An Attorney's Guide to the Recent I.R.S. Changes Regarding Innocent Spouse Relief


If you are representing clients in divorce proceedings, innocent spouse relief can help you to protect your clients from liability for underpayment or nonpayment of taxes caused by their spouse's dishonesty. Innocent spouse relief provides an important source of relief from tax debt, but until recently, there were significant limitations on when innocent spouse tax relief could be claimed.  The IRS recently lifted some of these limitations and the changes that were made can help you to make sure your client doesn't become unfairly burdened with his or her spouse's tax debts.

On July 25, 2011 the IRS issued Notice  2011-70, which made a significant change to the requirements for those seeking innocent spouse relief under (IRC Section 6015(f). IRS Commissioner Douglas Shulman indicated that the change was made because "when people are in tough circumstances, we [The IRS] need to be willing to work with them." Taxpayer Advocate Nina Olson has indicated that the change was a "a welcome occasion where everybody has emerged a winner."

The changes made by the IRS are simple - they extended the eligibility period for those seeking equitable relief, lifting the previously enforced two-year limit.

Mark S. Gottlieb recently wrote a white paper entitled, An Attorney’s Guide to the Recent IRS Changes Regarding Innocent Spouse Relief.  This is a must read for all matrimonial and family law practitioners.

This white paper is part of a 3 part special issue for all matrimonial practitioners.

Part 1 - An Attorney's Guide to Divorce-Related Tax Issues.

Part 2 - An Attorney's Guide to the Recent I.R.S. Changes Regarding Innocent Spouse Relief.

Part 3 - An Initial Document Request for Valuation & Litigation Services.

To obtain a free copy of this Special Report click here.

The Joint Appraiser's Role in a Divorce Action


In these economically challenging times, parties are increasingly seeking ways to reduce the cost and conflict of divorce. Many attempt to streamline the process by retaining a joint expert/valuator to appraise the marital business and/or business interests. Indeed, there are numerous benefits. Consider, for instance, that without a joint appraisal, many non-business owning spouses or those without direct access to marital funds would not be able to afford any expert in the case.  

In addition to the added financial benefit of retaining a joint expert,

  • ·the evaluator is also likely to get better access to documents and other evidence than an expert who has been retained by one party or another, 
  • ·the evaluator can often take on the role of creative problem solver, coming up with financially efficient, resourceful solutions,
  • ·the parties and their attorneys frequently view the joint appraiser as more independent and objective, and can use the joint expert to expedite mediation and settlement.

Attorneys avoid any pitfalls by clearly explaining to their clients the differences between retaining a sole expert and a joint expert. This will help clients from feeling “betrayed” later on in the case—when, for example, the appraiser may spend more time with the business-owning spouse to obtain information and financial records; or when the appraiser’s opinions conflict with the owner’s perception of the business’ value. 

It is important for the legal practitioner to become acquainted not only with appraisers who have experience as joint experts, but also those who also have some mediation or alternative dispute resolution training, as they may prove to be the most efficient joint experts.

The emerging field of collaborative law in many jurisdictions also utilizes the joint expert process. Many mediators/arbitrators are taking advantage of the joint appraisers as well, to reduce the conflict and cost of divorce cases.

The joint appraiser is particularly suited to smaller cases that concern sole proprietorships or family-owned businesses, when two experts would most likely reach similar conclusions of value. Parties in the smaller cases will not often have the funds to hire specialists or consultants—and conversely, where the parties do have such funds, a joint expert may not work to their advantage.

Once the parties have decided to take this route, it is important to work toward creating a framework for the engagement by taking steps to:

  • Define the scope of the engagement and determine whether the expert will provide ancillary services, such as forensic investigation, income determination, and accounting for separate property.
  • Establish a protocol for communications between the expert and counsel and the expert and the parties.
  • Establish a protocol for communications between the expert and the court.
  • Establish a protocol for communications between the expert and any consultant, specialist, or rebuttal expert that the parties may hire.
  • Establish a timeline and procedure for the document production process, especially who will provide the documents and what they will provide.
  • Provide a methodology to enforce the cooperation of the parties and a means of recourse for the expert if requested information is not forthcoming.
  • Discuss and define the applicable standard of value.
  • Institute a procedure for providing draft reports and receiving comments from attorneys and the parties.
  • Determine the format of the final work product and whether the expert will provide a summary or detailed report
  • Establish a procedure to compensate the expert, including the amount of a retainer, and his/her recourse for delinquent payments.

