June 8, 2023

Past-Due Child Support Interest: Taxable Income, Says Tax Court (May 2023)

A landmark decision by the Tax Court now characterizes interest received on overdue child support as taxable income, which is no longer excludable under Code Sec. 71(c). This ruling has been reached on the basis of Code Sec. 61(a)(4) which mandates that such income should be incorporated in the taxpayer’s gross income. The court’s conclusion was drawn from several pieces of evidence, including a Form 1099-INT (Interest Income) and a state court order insisting on the payment of child support and interest. (Rodgers v. Comm’r, T.C. Memo. 2023-56)

To give context, taxpayer Susan Rodgers was issued a notice of deficiency by the IRS in 2015, where a deficit of $3,473 was identified for the 2015 tax year. This was attributed to Rodgers’ omission of reporting the receipt of $7,824 interest income from the State of Alabama on her 2015 federal income tax return. Rodgers acknowledged this amount but maintained that these funds were perceived as child support, not taxable income.

The litigation history between Rodgers and her ex-spouse in an Alabama court highlighted the ex-spouse’s arrears in child support, totaling $18,000 initially and later revised to $5,361.89 excluding interest. The court then issued a judgement against the ex-spouse for $16,044.37, which constituted the principal and an additional $10,682.48 as interest.

Alabama’s Child Support Enforcement Division Court Order Payment Summary mirrored these figures, reflecting the amounts owed as principal and interest. By 2015, Rodgers had received $7,859.27, which fell slightly above the unreported interest identified by the IRS, and slightly below the total amount of interest awarded by the state court.

The Tax Court’s analysis relied heavily on previous cases and the presentation of concrete evidence. Code Sec. 61(a)(4) dictates that a taxpayer’s gross income includes all income, which prominently includes interest. Although child support payments are generally exempted from the recipient’s gross income under Code Sec. 71(c), the court cited a previous case (Fankhanel v. Comm’r, T.C. Memo. 1998-403) which held that interest paid on overdue child support should be included in the recipient’s gross income.

The court deemed that Rodgers had indeed received interest on past due child support during 2015. The ruling was driven by the fact that Rodgers didn’t dispute receiving the reported amount on Form 1099-INT in connection to a child support arrearage. Furthermore, the amount and nature of payment stipulated in the state court’s order were in line with Alabama law, and the Payment Summary reflected these figures.

Despite Rodgers’ references to county child support payment records, the court deemed them insufficient to disprove her receipt of interest income. In conclusion, the court affirmed that the amount reported on Form 1099-INT should be treated as interest, thereby taxable income.

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