In Klein v. Klien, filed October 3, 2023, husband argued on appeal that the trial court erred in failing to include in the calculation of wife’s income for the purpose of setting child support amounts she received when she withdrew funds from a retirement account. Wife testified that she “cashed in an annuity in order to pay off some of [her] bills and credit card debt that [she] had as mostly legal fees and some other purchases.” She withdrew the funds in 2020. The child support hearing was held in June 2021.
Was the trial court required to include the money withdrawn by wife from the retirement account when determining her income? The court of appeals held that it was not.
Present Income
The Child Support Guidelines define income broadly to include “income from any source.” Guidelines 2023, p.3. (nonexclusive list of sources of income and listing payments that do not constitute income). See also Moore v. Onafowora, 208 N.C. App. 674 (2010) (a court may consider all available sources of income); Kabasan v. Kabasan, 257 N.C. App. 436 (2018)(trial court has discretion to consider for purposes of child support all sources of a parent’s income, which in this case included income earned on investment accounts, the receipt of which father had deferred).
A child support obligation is determined based on the present income of the parties, with present meaning at the time of the entry of the child support order. Harnett Cty. ex rel. De la Rosa v. De la Rosa, 240 N.C. App. 15 (2015) (quoting Respess v. Respess, 232 N.C. App. 611, 630 (2014) (generally, child support is determined by a party’s actual income at the time the award is made); McKyer v. McKyer, 179 N.C. App. 132, 146 (2006) (“[g]enerally, a party’s ability to pay child support is determined by that party’s actual income at the time the award is made”).
One-time, lump sum payments
When income is received on an irregular, nonrecurring, or one-time basis, the court may average or prorate the income over a specified period of time or require the parent to pay as child support the same percentage of the parent’s nonrecurring income as that paid with respect to the parent’s recurring income. Guidelines 2023, p. 3.; Hinshaw v. Kuntz, 234 N.C. App. 502 (2014); Simms v. Bolger, 264 N.C. App. 442 (2019)(the settlement of an obligor’s workers’ compensation disability claim and a claim against a third party, resulting in two large monetary distributions to the obligor, was properly classified as nonrecurring income to the obligor).
But the lump sum must be both income and present income.
When is a one-time, lump sum payment income?
The mere fact that a nonrecurring payment has occurred, in the absence of evidence that the payment was “income,” is not sufficient by itself to be considered as nonrecurring income for calculation of child support. McKyer v. McKyer, 179 N.C. App. 132 (2006) (payment mother received from sale of house was not income).
In Klein, the court of appeals cited the decision in McKyer and stated that a “trial court is not required to treat the conversion of an asset into cash as income for the purposes of a child support calculation.” Noting that a trial court has the discretion to treat a non-recurring withdrawal from a retirement account as income under appropriate circumstances, the appellate court held that the husband in Klein failed to show that the trial court abused its discretion when it decided not to include the payments because he failed to show why the receipt of the payment constituted income of the wife.
The court of appeals did not offer any guidance on how to determine when a one-time payment is income rather than a “conversion of an asset.” In McKyer, the court of appeals held that the lump sum wife received when she sold the house she had been awarded in equitable distribution was not income, explaining:
“Although our courts have never addressed whether, in the child support context, the conversion of an asset to cash renders the cash income, courts in other jurisdictions have routinely held that it does not. See, e.g., Rimpf v. Campbell, 853 So.2d 957, 961 (Ala.Civ.App.2002) (noting that “the change in the character of an asset … awarded in a divorce judgment does not transform the asset into income”); Denley v. Denley, 38 Conn.App. 349, 353, 661 A.2d 628, 631 (1995) (“The mere exchange of an asset awarded as property in a dissolution decree, for cash, the liquid form of the asset, does not transform the property into income.”); Geiger v. Geiger, 96 Ohio App.3d 630, 635, 645 N.E.2d 818, 822 (1994) (“Converting a tangible or intangible asset into cash is not income except to the extent, if any, that there is a profit or gain.”). Likewise, proceeds from the sale of an asset under both Federal and State income tax laws are not considered taxable income except to the extent the seller profits from the sale. See Commissioner v. Wilcox, 327 U.S. 404, 407, 66 S.Ct. 546, 548, 90 L.Ed. 752, 755 (1946) (“The very essence of taxable income … is the accrual of some gain, profit or benefit to the taxpayer.”), overruled on other grounds by James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961).”
As husband offered no other evidence than wife received the funds, the court in Klein affirmed the trial court’s determination that the distribution of a portion of wife’s retirement account was the exchange of an asset (wife’s retirement account) for cash. Compare that to amounts received by the parent in Spicer v. Spicer, 168 NC App 283 (2005), as settlement for a personal injury lawsuit. The court in Spicer held that the settlement proceeds were nonrecurring income to be included in the calculation of the parent’s gross income.
When is a one-time, lump sum payment present income?
The court in Klein also held that the trial court did not err by not “accounting for wife’s retirement withdrawal when the trial court applied the Guidelines, using wife’s current income, because … child support calculations are based on the parents’ current incomes at the time the order is entered.” (citing Midgett v. Midgett, 199 NC App 202 (2009).
Wife’s income tax returns showed that the distribution was taken by wife in 2020 while the hearing to establish child support was held in 2021. The court of appeals stated that the “trial court had competent evidence of wife’s income in 2021 available, and the trial court did not err by utilizing the most recent figures from the current year to calculate wife’s income.”
Cf. Hinshaw v. Kuntz, 234 N.C. App. 502 (2014)(bonus received every year was present income). But see Simms v. Bolger, 264 N.C. App. 442 (2019)(settlement proceeds from a workers’ compensation claim received in 2011 was “current income” for parent at the time of the child support hearing held in 2016).