There are, of course, common problems in divorce cases. Just because the parties have retained a joint expert does not immune the process, or the appraiser, from the same challenges that can frustrate any divorce proceeding.  Investing the effort to establish a framework for the engagement can reduce these frustrations. In addition, if the attorneys and both spouses support the retention of a joint appraiser, they will have more confidence in the process. 

For more information on business valuation in matrimonial matters, please visit our website In addition, please visit our podcast library at for a variety of broadcasts specific to financial matters in a matrimonial setting.


Cliff Lee's Earnings Capacity Is At Its Peak. Would He Be Able to Keep It All If He Divorced In New York?


December is an exciting month for sports fans, particularly New York sports fans. The area’s football teams are both bidding for playoff berths; basketball and hockey fans are settling in with mixed feelings about their team’s early performance; and major league baseball’s “hot stove” league is a buzz with the potential of free agent signings.

This year’s biggest baseball free agent star is pitcher Cliff Lee. And to no surprise the New York Yankees are among the few teams bidding for his affection. The AngelsRangers, and Yankees have all reportedly “pitched” Cliff Lee and have offered him a king’s ransom to play for their team. 

Each of the three teams courting Mr. Lee has something different to offer. California has beautiful weather; Texas has no state income tax; and New York has an opportunity to earn millions of dollars above a baseball contract in endorsements and sponsorships. There is little doubt that in addition to his agent, family, and friends Mr. Lee is getting plenty of advice from a variety of marketing, legal, and tax professionals.

Even though I have not been asked, I thought I would give my two cents to Mr. Lee’s quandary. Cliff, stay away from New York. It could be your financial ruin.

Assume Cliff Lee signs with the Yankees for seven years at $25 million per year and contracts for an additional $5 million per year for marketing. It doesn’t take a forensic accountant to compute that during the next seven years he will earn $210 million.   But suppose Lee, A-Rod, and Jeter go out one night to celebrate a big win over their arch rivals, the Boston Red Sox. We all know that Alex Rodriguez and Derek Jeter are magnets for beautiful women. And just suppose Cliff Lee decides shortly thereafter that he would be happier living as a bachelor in New York City. Unlike any other state in the union, New York State provides equitable distribution for the enhanced earnings capacity acquired during marriage; a concept that the future ex-Mrs. Lee will shortly learn.

The enhanced earnings capacity (commonly referred to as EEC) is computed as the present value of the enhancement in earnings over an expected work life. In Lee’s case, this expectancy would extend over the next seven years of his new contract and may proceed for many years thereafter, if he should be fortunate enough to become a coach, commentator, or television analyst after his playing days are over.

The approach to calculating the enhanced earnings capacity in New York State was established in 1985 as a result of a New York Appellate Court’s decision in O’Brien v. O’Brien. This concept was later reaffirmed in 1995 in the New York Court’s decision in McSparron v. McSparron; as well as many other cases that followed. The methodology employed to this calculationspecific to Cliff Lee can be broken down into five steps:

  1. Determine Cliff Lee’s earnings capacity at the commencement of the hypothetical divorce action, resulting from signing with the NY Yankees. This is referred to as Top-Line Earnings.
  2. Determine Cliff Lee’s earnings capacity if he had not become a baseball phenom and continued the career path chosen at the time of marriage. This is referred to as Base-Line Earnings.
  3. Compute the after-tax earnings of the Top-Line and Base-Line amounts by applying federal, state and local income tax rates, as well as the social security and medicare tax.
  4. The difference between the net after-tax earnings of each earnings base is the net enhanced earnings capacity attributable to his record setting contract.
  5. Compute the present value of the net enhanced earnings capacity over his NY Yankee contract.

For illustrative purposes, let’s assume that Cliff Lee had a bachelor’s degree at the time of marriage. Let’s further assume that a white male with a bachelor’s degree, living in New York City at Mr. Lee’s current age would earn $125,000 per year. This is the amount considered as a proxy for Base-Line earnings.

