While there are several factors that a court will consider when making a determination of whether to award alimony and the amount, one of the arguably most important is the income earned and the lifestyle of the parties enjoyed during the marriage.
In the recent unpublished Appellate Division matter of Plocharczyk v. Plocharczyk, decided May 13, 2009, A-3749-07T1, the Court addressed the issue of alleged hidden income for a party who owned what is considered a cash business, a restaurant.
The parties were married for 19 years and at the time of the divorce had one 10 year old child. The parties proceeded to a trial to determine the issues of child support and alimony. The major dispute was the husband’s income. Each party retained their own forensic accountant to serve as an expert to calculate both parties’ incomes. During the course of the marriage, the husband was the primary financial provider by operating two restaurant businesses.
In the midst of litigation, the husband made the unilateral decision to sell one of the two restaurants and then proceeded to argue that his income was reduced, thus attempting to reduce his alimony and child support obligation. Husband claimed that he had to sell one of the restaurants because he owed $70,000 in back taxes. The trial judge found that although the back taxes were owed, there were other available means to pay the taxes, therefore there was no need to sell the restaurant. The trial court relied on the wife’s expert’s opinion that the sale of the restaurant had not been an arms length transaction.
The trial judge declined to reduce the husband’s annual income because of the sale of the restaurant. Based upon the calculations, the judge found there to be a $600 per week shortfall in the wife’s budget. In reaching that number, the trial court found that not only was the wife short of funds to meet the marital lifestyle but also lacked an ability to save money, as the couple had been able to do during the marriage.
The husband followed the trial court’s opinion with an appeal. The Appellate Court affirmed the trial court’s finding. In doing so they stated that New Jersey courts recognize that “it is the self-employed obligor who is in a better position to present an unrealistic picture of his or her actual income than a W-2 wage earner.” Larbig v. Larbig, 384 N.J. Super. 17, 23 (App. Div. 2006).
EDITOR’S NOTE: Cases where one party owns a business generally present more challenges than cases where someone is a W-2 wage earner. Naturally, the valuation of the business or businesses is a complex process requiring an expert and in depth discovery. As income is often the most critical element in determining value, it becomes that much more important to determine the accurate income. As noted in the above case and the Larbig case cited, someone who is self employed can manipulate their income such that what is reported on their tax return is not actually all that they are receiving. The first place to look is to see what perquisites the business owner has which are being paid by the business. These often include vehicles, cell phones, travel and entertainment. From an IRS perspective, many of these may be appropriate and allowable business expenses – from a divorce accounting perspective, you may have to add back these personal expenses paid by the business to determine true income. Moreover, while perhaps one car is legitimately deducted, the business owner’s spouse’s car is also “owned” and paid for by the business, as is their cell phone. Careful scrutiny has to be given to the corporate American Express or other credit cards to see whether the charges are really business expenses or personal expenses. In a case we have now, the typically personal type expenses on the business tax return seemed reasonable but the Cost of Goods Sold on the tax return for a business that didn’t sell anything seemed abnormally high. In reviewing the bank records, the personal expenses were buried in the cost of goods sold.
Then there is cash or “unreported income” which is a topic unto itself but something which must be determined to determine the true income of a party and value of the business.
The point is that you have to look behind the numbers on a tax return when someone is self employed or employed in a family business. Our firm is well versed in these kinds of cases. ERIC S. SOLOTOFF