The consideration of gifts and loans as income for purpose of the computation of child support – by Gloria E. Block
Under Illinois law, a non-custodial parent is required to pay child support to the custodial parent following a dissolution of marriage. The Illinois Marriage and Dissolution of Marriage Act (IMDMA) provides guidelines for calculating support obligations. Those guidelines outline a scale of minimum support obligations, equal to a percentage of the non-custodial parent’s “net income” per number of children they are responsible for. Those guidelines are to be applied in each case, unless the court makes a finding that the resulting amount would be inappropriate after considering the best interests of the child. For the purposes of this statute, “net income” is identified as all income from all sources, minus the following deductions: Federal and State income tax, Social Security, mandatory retirement contributions, union dues, insurance premiums, prior support/maintenance obligations, expenses necessary for income, necessary medical expenses, and reasonable expenses for the benefit of the child and other parent (exclusive of gifts).
“Net income”‘ is typically calculated through an examination and analysis of W-2s, paycheck stubs, 1099s and tax returns. Often times however, these documents can fail to give an accurate overview of a person’s financial situation. Until In re the Marriage of Rogers, 213 Ill. 2d 129, the term “income from all sources” was not separately defined in Section 505 of the Act, and courts continuously struggled with how to deal with gifts and loans. For instance, the payor spouse could have minimal income, however receive substantial gifts as loans from family members.
With these circumstances, most courts felt their hands were tied and could only base child support on the income and not the gifts or loans. As one can imagine, this created a very unfair result in that these gifts and loans would not be considered “income” for the purposes of child support. Courts have remedied this inequity by expanding the definition of the income of the non-custodial parent. This enables a court to treat a parent’s income as if it were greater than what is actually reported.
In 2004 the Supreme Court in In re the Marriage of Rogers, 213 Ill. 2d 129 dealt with the issue of whether gifts and loans are to be considered income for purposes of child support. The facts in Rogers are not complicated. The Payee brought a Motion to Modify Child Support. The existing Order required a monthly child support payment of $250 per month based on the Payor’s earnings of $15,000 per annum from teaching, although the payor received an additional $46,000 per annum from his family as gifts and loans. The Court increased child support predicated upon payor’s income of $61,000, including the gifts and loans from family.
The Supreme Court affirmed the Appellate Court’s decision and noted that the legislature had adopted an expansive definition of what constitutes “net income”; however, income was not separately defined under Section 505 and therefore the Court would give income its plain and ordinary meaning.
Gifts under Rogers
As the Court pointed out, gifts the Payor received “represented a valuable benefit to the father that enhanced his wealth and facilitated his ability to support (the child).” (See Rogers at pg. 137.) Further, the argument that “gifts” were uncertain and should not be considered was unsuccessful, the Court noting:
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. Accordingly, the relevant focus under section 505 is the parent’s economic situation at the time the child support calculations are made by the court. If a parent has received payments that would otherwise qualify as “income” under the statute, nothing in the law permits those payments to be excluded from consideration merely because like payments might not be forthcoming in the future.
As our appellate court has held, “the Act does not provide for a deduction of nonrecurring income in calculating net income for purposes of child support.”
In re Marriage of Hart, 194 Ill.App.3d 839, 850, 141 Ill.Dec. 550,551 N.E.2d 737 (1990). Rogers at pgs. 138-139.
Based on the above rationale the Court found that the inclusion of gifts as “income” is proper under the plain and ordinary language of Section 505(a) (3).
Loans under Rogers
The Court then turned to the matter of”loans given to the Payor by his father.” The Appellate Court focused on Section 505 (3)(h), “that allows deductions for expenditures for repayment of debts . .. ” but noted, “there is no corresponding provision authorizing the exclusion of loan proceeds.” The Supreme Court affirmed that the Appellate Court correctly reasoned that under the Statute it was proper to include loan proceeds when calculating child support obligations.
The Supreme Court further noted, however, that:
Although the father challenges the appellate court’s construction of the statute, we have no occasion in this case to address whether and under what circumstances loan proceeds are properly regarded as an element of income for child support purposes. The reason for that is that the sums at issue here are loans in name only.
Rogers supra. (Emphasis added).
It is clear from Rogers that the Supreme Court left open the question of whether and under what circumstance loan proceeds are to be considered income when calculating child support.
Subsequent Cases
In the case of ln re Marriage of Lindman, 365 Ill. App. 3d 462 2d(2006), the Court held that disbursements from an Individual Retirement Account (IRA) constituted income for the purpose of calculating net income under the Illinois Dissolution of Marriage Act; however, in In reMarriage of O’Daniel. 382 Ill. App. 3d 845 4d (2008), the Fourth District disagreed with the Second District and found that Rogers did not support the finding:
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 and 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.
O’Daniel at pg. 850. (Emphasis added).
