Opinion ID: 901034
Heading Depth: 1
Heading Rank: 3

Heading: Use of Structured Settlement in Calculating Child Support

Text: [¶ 27.] In calculating child support, the circuit court included Travis's medical malpractice settlement funds, but deducted $16,000 for extraordinary expenses related to his disability. In reviewing a child support award, we look to see whether the trial court abused its discretion in setting the support. Peterson v. Peterson, 2000 SD 58, ¶ 13, 610 N.W.2d 69, 71 (quoting Grode v. Grode, 1996 SD 15, ¶ 7, 543 N.W.2d 795, 800 (citation omitted)). However, the question whether a source of funds constitutes income involves statutory interpretation, and that is a question of law reviewable de novo. Bozied v. City of Brookings, 2001 SD 150, ¶ 8, 638 N.W.2d 264, 268 (citation omitted). Travis argues that his settlement proceeds are not a source of income under SDCL 25-7-6.3. [3] The court concluded that these proceeds are periodic payments from an insurance contract under 25-7-6.3(3). [¶ 28.] Although the circuit court was clearly right in holding that Travis receives periodic payments from an insurance contract under SDCL 25-7-6.3(3), there is more to this question than meets the eye. These payments are from a tax-exempt personal injury structured settlement. [4] As the court in Western United Life Assurance Co. v. Hayden, 64 F.3d 833, 839 (3rdCir.1995), explained: Structured settlements are a type of settlement designed to provide certain tax advantages.... [I]n a structured settlement the claimant receives periodic payments rather than a lump sum, and all of these payments are considered damages received on account of personal injuries or sickness and are thus excludable from income. Accordingly, a structured settlement effectively shelters from taxation the returns from the investment of the lump-sum payment. See also IRC 104(a)(2); Pub. L. No. 97-473, Title K, § 101(b)(1), Jan. 12, 1983, 96 Stat. 2605 (1982) (codifying the tax-free status of such structured settlements provided by Revenue Rulings 77-230, 79-220 and 79-313). [¶ 29.] Our law partially defines gross income in terms of federal tax reporting. SDCL 25-7-6.6 provides: Gross income from a business, profession, farming, rentals, royalties, estates, trusts or other sources, are the net profits or gain, or net losses shown on any or all schedules filed as part of the parents' federal income tax returns or as part of any federal income tax returns for any business with which he is associated.... In Roberts v. Roberts, 2003 SD 75, ¶ 18, 666 N.W.2d 477, 482, a case handed down a few months ago, we held that SDCL 25-7-6.6 does not establish a separate category of parental income in addition to the general provisions of SDCL 25-7-6.3. In reading the two statutes together, we concluded that if money received by a parent meets the criteria set by SDCL 26-7-6.3 and is also from certain specific sources identified by SDCL 26-7-6.6, then SDCL 26-7-6.6 provides further rules as to how to calculate that income. Id. [¶ 30.] Travis's funds do indeed fall under one of the categories in SDCL 25-7-6.3, namely § 6.3(3), periodic payments. But these payments are neither profit nor gain as shown on any or all schedules filed as part of the parents' federal income tax returns.... SDCL 25-7-6.6. Nonetheless, our child support statutes do not provide exclusions for personal injury benefits, nor do they generally exclude nontaxable proceeds in figuring parental income for child support purposes. [¶ 31.] The Nebraska Court of Appeals discussed the problem of the nontaxable nature of certain personal injury awards in Mehne v. Hess, 4 Neb.App. 935, 553 N.W.2d 482 (1996). [W]e are not persuaded by Mehne's argument that personal injury settlements should be ignored as an income source in determining child support because they are not considered as gross income by Internal Revenue Service laws. The taxability of moneys received provides no logical basis to necessarily include or exclude them from the category of resources available to pay child support. Such a general proposition would exclude such settlements, when in fact many represent compensation for lost wages or diminished earning capacity, which are pivotal considerations in setting child support under Nebraska law. Id. at 487. [¶ 32.] In disregarding the nontaxable status of these types of structured settlements in child support cases, several authorities have held that, in the absence of any legislative intent to exclude nontaxable parental income, periodic payments from an annuity, regardless of the annuity's source, will be included. Sherburne County Social Serv. v. Riedle, 481 N.W.2d 111, 112 (Minn.App.1992). In Mower County Human Serv. v. Hueman, 543 N.W.2d 682 (Minn.App.1996), the court ruled that two annuity contract payments received by a father