Whether you are a business owner or executive – or the spouse of one – the division of company and business assets can prove to be very complicated. The property division process will often require not only the involvement of an experienced attorney, but also a forensic accountant who is skilled in the valuation of a business. In this podcast, Sonya K. Zeigler – a Toms River divorce attorney – discusses special issues in divorce cases involving business owners and executives and provides expert advice.
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Hosted by: Diana Shepherd, Editorial Director, Divorce Magazine
Guest speaker: Sonya K. Zeigler, Family Lawyer
Sonya K. Zeigler is a family lawyer practicing in Toms River, New Jersey. She specializes in handling financially complex divorces that involve property division, business valuation, and cash-flow determination and spousal support. With a Master of Laws in taxation and having previously worked as a tax attorney for the world’s largest professional services firm, Sonya has the skills and experience to resolve even the most complex cases.
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Read the Transcript of this Podcast Below.
What advice would you give to a business owner or an executive who is divorcing?
I would start by helping them identify the documentation that would need to be produced by them as part of the divorce process. One of the most important points when you are meeting with the owner of the business in the divorce litigation is to dispel any myths with regard to what they do or do not have to produce and what is or is not subject to the equitable distributions in the divorce in the state of New Jersey.
What advice would you give to the financially inexperienced spouse of that business owner or executive?
Oftentimes it’s the same answer; however, the work that would be required of the professionals representing the non-owner spouse is a little bit different. Remember, when you are representing the person that runs the business, you are in control and you have all of the information that exists. When you represent the non-titled spouse, you have to be on high alert with regard to the review of everything that you receive or do not receive, because it is up to you as the attorney and the forensic accountant to be sure that you can sit down with the non-sophisticated spouse and tell them with certainty that you are confident that the assets that you have discovered and that the cash flow that you are recommending be utilized for alimony and child support purposes is accurate to the best of your ability based on the facts in that case.
In general, how are business assets divided during a divorce in New Jersey?
A business in New Jersey would typically be divided with the non-owner spouse receiving less than 50% of the market value of the business. The reason for that is, there are cases that have evolved over the years that have established or stand from the proposition that when someone’s business is valued for divorce, there is certainly no guarantee that, when they ultimately go to sell the business, what they receive upon the sale would be what the value is at the time of the divorce.
In a divorce scenario, we value a business at what is called “fair value” as opposed to other scenarios where, for example, an independent third party wants to buy a business from someone else, where they would value it at what is called “fair market value.”
How can a business owner protect their company during divorce both financially and from unnecessary disruption from the other side’s attorney?
The easiest way to protect your company is to cooperate, disclose, and provide the documentation that is requested by the other side. Oftentimes people think that a refusal to produce a document or a refusal to be cooperative will somehow eliminate your obligation to provide that information. On the contrary, all that conduct does is generate court orders, potential sanctions, and potentially things like having individuals appointed to come into the business to review the books and go through the records, which is obviously much more of an invasion into the operation and privacy of the business than if the individual owner had just provided the documents requested in the first place.
Is it common for a business owner to try to hide or perhaps downplay assets during a divorce? What can the other spouse do to make sure that isn’t happening?
In terms of the cases that I have had over the years, I am pleased to say that I don’t think that most of my clients or clients from the other side were trying to hide assets. However, I do believe that it’s fair to say that when you own a business and you are getting divorced, you want the value to be as low as possible, because the value of the business will ultimately determine the amount of money you owe the other spouse. Trying to have value of a business be low or lower does not necessarily mean that that individual has to do anything you listed or try to hide information from the other side.
Many times, value of the business can be swung one way or the other based on the argument of the attorneys and the accounting techniques employed by their experts. That’s one of the reasons that attorneys like myself develop niches in specializing in these business cases. Knowing how to review a business valuation and knowing how to argue this specific component that generates the ultimate value is what gives us the ability to push the value up or down depending on which side of the case we are on.
Can a business owner use the company’s accountant, who is presumably very familiar with the business, to value that business instead of hiring an outside professional?
They can, but they should not because, typically, accountants that represent businesses and create their financial statements and file their tax returns are not forensic accountants, who are skilled and trained in the field of valuing a business for the purpose of divorce. In a case where someone insists that they want to use an accountant that they already have, typically what happens is, it creates more litigation costs and it takes more time. The accountant will generate a value that is not created in a manner consistent with the fair value standard that we utilize for the purpose of divorce.