The following table illustrates the after-tax earnings of both the Top-line and Base-Line amounts; as well as the annual net enhanced earnings capacity.

                                                 Top-Line Earnings
Base-Line Earnings
Pre-Tax Earnings 30,000,000 125,000
(-) Fica/Medicare -441,622 -8,434
(-) Federal Income Taxes -9,256,731 -24,333
(-) State/City Income Taxes -3,784,335 -12,019
Net After Tax Earnings
Net Enhanced Earnings Capacity   16,437,098

A present value discount rate is designed to reflect the value of money in a relatively risk free investment. Economists, financial analysts and accountants generally agree that the real rate of interest is between 2% and 4%. The courts have historically accepted 3% as the present value factor applied in this computation; but in recent cases have considered rates between 5% and 10%. The present value discount rate is very important. As the present value discount factor increases, the total enhanced earnings computation decreases.

Based upon these computations, the enhanced earnings capacity attributed to Cliff Lee’s potential seven year contract with the NY Yankees is $102 Million (Rounded). The following table illustrates this computation.

Net Enhanced Earnings Capacity Present Value Discount Factor @ 3% Net Present Value
1 16,437,098 0.97087 15,958,348
2 16,437,098 0.94260 15,493,541
3 16,437,098 0.91514 15,042,273
4 16,437,098 0.88849 14,604,149
5 16,437,098 0.86261 14,178,785
6 16,437,098 0.83748 13,765,811
7 16,437,098 0.81309 13,364,865

Since New York is an equitable distribution State, a portion of this amount would belong to his soon to be ex-wife. In some instances the courts have awarded as much as a 50% share and in others as little as 10%.

As you can imagine, there are a variety of things Cliff Lee has to consider when deciding which mound to call home next year. Will he flourish in the California sun; the familiarity of Texas home cooking; or the cement jungle of New York City. Only time will tell. But what we do know is this – getting divorced in New York State after signing a record setting free agent contract could be more painful than losing in the World Series to the San Francisco Giants.

For more information about the computation and application of the enhanced earnings capacity calculation, including our Enhanced Earnings Capacity Questionnaire, please visit our website.


An Attorney's Guide To Divorce-Related Tax Issues

There may be no glory in being a family law attorney these days, especially when it comes to dealing with the often challenging economic consequences in a divorce action.

Clients may initially contact you with one issue related to their potential divorce, but often these concerns can quickly manifest as emotions and pressures begin to develop.

Perhaps the questions attorneys resist the most or feel least comfortable in answering pertain to divorce-related tax matters. Many individuals, including those contemplating divorce, will be reaching out to you for answers to a variety of tax-related divorce questions. So, this may be the best time to revisit some of the questions you may be faced with.

Here are ten divorce-related tax issues that all matrimonial and family law attorneys should know.

1.       Taxability of Assets Distributed Incident to Divorce

In many instances one of the most disputed issues in a divorce is the distribution of the marital assets. This is commonly referred to as “equitable distribution” or “ED”. Under the Internal Revenue Code (IRC) Section 1041 (a), no gain or loss is recognized on the transfer (acquisition or distribution) incident to divorce provided such transfer occurs within one year after the divorce or related to the ending of the marriage. 

The ending of the marriage is defined pursuant to a divorce or separation agreement and occurs within six years after the date on which the marriage ended. 

Practice Tip: Often, one of the most significant marital assets is the marital residence and/or a business. The values of these assets should be appraised by an independent credentialed valuation expert in the early stages of the divorce proceeding.

2.       Tax Deductibility of Professional Fees

Legal and other professional fees related to getting a divorce are generally not tax deductible. These non-deductible costs include expenses related in arriving at financial settlements and retaining income-producing property. However, some legal and accounting expenses can be deducted as a miscellaneous itemized deduction, subject to the 2% limitation (and also as a preference for alternative minimum tax purposes). Here is a short list of some of these exceptions:

  • Fees related to tax advice related to a divorce,
  • Fees to determine or collect alimony,
  • Fees to determine estate tax consequences of property settlements, and
  •  Appraisal and actuary fees to determine tax liabilities or to assist in obtaining alimony

Practice Tip: When your client retains an accounting/tax professional ask them to prepare their invoices with specific descriptions so that the tax deductible portion of their charges can be easily determined.

