Real Income for Support in Divorce

Sometimes “Real” Income in Divorce is not so Obvious

Forensic accountants are frequently requested to quantify the parties’ real income for purposes of support in divorce litigation. This exercise is often in the context of a non-public business owned by one of the parties.  When the monied spouse owns a business with substantial cash revenues, the analysis is more complicated, and is exacerbated when the closely held business generates reported flow-through tax losses that are often alleged to have been funded by the owner-spouse.  For example, if the monied owner-spouse has Form W-2 income of $550,000 from an S Corporation which he/she owns, and the company generates a tax loss of $350,000 that was funded, in part, with $250,000 of advances from the owner-spouse, the non-monied spouse will argue that support should be based upon $550,000 while the monied spouse will likely argue that the pre-tax real income from the business was $200,000, but no more than $300,000.

Of course, the facts vary with each case and the forensic accountant need not (and should not) opine on issues of law. The forensic accountant need only report the facts as in this example:  the reported Form W-2 income, adjustments thereto for “perquisites” paid by the business, unreported income enjoyed by the parties, profits “distributions” received from the business (if any) and the like.  Reporting of the lending activity and tax loss attributes which may be relevant allow the attorneys and the court to make informed decisions about such issues.

While tax losses may enhance real income through reduced personal tax liabilities, they do not necessarily, in and of themselves, represent a reduction to “real” income received from an S Corp.  Similarly, loans to the business do not decrease the actual income received from the business, just as the repayment of business loans do not increase the spouse’s income.  Similar issues arise with respect to “sole proprietorships” and closely-held LLCs even when no Form W-2 compensation exists as a matter of tax law.  All of these situations involve a multitude of reporting scenarios for the forensic accountant, including the level of profit or other “distributions” actually received from the business, who must be careful to avoid double-counting overlapping attributes (e.g., owner loans that fund tax losses, profits distributions versus reported flow-through taxable income, etc.).

Cipolla is frequently a court-appointed neutral, acting, in effect, as a consultant to the court, which sometimes leads to an expert report and related testimony when the non-neutral financial forensic experts are far apart in terms of their opinions and conclusions.  We perform this forensic accounting function in business divorce, matrimonial, commercial litigation, fraud investigations (including white-collar and tax

investigations) and personal injury claims, as well as in Bankruptcy Court and insolvency proceedings.  With respect to matrimonial litigation, we frequently value businesses and perform income and lifestyle analysis, including a savings component, to help determine alimony (including changed circumstances) and Pendente Lite support.  We also frequently conduct net worth analysis and asset tracing to determine exempt or immune assets for purposes of equitable distribution.

Cipolla has been involved with tax and white-collar criminal defense, forensic accounting, valuation and damages assessment for over three decades and, according to the New Jersey Law Journal readership survey, was recognized as the best matrimonial financial expert, the best economic damages accounting firm and the best business valuation firm, and one of the top forensic accounting firms, litigation accounting firms and business accounting firms in the New York Metropolitan area.  At Cipolla & Co., “we peel the onion” to provide thoughtful, comprehensive and thoroughly researched opinions and conclusions. www.cipollacpa.com Joseph Cipolla, CPA/ABV/CFF/PFS, CFE