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NJ Family Legal Blog Pertinent Information As It Relates To New Jersey Family Laws

Court Says Incomplete Records and Inaccurate Tax Filings from the Self Employed Common in Divorce

Posted in Practice Issues

On Friday, I blogged on the judicial estoppel aspect of the Romano case decided last week by the Appellate Division. While that was the major issue in that case, there was another part of the case that jumped out at me, when I read this line related to the court’s valuation of the husband’s business and calculation:

John also maintains that Judge Becker should not have accepted Dana’s expert testimony with regard to the value of his business and the income it generates. John did not provide sufficient reliable information to allow Dana’s expert to use valuation techniques based on tax reporting, so the expert was forced to consider the family expenses as a means to gauge the income generated by the business.

This scenario is not uncommon in divorce matters where a sole proprietor provides neither complete business records nor reliable Internal Revenue Service filings. We defer to Judge Becker’s fact-findings concerning the value of the business and its revenue.  (Emphasis added).

Unfortunately, when dealing in cases with small (and some times not so small) businesses, this is a common occurrence.  Often, it becomes a game of "tell me how much you can find and I tell you how much I have."   In this case, the non-owner has the laboring oar to try to reconstruct the exact income.

Many years ago, I had a case where the husband listed just enough income to pay for the mortgage and utilities on the $2 million marital home. Much of the families expenses were paid for in cash, thus, no documents existed evidencing their purchase.  This included things such as groceries – his explanation for not having grocery expenses were that his wife and daughter were "always on diets."  He had no good explanation for why there was no close expense to explain the 1000 square foot closet filled with designer clothes nor any evidence of the purchase of cigarettes where both parties smoked several packs a day.  I can go on but the point was that the income and lifestyle had to be reconstructed through expenditures.  This is difficult when you have proof of family expenses and even harder when even the expenses have to be reconstructed. 

There was another related line in the case that I also found interesting. The Court noted that, "Judge Becker determined John receives $82,000 in income and, due to his tax reporting methods, does not pay taxes on that income."

That brings up two issues.  First, when a judge makes a finding that someone is not reporting all of their income and not paying taxes on it, pursuant to a case called Sheridan v. Sheridan, the judge is supposed to report the matter to the IRS.  There is no indication in this opinion whether that was done in this case. As I have previously blogged, despite the fact that a judge has this affirmative obligation, it is often honored in the breach. 

The second issue raised, and it is not clear about what exactly happened, is whether the court really took into account the fact that the husband wasn’t paying taxes on his income.  Put another way, the self employed person who makes $82,000 and doesn’t pay taxes has more available income and an ability to pay more support than a W-2 employee who makes $82,000 and has withholdings/pays taxes on his/her full income.  On one hand, you would expect the person not paying taxes to pay more support.  On the other, can a court actually base it’s decision on the fact that a person is perhaps breaking the law. 

In any event, this case evidences some of the issues related to cases where a party is self employed. 

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Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric practices in Fox Rothschild’s Roseland, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com.