Anecdote of the Week

I’M GONNA WASH THAT MAN RIGHT OUT OF MY HAIR

New Jersey has civil unions, which from a cynical point of view, means more business for divorce attorneys and forensic accountants. We were called in on exactly that type of situation, where after about 30 years or so of being together, these two men “tied the knot” in a civil union ceremony, and for all intents and purposes, certainly for all state financial and procedural issues, were now the equivalent of husband and wife. Unfortunately, they had a falling out and we were called in to assist in reviewing their finances. The interesting issue here was the cause of the falling out – which supports what our female staff had said when the case came to us – and that was “a man is a man is a man.” What prompted that wry comment was that what broke up this 30+ year relationship, was that the now 55 year old dominant of the two took up with a lovely young 17 year old boy. I’m not sure what the age of consent is under these circumstances, but that wasn’t our concern

Kal's Kweries**

KWERY:
My husband and I have been in divorce litigation for a couple of years now, and my business has suffered badly because of the recession. As a result, it’s worth a lot less now than it was when we started the divorce action. Am I looking at having to share a value which no longer exists?

RESPONSE:
This is a very difficult area, with no simple answer. Generally speaking, if the decline in value is substantial and expected to be somewhat permanent (as contrasted with the value is down somewhat today and will come back tomorrow), then you and your team need to put forth, if you will, your worst foot and show that value is really down, and convince the other side (or the Court) that it would be inequitable to expect you to carve up a value which no longer exists.

Tax Tip of the Week*

UNALLOCATED
This is a very interesting word, and sometimes its relevance is that it is not even stated (that is you will not see the word “unallocated”). What this means is that there are payments in support of a spouse and children but that there is no definitive separation between how much is for the spouse and how much is for the children. That is, the payment is unallocated (there is no allocation between spouse and child). When that language (or absence of such language) exists, the entirety of the payments are considered traditional alimony – taxable to the recipient and deductible to the payor. It does not matter if the language says that the payment is for the support of the spouse and children – unless there is a specific carve-out as a dollar or percentage on behalf of the children.

Anecdote of the Week

ABSURD MINUTIAE

Doing lifestyle analyses has become fairly commonplace, in part to establish how the family lived and of course to assist relevant to determining alimony. Sometimes though, counsel as well as the experts, can get carried away, doing an extent of fine-tuning detail that makes no sense. In one of our lifestyle cases, the other side had asked its expert to break out the lifestyle expenses by person. Somebody got the bright idea that the best way to do that was (since the husband and wife had separate checking accounts), to treat the expenses based on who paid for them. Thus, we had the ingenious conclusion that one of the parties to this divorce case was living on $8 per month for food

Tax Tip of the Week*

HEAD OF HOUSEHOLD

Generally speaking, the most advantageous way to file a tax return is married jointly, and the least advantageous is married filing separately. Somewhat better than the latter is single, and somewhat better than single but not quite as good as married jointly is filing as head of household. As a general comment, when going through a divorce, you are either going to file jointly (as you typically have over the years) or you are going to be filing married filing separately. However, if there are dependent children, then there is the possibility of filing as head of household – but that is only available to the custodial parent. Who is entitled to take the exemptions is not relevant to the issue of who is entitled to claim head of household. Thus, in a stereotypical situation where the children stay with the wife, she may be entitled to file head of household, but the husband would not, and would probably have to file married filing separately.

Anecdote of the Week

CAIN & ABEL

What most of us in the forensic accounting field will tell you is that a business breakup among family – a shareholder’s suit let’s say between brothers – can make a bitter divorce battle over a business seem like a discussion at a knitting circle. In dealing with a shareholder suit among two brothers who owned a supply business, our client bitterly complained that his brother was a thief (the words he used were somewhat more colorful), and was stealing from the business. Figuring that in-your-face candor was the best route to take, we suggested to our client that his brother was doing nothing different than he was – they were both stealing from the business, they were both stealing from each other. As only a guiltless thief can say with a straight face, our client responded “Yes, that’s true, but he’s stealing more than I am.” These two brothers, who by the way were no youngsters – they were both in their 70s – were so angry with each other, and so irrational, that during the litigation, when their mother died, they couldn’t agree on anything having to do with the funeral or the mourning period

Kal's Kweries**

KWERY:
I’ve been married for 20 years, and have my own business. I had the business before we got married, but I’m concerned that my wife in our divorce is going to get half of my business. Is my concern reasonable?


