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Part 2 of 2 

Conniff Law Offices

This is the second of two articles discussing the imputation of income.  In this article we will provide examples of when income may be imputed and explain the application of the discovery techniques outlined in the first article.

To reiterate: income may be imputed when there is doubt that the obligor’s reported income is accurate and there is evidence to suggest that the obligor is or can be earning more than he or she claims.  Every district in Illinois has upheld the Trial Court’s ability to impute income.  The Third District best summarized the three instances when income may be imputed: “It is well established in Illinois, ‘[i]n order to impute income, a Court must find that one of the following factors applies: (1) the payor is voluntarily unemployed * * *; (2) the payor is attempting to evade a support obligation * * *; or (3) the payor has unreasonably failed to take advantage of an employment opportunity.’”[i]  I will discuss each scenario in turn. 

Voluntary Underemployment

In the Fourth District case of In re Marriage of Deike, the appellant and child support-obligor lost his job at an automobile manufacturing plant and, after a failed job search, opened a bar and grill, which failed to turn a profit by the time of appeal.[ii]  The appellant filed his petition to modify support in September 2004 and “His net income from October 1, 2004, to June 1, 2006, when both daughters graduated from high school was $31,174. During the same period, he lost $45,600 related to opening the bar and grill.”[iii]

The appellant-obligor argued that a dramatic change in circumstances had occurred, whereby the appellee-obligee saw a salary increase from $30,000.00 per year to $57,000.00 per year, while the appellant lost his job and used up his severance and unemployment benefits before finding new employment.[iv]  While the appellant insisted that owning a bar and grill was a solid financial investment, he also took a job paying “only $27,000 per year” to help make ends meet while the bar was in its first few months.[v]

The Fourth District stated that “[C]ourts have the authority to compel parties to pay child support at a level commensurate with their earning potential” and that “A Court may impute additional income to a noncustodial parent who is voluntarily underemployed.”[vi] The Court rejected the appellant’s claim that the “bulk of the bar and grill patrons pay in cash he and [appellant’s wife] contend they receive no salary.”[vii]  Appellant’s appeal of the Trial Court’s denial of his petition to modify support was denied and the appellant continued to pay child support at a rate commensurate with his prior income.[viii]

In Deike, the Appellate Court’s ruling was supported by substantial information regarding the obligor’s prior earnings and failure to seek full employment.  The Trial Court could not determine whether the obligor was underemployed or hiding cash income, but since income may be imputed in either scenario, and since there was sufficient evidence to support either conclusion, the Appellate Court upheld the imputation of income.

Evading A Support Obligation 

In the Third District case of In re Marriage of Lichtenauer,[ix] the appellant, the child support obligor, formed a company, appointed his live-in girlfriend as president, and paid her an annual salary of $120,000.00 “in spite of having no previous corporate executive experience or qualifications for this position.”[x]  The live-in girlfriend was also the company’s majority shareholder and the shareholder’s agreement allowed her to transfer all of her shares to the appellant at any time, without the approval of the company’s other shareholders.[xi]  The appellant “claimed no financial interest in Correct Electric beyond the approximate $70,000 annual salary he received as an employee.”[xii]

On appeal, the appellant-obligor argued that the Trial Court awarded the appellee “an excessive amount of permanent maintenance after imputing the gross income” of the appellant’s live-in girlfriend to the appellant-obligee.[xiii]  The appellant further argued that the Trial Court erred in determining the appellee’s maintenance award “because the Court did not consider the unequal distribution of marital property” when balancing the appellee’s monthly needs and the appellant’s own monthly income and household expenses.[xiv]

In upholding the Trial Court’s maintenance award, the Appellate Court explained “It is well established in Illinois, ‘[i]n order to impute income, a Court must find that one of the following factors applies: (1) the payor is voluntarily unemployed * * *; (2) the payor is attempting to evade a support obligation * * *; or (3) the payor has unreasonably failed to take advantage of an employment opportunity.’”[xv]  The Court found that the appellant’s business structure, specifically naming his live-in girlfriend as the president of the company he founded, was a contrived attempt to evade a support obligation and, accordingly, the imputation of income was appropriate.[xvi]