3.       Alimony v. Child Support

In simple terms, alimony is taxable to the recipient and deductible by the payer. To qualify as alimony under IRC Section 71(b) the payments must meet the following requirements:

  • Payments are required under a written divorce or separation agreement,
  • The payment cannot be designated as “not alimony”,
  • Spouses may not be members of the same household,
  •  Payments may not be treated as child support,
  •  Payments must cease upon death of recipient, and
  •  The parties cannot file a joint tax return

Child Support is never taxable, and there are a few other common payments that do not qualify as alimony, such as:

  • Non-cash transfers,
  • Payments for use of property, and
  • Payments to keep up the payer’s property

In addition, an often neglected issue pertains to the short-fall of child support obligations. When an individual is obligated to pay (both) alimony and child support, payments are first applied to satisfy child support obligations and then to alimony. In other words, child support obligations must be fully satisfied before any amount of alimony is considered deductible.

Practice Tip: When structuring alimony agreements one should be conscious of the possible applicable alimony recapture rules. If there is a decrease or termination of alimony during the first three calendar years, recapture rules apply if the alimony in the second or third calendar year is $15,000 less than in the prior year. The recapture provision may be initiated by one or more of the following:

  • Failure to make timely payments,
  • Change in divorce or separation agreement,
  • Reduction in spouse support needs, and
  • Reduction in payers ability to provide support

4.       Sale of Personal Residence

If you live in your “Principal Residence” for any two of the last five years you are eligible for a capital gain exclusion upon the sale of the home. This exclusion is $250,000 for a single taxpayer and $500,000 for a married couple. Because of the significant difference in tax treatment, the tax consequences related to the sale of the marital home should be considered early on in the divorce settlement negotiations.

Practice Tip: If the sale of the marital residence is contemplated, consider the transaction prior to the termination of the marriage in order to take advantage the higher exclusion amount in order to secure more proceeds from the sale.

5.       Filing Status

An individual’s marital status is determined as of the last day of the calendar year – December 31st. Married individuals can file jointly or married filing separate. When the parties file jointly each is jointly liable for the tax obligation, regardless of what a divorce instrument may say. 

The married filing separate status is the highest tax rate. When spouses file separate returns they both must utilize the standard or itemized deductions. The first one to file establishes the requirements for the other to follow. When married individuals file their tax returns separately we often find other critical issues being considered. 

If an individual is divorced as of December 31st, even if married and living together with their ex-spouse sometime during the year, they must file as a single taxpayer or head of household for that year.

For those that are still married at the end of the year but were legally separated on December 31st or have not lived with their spouse for the last six months of the year – they may be able to file as head of household. This filing status is attractive because the tax rates are significantly less than for those filing as married filing separate. 

To file head of household a number of requirements must be met:

  • The individual must have paid more than half of the cost of keeping a home for a child or other qualifying person,
  •  This individual is entitled to claim the qualifying person as a tax exemption, and
  •   The qualifying person must have lived in the individual’s home for more than half the year

Practice Tip: Income Tax projections utilizing different scenarios are an often neglected but valuable planning tool. This exercise should be performed for years before and after the termination of the marriage.

6.       Children/Dependents Personal Exemptions

Generally, the custodial parent is entitled to the dependency exemption as long as the parents (individually or together) provide at least one-half of the dependents support. However, there are two exceptions to this general rule:

  •  When the custodial parent relinquishes the rights to the exemption, or
  •   When a multiple support agreement is established

Practice Tip: Dependent exemptions often vary by agreement. When preparing these arrangements make sure you consider the age of the child/dependent and the taxable income of each parent.

7.       Deductibility of Mortgage Interest & Real Estate Taxes

When a couples’ principal residence is jointly owned and the mortgage interest and real estate taxes are paid from a joint account there is a presumption that these payments are attributed to each party on a 50/50 basis. 

However, when a home is jointly owned and these payments are paid directly by the non-occupant spouse, half of the mortgage interest and real estate taxes is deductible to the paying spouse as an itemized deduction and the remainder qualifies as alimony. The occupying spouse must report these amounts as income (alimony) but is able to deduct the interest and taxes as an itemized deduction.