In those cases where that happens, it’s often the case that half way through the divorce process, they have to hire a forensic expert anyway, because the numbers that are generated by their own certified public accountants are really not those that can be used in family courts in New Jersey.
Is there a minimum size or potential dollar value that makes it a worthwhile exercise to hire a forensic professional?
I think that the answer is most likely no. The decision to hire a forensic expert depends on the facts and circumstances of each case, each individual, and what they are hoping to achieve. Whether the assets of a marriage are $2 million or $50 million, those individuals that are part of that marriage want to be sure that they receive their fair share of that particular asset.
For the individual to have assets of $2 million, those assets are every bit as important to them as the individual who has the $50 million estate. It wouldn’t be appropriate, in my opinion, to make the decision on whether or not to hire an expert based on how much you believe the people are worth.
If both spouses co-own a business together, how will it be divided and who gets to stay in the business?
In a scenario where both spouses are involved in the business, you certainly have a lot more support to argue that the business should be equally divided based on their circumstance. The decision on who is going to keep it really depends on who wants it. Typically, there is one spouse who runs the day-to-day operations of the business and another spouse, perhaps, that is behind the scenes, maybe doing the books, generating payroll, and things like that.
If one of them can’t make the decision to be bought out, ultimately the business would have to be sold to an independent third party. In the cases that I have had, where the businesses are owned by and run by both spouses, it’s typically and has been my experience that the spouse who isn’t the one generating the accounts or the one out there pounding the pavement, generating sales, that spouse typically will allow the buyer their share.
What happens if a high-wage earner’s income suddenly plummets just before divorce? Would that affect spousal or child support payments?
It could. If the income plummets only the year before the divorce, we would obviously look at that to determine why it plummeted, to see if there was some divorce planning being utilized on the part of that spouse. If we assume, for argument sake, that the loss or the drop in income was not intentional, we would have to look to see whether or not we believe that that is an anomaly or whether that trend will continue.
There are certainly cases in New Jersey that came to the proposition that income can be averaged over a three- to five-year period of time for individuals whose income is not even or consistent on a year-to-year basis. But it would really depend on the facts of each particular case. The question you ask is, whether or not that one year’s drop would be enough to dramatically impact the numbers used for support.
If one spouse owns and runs one or more businesses that the other has nothing to do with and knows nothing about, should they agree to file a joint return during their divorce? What are the pros and cons of doing so?
If the spouse that is uninvolved in the businesses feels fairly confident that the financial information that’s being represented in the tax returns is accurate, there is certainly no reason not to file a joint return. Filing jointly is more financially beneficial than filing separate, which is the only other filing status available to married individuals, if they do not want to file a joint return.
However, if the non-owner’s spouse thinks that asset income is being hidden, inappropriate deductions are being taken, or other steps are being employed on the part of the owner spouse that could potentially trigger a tax audit, a liability, or potentially something worse, then it would certainly be wiser to consult with their attorney and also their private accountant to determine if they should, for that particular year, file separately from the other spouse.
If one spouse has cash based on business and the other is pretty sure that not all income is being reported on the tax returns, can you help them to establish true income before setting child and spousal support, and should they report their spouse to the IRS?
We can absolutely help them identify what the income is for purposes of child support and alimony. There are oftentimes cases where people have identifiable income as well as cash components to their incomes, and we wonder whether they are honest about it or not. With regards to the issue of filing the tax return, in New Jersey there is a case that specifically requires the trial court judges to refer the matter to the Internal Revenue Service if they believe that tax fraud exists in a particular case.
If a litigant is concerned that the other side has potentially hidden income or filed tax returns that are not exactly in line with the specific tax of that business’s existence, we recommend settling the matter outside of court. If we have to go to a third party decision-maker or an alternative dispute mechanism, we do it through mediation or arbitration so that the obligation to pass that file along to the Internal Revenue Service would not exist.
Oftentimes when people are getting divorced, one spouse gets angry and threatens to turn the other side over to the Internal Revenue Service. The reason why that is not an advisable course of action is that, if it’s a joint tax return, both individuals are going to be potentially exposed to whatever consequence as a result of that tax return being filed — unless the non-titled spouse can qualify for what is called “innocent spouse relief”, which is a very limited and difficult to achieve status that the IRS sometimes, but on an infrequent basis, will award to someone if they meet a certain statutory criteria and they feel that the non-titled spouse truly has no knowledge of or involvement in the concealment of income or the production of a tax return that is not accurate during the course of the parties’ marriage.