RESPONSE:
Generally speaking, for a business that existed prior to a marriage, your wife is only entitled to a share of the increase in value (if any) during the marriage. That is under the assumption that the interest in the business is an active asset (generally one in which you make a significant contribution). The percentage that your wife will get will vary dramatically based on jurisdictions as well as whether or not she contributed in any way to that business.

Tax Tip of the Week*

CHILD SUPPORT VERSUS ALIMONY

Alimony is usually tax deductible to the one making the payments and taxable to the one receiving them; whereas child support is neither deductible or taxable. There can be opportunities to play off one against the other, and benefit one or both parties. It is important that issue be recognized, and calculations done to determine what is best in your specific situation. Don’t forget that the classical tradeoffs are that alimony will often continue for quite a number of years, but will terminate upon remarriage or death; whereas child support will typically end at a specific time upon the reaching of majority by the child.

Anecdote of the Week

SILENCE IS GOLDEN

We were involved as the neutral expert in a business run by the husband where we believed there was cash/unreported income, and had a preliminary conclusion along those lines. During a settlement conference, with both clients and counsel involved, the husband protested mightily that our preliminary conclusions were incorrect, and that his business had no unreported income. While we had our doubts, he made a fairly convincing argument – and we agreed to put that issue aside and revisit it later. We then proceeded in another direction in attempting to settle the case, addressing a loan from the bank that the husband had to take out to cover expenses. He complained about carrying the debt load, and how he found it a burden to keep on making payments against that liability – showing us a couple of statements from the bank, indicating the balance, and payments against same. The only problem was that, despite our intimate involvement and familiarity with their personal and business checking accounts, we had seen no evidence of the paydown of any such debt. So, we raised the question as to where the money came from to pay down the debt. As they say, the look on the husband’s face was priceless

Kal's Kweries**

KWERY:
My husband gets a weekly paycheck, but I don’t get to see it. He cashes the check and deposits only some part of it into our checking account. I do not know how much is not being deposited. How can I get a better understanding of what the real number is?

RESPONSE:
If you can wait until he gets his W-2 (and assuming that you will see a copy of it – which you should because it will be part of a joint tax return), then compare the amount in Box 1 of the W-2 minus the federal withholding in Box 2 and the state withholding in Box 17 (that’s if there is state withholding where you are), as well as subtracting local withholding if it applies to you. This will give you a rough estimate of your husband’s year’s total net after tax withholding paycheck. Compare that to the amounts deposited in your checking account during the year. If there is a difference of significance, then you can be pretty sure that something is being kept from you. If the numbers are pretty close, then you can be pretty comfortable that you’re getting an honest count. If you can’t or won’t wait to see the W-2, you can try to get a copy of a cumulative paystub or equivalent – but that may be unlikely since if you’re not getting the weekly paycheck, your husband probably will not share with you the paystub.

Tax Tip of the Week*

ALIMONY, THINKING OUT OF THE BOX

Alimony is almost always thought of as being deductible by the one making the payments, and taxable to the one receiving it. Indeed, that is typically and almost always the case. However, the tax laws give you an opportunity involving alimony that exists almost nowhere else in the tax laws – and that is to make a determination in advance as to whether or not you want that alimony to be taxable (and deductible). In certain limited circumstances, it may be to everyone’s advantage to make the alimony tax free to the recipient and non-deductible to the one making the payments. This truly involves some creative tax planning, but it is very relevant and apropos in some situations.

