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Interest Received on Past-Due Child Support Was Taxable Income

(Parker Tax Publishing May 2023)

The Tax Court held that a taxpayer could not exclude income she received as child support under Code Sec. 71(c) because the income was properly characterized as interest on past-due child support that was includible in her gross income under Code Sec. 61(a)(4). The court found that the evidence, including a Form 1099-INT, Interest Income, and a state court's order specifically directing the payment of child support and interest, strongly supported the conclusion that the taxpayer received taxable interest income. Rodgers v. Comm'r, T.C. Memo. 2023-56.


In 2015, the IRS issued to Susan Rodgers a notice of deficiency in which it determined a deficiency of $3,473 for the 2015 tax year. The deficiency resulted from IRS's determination that Rodgers had failed to report on her 2015 federal income tax return her receipt of $7,824 of interest income from the State of Alabama, which had reported the payment of that amount to the IRS on a Form 1099 - INT, Interest Income. Rodgers conceded at trial that she received the amount shown on the Form 1099-INT. She explained that, with respect to other tax years, she had received child support payments through the State of Alabama from funds collected from her former spouse, but she had not previously received a Form 1099 indicating that any portion of those funds represented taxable income.

During 2011 and 2012, Rodgers and her former spouse were engaged in litigation in an Alabama court (state court) concerning the termination of her former spouse's child support obligation. In the course of that litigation, the state court entered an order in September 2011 stating that the former spouse's child support obligation was in arrears in the sum of $18,000 and entering judgment against him in that amount. In April 2012, the state court amended its order to provide that the former spouse was in arrears in the amount of $5,361.89 excluding interest, and the court entered a judgment against the former spouse of $16,044.37, comprised of $5,361.89 principal and $10,682.48 in interest.

A copy of the State of Alabama Child Support Enforcement Division Court Order Payment Summary (Payment Summary) for Rodgers's account reflected a series of payments commencing in April 2012 (i.e., shortly after the state court amended its order), and ending in May 2014, that are identified with the code "CS NA AR." Those payments total $5,361.89, matching the amount of the arrearage principal determined in the state court's order, as amended. All other payments posted on and after May 14, 2014, are identified with the code "CP INT," with "INT" presumably meaning "interest." The payments marked "CP INT" and posted during 2015 total $7,859.27 - slightly more than the amount of unreported interest that the IRS determined in the notice of deficiency, and less than the total amount of interest included in the judgment that the state court awarded to Rodgers.

Under Code Sec. 61(a)(4), a taxpayer's gross income generally encompasses all income from whatever source derived, specifically including interest. Before 2019, alimony or separate maintenance payments were generally also includible in the recipient's gross income during the year at issue under Code Sec. 71(a) (and were deductible from the payer's gross income under Code Sec. 215(a)). Code Sec. 71(c) provided that this general rule was inapplicable, however, for payments in an amount fixed by the terms of a divorce or separation instrument that were made or treated as made to support the payer's children. Consequently, as provided in Reg. Sec. 1.71-1T(c), Q&A-15, such child support payments were not includible in the gross income of the recipient (and were not deductible by the payer). However, as the Tax Court held in Fankhanel v. Comm'r, T.C. Memo. 1998-403, aff'd per curiam without published opinion, 205 F.3d 1333 (4th Cir. 2000), interest paid on a child support arrearage is includible in the recipient's gross income under Code Sec. 61(a)(4).

The proper characterization of a payment as alimony, child support, or interest for federal tax purposes is governed by federal law. To determine whether a taxpayer has received interest payments with respect to child support arrearages, the Tax Court has previously considered the following types of evidence: (1) a taxpayer's admission that she received payments in connection with child support arrearages; (2) state court child support payment records; and (3) the existence of a state court order directing the payment of interest on arrearages.


The Tax Court held that Rodgers received interest on past due child support during 2015, as determined in the notice of deficiency, and that such interest had to be include in her gross income for 2015 under Code Sec. 61(a)(4).

In the court's view the evidence strongly supported the conclusion that Rodgers received interest as reported to the IRS by the State of Alabama. First, Rodgers did not dispute that she received the amount reported on Form 1099-INT in connection with a child support arrearage. Nor did she dispute, the court observed, that her former spouse failed to timely make child support payments that he was obligated to make, thus depriving her of the use of the money owed. Second, the court found that the state court's order, as amended, specifically directed the payment of child support and interest in particular amounts. The court found that determination to be consistent with Alabama law, under which interest on a past due child support obligation accrues by statute and must be included in any judgment fixing the amount of child support arrearages, even if the party seeking payment has not requested an interest award. Finally, the court found that the amounts set forth in the Payment Summary were consistent with the amounts of principal and interest determined in the state court's order, as amended, and with the amount of interest reported to the IRS on Form 1099-INT.

The court found that Rodgers did not provide sufficient evidence to establish that she did not receive interest income in connection with the child support arrearage. The court noted that at trial, Rodgers referred to certain county child support payment records indicating that, at some point before the issuance of the state court's order, as amended, the amount of the arrearage principal may have been larger than the amount that the state court ultimately determined. Although Rodgers testified that she raised this issue with the state court by letter, she admitted that the state court had not taken any action based on her letter, that she did not appeal the state court's judgment, and that she was not aware of any other order of the state court or any state appellate court modifying the judgment. The court said that moreover, even if it assumed Rodgers was correct that the state court understated the amount of the arrearage principal, any increase in the principal would have served only to increase the amount of interest due to Rodgers. The court concluded that the county payment records on which Rodgers relied thus gave no indication that any portion of the amount reported on Form 1099-INT should be treated as child support principal rather than as interest.

For a discussion of the taxation of alimony and separate maintenance payments, see Parker Tax ¶14.220.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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