Lichtenauer is a classic example of money laundering.  It was evident to the Trial Court and Appellate Court that a significant portion of the obligor’s salary was being funneled through his girlfriend.  This technique is more common amongst small business owners, of which the obligor was one.  The obligee conducted discovery on the live-in girlfriend to determine that she was unqualified for the job she held.  The conspiracy proved unbelievable and the Appellate Court upheld the Trial Court’s imputation of income.

In the First District case of In re Marriage of Samfratello,[xvii] the appellant child support obligor argued that the Trial Court erred when it ordered him to pay $3,446.00 in monthly child support, based on an imputed annual income of $130,000.00.[xviii]  The appellant worked at a family-owned pizza restaurant and testified that he “received a paycheck of $2,200 every two weeks for the past 20 years, an amount duly reflected in his income tax returns.”[xix] However, the appellant admitted at trial that he lied to the IRS about his income and a review of his bank statements showed substantial cash deposits, including $72,894 in cash deposits in 2002 alone.[xx]  The appellee testified that many family expenses were paid for entirely in cash.[xxi]  “In the absence of credible evidence” from the appellant regarding his net income, the Trial Court imputed an annual income of $130,000.00 onto the appellant.[xxii]  The Appellate Court upheld the Trial Court’s imputation.[xxiii]

In Samfratello the obligor was hiding cash from both the IRS and the obligee.  In this case, the obligor was not hiding cash by making cash purchases but instead he was depositing his earnings into his personal bank account.  A simple ‘Notice to Produce’ likely uncovered the inconsistency between the obligor’s reported income and his bank deposits.

Failure To Take Advantage Of An Employment Opportunity 

In the Fifth District case In re Marriage of Hubbs, the appellant child support obligor argued that the Trial Court erred when it imputed his income at $115,000.00 per year based on his prior earnings rather than his earnings at the time of trial, which were approximately $2,367.00 per month.[xxiv]  The Appellate Court explained that

“Where it is difficult to ascertain the net income of a noncustodial spouse, the circuit court may consider past earnings in determining the noncustodial spouse’s net income for purposes of making a child support award. [citation omitted] Using an average income for the previous three years of employment is a reasonable method for determining net income where income has fluctuated widely from year to year.”[xxv]

The Appellate Court went on to find that the appellant had testified that “he had recently rejected a job offer that would have paid him a salary of $120,000 a year,” and that “the circuit court acted properly in imputing [appellant’s] gross income at $115,000.”[xxvi] The Appellate Court explained that “This figure is slightly below his average income for the previous three years and slightly below a salary that he could have earned had he accepted another position. Although the circuit court could have required [appellant] to pay a percentage of his net income to [appellee], we believe that it acted properly in determining gross income to be $115,000.”[xxvii]

Hubbs is similar to Deike, except that, in Hubbs, there was a specific job the obligor turned down, while in Deike the obligor failed to look for a job that would provide him with a standard of living comparable to what he had enjoyed during the marriage.  The relevant information in Hubbs was likely obtained by subpoenaing the obligor’s place of employment and reviewing his prior years’ tax returns.  The obligor’s income disparity raised red flags for the Trial Court and the Appellate Court upheld the ruling.

Conclusion 

Imputing income is often a last resort, but it is not an impossible argument.  So long as there is sufficient evidence to support the inference that the obligor has misrepresented his or her income or earning potential, or is enjoying a standard of living beyond his earnings, a Court may impute income.

Please contact our office to schedule a consultation and discuss your maintenance or child support case.

The “War of the Roses” makes for great theater.  But in the real world, the Roses’ process of self- destruction is financially destructive, unnecessarily stressful, and immeasurably damaging to the children, the family, and society as a whole.