Anecdote of the Week

MAKE MY DAY
In all the years that we have been doing this work, and all the cases we’ve handled, we’ve never experienced a physical threat, or anything worse than an occasional raised voice. On the other hand, we were investigating a wife’s white collar office type business, in which her 85-year old father still worked (kind of in a consulting capacity). We were provided with various records and access to a copier. We copied certain items that we wanted, and came the end of the day, we started to pack up to get ready to leave. It was at that point that the wife’s father – keep in mind he is 85-years old, 5’4” and maybe 130 lbs. – had a change of heart as to our copying records, and demanded that we not leave with those records but rather return them to his possession. We of course refused. He got up, drew himself up to his full height, and blocked our way out the door. Were the matter not as serious as it was, one would have to actually laugh. However, the wisest thing to do was to cool our heels, use our cell phones (he wouldn’t allow us to use their phones) and call the police. They had to then escort us past the raging bull

Kal's Kweries**

KWERY:
My wife has a retail clothing store and I don’t think she is reporting all of the income. How might I get a sense for whether my suspicions are valid?

RESPONSE:
While there are several different ways to attempt to test whether or not there is unreported income, one quick visual is to compare the reported gross profit margin of the business as per its tax returns to that of the industry in general. By way of example, if the benchmarking information for the industry indicates that the typical gross profit margin is 45%, and if your wife is reporting say a 35% gross profit margin, that’s an indication there may be unreported income. There are potentially a number of good and valid answers as to why the gross profit margin is that low, but one possible answer is unreported income.

Tax Tip of the Week*

TAXES AND PROPERTY DISTRIBUTIONS

When assets (and liabilities) are whacked up between husband and wife going through a divorce, with rare exception, all such movement of assets are non-taxable and non reportable events. From a tax point of view, you can do whatever you want with assets and liabilities between husband and wife. However, that does not mean there are no tax consequences to the dividing up of the assets. It is important to keep in mind that different assets come with potentially different tax costs or burdens – and even though those tax costs or burdens may not rear their ugly heads immediately, down the road, whether it be a year or 20 years later, there very well may be a tax issue. A simple illustration is $100,000 of cash has no tax issues; $100,000 of stock that cost $30,000, and therefore has a $70,000 gain, has significant tax issues.

Anecdote of the Week

THERE ARE WHEELS AND THERE ARE WHEELS

It is hardly unusual to see a business where the owner is writing off one or more cars – commonplace of course is the car for the business owner, often done at 100% even though it’s only maybe 30% business. There are other times when we also see a write-off (whether it is depreciation or car leases) for family members. One of our cases in particular stands out – it involved a manufacturing operation, and the owner (presumably with some help from his accountant) had on his books his personal and his wife’s vehicles. He wrote them off entirely in the year of acquisition, posting them as machinery and equipment for the business. While that was of course clearly incorrect, what made this particularly notable was that one of the cars was a Rolls Royce, and the other a Maserati – each one of them costing in excess of $200,000, and both of them acquired in the same year

Tax Tip of the Week*

INTERPLAY OF ALIMONY AND CHILD SUPPORT

The general rule for alimony is that it is deductible by the one paying it and taxable to the one receiving it. The absolute rule for child support is that it is not taxable to the one receiving and not deductible by the one paying it. A problem that occurs once in a while is when child support is disguised as alimony – whether intentionally or unintentionally. This can come about – at least in the minds of the tax people – if alimony is established to be at a certain level, but then is reduced (increases are not a problem) at a time or event that is related to, or deemed to be related to, a child. Simple example – the alimony is reduced by some amount when a dependent child reaches the age of 18. Wording like that makes the amount of the reduction non-deductible/not taxable child support from the very beginning.

“Is It A Profit? Is It A Loss? NO, It’s Super Manipulation”

“Is It A Profit? Is It A Loss? NO, It’s Super Manipulation” – addressing the investigative accounting process, explaining selected key adjustments that we commonly experience, looking at it from the bigger picture point of view. Those areas are often the ones that create the larger adjustments. Areas covered include cash versus accrual, unreported income, income deferral, payroll and depreciation.

Read entire article here: www.barsongroup.com/articles

“Revenue Ruling 59-60 – A Return To The Basics”

“Revenue Ruling 59-60 – A Return To The Basics” – explaining the importance of this IRS Revenue Ruling in understanding the theory and process of business valuation. It highlights the cautionary and advisory steps provided in that Revenue Ruling, including the need to take into account a multitude of factors involving the specific business and the economy, as well as expectations going forward.

