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Are Your Colorado Taxable Distributions Considered Income?

Issue: Are taxable distributions for a closely-held​ company included in gross income for purposes of child support?

Answer: Only those distributions actually distributed are included in gross income.

Discussion:

The child support statute is §14-10-115, C.R.S. Section (5)(A)(1)(W) of the statute provides that gross income for purposes of child support calculation includes “taxable distributions from general partnerships, limited partnerships, closely-held corporations, or limited liability companies.”

Only two published cases address the issue at all that I am aware of. In In re Marriage of Upson, 991 P.2d 341 (Colo. App. 1999), the Colorado Court of Appeals held that the former husband’s taxable distributions from a subchapter S corporation that was owned wholly by him and two partners should have been included in taxable income. Id. at 343. This was essentially only a restatement of the plain meaning of the statute. (However, the court pointed out that the corporation’s gross income was calculated only after deducting all ordinary and necessary expenses required to produce such income).

In a subsequent decision, In re Marriage of Mugge,, 66 P. 3d 207 (Colo. App. 2003), a different division of the Colorado Court of Appeals rejected the ex-wife’s argument that the husband’s unrealized retirement benefits should be included in his gross income for purposes of calculating child support. Id. at 211. The court went on to emphasize several other circumstances, including taxable distributions, in which unrealized income could not be included in gross income:

Several other statutory income categories expressly require payment or receipt: “payments received as an independent contractor”; “moneys drawn by a self-employed individual”; “social security benefits actually received “; “taxable distributions from general partnerships”; and “alimony or maintenance received. ” Section 14-10-115(7)(a)(I)(A) (emphasis supplied). Hence, we adhere to our conclusion that the definition of “pensions” similarly requires actual payment to the recipient, notwithstanding an unexercised option to elect payment.

Id. at 213 (italic emphasis in original).

It’s important to note that the Mugge decision concerned retirement income, not taxable distributions. Nevertheless, the dicta, cited above is highly persuasive on policy grounds. In other words, it is not equitable to include unrealized income of any sort when calculating “gross income” under the child support statute. Mugge was later cited for the proposition that the determination of a parent’s gross income for child support purposes is not controlled by definitions of gross income used for federal or state income tax purposes. In re Marriage of Cardona, 09CA1996 (Colo. App. 2010). In other words, phantom income from “taxable distributions” under tax laws and regulations, isn’t included in“gross income” under Colorado’s child support statute.