The introduction in the Illinois Senate of Senate Bill 31, the Uniform Collaborative Law Act (the “UCLA Act”), will hopefully create a critical mass for the Collaborative Law Process in the State of Illinois.  Two elements are presently interfering with the Collaborative Law Process becoming the preferred process for divorcing couples.  The first is lack of public awareness and understanding of the process.  The second is the divorce bar’s unwillingness to embrace a process that appears to undermine the litigation process as the preferred medium for family dispute resolution.

The Collaborative Law Process is a process whereby divorcing couples can resolve their issues amicably and respectfully without recourse to litigation or positional bargaining.  At the outset, the couple and their attorneys signs a Collaborative Participation Agreement in which they commit to resolve their differences outside the legal process, to participate in good faith in dealings with each other, to disclose all information necessary to finalize an agreement, and to focus on a solution which is in the best interests of their children.

Family Law, especially dissolution of marriage actions, is presently the most common practical application for the Collaborative Law Process.  However, inroads are being made to use the elements of the Collaborative Law Process in other areas of the law.  Professionals in other substantive law areas will be well served by studying the Collaborative Law Process and looking for applications to their own practice areas.

The Collaborative Law Process does not replace the litigation model.  It is an alternative, but, without a doubt, a desirable alternative for couples who want privacy and are interested in avoiding the expense, stress, and destructiveness of processing their divorce through the court system.  The cornerstone of the Collaborative Law Process is trust: the trust that the divorcing spouses will treat each other respectfully during the process and disclose ALL information necessary for a fair and reasonable outcome, and the trust among the professionals in the Collaborative Law Process to focus not on winning and losing for one’s client, but on resolving differences by exploring needs and interests of the parties and their children.

A couple’s interest in using the Collaborative Law Process is typically a good first step to determining whether the case is suitable for the process.  Even in cases where there are significant assets, complicated financial structures, financial distress, a pattern of emotional dysfunction in the family, or a relationship outside the marriage, the Collaborative Law Process can work very effectively.  However, in those cases where there is hiding of assets, ongoing physical abuse, child abuse, child abduction, child endangerment, or ongoing criminal activity, the Collaborative Law Process is not an option.  A well trained Collaborative Law attorney has the skills to determine the suitability of the case for the Collaborative Law Process.

 Starting the Collaborative Law Process

The first step in starting a collaborative case should be to contact an attorney with experience and training in the Collaborative Law Process to determine whether the case is suitable for the Collaborative Law Process.

Please contact our office to schedule a consultation with an experienced attorney who is extensively trained in the Collaborative Law Process, and who has over ten years’ experience of working in the Collaborative  Process.

Part 1 of 2

Conniff Law Offices

Maintenance and child support calculations do not have to produce conflict and tension in a case.  In many instances, the parties understand the need for maintenance or child support and work together to reach a fair and mutually-agreed upon result.  Unfortunately, there are times when one party attempts to evade his or her support obligation by hiding income or his or her earning potential.  When traditional discovery tools fail to prove that party’s true income, a party may argue for the imputation of income.

This is the first of two articles discussing the imputation of income.  In this article I will discuss the preliminary discovery steps that must be taken prior to imputing income, as well as the three scenarios whereby a Court will impute income on a child support or maintenance obligor.

To Impute, We Must Infer

It sounds easy enough: an imputation of income is based on an inference of earnings or would-be earnings.  A Court will not impute income if it does not believe a party is earning, or could be earning, more money than he or she claims.  However, producing evidence to support such an inference is the first, and perhaps most important, step in successfully arguing for an imputation of income.

There are a variety of ways in which a child support or maintenance obligor may seek to decrease his or her support obligation, but the two most common practices are: (1) hiding income and (2) failing to seek full employment.  Both scenarios are unique and require differing discovery methods.  I will discuss each one in turn.

Hiding Income

Income may be hidden in a number of ways, but the two most common forms are money laundering and the failure to report cash earnings.

