In a nutshell, it’s important to know that the family business is an asset and a source of income during divorce because you’ll be splitting the marital portion of the business during property division, and the income from the business will help determine both child and spousal support. However, when you don’t know what the business really earns or how those earnings are reported, you are unlikely to get your fair share.
A Business is Both an Asset AND a Source of Income During Divorce – But What Happens if you Don’t Know the Value of Either One?
Several years ago, a family law attorney called me. She was representing the wife, who was the “out-spouse” in this divorce – meaning that she didn’t have all the professional relationships or day-to-day experience managing the legal, tax, and financial matters regarding the business. Her husband – the “in-spouse” was the one with all the knowledge and contacts necessary to run the company. I requested she send me their tax returns and that’s when this story gets interesting.
The tax return showed business losses and an earned income credit, a tax credit for low to moderate income earners. I could have said, “You don’t need me” and moved on. I get paid to be curious, so I called the attorney and asked if there was more to this business than what I saw. She said there was, and we decided it would be good to meet her client at her office.
The wife said her husband had threatened to throw her out of the house. She and her son were cut off financially and she was currently working a minimum wage job.
She said the business wasn’t losing money. Quite the contrary. The wife had been active in helping her husband in the business, which transported antique cars from sellers to buyers. When they delivered the cars, the buyers handed the husband cash – most of which went unreported. A single “run” could bring $1,500–$2,000.
They showed me pictures of various motorcycles and other “toys” bought by the husband. They lived in a nice home and certainly shouldn’t have been entitled to an earned income tax credit. If everything was as it appeared, tax fraud was likely. (As an aside, it appeared the local bank should have known about the fraud. He had loans with the bank and no reputable bank would have loaned money on those tax returns).
Finding the True Value of the Business
I suggested digging through other records to determine true income and value since the tax returns we had were worthless. Building a “lifestyle analysis” would be one option since these kinds of cash transactions were very difficult to trace – especially if the husband had been lying to the IRS about the income from the by=usiness for years (or even decades).
A couple of days later, I called the attorney to check the status of the case. She said, “They settled it.” I hung up the phone and thought, “Settled for what?”
Did the Wife Get Her Fair Share?
I don’t know. I have doubts. Why should I be concerned?
- Not enough time passed for the attorney to request more records – let alone dig further.
- If you can’t see cash coming in and going out, what settlement figure should you propose for the wife’s share of the business?
- How do you set child support or spousal support if you don’t know the business-owner spouse’s true income?
I understand the attorney was probably in a tough spot. She may have weighed the chances of success trying to pursue more information and decided the costs would exceed the benefits. I’m still not sure she had enough information to make an informed judgment. To this day, I believe this case could have settled on solid ground.
What About The Value of the Business?
If the income was confusing, the value of the business was nothing less than a mystery. It might be worth somewhere between $200,000 and $400,000 if it was grossing $50,000 to $100,000 per year with few expenses. I don’t know if the wife got a share of the business or not – a share that would have been in addition to any income settlement for maintenance and child support.
The Bottom Line
As I’ve written before, my general guidance in most cases is to settle if possible. However, you need to understand if you’re playing a good hand or playing a cheater who is stacking the deck and throwing you a few cards. I would have gone to the judge and requested funds to pay for further investigation. At a minimum, you need to establish some verifiable income needed for lifestyle. And if there’s a business, you need a value for that business, so you can make sure you get a share of the business as an asset. If you’re on the wrong side of something similar, I hope you’ll do the same.