Read entire article here: www.barsongroup.com/articles

“Nuggets From The Tax Return”

“Nuggets From The Tax Return” – in performing the forensic/investigative accounting function, particularly in relevance to determining income and the value of a business, the key items to look for on a tax return to give you an idea as to whether or not there are any problems or likely areas to investigate further. These include sales revenues, gross profit, payroll, depreciation, pension expense, distributions to partners or shareholders and book value.

Read entire here: www.barsongroup.com/articles

“Don’t Be A Victim”

“Don’t Be A Victim” – with fraud and embezzlement a constant concern of businesses, this article provides the reader with some warning signs, flags of where there might be fraud or embezzlement, or an increased likelihood of same. Cautions include illegal actions, changes in business ownership, and financial statement concerns.

Read entire article here: www.barsongroup.com/articles

“Valuation on Trial”

“Valuation on Trial” published in the American Journal of Family Law. Based on a divorce case that went to trial, illustrating a few selected key aspects of that trial, and how the experts testified and explained certain issues and how the judge ruled. This covers reasonable compensation, development of the cap rate, the use of subsequent information and the tax basis of assets.

Read entire here: www.barsongroup.com/articles

Anecdote of the Week

Mi Casa es Su Casa

If you are going to run personal home maintenance and repair expenses through a business, some effort should be made to see to it that the bills in support of those expenses at least reflect business purposes. In this particular case, invoices indicated repairs to and painting of the master bedroom and the kitchen. To help the deceiving process along, there was also a journal entry at the end of each year of several years charging various expense categories for alleged out-of-pocket expenses by the business owner. Not only were there no invoices or other documentation in support of these alleged expenses, but when you added together the various parts of this multiple-part journal entry, miraculously, each year, they added up to exactly $10,000

Tax Tip of the Week*

Early Withdrawal of Retirement Money

Just about everybody knows that if you take money out of an IRA or company retirement plan prior to reaching age 59 ½, you will be subject to a 10% penalty. There are a number of exceptions to that rule – and one of the most interesting, and difficult to use, as well as typically worthwhile only in the exception, is that anyone, for no reason at all, can take withdrawals from his/her IRA or retirement plan at any age and avoid the penalty. The “trick” is that the payments need to be relatively constant, and approximate an annuity type withdrawal (roughly meaning estimated over your anticipated lifespan) from that account or plan. Further, you cannot stop those withdrawals until you are at least age 59 ½. This is a complex area, but for those in need of IRA type funds who happen to have enough to make a difference in their lifestyle, it is something to consider.

Anecdote of the Week

I Never Said I Was Bright

Our work brings us into contact with many people with very unusual ideas of recordkeeping and reporting, many of them are reasonably bright, some very bright. Every once in a while we come across someone who, let’s say, has a few rungs missing from his/her ladder. One case involved a couple with a considerable amount of cash in the bank – nothing improper, legitimate funds accumulated over the years, in various bank accounts and cds. Over a period of several months, a large portion of that money kind of disappeared – it was no longer in the bank. This continued for a few years – which is about the time that the divorce complaint began and we were called in. The explanation was amazingly simple. The husband figured he could hide this money from his wife if he put it – the “it” here being literally cash in the form of dollar bills – in a safe deposit box, a couple of tin cans, under the mattress, etc. And, yes, in that fashion it also failed to earn any interest. Not only of course was the money all discovered, but the husband was held responsible for the loss of the interest to the marital estate.

Tax Tip of the Week*

Retirement Money
There is one key difference between IRAs on one hand, and just about all other plans (profit sharing, pension and the like) on the other hand relevant to retirement funds being carved up in the divorce process. That major difference is that when retirement funds are carved up between divorcing spouses, regardless of age, there is a window when you can receive funds from a qualified retirement plan (profit sharing, pension, 401(k), 403(b), etc.) without penalty; whereas there is no such opportunity with monies coming from an IRA. That is, the age 59 ½ rule, under limited circumstances, does not apply to those qualified plan distributions resulting from a divorce – but they still apply to IRA distributions.