as part of his childhood personal injury settlement constituted income for the purpose of establishing child support. [¶ 33.] Likewise, in the case of In re Marriage of Fain, 794 P.2d 1086 (Colo. App.1990), the court ruled that payments received through a personal injury structured settlement constitute gross income for calculating child support. The court wrote: Section 14-10-115(7)(a)(I)(A), C.R.S. (1987 Repl. Vol. 6B) provides that gross income includes income from any source and includes, but is not limited to... the items specifically enumerated therein. Therefore, although social security benefits and disability benefits are expressly included as gross income, § 14-10-115(7)(a)(I), by its plain language, also includes all payments from a financial resource, whatever the source thereof.... While the General Assembly expressly excluded certain benefits from the definition of gross income, ... the statute does not provide an exclusion for personal injury benefits. Id. at 1087. Under Colorado's inclusive definition of gross income, a parent's structured settlement payments are included for child support purposes. Similarly, our Court held in Peterson that the use of the word include in SDCL 25-7-6.3 suggests a legislative intent to encompass other unlisted sources of income. [5] [¶ 34.] Even if the circuit court had not relied on SDCL 25-7-6.3, as an alternative, it could have fallen back on SDCL 25-7-6.5. That statute provides: If a child's needs are not being met through the income of the parents, assets shall be considered. If the parents have savings, life insurance or other assets in amounts unrelated to income, these holdings shall be considered. Without his structured settlement funds, Travis has no money to support his child. Thus, his income is insufficient to meet his child's needs. His structured settlement payments can therefore be used as an asset to be considered for child support purposes. SDCL 25-7-6.5. Several jurisdictions have held that these settlements constitute a financial resource or asset to be included in a child support calculation. See Genna Rosten, J.D., Annotation, Consideration of Obligor's Personal-Injury Recovery or Settlement in Fixing Alimony or Child-Support, 59 A.L.R.5th 489 § 3 (1998). See also Butler v. Butler, 339 Pa.Super. 312, 488 A.2d 1141, 1143 (1985) (it would be illogical to rule that the tort award is available to pay debts to the butcher, the baker, and the candlestick maker, but not debts for child support). [¶ 35.] Because Travis's structured settlement payments are either income or an asset available for purposes of calculating child support, the next question is how much of these amounts should be included in the child support calculation? As previously mentioned, the trial court excluded $16,000 of Travis's annual payments for extraordinary expenses. Some jurisdictions only include that portion of the personal injury settlement proceeds that represent lost income and income capacity. Villanueva v. O'Gara, 282 Ill.App.3d 147, 218 Ill.Dec. 105, 668 N.E.2d 589 (1996); In re Marriage of Durbin, 251 Mont. 51, 823 P.2d 243 (1991); In re Marriage of Gallegos, 174 Ariz. 18, 846 P.2d 831 (Ct.App. 1992); Mehne, supra; Whitaker v. Colbert, 18 Va.App. 202, 442 S.E.2d 429 (1994); Geyer v. Geyer, 1992 WL 352642 (Ohio Ct.App.1992). Personal injury settlements often compensate for more than lost earnings and earning capacity. These awards also compensate for such things as disability and disfigurement; past and future pain and suffering; past and future medical expenses; and caretaking expenses. See South Dakota Pattern Jury Instructions 30-01, et seq. Here, however, because Travis maintained that none of his proceeds should be considered, he offered no suggestion on what part of his settlement was intended to replace income. And the settlement agreement itself does not specify a lost income component. It is simply a structured settlement, providing for payments beginning in 1992 and ending either in 2012 or at the end of Travis's life, whichever period is longer. [¶ 36.] Counting all his funds as income for child support purposes may be unfair to Travis, though excluding all of it, as he requested, is clearly unfair to his child. If Grace lived with her father fulltime, she would enjoy his standard of living made possible by the use of these funds. With the limited information available to the trial court, it did its best to exclude those portions of the settlement necessary for Travis's basic care. Because Travis took the position that none of the settlement could be used for child support, he left the court with an all or nothing choice. On this record, we cannot say that the court abused its discretion in setting support using a portion of Travis's structured settlement proceeds. We affirm the child support award.