If the home is owned only by the occupying spouse but the non-occupying spouse is still obligated on the mortgage, the non-occupying spouse can only deduct the mortgage interest if a minor child of the marriage resides in the home. The non-occupying spouse cannot deduct any of the real estate taxes, since he or she has no ownership in the property.

Alternatively, if the non-occupying spouse solely owns the house and pays the mortgage interest and real estate taxes then those amounts can be deducted in their entirety as an itemized deduction. The occupying spouse would not have to report these amounts as alimony.

Practice Tip: Don’t assume that the marital residence is jointly owned by each the husband and wife. Inquire as to who owns the property and who is obligated on the primary and secondary mortgages.

8.       IRA’s and Retirement Plans

A Qualified Domestic Relations Order (QDRO) is a useful tool to designate a portion of a qualified retirement plan to the other spouse. This vehicle allows the distribution of the marital asset without damaging the integrity of the plan or the creation of a taxable event. Benefits are taxed when distributions are made, not when the QDRO is established. QDRO’s do not apply to Individual Retirement Accounts (IRA’s); however, IRA’s transferred pursuant to a divorce or separation agreement is not a taxable event.

Practice Tip: The use of a QDRO is an accessible tool to facilitate the equitable distribution of assets when there are limited liquid assets.

9.       Stock Option & Deferred Compensation Plans

The transfer of an interest in a non-statutory stock option or a non-qualified deferred compensation plan incident to a divorce is not a taxable event. However, income is reported when the former spouse exercises the stock options or when the deferred compensation is paid (or made available).

Practice Tip: Stock option & deferred compensation plans can be identified within employment contracts and/or annual wage reporting statements. Obtain the periodic statements (monthly, quarterly, annual, etc.) for your file.

10.   Innocent Spouse Relief

There are currently three sections of Internal Revenue Code that provide relief from tax liability to spouses:

  • Innocent Spouse (IRC Section 6015 (b)),
  • Separation of Liability (IRC Section 6015 (c)), and
  • Equitable Relief (IRC Section 6015 (f))
  • When applicable, the courts have considered the following factors to determine their applicability:
  • Knowledge,
  • Economic hardship,
  • Benefit,
  • Compliance with tax laws,
  • Tax liability attributed to non-requesting spouse,
  • Marital status, and
  • Spousal abuse

Practice Tip: If you plan to invoke the innocent spouse rule prepare your argument by addressing as many of the above factors discussed above. IRS Form 8857, Request for Innocent Spouse Relief, is filed separately, not with the couples’ individual income tax returns.

We hope this brief summary is of value to you and your practice. Your questions or comments regarding this information are always welcome.  

For additional timely information to assist your family law and matrimonial law practice please feel free to visit our website, or call our offices.

New York State's New Legislation Impacts The Financial Concerns of Family Law


The summer of 2010 may be remembered by many Family Law practitioners as the “Historic Summer of Legislation” that will forever change how matrimonial law is practiced in New York State. There have been five major changes of legislation; new laws that many in the legal community have strong views about.  These changes include significant financial implications.

These five major bills address the following:

  1. Significant changes effectuating child support modification (Bill # A8952); effective October 13, 2010,
  2. “No-Fault” Divorce (Bill # A3890); effective October 12, 2010,
  3.  The new Counsel Fee Bill that addresses payment of attorneys’ fees (Bill # A4532) on behalf of the less monied spouse; effective October 12, 2010,
  4. New procedures for setting awards of temporary maintenance while a divorce is pending (Bill # S08390); effective October 12, 2010, and
  5. Limiting the grounds by which orders of protection may be denied, or applications for such orders may be dismissed; effective August 13, 2010.

For those of you that have been following our blog throughout the summer, you are very much aware of how the legal community has been intensely interested in these and other changes. For instance, on our podcast Forensic Perspectives, we interviewed the Honorable Sondra Miller on the topic of No-Fault Divorce. In addition, I recently participated in a panel discussion with three prominent attorneys on New York State’s Current Legislation to Develop Maintenance/Alimony Guidelines. Additional information regarding these programs are available on our website.

According to Governor David Paterson, in addition to bringing New York’s divorce laws into the 21st Century, “These bills fix a broken process that produced extended and contentious litigation, poisoned feelings between the parties, and harmed the interests of those persons—too often women—who did not have sufficient financial wherewithal to protect their legal rights.”

