Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and the editor of our Pennsylvania Family Law Blog, wrote an interesting post entitled "The Owner Know Thy Business" on that blog.
To read the complete post, click here.
EDITORS NOTE: Mark’s post leads to a discussion of several interesting issues that are frequently encountered in matrimonial cases. It is not unusual in cases where one or both parties are self employed that there is either unreported income and/or personal expenses being paid through he business. In those cases, the tax returns are obviously unreliable for support purposes and you have to get the business books and records, credit card records and other documents to determine the business owner’s actual income/cash flow. I say cash flow because that person is not paying taxes on the expenses being paid through he business and the expenses are not added to that person’s income. In some cases, though there are some personal expenses that are paid through the business, that is neither unusual nor problematic from an income tax perspective. A perfect example is the deduction of automobile expenses. While this is acceptable, within limits, per the IRS, those expenses have to be added back to income per the Child Support Guidelines. In fact, all personal expenses are supposed to be added back. I have been involved in other cases where the husband was declaring just enough income to pay the mortgage, taxes and utilities on the parties’ $2 million dollar house and there was no other declared income apparent to pay their other expenses which amounted to a few hundred thousand per year. In that case, we had to use a forensic accountant to reconstruct the income through the parties’ budget because, there were, surprise, sparse records.
An interesting question, and unanswered question, is how these non-taxed expenses should be treated for support purposes. If some declares $100,000 in taxable income and has another $100,000 in non-taxable perks, what is the income number for support purposes. $200,000 doesn’t seem right because only half is taxed. A normal, taxpaying citizen may have to earn $240,000 or more to have the same net after tax spending power.
A bigger issue to address which deserves its own separate blog entry is what to do when the case has these issues because of a NJ case called Sheridan v. Sheridan. The rule as per Sheridan is that when a judge hears evidence of unreported income, they are duty bound to refer the matter to the IRS. As Mark suggests, filing amended tax returns makes the most sense when confronted with this issue – as long as it doesn’t happen too late – as was the case in the example in Mark’s post. -Eric Solotoff