A frequent issue for family law practitioners is what is "net income" for child support purposes. The law on this issue has been evolving over the decades since the enactment of the child support statute (750 ILCS 5/505). In order to understand and appreciate this issue, the family law practitioner needs to understand the statute itself and how it is to be implemented.

Statute

750 ILCS 5/505 provides the following statutory definition of "net income":

"Sec. 505. Child support; contempt; penalties.

(a) In a proceeding for dissolution of marriage... the court may order either or both parents owing a duty of support to a child of the marriage to pay an amount reasonable and necessary for his support...

(1) The Court shall determine the minimum amount of support by using the following guidelines:

Number of Children

Percent of Supporting Party's
Net Income

1

20%

2

28%

3

32%

4

40%

5

45%

6 or more

50%

(2) The above guidelines shall be applied in each case unless the court makes a finding that application of the guidelines would be inappropriate, after considering the best interests of the child in light of evidence including but not limited to one or more of the following relevant factors:

(a) The financial resources and needs of the child;

(b) The financial resources and needs of the custodial parent;

(c) The standard of living the child would have

(d) The physical and emotional condition of the child, and his
educational needs; and,

(e) The financial resources and needs of the non-custodial parent.

If the court deviates from the guidelines, the court's finding shall state the amount of support that would have been required under the guidelines, if determinable. The court shall include the reason or reasons for the variance from the guidelines

(3) "Net income" is defined as the total of all income from all sources, minus the following deductions:

(a) Federal income tax (properly calculated withholding or estimated payments);

(b) State income tax (properly calculated withholding or estimated payments);

(c) Social Security (FICA payments);

(d) Mandatory retirement contributions required by law or as a condition of employment;

(e) Union dues;

(f) Dependent and individual health/hospitalization insurance premiums;

(g) Prior obligations of support or maintenance actually paid pursuant to a court order;

(h) Expenditures for repayment of debts that represent reasonable and necessary expenses for the production of income, medical expenditures necessary to preserve life or health, reasonable expenditures for the benefit of the child and the other parent, exclusive of gifts. The court shall reduce net income in determining the minimum amount of support to be ordered only for the period that such payments are due and shall enter an order containing provisions for its self-executing modification upon termination of such payment period.

(4) If the net income cannot be determined because of default or any other reason, the court shall order support in an amount considered reasonable in the particular case... (Emphasis added)

How the Statute Is Intended to be Implemented

The design of the statute is rather simple essentially having three (3) essential components. Before getting to the steps the preamble for the process as set forth in section (a) must be recognized. The amount of support by statute is "an amount reasonable and necessary for (a child's) support". The statute then provides for the following procedure:

1) Section (a)(1) the Court must determine hat guideline support would be based on the percentages of net income. Ultimately the Court may set a child support amount that deviates from he guidelines; however, from the onset the Court must determine the guideline amount and make findings to this effect. Having made the determination of guideline support, if a party contests that the amount is unreasonable or unnecessary, the Court then addresses the second component.

2) Assuming net income can be determined and therefore the mathematical calculation can be made, pursuant to section (a)(2) either party may apply for a deviation from the guideline calculation. Again the focus is reasonable and necessary.

3) Section (a)(4) provides the only exception to the determination of guideline child support where net income cannot be determined. Following the dictates of the preamble, any such support in this circumstance shall be "in an amount considered reasonable in the particular case"

Deviation from Guidelines if Net Income is Determined

In determining child support, the "...utility of the statutory guidelines decreases as incomes of the parties increase." Department of Public Air Ex. Rel. Nale v. Nale, 294 Ill.App.3d 747, 754. 229 Ill.Dec. 5, 10, 690 N.E.2d 1052, 1057 (4th Dist. 1998). Indeed, in the seminal case of In Re The Marriage of Scafuri, 203 1l1.App.3d 385, 149 1ll.Dec 124, 561 N.E.2d 402 (2nd Dist. 1990), the Appellate Court in the Second District specifically addressed this issue:

"One commentator has expressed the view that the support schedules contained in the statute have less utility as the net income of the parties increases because the schedules are premised upon percentages related to average child-rearing expenses. (See K. Levin, The Use (and Abuse) of Child Support Schedules in Illinois, 71 Ill.B.J. 314 (1983).) We agree with this assessment. When dealing with above average incomes, the specific facts of the case become more critical in determining whether the guidelines should be adhered to.

...While we cannot be certain from this passage that the court intended a portion of the child support to be ersatz maintenance for Pamela, we note that any such practice would be improper Child Support is for the support of the children, and maintenance is for the support of the spouse." Id. at 392-93, 149 Ill.Dec. at 128-29,561 N.E.2d at 406-07.

Child support is not intended to provide the child with an extravagant lifestyle (In Re The Marriage of Harmon, 210 Ill.App.3d 92, 97, 154 Ill.Dec. 727, 730, 568 N.E.2d 948, 951 (2nd Dist. 1991)) or a "windfall" to the recipient parent. Department of Public Air Ex. Rel. Nale v. Nale, 294 Ill.App.3d 747, 754, 229 Ill.Dec. 5, 10, 690 N.E.2d 1052, 1057 (4th Dist. 1998); In Re The Marriage of Singleteary, 293 Ill.App.3d 25, 38, 227 Ill.Dec. 598, 607, 687 N.E.2d 1080, 1089 (1st Dist. 1997); In Re the Marriage of Charles, 284 1l1.App.3d 339, 347, 219 Ill.Dec. 742, 748, 672 N.E.2d 57, 63 (4th Dist. 1996); and In Re the Marriage of Lee, 246 Ill.App.3d 628, 644, 186 Ill.Dec. 257, 269, 615 N.E.2d 1314, 1326 (4th Dist. 1993).

