Colorado Child Support: Non-Realized Income Considered For Child Support Purposes
In 1987, the Advisory Panel of the Office of Child Support Enforcement made its recommendations for the development of child support guidelines to be used nationally. In response, Congress enacted the Family Support Act of 1988, requiring each state to develop presumptive child support guidelines. Colorado's child support guidelines are based on the Income Shares Model. The Income Shares Model evolved from research establishing that a certain percentage of two-parent family income is spent on children.1 The Income Shares Model was formulated in response to concerns that "child support award levels were too low, with the result that many children and custodial parents were thrust into poverty or suffered a seriously diminished standard of living while the non-custodial parent often had an improved living standard."2 The child support guidelines articulate the Income Shares Model by the statute's requirement that child support be calculated "based upon the parent's combined adjusted gross income estimate to have been allocated to the child if the parents and children were living in an intact household." One touchstone of child support guidelines, therefore, is that the final support award is "income driven." This means that the support award is determined primarily by the income of the parties. It is therefore vital that parents understand what funds can be considered "income" under the child support guidelines, and what funds are excluded from the definition of income.
II. "Income" for Purposes of Child Support
Each state's child support guidelines contain a definition of "gross income." At the very minimum, pursuant to federal law, the definition of "income" must take into consideration all income and earnings of the absent parent. In Colorado, "income" means actual gross income of a parent, if employed to full capacity, or potential income, if unemployed or underemployed. "Income" does not include the income of the parent's subsequent spouse, even if the parent is benefiting from the subsequent spouse's payment of shared household expenses such as the mortgage.3
"Gross income," pursuant to the Colorado child support guidelines, includes income from any source and includes, but is not limited to, income from salaries; wages, including tips declared by the individual for purposes of reporting to the federal Internal Revenue Service or tips imputed to bring the employee's gross earnings to the minimum wage for the number of hours worked, whichever is greater; commissions; payments received as an independent contractor for labor or services; bonuses; dividends; severance pay; pensions and retirement benefits; royalties; rents; interest; trust income; annuities; capital gains; any moneys drawn by a self-employed individual for personal use; social security benefits, including social security benefits actually received by a parent as a result of the disability of that parent or as the result of the death of the minor child's stepparent, but not including social security benefits received by a minor child or on behalf of a minor child as a result of the death or disability of a stepparent of the child; workers' compensation benefits; unemployment insurance benefits; disability insurance benefits; funds held in or payable from any health, accident, disability, or casualty insurance to the extent that such insurance replaces wages or provides income in lieu of wages; monetary gifts; monetary prizes, excluding lottery winnings not required by the rules of the Colorado lottery commission to be paid only at the lottery office; taxable distributions from general partnerships, limited partnerships, closely held corporations, or limited liability companies; and alimony or maintenance received. "Gross income" includes overtime pay only if the employer, as a condition of employment, requires the overtime. "Gross income" does not include income from additional jobs that result in the employment of the obligor more than forty hours per week or more than what would otherwise be considered to be full-time employment. "Gross income" also does not include child support, benefits received from means tested public assistance programs, supplemental security income, food stamps, and general assistance.
Expense reimbursements or in-kind payments received by a parent in the course of employment, self-employment, or operation of a business are counted as income if they are significant and reduce personal living expenses. These include non-money items such as employment perquisites, including use of the company car, free housing, health club memberships, and other reimbursed expenses that reduce personal living expenses.
For income from self-employment, rent, royalties, proprietorship of a business, or joint ownership of a partnership or closely held corporation, "gross income" means gross receipts minus ordinary and necessary expenses required to produce such income. "Ordinary and necessary expenses" do not include amounts allowable by the Internal Revenue Service for the accelerated component of depreciation expenses or investment tax credits or any other business expenses determined by the court to be inappropriate for determining gross income for purposes of calculating child support.
III. Non-realized Income as "Income"
Because the child support guidelines seek to define "income" as expansively as possible, the question arises as to whether non-realized income, that is, income that exists only on paper but is not received, is "income" for child support purposes.
