Gross Income for Purposes of Calculating Child Support in AZ
Child support in Arizona can be a complicated issue for both the parent paying child support, as well as the parent receiving child support. The problems sometimes associated with determining the correct amount of child support can be more complex when the parents disagree what sources of funds constitute gross income to be included in the child support calculation.
Income from employment is straightforward as constituting income to a parent. However, is income received from an inheritance, funds are withdrawn from a retirement account, or funds removed from an investment account income to be included in the gross income of one of the parents? Should the court only consider the investment return on those investments or can a court consider both investment return and principal withdrawals as income?
In the first case of its kind in Arizona, the Arizona Court of Appeals addressed these issues in the Milinovich vs. Womak case. Monica gave birth to Anthony’s child. She subsequently filed a court case to declare Anthony as the child’s father and to establish parenting time and child support orders.
At the time of the hearing, Anthony was nearing the end of his career as a professional athlete and had reached an agreement with his employer to defer a majority of his earnings to a deferred compensation arrangement consisting of approximately $3,300,000.00.
Anthony took those funds and created two separate investment accounts. One such investment account was funded with $800,000.00 and was designed for the sole purpose of paying Anthony $5,000.00 per month for expenses until it was exhausted at which time the second investment account was set up as an annuity to enable Anthony to begin then drawing money from that account when the first account was exhausted.
Anthony’s actual living expenses, however, turned out to be more around $40,000.00 per month. Anthony, therefore, withdrew the $5,000.00 interest earned on the principal, as well as an additional $35,000.00 from the principal investment in the account every month.
Anthony was making approximately $166,000.00 a year in gross income when child support was first calculated. Anthony filed a Petition to Modify Child Support on the basis that his annual income had dropped from $166,000.00 to $60,000.00, which was the $5,000.00 per month he earned on the interest in the first investment account.
The issue for both the trial court and the Arizona court of appeals was whether gross income in Arizona child support calculations should only be based upon, in this case, the investment return on Anthony’s asset (i.e., investment account). Or, whether Anthony’s withdrawal of principal from that account, which was Anthony’s sole and separate property, could also be included as “income” for the purpose of calculating child support.
The Arizona Court of Appeals began its’ analysis by pointing out the Arizona Child Support Guidelines were created to establish child support that meets the needs of children and is in an amount the parents can pay and ensure people in similar financial situations are treated similarly.
The Arizona Court of Appeals found that the withdrawal of principal from an investment account is not addressed in the guidelines and has not been previously ruled upon by the Arizona Court of Appeals. The Arizona Court of Appeals indicated the purpose of the Arizona Child Support Guidelines was also to determine how much money would be spent on a child if the parents were living together.
The appellate court referred to a prior Arizona Court of Appeals ruling in Cummings v. Cummings. The court in the Cummings case held the guidelines do not explicitly limit what the court may consider as income for the purpose of calculating child support and that income for child support purposes is not necessarily the same as income for income tax purposes.
Anthony argued his withdrawal of principal from his investment account does not constitute income for income tax purposes and should not be included as income for child support purposes. The court of appeals rejected Anthony’s argument; albeit very cautiously.
The appellate court reasoned that Anthony’s withdrawal of principal from his investment account was his planned retirement strategy and, further, that the child would have enjoyed the benefit of those withdrawals had the parents been living together.
The appellate court also reasoned that had Anthony’s employer paid him in equal monthly installments, instead of deferring the $3,300,000.00 into one lump sum payment, all of those monthly payments would constitute income to calculate child support.
The justices reasoned that the child should not be deprived of a higher child support amount just because Anthony structured his compensation in a way that led to a lump sum payment to be invested and then used by Anthony to support himself.
Anthony argued an Illinois Supreme Court decision case of In Re the Marriage of McGrath that held a withdrawal from a savings account should not be considered income to calculate child support. The Arizona Court of Appeals stated the ruling, in that case, was correct but distinguished it from the facts present in Anthony’s case by ruling a withdrawal from a savings account is significantly different than setting up an investment strategy that provides a continual source of money to support oneself.
The court of appeals held that the analysis as to whether the sale of an asset, withdrawals from investment accounts, or monies received by inheritance may be used to calculate child support needs to be decided on a case-by-case basis with the primary focus being upon whether the transactions are being relied upon to pay living expenses.
The justices cited the Jenkins v. Jenkins case and the Burnette v. Bender, both Arizona cases, as examples of when monies received from the sale of the property should not be included as income when calculating child support in Arizona. In those cases, assets were either sold and then used to purchase other assets or were reinvested. In other words, the owner of such property was not using the money to support themselves.
The takeaway from this case is that the trial court must look beyond what the Internal Revenue Service defines as income and look at any source of funds used to support a person as “gross income” when calculating child support in Arizona.
Contact our experienced Scottsdale and Phoenix divorce attorneys for a consolation at (480)305-8300.