Often, cases are given nicknames, sometimes by judges and law clerks, and sometimes by the attorneys.  Sometimes the nicknames come from who the people are – for instance, a case we had several years ago where both parties were models became the “model case” at the courthouse.  Sometimes, the names come from something that one

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.


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There is a case in New Jersey called Sheridan v. Sheridan,247 N.J. Super. 552 (Ch. Div. 1990), that requires trial judges to report evidence (usually after a trial or hearing) of any illegal activity to the proper authorities.  It most cases, it comes up in the context of unreported or under reported income cases, affectionately known as "Sheridan cases."  That said, I have often joked that this is like Bigfoot or the Loch Ness Monster, that is, we have all heard about the legend, but no one has actually seen it.  I have even tried cases where a party testified about cash and employees who were "off the books", and other cases where the excess perks paid through the business were massive, with no referral to the IRS, etc. 

However, in the last two months, I have seen two unreported Appellate Division decisions which noted that the trial court made a Sheridan referral. 


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Very often, we are confronted with situations where on spouse is self employed and the business pays certain personal expenses on behalf of one or both of the parties.  Often times, these expenses are wholly appropriate and would withstand IRS scrutiny.  Other times, there are excess perks or other personal expenses paid through the business that have no business purpose.  The practical effect is that these expenses are deducted as business expenses, and essentially taken as tax free income.  For purposes of the determination of the proper income to use for support purposes, as well as for business valuation calculations, these expenses are added back to income. While obviously inappropriate, some times we even encounter unreported income which also has to be added back for support and valuation purposes.

A bigger question/debate is once added back, should taxes being considered?  Put another way, if the person was not paying taxes on this aspect of his/her income. should the income be reduced by taxes or should it be grossed up.  As an example, a person whose W-2 income is $300,000 per year, has far less spending power then someone who earns $300,000 but only pays taxes on $200,000 because of appropriately deducting an expense that is part personal and part business and/or inappropriately taking excess business deductions for personal expenses paid through the business.  To exemplify this point, I have often asked the forensic accountant at a deposition or trial, "What would a taxpaying W-2 wage earner have to earn to have the same spending power (net after tax income), as this person?" 


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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

The process for seeking Innocent Spouse Relief, a provision for individuals concerned about the accuracy of tax returns filed by their current or former spouses, has become a potential minefield.

In June 2007, the IRS published a revised Form 8857 – Request for Innocent Spouse Relief. Prior to that time, the form was short and