Laundering is the transfer ( such as illegally obtained money or investments) through an outside party in order to conceal the true source.  In many cases, income may be laundered through friends and family.  An obligor may request that earnings from a business be directed through a third party, who in turn will either “loan” money to the obligor or pay for the obligor’s expenses as a “favor.”  In both instances, the obligor will be spending his or her own money under false pretenses.  Money laundering is most often accomplished when the obligor is a small business owner or works for a family member or friend.

Notices to produce and subpoenaed documents will fail to uncover the laundering.  The obligor’s bank records will show very little earned income and deposits of personal checks will be easily dismissed as a “loan” from a friend or relative.  However, an obligor’s laundering is only as effective as the coconspirators are dedicated.  The obligee’s attorney should pursue aggressive discovery on all parties who are supposedly lending the obligor money, as well as the obligor himself.  All involved parties should be deposed and, to the extent possible, their earnings from employment should be verified.  The money should be traced as far back as possible to determine its origins and all alibis should be thorough investigated.

The failure to report cash earnings is less dependent on the cooperation of coconspirators.  Many contractors and service employees receive substantial cash income, which they may fail to report.  In these instances, discovery should be focused on the bank records and paystubs of the obligor.  The obligor may deposit some of his or her cash earnings.  Further, the obligor’s employer may keep records of cash payments made to the obligor.  Even if the obligor’s bank records are consistent with his or her reported earnings, and his or her employer does not have any records of cash payments, the obligor still must demonstrate a standard of living consistent with his or her reported earnings.  Unlike the money launderer, the cash-hider does not have an alibi for large monthly expenses or lavish expenditures.  Proof of a lifestyle inconsistent with the obligor’s reported earnings will likely cast doubt on his or her reported income.

Failure To Seek Full Employment

Unemployment and underemployment are an unfortunate, and occasionally traumatic, part of life.  This has never been truer than during the Great Recession.  However, there are many instances in which a party may fail to take a higher paying job or seek employment in an attempt to avoid a support obligation.

Child support is based on the net income of the obligor and maintenance is based on a list of factors, including the present and future earnings of both parties.  An obligor may seek to reduce or avoid his or her support obligation by taking a lower paying job or failing to seek full time employment during the pendency of his or her case.  Unlike hiding income, this tactic is much easier to address.  The obligee should first request that the obligor maintain a job diary to document his or her job search.  Job diaries are typically accompanied by a requirement that the job seeker apply to a predetermined number of jobs each week and provide detailed information on each application. Where an obligor is underemployed, the obligee should request that the court take into consideration the obligor’s prior earnings in determining any support obligation.

When May Income Be Imputed?

Under Illinois law, income may be imputed when there is doubt that the obligor’s reported income is accurate and there is evidence to suggest that the obligor is or can be earning more than he or she claims.  Every court in Illinois has upheld a court’s power to impute income.  For example, in [citation}, the Appellate Court  summarized the three instances when income may be imputed:

“It is well established in Illinois, ‘[i]n order to impute income, a Court must find     that one of the following factors applies: (1) the payor is voluntarily unemployed * * *; (2) the payor is attempting to evade a support obligation * * *; or (3) the payor has unreasonably failed to take advantage of an employment opportunity.’”

In part two of this series, I will provide examples for each aforementioned scenario and explain how the discovery methods we discussed were important to successfully arguing for the imputation of income.

Maintenance

Section 504 is the maintenance statute of the Illinois Marriage and Dissolution of Marriage Act. Maintenance is a spouse’s right to support (periodic payments).