So how is the divorce process now going to be different for Family Law practitioners?  

Let’s quickly look at some of these new provisions.

No-Fault Divorce

Before the “No-Fault” legislation was passed, couples at both ends of the economic spectrum often had to leap over hurdles addressing grounds. With the passing of the No-Fault Legislation, grounds are no longer an obstacle, if certain financial and custody issues have already been resolved. It should also be noted that the no-fault provisions are only applicable after a marriage has “irretrievably” broken down for six months or more.

Counsel Fees

The Counsel Fee Bill is intended to cure instances where the parties have significantly different economic resources. In situations where one party has significantly more assets and/or higher income, the less monied spouse will now have access to funds for attorney fees. It is often said that “all is fair in love and war”. This legislation is intended to even the playing field of the less monied spouse by providing resources for legal representation.  In the end, the court still must exercise its discretion. Many legal practitioners have welcomed this change, but are cautioned to understand that no one will be given carte blanche.

Temporary Maintenance Guidelines Bill

The Temporary Maintenance Guidelines bill will allow for a speedy resolution of the maintenance issues. It is intended to prevent the non-monied spouse from descending into poverty because they lack the resources to obtain a temporary maintenance order. The guideline amount of temporary maintenance is the sum derived by a formula set forth in the statute. The Court has the right to make a durational temporary maintenance award which ceases prior to the end of the case or death. If the Court finds this award unjust, as determined from this formula, it can be changed. 

Modification of Child Support

The Family Court Act (“FCA”) was amended to conform provisions governing the modification of child support orders to the Domestic Relations Law. This change would allow modification of an order of child support due to “substantial change in circumstances”.

In addition, unless parties specifically opt out, the court can modify a post October 13, 2010 order where three years have passed since the last order was entered, modified, or adjusted. Substantial change in circumstances is generally defined in a change in either party’s gross income by 15% or more. A reduction in income shall not be considered as a ground for modification unless it was involuntary and the party has made diligent attempts to secure employment.

Chapter 341 of the Laws of 2010

Various provisions of the Family Court Act and the Domestic Relations Law have been amended by Chapter 341 of the Laws; effective August 13, 2010. They provide that a court “shall not deny an order of protection solely on the basis that the acts or events alleged are not relatively contemporaneous with the date of the application.” The duration of any temporary order shall not by itself be a factor in determining the length of any final order. It applies to all orders of protection pending or entered on or after the effective date.

As you can see from this overview, these changes will significantly impact how you approach a matrimonial case. While this summary is not intended to provide a complete analysis of the changes, you can easily see the financial implications concerning your current and future case load. Many of the local Bar Associations are conducting CLE classes addressing these changes. We have been fortunate enough to have sponsored a number of them. For further information regarding these classes please contact your local Bar Association.


Finding Hidden Treasures In Tax Returns

I often tell of my first experience as an expert witness in a matrimonial matter. At that time there was not a plethora of literature that addressed the search for omitted income or hidden assets. Much of what we now call forensic accounting was performed intuitively by those of us with strong auditing backgrounds.

The “money spouse” was in a family business. Income, sales, and payroll tax returns were all filed on time and appeared to be complete and accurate. The problem appeared when the reported income (net of income taxes) was compared to the ordinary living expenses on the “non-money spouse’s” Certified Net Worth Statement.

As you probably guessed, the expenses greatly exceeded the funds earned and available to pay these expenses. Now that the red flag has been raised, two obvious questions emerged; (1) Were the expenses listed on the net worth statement actually paid or merely the non-money spouse’s wish list?; and (2) Were there other sources of funds such as increase in loans and/or credit card debt, distributions from other entities, receipt of gifts, etc. to account for this difference.

Truth be told, you don’t necessarily need to be an auditor or forensic accountant to smell a thief. However, to catch the culprit red handed you need the skills of a gumshoe. This article is designed to provide attorneys with a road map to identify those possible treasures found within tax returns.

