After nearly 20 years as a New Jersey divorce attorney, I have handled many cases in which one or both of the parties have a “cash” business. As I am far from an ignorant man, I understand that it is extremely likely that the parties do not report some (or sometimes any) of the cash for tax purposes. Now, while as a married couple, “Cash is King,” in a New Jersey divorce a plethora of problems arise. These range from complex legal issues to psychological and emotional components that make many of these cases difficult to settle. Let’s explore.
1. Experienced New Jersey divorce lawyers know that if a judge learns of unreported income, they are legally obligated to report the parties to the Internal Revenue Service. Among New Jersey family lawyers and judges, this is known as a Sheridan problem (which is the name of the case that resulted in the NJ Family judge’s obligation to report the parties. Therefore, experienced NJ divorce lawyers know that we need to steer the client’s toward private mediation or arbitration. This way, everyone involved in the case may speak freely about the cash without concerns of consequences.
2. The next legal problem is proving what the parties’ true income actually is. This can be done in a number of ways, but in my opinion not one of them is fool proof. First, a forensic accountant may perform a “true cash flow analysis”. This is how to explain to that even if one litigant had unreported income, the business has enough “cash flow” to maintain the lifestyle that the parties enjoyed during the marriage. This is essential for determining the appropriate amount of New Jersey alimony as well as calculating child support. However, when cash is involved, even the best experts can never recapture all of the cash generated by a business. Second, by analyzing a family’s average monthly budget, New Jersey divorce attorneys and forensic accountants can “reconstruct” what the “true cash flow” actually was, again for support purposes.
3. Most businesses in a divorce are considered an asset for equitable distribution purposes. In other words, if one spouse owns a business, especially one that began during the marriage, the other spouse has a right to a portion of the value of the business. Typically, especially in a long-term marriage, 33% of the value would go to the other spouse. However, as cash can be difficult to track, personal bills being paid from the business accounts and others complications prevent the forensic account from being able to assess the true value of the business enterprise.
Psychological and Emotional Issues
Again, when a family is “in tact,” cash is king. However, once a divorce action commences, cash is trouble and for a very simple reason. While the family is together, they reap many rewards ranging from tax write offs to cash in the proverbial mattress. However, after a divorce, while one party still enjoys all of that beautiful cash and tax benefits, the other spouse most likely suffers from a decreased lifestyle than they enjoyed during the marriage. Further, while negotiating the divorce, once it begins to dawn on the party who will no longer enjoy the benefits of cash, they become very aggressive and sometimes unreasonable in their positions. This is because they realize that their ex is not going to be as financially worse of as they shall be.
If you or a loved one find themselves in a similar circumstance and facing a potential divorce, please never hesitate to contact my office. Thank you.