Income. Such a simple word and such a complicated concept.
Consideration of “income” permeates many aspects of domestic relations cases. In divorce proceedings income is relevant to issues such as alimony, child support, and the valuation and division of assets and liabilities. Income is also relevant in proceedings involving the determination of parental responsibilities and child support between and among people who were never married to one another. The question of a party’s income is also often relevant to the question whether they can afford to pay their own legal fees or contribute to the fees of the opposing party.
Despite the relevance to many aspects of domestic relations cases, there is not a single or overriding definition of what constitutes “income.” As well, the determination of what constitutes “income” for purposes of the federal or state tax codes is commonly not the sole or definitive standard when the question is what constitutes “income” for purposes of alimony, child support, or the valuation of a business. In fact, looking only at the tax treatment of a particular dollar figure can blind one to important nuances. For example, the investor who receives steady cash flow from a tax-free investment portfolio has more money they can spend for living purposes than their tax return will reflect. By contrast, a shareholder in many types of small businesses will be taxed on a portion of the business revenue that they never received and never had any right to receive. That person will have less money available to them than their tax return reflects.
The concept of income, improperly applied, also carries with it significant risk of the same dollars being counted twice. For example, assume an employee receives a large one-time bonus payout and deposits those funds into a savings account. Those dollars will be counted twice if the savings account is divided as an asset and at the same time the bonus payout is included with other earnings in calculating the employee’s income. Similarly, a business owner’s projected future income from the business is frequently used in calculating the value of the business. Arguably those future earnings are being counted twice if the same portion of the business owner’s income is also used to determine their ability to pay future maintenance or child support obligations.
We hope the articles compiled in this issue will help shed some light on some very complicated concepts.
We have all heard the threat, “I’ll quit my job and then you can’t make me pay anything.” In “Earning Capacity: A Necessary Consideration When Support Is at Issue,” Cynthia J. Ponce explains how the determining factor in calculating spousal support and child support is not always the income of each party and when it may be necessary to consider a party’s earning capacity, including their investments. In cases where one of the parties is unemployed or underemployed, purposely cuts back their work hours, refuses to work, and lives beyond their actual earnings, she discusses how income imputation can ensure that proper child support and spousal support is ordered and how experts can assist counsel with deciding to pursue income imputation and determining earning capacity.
In “Establishing Income Available for Support,” Tracy Coenen discusses the not-so-straightforward criteria for calculating support income in a divorce. She shares what constitutes income, from earned income, such as wages salaries, tips, and bonuses, or unearned income, such as investments, capital gains, inheritance, and disability income. She notes how the “gig economy” and nontraditional income streams complicate matters further. In a helpful discussion of discovery of income, she explains what documents to request and why it is worthwhile to do your due diligence even if you think that some sources of income will be automatically excluded from support calculations based on state guidelines.
Attorney Richard D. West brings us an interview with forensic cryptocurrency expert Dorothy Haraminac, who defines the different types of cryptocurrencies, what blockchain is, where crypto is stored and where to find it, and how to spot questionable transfers. Haraminac believes it is a must to ask about crypto ownership as early as the client in-take form and notes that crypto is property subject to division and can be used as a basis for support demands. Because crypto is relatively new, the process of discovery and arguing in court about the completeness of records can be complicated and costly, so finding a financial expert who specializes in crypto early on can help.
Lawyers who are afraid to look at tax returns do themselves and their clients a big disservice. Miles Mason Sr. provides “A Quick Start Guide to Reading Tax Returns” and teaches us how to spot the most obvious ways of obscuring the reality. He shows how to overcome our anxieties about tax returns and use them as valuable clues in finding hidden income. He encourages us to become familiar with Form 1040 and W-2s on a granular level so we can spot suspicious deviations and patterns that give insight into a couple’s lifestyle. He calls 1040 schedules “a gold mine” of information and suggests looking for conflicts between loan applications and tax returns. Despite the need to educate yourself on these matters, he calls forensic accountants and CPAs “your best friend.”
Steven E. Juska breaks down in helpful detail all the different “Components of Income” that can be considered when determining child and spousal support, from wages, salaries, bonuses, to net income from business or dealings in property, interest, retirement benefits, Social Security disability benefits, alimony, and much more. He covers the nuances within each defined type of income, such as the timing, nature, and availability of the income, that should be considered in any income defined in your specific jurisdiction.
Melanie K. Reichert elucidates the often-debated “Double Dip Concept in Divorce Cases”—when the same funds are counted both as income for child or spousal support and in the valuation of an asset to be divided in a divorce proceeding. As she notes, some jurisdictions allow it, while others explicitly reject it; so the issue currently has no uniform resolution and attorneys must understand the prevailing approach in their respective states. She reminds us of the ultimate goal of ensuring a just division of assets that provides both spouses a means for support.
In “The Use of Experts for Income Analysis and Opinions: Navigating the Complexities of Divorce Litigation,” Shannon Ciesluk and Dominique Langford illustrate the importance of using a financial expert for income analysis in a divorce proceeding, especially when dealing with high-net-worth individuals and complex assets and finances. As we know, one spouse may attempt to hide assets and income to gain an unfair advantage, and forensic accountants have the investigative skills and financial and accounting expertise to navigate complex divorce litigation that a CPA may not.
Beth Garrett asks the complicated question, “Complex Compensation: Asset, Income, or Both?” which entails such issues as whether a stock option or restricted share is a marital asset, how to treat deferred compensation and other nonqualified plans and forgivable loans, and what asset element should be included in the current and future income of the employee for support considerations. She mentions what documents to request during the discovery process and again why the assistance of a financial expert who is familiar with these types of assets and their intricacies is highly recommended.
