The Arizona Court of Appeals has found that a like-kind exchange of property done under the Internal Revenue Code section 1031 does not change the nature of property to require the court to begin attributing income to the property for child support purposes. Jenkins v. Jenkins, 1-CA-CIV-06-0359, filed April 26, 2007. Download Jenkins.pdf
At the time the original child support order was entered, Father owned farm property worth approximately $7M which produced no direct income (but which Father apparently farmed for his personal income which was used to calculate child support). The original order noted that if Father ever sold that property and invested the funds, it might be proper for the court to impute income to Father based on those invested funds. Neither party appealed from the original Decree and child support order.
Post-decree, Father did sell the property but entered into a 1031 like-kind exchange which required him, under the Internal Revenue Code, to reinvest his proceeds from the sale into a new property within 180 days of the sale. By doing this, Father received no actual income and avoided paying taxes on the sale. Father’s actual proceeds (before the exchange) exceeded $7M and he completed the like-kind exchange for the new property, which he continued to farm.
After the sale/ exchange, Mother filed a petition to modify child support and asked the court to attribute a 5% return on the $7M of sale proceeds, and to increase the child support award based on Father’s increased (attributed) income. Mother argued that Father made the decision to use the like-kind exchange rather than receive the actual sales proceeds and therefore income on the property proceeds should be attributed to him.
Mother analogized this situation to one where an employee spouse decided not to exercise stock options which were vested and available to the employee. In re Marriage of Robinson, 201 Ariz. 328, 35 P.3d 89 (2001). The Robinson court held that vested stock options constitute income to the employee for child support purposes regardless of whether the employee actually exercised the options.
The Court of Appeals disagreed with the analogy. While unexercised but vested options are actual, available income to the employee, the Father in this case did not receive any actual income. The like-kind exchange transformed property from one form to another, but did not make the property income-producing. The Court of Appeals affirmed the trial court’s refusal to attribute income.