One example of this question is whether the interest that is earned on an Individual Retirement Account (IRA), but is not withdrawn and is merely reinvested back into the IRA, should be considered "income" for purposes of child support. Cases in Alaska, Colorado, Montana, Ohio, and New Mexico have held that the interest on an IRA is income for purposes of child support,4 while cases in Louisiana, Tennessee, and Virginia have held that interest on an IRA is not income for purposes of child support.5
Another example is the unrealized capital gain from unexercised stock options. In Ohio, the court held that the capital gain an employee could realize from exercising stock options, but that had not yet been exercised, was to be considered "income" for purposes of child support.6 A recent case from Florida applied the exact same principle to state that capital gains from unexercised stock options are income for purposes of alimony.
A third example of funds that are non-realized, but could be considered income for purposes of child support, is the retained earnings of a corporation, partnership, or sole proprietorship. The states are divided on this question, with some holding that the retained earnings of a business are income for purposes of child support, and others holding that whether retained earnings of a business are income depends on whether the parent paying support is a majority owner of the business and thus entitled to the retained earnings.7 A fourth example of non-realized income that may be considered income for purposes of child support is income from a trust. Sometimes, people will make estate planning decisions that result in fictional income, that is, income that is reported to the Internal Revenue Service as income, but is not received. For example, in a Louisiana case, the mothers parents created an estate planning agreement that resulted in taxable income to the mother.8 The court reasoned that while the money was income upon which she was taxed, it was not money to which she had access. Consequently, the court held that the money was not includable as gross income for purposes of child support. A fifth example of non-realized income is the capital gains people may make in stock transactions. In a New York case, the court held that capital gains that were a tax fiction, that is, gains that are reported to the Internal Revenue Service but not received, should not be considered income for purposes of child support.9 Finally, there is a definite trend to impute a higher rate of earnings to investments than the investments actually returned if the parent has placed the investments in no-yield or unusually low-yielding instruments. In New Jersey, the court held that it was permissible to impute income to an investor who maintains an extensive portfolio, has no income, and invests for capital gains rather than for stream of income.10 Similarly, in North Dakota, the court held that it was permissible to impute income to under-producing investments by applying passbook rates to those investments.
IV. Non-realized Income in Colorado
Colorado follows the national trend and construes liberally "gross income" for child support calculations. Specifically, actual "gross income" for inclusion in the computation does not have to be income that is actually received. For example, in Marriage of Tessmer, 903 P.2d 1194 (Colo. App. 1995), the Court of Appeals held that a father's actual "gross income" for child support computations included interest or dividends which had accrued to his individual retirement account, but which he had not withdrawn, regardless of whether interest and dividends were accessible to the father without payment of a penalty. Also, the Court of Appeals in Marriage of Armstrong, 831 P.2d 501 (Colo. App. 1992) held that the amount of income that the father's onetime, post-decree inheritance reasonably could be expected to generate was part of the father's "gross income" for child support calculations, even though the father was not actually receiving that rate of return on the inheritance.
Similarly, in Marriage of Bohn, 8 P.3d 539 (Colo. App. 2000), the Court of Appeals held that the entire amount of the father's lottery winnings, not just the after-tax, net amount the father actually received, were includable in computing his "gross income" for child support calculations. In other words, the taxes the father paid as a condition of receiving the lottery prize were included in calculating his gross income.
In Colorado, as in most states, a capital gain is treated as "gross income." In Marriage of Bregar, 967 P.2d 199 (Colo. App. 1997), the Court of Appeals held that the trial court should calculate the reasonably expected income from each year's sales proceeds from the time of the receipt of the proceeds until the time the capital gains taxes are paid, then calculate the reasonably expected income on remaining amounts after the date of the tax payment. In Marriage of Zisch, 967 P.2d 199 (Colo. App. 1998), the Court of Appeals held that a capital gain should be treated as income in the year received and income imputed on net capital gain after taxes in future years. In Marriage of Laughlin, 932 P.2d 858 (Colo. App. 1997), the Court of Appeals held there was no error in attributing income of $1,200 per month to the father based on a $200,000 capital gain which he used to pay down debt, thus saving himself $1,200 per month in debt service.
The various states' guidelines and case law have made it apparent that almost any source of income will be considered income for purposes of child support so long as the consideration of such income does not unduly burden the person paying support. Therefore, it is essential to consult an experienced family law attorney to determine how best to maximize or shield income, depending on your particular situation.
