Part 2 of 2
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.
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.
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.
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[i] Id. at 1089.
[ii] In re Marriage of Deike, 381 Ill.App.3d 620, 624-625 (Ill.App. 4 Dist., 2008).
[iii] Id. at 630.
[vi] Id. (citing In re Marriage of Adams, 348 Ill.App.3d 340 (Ill.App. 3 Dist. 2004).
[viii] Id. at
[ix] In re Marriage of Lichtenauer, 408 Ill.App.3d 1075 (Ill.App. 3 Dist., 2011).
[xiii] Id. at 1086.
[xv] Id. at 1089 (citing In re Marriage of Gosney 394 Ill.App.3d 1073 (Ill.App. 3 Dist., 2009).
[xvi] Id. at 1089-1091.
[xvii] In re Marriage of Sanfratello, 393 Ill.App.3d 641 (Ill.App. 1 Dist., 2009).
[xviii] Id. at 646.
[xx] Id. at 647.
[xxiv] In re Marriage of Hubbs, 363 Ill.App.3d 696, 706 (Ill.App. 5 Dist., 2006).