditures exceeded his net income, a fact for which Mr. Tegeler offered no explanation. (51) The court held that personal spending that exceeds net income should be considered as an additional resource for child support to the extent those expenses are unexplained. (52)
Tegeler and "net income." Tegeler expands the deductions for net income under 750 ILCS 5/505(a)(3) by allowing the deduction of day-to-day operating expenses without requiring that they be tied to the repayment of debt. These expenses are not explicitly deductible under the statute, and this is the first case to so hold.
Citing Gay, the court said that the day-to-day operating expenses of a self-employed payor could justify deviating from the statutory guidelines and lowering the payor's obligation if those expenses are not allowed as a deduction. (53) By allowing these deductions, the court could achieve a fair result without emasculating the guidelines. The Tegeler court focused on the reliability of the statutory guidelines and the need to avoid routinely going beyond them. (54) Indeed, the court was adamant about maintaining the value the guidelines provide for courts. (55)
From the child-support obligee's standpoint, Tegeler also expands the definition of "net income" by allowing inclusion of unexplained income, evidenced in this case by personal spending that exceeded claimed net income. While this holding is hardly revolutionary--courts have been making decisions based on similar facts for years--Tegeler is the first case to cite the obvious as a principle of law.
The crux of the court's decision was its common sense construction of the statute, which expanded the definition of income and allowable deductions from net income. Additionally, it reinvigorated the proposition that courts should avoid routinely deviating from the statutory guidelines in setting child support. (56)
There is a common thread in each decision from Gay to Tegeler. The courts, almost uniformly, seek to establish net income on par with the definition provided by the Illinois Supreme Court. In essence, the courts have been taking a common sense approach to determining net income.
They give credit for income actually received, regardless of its source. They only allow payors to deduct expenses that truly reduce the income they actually received and disregard principles of accounting and tax law that artificially decrease income. They want to see real income, real money, and real deductions.
The process of determining net income is still complex, and there is still some room for dispute on almost every issue regarding the calculation of net income. Nevertheless, the meaning of net income is more clearly defined with each commonsense decision by the courts.
(1.) 750 ILCS 5/505(a).
(2.) 750 ILCS 5/505(a)(3).
(3.) 213 Ill 2d 129, 136-37, 820 NE2d 386, 390 (2004) citing Webster's Third New International Dictionary 1143 (1986).
(4.) Rogers at 137, 820 NE2d at 390, citing Black's Law Dictionary 778 (8th ed 2004).
(5.) In re Marriage of Tegeler, 365 Ill App 3d 448, 460, 848 NE2d 173, 183 (2d D 2006).
(6.) In re Marriage of Breitenfeldt, 362 Ill App 3d 668, 674-77, 840 NE2d 694, 699-702 (4th D 2005).
(7.) Einstein v Nijim, 358 Ill App 3d 263, 270, 831 NE2d 50, 54 (4th D 2005).
(8.) Id at 270-71, 831 NE2d at 56.
(9.) In re Marriage of Lindman, 356 Ill App 3d 462, 471, 824 NE2d 1219, 1227 (2d D 2005).
(10.) In re Marriage of Colangelo and Sebela, 355 Ill App 3d 383, 392, 822 NE2d 571, 578 (2d D 2005).
(11.) Rogers at 138, 820 NE2d at 390.
(13.) In re Marriage of Rogers, 345 Ill App 3d 77, 81, 802 NE2d 1247, 1250 (1st D 2003); see also Tegeler at 457, 848 NE2d at 181, which finds that loans generally should not be considered income, but there are instances where a loan would qualify as income.
(14.) In re Marriage of Worrall, 334 Ill App 3d 550, 555, 778 NE2d 397, 401 (2d D 2002).
(15.) In re Marriage of Ackerly, 333 Ill App 3d 382, 390-92, 775 NE2d 1045, 1053-54 (2d D 2002).
(16.) In re Marriage of Baylor, 324 Ill App 3d 213, 217, 753 NE2d 1264, 1267 (4th D 2001).
(17.) Myers v Kidd, 308 Ill App 3d 593, 595-96, 720 NE2d 1125, 1127-28 (5th D 1999). See also, In re Marriage of Klomps, 286 Ill App 3d 710, 715, 676 NE2d 686, 689 (5th D 1997).
(18.) Klomps at 715, 676 NE2d at 689.
(19.) Jennings v White, 286 Ill App 3d 213, 219, 675 NE2d 985, 988 (3d D 1997).
(20.) Villanueva v O'Gara, 282 Ill App 3d 147, 151, 668 NE2d 589, 593 (2d D 1996).
(21.) In re Marriage of Pylawka, 277 Ill App 3d 728, 732, 661 NE2d 505, 508 (2d D 1996).
(22.) Id at 733, 661 NE2d at 509, citing In re Marriage of Freesen, 275 Ill App 3d 97, 103, 655 NE2d 1144, 1148-49 (4th D 1995).
(23.) Gay v Dunlap, 279 Ill App 3d 140, 149, 664 NE2d 88, 95 (4th D 1996).
(25.) Tegeler at 457, 848 NE2d at 180.
(26.) Id at 457-58, 848 NE2d at 181.
(27.) Roper v Johns, 345 Ill App 3d 1127, 1131-37, 804 NE2d 620, 624-29 (5th D 2004).
(28.) Worrall at 555, 778 NE2d at 401.
(29.) In re Marriage of Davis, 287 Ill App 3d 846, 854, 679 NE2d 110, 116 (5th D 1997), citing Posey v Tate, 275 Ill App 3d 822, 826, 656 NE2d 222, 225 (1st D 1995).
(30.) Villanueva at 151, 668 NE2d at 593.
(31.) Einstein at 267-70, 831 NE2d at 55-56.
(32.) Ackerly at 390, 775 NE2d at 1053.
(33.) In re Marriage of Boland, 308 Ill App 3d 1063, 1066-67, 721 NE2d 815, 817-18 (4th D 1999).
(34.) In re Marriage of Nelson, 297 Ill App 3d 651, 655-56, 698 NE2d 1084, 1088 (3d D 1998).
(35.) Gay at 145-46, 664 NE2d at 92-93.
(36.) See 750 ILCS 5/505(a)(2).
(37.) Tegeler (cited in note 5).
(38.) Id at 451, 848 NE2d at 176.
(39.) Id at 457, 848 NE2d at 180.
(41.) Id at 453, 848 NE2d at 177.
(42.) Id at 456, 848 NE2d at 180.
(45.) Id at 457, 848 NE2d at 180.
(46.) See Rogers, 345 Ill App 3d at 80, 802 NE2d at 1250.
(47.) Tegeler at 457, 848 NE2d at 181.
(50.) Id at 459, 848 NE2d at 182.
(51.) Id at 461, 848 NE2d at 183.
(53.) Id at 456-57, 848 NE2d at 180, citing Gay at 152, 664 NE2d at 96.
(54.) Tegeler at 457, 848 NE2d at 180.
(56.) Gay at 152, 664 NE2d at 96.
Gregory C. Maksimuk is an associate with The Law Offices of Steven N. Peskind and Associates in St. Charles, where he concentrates his practice on complex family law issues involving division of property, valuation and division of closely held companies, custody, parentage and related issues.
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|Author:||Maksimuk, Gregory C.|
|Publication:||Illinois Bar Journal|
|Date:||Sep 1, 2007|
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