Interest payments a taxpayer received on past-due child support were includible in her income and not excludable as child support payments, the Tax Court held.

Facts: During 2011 and 2012, Susan Rodgers, an Alabama resident, engaged in litigation with her former spouse concerning the termination of her former spouse’s child support obligation. In 2011, the Circuit Court of Mobile County, Ala., issued a judgment for Rodgers for $18,000, representing child support arrearages. This was amended a month later to $16,044, consisting of $5,362 in principal and $10,682 in interest. A copy of the state’s payment summary reflected a series of payments from April 23, 2012, until May 14, 2014, totaling $5,362 of principal and $7,859 of interest.

The IRS issued Rodgers a notice of deficiency of $3,473 for past-due taxes on her 2015 Form 1040, U.S. Individual Income Tax Return. The deficiency resulted from her failure to report $7,824 of income on interest payments she received from her former spouse for the past-due child support payments, the amount reported by the state of Alabama on Form 1099-INT, Interest Income. Rodgers petitioned the Tax Court for a redetermination.

Issues: Rodgers conceded at trial that she received the amount reported on Form 1099-INT. She explained, though, that she had received child support payments from her former spouse in the past but never received a Form 1099-INT from the state “indicating that any portion of those funds represented taxable income.” The only question the court needed to determine was whether the interest income reported by Alabama to Rodgers on Form 1099-INT, was taxable as interest income or nontaxable child support.

Gross income includes all income from whatever source derived, including interest (Sec. 61(a)(4)). Federal law governs the proper characterization of alimony, child support, or interest for federal tax purposes (see Henry, 76 T.C. 455 (1981)).

Since the alleged deficiency occurred before the law known as the Tax Cuts and Jobs Act, P.L. 115-97, repealed Secs. 71 and 215, those sections potentially applied. With respect to divorce or separation instruments executed or modified before Jan. 1, 2019, former Sec. 71 generally included alimony and separate maintenance payments in the income of the recipient spouse and allowed their deduction by the payer spouse. However, this rule did not apply to child support payments, which were (and, generally, remain) excluded from the recipient spouse’s gross income and nondeductible by the payer spouse.

Interest payments the taxpayer receives on child support arrearages are includible as interest income by the recipient spouse (Sec. 61(a)(4); see also Fankhanel, T. C. Memo. 1998-403, aff’d per curiam without published opinion, 205 F.3d 1333 (4th Cir. 2000)). Also, since interest “compensates for delay in the receipt of funds,” any interest awarded as part of a judgment is taxable “regardless of how the judgment principal is, or is not, taxed,” the Tax Court stated (citing Aames, 94 T.C. 189 (1990)).

In determining whether a taxpayer has received interest payments with respect to child support arrearages, the Tax Court in previous cases has considered: (1) a taxpayer’s admission; (2) state child court support payment records; and (3) whether a state court order directs interest payments on arrearages (Fankhanel, slip op. At 21).

Rodgers did not dispute that she received the Form 1099-INT or that her former spouse’s delay in payment deprived her of the use of money owed her.

The state court’s amended order between Rodgers and her former spouse also dictated how much of the arrearages were to be applied to principal and interest. Under Alabama law, interest accrues by statute and must be included in any amount representing child support arrearages, even if not requested by the party seeking payment.

Rodgers, in turn, argued that “certain county child support payment records” before the amended court order indicated that the principal payments may have been larger than the amount the state court ultimately determined. She claimed she raised this issue with the state by letter. However, during the Tax Court proceedings, she admitted that the state did not act based on her correspondence. Also, she did not appeal the state court’s judgment and was not aware of any other state court order modifying the judgment. The Tax Court found that the county payment records did not indicate that any amount on the Form 1099-INT should be treated as child support principal rather than as interest.

Holding: Since Rodgers received interest on past-due child support during 2015, the Tax Court held that the amount the state of Alabama reported on Form 1099-INT must be included in her income, and it accordingly sustained the IRS’s deficiency determination.