The current relevant factors in maintenance awards in Illinois are:

• The income and property of each party, including marital property apportioned and non-marital property assigned to the party seeking maintenance;

• The needs of each party;

• The present and future earning capacity of each party;

• Any impairment of the present and future earning capacity of the party seeking maintenance due to that party devoting time to domestic duties or having foregone or delayed education, training, employment, or career opportunities due to the marriage;

• The time necessary to enable the party seeking maintenance to acquire appropriate education, training, and employment, and whether that party is able to support himself or herself through appropriate employment or is the custodian of a child making it appropriate that the custodian not seek employment;

• The standard of living established during the marriage;

• The duration of the marriage;

• The age and the physical and emotional condition of both parties;

• The tax consequences of the property division upon the respective economic circumstances of the parties;

• Contributions and services by the party seeking maintenance to the education, training, career or career potential, or license of the other spouse;

• Any valid agreement of the parties; and

• Any other factor that the court expressly finds to be just and equitable.

• Tax Consequences of Maintenance

Maintenance is generally taxable to the recipient and the party who pays maintenance is able to deduct the maintenance payments that are made. There are circumstances where the parties may agree that the person who receives maintenance will not have to pay taxes on maintenance. However, this is not typical. Generally, the maintenance recipient will pay taxes on the maintenance award.

Modification of Maintenance

Furthermore, maintenance can be agreed upon as modifiable or non-modifiable (unlike unallocated support discussed below). If a spouse later seeks to modify the terms of the maintenance, he/she would need to show a substantial change in circumstances to warrant modifying the prior award of maintenance. If the order for maintenance states that it is reviewable upon a specific date, then the parties have an automatic right to review the terms of the prior maintenance award and no showing of a substantial change in circumstances is necessary.

However, where the parties agree that maintenance is non-modifiable, neither party can change the terms of the maintenance before the agreed upon end date for maintenance payments, even if there is a substantial change in circumstances.

Child Support

Child support is paid due to an obligation to support one’s children. Section 505 is the child support statute of the Illinois Marriage and Dissolution of Marriage Act. To establish a child support order in Illinois, the amount of child support considered for the order depends on the non-custodial parent’s net income and the number of children for which he or she is responsible. The chart below represents the minimum of what may be ordered according to the Illinois Statutory Guidelines:

The guidelines in the chart are applied to each case unless the court makes a finding that the amount determined in the guidelines would be inappropriate after considering the best interests of the child. Relevant factors for deviations may include but are not limited to:
• The financial resources and needs of the child(ren);
• The financial resources and needs of the custodial parent;

• Standard of living the child(ren) would have enjoyed had the marriage not been dissolved, the separation not occurred, or if the parties had married;

• The physical and emotional condition of the child(ren) and their educational needs; and

• The financial resources and needs of the non-custodial parent.

• Modification of Child Support

Child support is always modifiable if there is a substantial change in circumstances. Typical changes in circumstances are an increase or decrease in net income in excess of 20% of the non-custodial parent’s net income, or a change of residential custody where the child moves permanently to the other parent’s home.
Net income is the total of all income from all sources, minus the following deductions:
• Federal income tax;
• State income tax;
• Social Security (FICA);
• Mandatory retirement contributions;
• Union dues;
• Dependent and individual health/hospitalization insurance premiums;
• Prior obligations of support or maintenance actually paid pursuant to a court order or administrative order;
• Expenses to repay debts that represent reasonable and necessary expenses for the production of income;
• Medical expenses necessary to preserve life or health; and
• Reasonable expenses for the benefit of the child and the other parent, exclusive of gifts

If net income cannot be determined, the court has the authority to order support in an amount considered reasonable in the particular case.

Tax Consequences of Maintenance

For tax purposes, child support is non-taxable to the custodial parent (who receives the child support for the benefit of a child), and non-deductible by the payor/non-custodial parent.

Unallocated Support

In many cases, a party (more often the husband) is ordered to pay both child support and maintenance. If the husband is in a higher tax bracket as compared to the wife, there can a significant tax savings if the husband pays “unallocated support” to the wife instead of separate maintenance and child support payments. Unallocated support does not specifically allocate between child support and spousal maintenance.