Anecdote of the Week

The Doctor is Not In

In one of our many doctor investigations (it seems that they get divorced more often than any other profession), while reviewing various records, including bank statements and cancelled checks, we noted that one bank account did not appear on the “official” books and records, trial balance/general ledger of the medical practice – and thus of course was never included in the Practice’s tax returns. If we could believe the story told us, it seems that a year or two prior, this additional bank account was set up, into which a significant amount of income was deposited. Allegedly, inadvertently and innocently, when it came time to entering this account into the system, oops, it was overlooked. Some of you who might say that’s not necessarily so bad because the money that went in was taken out and thus unreported income was offset by unreported expenses – no harm, no foul. Not quite – the only expenses from that bank account were disbursements to the doctors/owners

Tax Tip of the Week*

Sale of Marital Home

Many of our readers know that when you sell your home (principal residence) you are entitled to a $250,000 per person ($500,000 if married filing jointly) exclusion of gain from taxation. However, there are various rules, including that you needed to have lived in that house for at least two of the past five years. There is a special rule for divorced couples called the “Ousted Spouse Rule” that essentially allows that the two years out of five residency is met by a divorced person if his/her fellow divorced spouse meets that rule. This allows someone who has been out of the house for a number of years, and yet has retained his/her ownership interest in that house until it is sold (not an unusual situation), to benefit from the exclusion rule.

The Barson Group - Forensic accounting, Investigative accounting, Business valuations in NJ

Welcome to The Barson Group.

We are an accounting firm located in Somerville New Jersey, specializing in litigation support services, financial investigations and business valuations. We offer the "usual" services that a local accounting firm provides - such as tax planning and return preparation, related financial planning, general business services including consulting and preparation of financial statements, and assistance to internal accounting department personnel. In addition, we have extensive experience performing financial investigations for all forms of litigation (such as shareholder suits, partnership dissolutions, divorce proceedings, fraud and embezzlement matters, insurance claims and the like); as well as investigating finances for matters of funds flow tracing and determining income. We also have extensive experience in valuing a wide range of businesses - for litigation purposes, as well as for estate and gifting, and shareholder or partnership agreements. We welcome new clients, and invite your inquires.

Plese visit our website at www.barsongroup.com

Why is this Valuation Different Than All Other Valuations

Why is this Valuation Different Than All Other Valuations
by Kalman A. Barson, CPA/ABV, CFE, CFF
of The BARSON GROUP
www.barsongroup.com

It is possible that more business valuations are done for and in the context of divorces than for any other reason. However, the field of divorce presents a plethora of unique issues, some of which really have nothing to do with the technical aspects of business valuation. While the forensics, funds flow tracing, determination of income and determination of benefits is conceptually the same regardless of the purpose of the valuation, in some ways, divorce business valuation is like no other valuation.

There is likely no real transaction.

No matter what the rules are, Courts often create their own sense (and blend) of value.

Equity, or some interpretation of same, can be a driving factor in determining the value of a business.

The buyer of an interest in the business often has to continue to support the seller’s lifestyle.

Where part or all of the interest being valued was received via gift or inheritance during the marriage, or perhaps even prior to the marriage, present twists unique to divorce.

And then there’s the infamous “double dip”. In any valuation but a divorce valuation we merely have to value the interest at hand. In a divorce context, the person buying out the interest is also often called upon to maintain the lifestyle enjoyed during the marriage – to pay alimony, support or whatever. A problem arises, in the eyes of some, when we realize that it is the same “excess” income used in determining value, that same income which has created value, that is also being used at the same time for support. Is that fair – or is it a double dip. If it is a double dip, how do we address it.

To view the entire article please go to www.barsongroup.com

Kalman A. Barson - CPA/ABV, CFE, CFF, founder of The BARSON GROUP, Somerville NJ

Kalman A. Barson, CPA/ABV, CFE, CFF is the founder of The BARSON GROUP, a CPA firm with offices in Somerville, New Jersey. Kal and The BARSON GROUP specialize in litigation support services – including financial investigations, income determination, business valuations, expert witness testimony, funds flow tracing, and related tax consulting and financial planning. Kal is a frequent lecturer, having spoken on behalf of the American Institute of CPA’s, the New Jersey Society of CPA’s, the Institute for Continuing Legal Education, various Bar Associations and legal groups and various other professional and business organizations. He is the author of several books and numerous articles, and a frequent lecturer.

To read more on The Barson Group please visit out website at http://www.barsongroup.com/.