Cash Flow verses Declared Net Income

The starting phase to a possible deviation is what is net income. Frequently practitioners focus of reported income for federal and state tax purposes. This is misguided. One of the first important decisions in the development of existing law was Bush v. Turner, 191 Ill.App.3d 249, 138 Ill.Dec. 423, 547 N.E. 2d 590 (4th Dist. 1989). In the case, the parents were both physicians with one (1) four (4) year old child. While the guidelines were used, the Appellate Court in reversing the trial court the Appellate Court noted as follows:

"However, a reasonable basis exists where both parties have more than enough income to provide for a child, and an award of 20% of the non-custodial parent's income exceeds the bounds of anything the child can reasonably need or desire. Certainly, there will be instances where high child support figures will be warranted...The Act was not intended to create windfalls but, rather, adequate support payments for the upbringing of the children..."

Id. at 260-61, 138 Ill.Dec. at 429-30, 547 N.E. 2d at 596-97. The "need or desire" reflects what the lifestyle was or would be for that child had the marriage not been dissolved. The emphasis is what would have been used for economic consumption for the child.

"Income" for purposes of child support determination (750 ILCS 5/505) is not synonymous with income for Internal Revenue Service purposes. In Re The Marriage of Rogers, 213 Ill.2d 129, 137, 289 Ill.Dec. 610, 614, 820 N.E.2d 386, 390 (2004) (loans from parents which are not repaid but are used to pay expenses qualified as "income" for inclusion in child support). At the same time funds required to be declared which are not actually received or used can be excluded from "income" for child support purposes. In Re The Marriage of Freesen, 275 Ill.App.3d 97, 104, 211 Ill.Dec. 761, 766, 655 See Also: N.E.2d 1144, 1149 (passive income is not to be included in child support calculation); In Re The Marriage of Harmon, 210 Ill.App.3d 92, 96, 154 Ill.Dec. 727, 729-30, 568 N.E.2d 948, 950-51 (2nd Dist. 1991); Ivanyi v. Granoff, 171 Ill.App.3d 411, 421-22, 122 Ill.Dec 49-57 526 N.E.2d 189, 197 (2nd Dist. 1988). The Court's are increasing looking at cash from (what someone uses to pay their expenses) as opposed to what is properly declared as "income" for IRS purposes.

The emerging focus on "cash flow" is not unique to divorce. The focus on "cash flow" and "lifestyle" are common inquires for the IRS in cases being reviewed for possible under-declared or improperly declared income. The questions become two fold: (1) how much cash flow is being expended verses what is being declared; and/or (2) how are the parties living verses what are they declaring income. If there are any significant discrepancies which result as it relates to either inquiry, red flags result that there may be undisclosed or under-reported income. If parties have one (1) or two (2) primary accounts out of which they pay expenses, how much are they spending as opposed to what they are declaring is a preliminary inquiry which has great value. There would be legitimate reasons for the discrepancies: people living beyond their means using increasing debt to fund a lifestyle; people cannibalizing assets to fund such discrepancies; legitimate business expenses; etc.

Three relatively recent cases highlight the trend in the law towards focusing in "cash flow." In the case of In Re The Marriage of Baumgartner, 384 Ill.App.3d 39, 322 Ill.Dec. 337, 890 N.E.2d 256 (1st Dist 2008) a good analysis exists addressing this issue. In Baumgartner, proceeds from the sale of a residence are reinvested in a second residence. The Appellate Court determined such "income' was not deemed to be "net income" for purposes of child support. The funds were not utilized for lifestyle purposes.

In the case of In Re The Marriage of Lindman 356 Ill.App.3d 462, 291 Ill.Dec. 969, 824 N.E 2d 1219 (2nd Dist. 2005) retirement account distributions which were used to pay expenses were viewed as "net income" for child support purposes. Id at 291 Ill.Dec at 973, 824 N.E.2d at 1223. In the case of In Re The Marriage of Rogers, 213 Ill. 2d at 129, 289 Ill.Dec. 610, 820 N.E. 2d 386 (2004), loans from parents which were forgiven and not subject to taxation that where utilized for living expenses were deemed to be "net income" for child support purposes. Id. at 1237-40, 289 Ill.Dec at 614-15, 824 N.E. 2d 390-91. The trend in the law is instructive to practitioners. The focus needs to be on what people are spending, what the child or children would have enjoyed had the marriage not been dissolved, not what they declare as income.

Conclusion

When there is a question as to what is "net income" for child support purposes, obviously a starting place is tax returns. The inquiry should not end here. In cases where funds are received and used for consumption of income is declared but not received or used (i.e. subchapter "s" income, capital gains reinvested, etc.), the inclusion or exclusion of these amounts may not be appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.