For example, assume a case in which there are three children. According to the statutory child support guidelines, the husband would have to pay 32% of his net income for child support. Assume also that the parties have agreed that the husband will pay 10% of his net income for maintenance for four years. It is possible to structure a financial support settlement under which the husband would pay somewhat more than 42% of his net income for unallocated support. The reason for payment of somewhat more than the 42% figure is that the husband would be able to deduct from his taxable income the entire award, rather than just the 10% maintenance portion. In addition to increasing the husband’s tax deduction, and, therefore, his after-tax cash, the payment of unallocated support in the amount of 42%+ can, in certain circumstances, increase the available after-tax income for the support recipient. Therefore, unallocated support awards can often result in a “win-win” situation for the parties because of the resulting tax savings.

It should be noted, that currently in Illinois, because child support is a part (albeit non-divisible) of unallocated support, Courts have ordered that, just like its child support component, unallocated support amount is by its very nature cannot be made non-modifiable. This means that unallocated support is always modifiable.

Conclusion

In Illinois, conservative practitioners lean towards separate maintenance and child support awards over unallocated support for several reasons. Although unallocated support seems to have more generous tax benefits, there are also risks and drawbacks. Unallocated support can always be modified due to the fact that child support is included within. This is risky for a spouse who may have substantial income or a spouse whose earnings are likely to increase. Also, because Illinois courts have acknowledged that there is a child support component to unallocated support, there is a concern that the Internal Revenue Service may unilaterally determine a non-taxable child support component. Before entering into any support agreement, clients are always encouraged to check with their tax advisors to determine if there is such a risk in their special circumstances.

For individuals with substantial incomes, aside from the tax issues, there is much less risk involved in making separate maintenance and child support payments in that the maintenance payment portion can be made non-modifiable during its term. This is important for individuals who foresee increased earnings, or who do not want to leave themselves open to a review of maintenance during its term.

By

James T. Keleher & Lyn C. Conniff

“Setting the right tone” is a commonly overlooked element at the outset of a divorce.  Although it’s true that some divorces will ultimately become adversarial in nature because of the personalities involved or the issues, even the most amicable divorce can become contentious as a result of poor choices in the initial phases of the divorce process.

What do we mean by setting the “wrong” tone?   A classic example of setting the wrong tone is serving your spouse with papers before discussing your intent to file for divorce.  Other examples are (a) draining the joint savings or checking account, (b) running up the joint credit card, or, (c) in order to gain an edge in a custody battle, filing for an order of protection or alleging abuse.   These types of actions might not only be harmful to your case, but they are harmful to your family and any future working relationship with your spouse.  While it may seem strange to contemplate a future relationship with a soon-to-be ex-spouse, if you have children, you will have an ongoing relationship, whether you like it or not.

How can you set the “right” tone?  For starters, you must communicate with your spouse or his or her attorney in a respectful tone at all times both during and after the divorce.  Also, it’s essential to have a professional working with you who understands the importance of being respectful to opposing counsel.  Many divorces get “ugly” because of the personalities involved and also because of attorneys with strong personalities who can derail an otherwise amicable process.

It’s not only the parties who must set the right tone in a divorce, but also the attorneys.  Therefore, it is essential to select an attorney who recognizes the importance of “setting the tone.” An attorney can set the correct tone by (a) not agitating the dispute between the parties for personal gain,  (b)  communicating respectfully with opposing counsel despite divergent views on the issues, and (c), acknowledging the needs and interests of both parties in the process.  Additionally, it is vital for an attorney to keep a consistent tone and theme throughout the divorce.  If custody or spousal support is of vital importance to you, then don’t confuse that message or weaken the import of those matters with less important issues.

When one spouse sets the wrong tone, it is tempting for the other spouse to react inappropriately.  The importance of first impressions is well documented.  It is no different in divorce.  That’s why the best practice when starting a divorce is an appropriate, respectful and consistent tone for the duration of the process, through an attorney who understands the importance of these considerations.