VII. Preeo Silverman Green & Egle, P.C. and Child Support Guidelines
Our firm has extensive experience in child support matters and typically represents clients in complex, high-income and large asset cases. In addition to skilled litigation services, our tax and estate planning attorneys can participate in artfully crafting tax-advantaged settlement agreements and estate planning tools designed to preserve assets for the future. Our firm is located at 6465 Greenwood Plaza Blvd. Suite 1025 Centennial, CO 80111, (303) 296-4440. The firms attorneys representing clients in these matters may be reached by e-mail as follows:
Eldon E. Silverman, Esq. (divorce) Email Me
Jersey M. Green, Esq. (divorce) Email Me
Martin J. Green, Esq. (taxation and estate planning) Email Me
Timothy K. Jordan, Esq. (taxation and estate planning) Email Me
Robert L. Preeo, Esq. (estate planning) Email Me
- 1 2 Marygold S. Melli & Ann M. Stanton, Alimony, Child Support & Counsel Fees-Award, Modification & Enforcement 14.04[a][I].
- 2 Diane Dodson, A Guide to the Guidelines, Fam.Advoc., Spring 1988, at 4, 5.
- 3 Marriage of Nimmo, 891 P.2d 1002 (Colo. 1995).
- 4 Dunn v. Dunn, 952 P.2d 268 (Alaska, 1998); Marriage of Tessmer, 903 Pl.2d 1194 (Colo. App. 1995); In re Pedersen, 862 P.2d 411 (Mont. 1993); Albertson v. Ryder, 621 N.E.2d 480 (Ohio App. 11 Dist., 1993); Quintana v. Eddins, 38 P.3d 203 (N.M. App. 1993)
- 5 Bullock v. Bullock, 719 So.2d 113 (La. App. 4 Cir. 1998); Narus v. Narus, 1998 WL 959839 (Tenn. App. 1998); Tucker v. Tucker, 1993 WL 271338 (Va. App. Jul 20, 1993).
- 6 Murray v. Murray, 716 N.E.2d 288 (Ohio App. 12 Dist. 1999).
- 7 Murray v. Murray, 716 N.E.2d 288 (Ohio App. 1999)(where obligor is a majority shareholder in corporation, the trial court may impute to the obligor the retained earnings of the corporation when determining child support); Weis v. Weis, 572 N.W.2d 123 (Wis. App.1997)(court can look to retained earnings of partnership when calculating gross income for purposes of determining child support obligation only if court determines that payor of child support has individual ability to exercise control over or access undistributed earnings of partnership, and that there is no valid business reason to retain earnings in partnership or retained earnings are pretext to manipulate income and avoid child support obligations); Mitts v. Mitts, 39 S.W.2d 142 (Tenn. Ct. App. 2000)(retained earnings of business in which husband was a minority stockholder would not be calculated as income where husband did not have ability to manipulate his reported income); Fennell v. Fennell, 753 A.2d 866 (Pa. Super. 2000)(fathers proportional share of retained earnings of subchapter S corporation were not income available for child support purposes where father was a minority shareholder who could not control whether net profits of business would be retained or distributed, retaining earnings was a long-standing practice of corporation, and decision to retain earnings was a business decision); Marriage of Brand, 44 P.3d 321 (Kan. 2002)(including earnings or distributions made to former husband by subchapter S corporations would have been inappropriate where there was no evidence husband manipulated corporate assets, decreased the amount of his salary to increase retained earnings, or acted in any way to shield income, and historical information regarding his interests supported conclusion that distributed amounts were for sole purpose of paying his share of corporations taxes and were not available for support); Kuhn v. Bovier, 701 N.Y.S.2d 748 (N.Y. App. Div. 2000)(imputation of income to former husband, beyond salary paid him by his wholly owned corporation, was warranted for purposes of calculating former husbands child support obligations, where corporation paid almost all of former husbands living expenses in addition to his salary, and corporation had retained earnings for which there was no business explanation).
- 8 Jones v. Jones, 628 So.2d 1304 (La. App. 1993).
- 9 Orofino v. Orofino, 627 N.Y.S.2d 460 (N.Y. App. Div. 1995).
- 10 Miller v. Miller, 734 A.2d 752 (N.J. 1999).