In the case of ln re Marriage of McGrath, 970 N.E. 2d 12 Sp. Ct. (2012), the trial Court held that the monies the unemployed Payor withdrew from his savings account constituted income for the determination of child support, and supported its decision relying on the Lindman case referenced above. The Payor appealed, relying on the O’Daniel case. The Appellate Court did not resolve the conflict between the 2nd District and 4th District because the McGrath case did not involve withdrawals from an IRA. The Appellate Court further could not find that the trial Court had abused its discretion in including savings account withdrawals in its calculation of “net income.” The Supreme Court determined that the issue was solely a question of law on how to interpret the term “net income” in Section 505 of the Act when it stated:
[14] This Court noted in Rogers that, although the Act provides a definition of “net income”- the total of all income from all sources minus certain deductions- it does not separately define the term “income.” Thus, this Court explained that the term must be given its plain and ordinary meaning. Rogers quoted the following definitions from Webster’s and Black’s: “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” (Webster’s Third New International Dictionary 1132 [ 1986]); and “(t)he money or other form of payment that one receives, usu(ally) periodically, from employment, business, investments, royalties, gifts and the like.”
(Black’s Law Dictionary 778 [8th Ed. 2004].) Rogers, 830 N.E.2d 386
Money that a person withdraws from a savings account simply does not fit into any of these definitions. The money in the account already belongs to the account’s owner, and simply withdrawing it does not represent a gain or benefit to the owner. The money is not coming in as an increment or addition and the account owner is not ‘receiving’ the money because it already belongs to him.
McGrath at pg.15. (Emphasis added).
Therefore, because there was no “gain” or something additional to the Payor, the withdrawals from the Payor’s savings account were not income for purposes of computing support.
Monies received from “loans” were at issue in case of ln re the Marriage of Baumgartner, 384 Ill. App. 3d 49 (2008). The Court stated, citing Rogers as follows:
This leaves only the matter of the annual “loans” given to the father by his parents. For purposes of determining a parent’s net income, section 505 of the Act authorizes the deduction of amounts expended in repayment of certain types of debts. There is no corresponding provision authorizing the exclusion of loan proceeds. Accordingly, the appellate court reasoned that under the language of the Act, the circuit court acted correctly when it included the money the father’s parents loaned him when it calculated his support obligations.
Although the father challenges the appellate court’s construction of the statute, we have no occasion in this case to address whether and under what circumstances loan proceeds are properly regarded as an element of income for child support purposes. The reason for that is that the sums at issue are loans in name only.”
Rogers II, 213 Ill.2d at 139-40, 289 Ill.Dec. 610, 820 N.E.2d 386.
This gave the Baumgartner court the ability to consider whether the loans could be excluded from income for the purpose of calculating child support. The court noted that in Rogers, “the father had never been required to repay the ‘loans’ received from his parents.” Id.
The Baumgartner court then cites the decision in the case of ln re Marriage of Tegeler, 365 Ill. App. 3d 448 (2006), and disagreed that loan proceeds were to be considered income under section 505(a)(3):
We believe that, in general, loans should not be considered income. We note that the Black’s Law Dictionary definition of ‘income’ quoted by the Supreme Court in Rogers II cited earlier in our opinion, specifically includes gifts as income but does not mention loans. More significantly, loans typically should not be counted as income because they usually do not directly increase an individual’s wealth. Tegeler, 465 Ill. App. 3d 458 (2006).
ld at 50.
In connection with mortgage loans, the Baumgartner court concluded:
We do not hold that loan proceeds may never constitute income. However, a residential mortgage loan, made by a bona fide lender, does not constitute income. 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 herein.
Id at 52.
A key factor to determining loan proceeds as income is whether repayment was required, or even intended, when the loans were incurred.
In the case of In re Anderson, 405 Ill. App. 3d 1129 (20 1 0), the Court held that the proceeds from the reverse stock split did not involve a gain or recurring benefit of employment compensation. (See Anderson at 1136). The Court found that the forced sale reduced the Payor’s wealth because he no longer received the yearly dividends the stock generated. It was significant that the Payor had no control over the reverse stock split.
Further, in Anderson the Court held that any gifts the Payor receives from his family must be included in the determination of net income because “they represented a valuable benefit to the father that enhanced his wealth and facilitated his ability to support his son.” Anderson at 1137, citing Rogers.
The issue raised in In re Marriage of Moorthy, 29 N.E. 3d 604 (Ill. App. 1st 2015) was whether retained earnings of a closely held corporation should be included in a supporting parent’s income. The Court conducted an extensive analysis of whether the Payor had control over the distributions and whether there was any evidence of manipulation to reduce income in order to reduce the support obligation.
Expanding the definition of income in the form of gifts and loans must be considered in the determination of child support. The sources could be family gifts or loans, withdrawals that include gain, or retained earnings in a closely held corporation. A specific fact analysis must be performed to determine whether retained earnings of corporation should be imputed to the sole or majority shareholder for purposes of calculating child support.
Rogers establishes that gifts constitute income for purposes of calculating child suppmt. The issue of whether loan proceeds constitute income was not resolved in Rogers. The subsequent cases establish that the focus of the analysis must be whether there is a clear repayment obligation; the control the recipient has over the terms of the loan and whether the loan is from the family members and is in actuality a gift as opposed to a loan.
A model of income sharing is now being explored in Illinois. It is suggested that any modifications of the statute to the calculation of child support also revisit the definition of income and provide guidelines for the determination of income for all sources. *