Business tax returns report the assets, liabilities, equity, revenues, and expenses of an entity. The balance sheet primarily lists the historical cost of what the entity owns (assets) and its obligations (liabilities). Assets are those items that have economic value or which are used in the ordinary course of business. These are also commonly referred to as the business’s resources. Examples of assets are cash, inventory, fixed assets, and real estate. Liabilities represent amounts owed. Examples of liabilities are amounts due to vendors and suppliers, mortgage/loan obligations and other debts.

When analyzing the balance sheet of a business one should verify that these assets and liabilities are truly business related and not personal. Examples of personal assets hidden within the confines of a business commonly include automobiles, real estate, investments and other tangible assets. A good start in this analysis is to request a detailed fixed asset schedule and then identify what assets are actually being used in the normal course of business. Don’t forget to look for other assets identified within the balance sheet. Potentially, any excess assets identified may be personal.

Liabilities should also be considered. Recorded and paid debts should be verified to insure that they relate to the business. The payment of obligations can be easily traced to its source. If payments are being made, then an asset or benefit should exist. You may even identify debt payments where an asset is not apparent or recorded.

The income and expense sections of tax returns are also rich sources of information. However, the devil is in the detail. There are two common ways to identify personal expenses. First, compare expense categories year by year. Spikes and valleys within the same category commonly detect personal spending. Second, obtain grouping schedules and transaction listings for deductions taken. Identifying vendors, suppliers, and other payees often highlights those that may not be business related. The Treasury calls these non-deductible expenses, the forensic accounting community frequently refers to them as discretionary items. Expense categories that commonly contain such items are travel, meals, entertainment, automobile, and miscellaneous.

Further analysis can also identify hidden assets, such as real property. A review of the utility and real estate tax payments may uncover property not otherwise known. But these items may not necessarily be found only within the expense detail of tax returns. Amounts paid on behalf of the business owner may be recorded as a dividend distribution, loan payment or even salary. In these instances, the true nature of the disbursement can be easily disguised.

Personal income tax returns can also serve as an investigative tool. A review of itemized deductions can be very informative. For instance, a deduction for investment management fees can lead to the discovery of an undisclosed investment portfolio. Since such fees are commonly based upon the principal value of the portfolio, this amount may be reasonably estimated. And don’t forget about the miscellaneous deduction for the safe deposit box rental. Unfortunately, you won’t know what assets are kept there until you open the box.

A review of the pass-through entities on Schedule E, Supplemental Income and Loss, can also be informative. Schedule E lists the income and losses attributed to ownership interests from business entities. Bank and brokerage accounts appear on Schedule B, Interest and Dividend Income. What may be the most important observation in analyzing Schedules E and B are the change in their components from year to year. The change in bank, brokerage, and investment accounts may be an indication of money being moved.

Another item to note is the change in interest and dividend income. This may reflect a change in returns on investment or the alteration of principal investment. You may also want to trace the proceeds for the sale of stocks and investments. These transactions are itemized on Schedule D, Capital Gains and Losses on Form 1040.

The paths on which business and individual income tax returns take you may be limitless. Although this process may be an expensive task, more times than not it provides an insight to a couple’s finances that may otherwise go undetected. Hopefully, this blog will make you aware of the potential issues you may encounter and how you may want to address these matters with your client.

I will be lecturing on this topic, “Finding Hidden Treasures In Tax Returns” at the upcoming annual conference sponsored by the Association of Divorce Financial Planners (CDFA) this fall.  Please visit their website for registration information.


The Honorable Sondra Miller's Take On No-Fault Divorce

Since our last blog was published, the New York State Assembly gave final passage on July 1st to no-fault divorce, clearing the way for New York State to allowing couples to end their marriages quickly when one spouse believes the union is over. The new measure, which requires one spouse to swear under oath that the relationship has broken down irretrievably for at least six months, is the final piece of a legislative package enacting the most sweeping changes to the state’s divorce laws in 40 years. This final legislative approval comes after what one member of the Assembly called “an awfully long and hard battle.” The bills now await Governor Paterson’s signature.

No-fault divorce has long been opposed by the Catholic Church, with the view that the legislation would make divorce easier; feminists argued that no-fault did not address the concerns of poorer women. The National Organization for Women of New York State has found itself on the same side of the issue as the Church, although the New York City chapter of NOW supports the legislation.

Marcia Pappas, president of the New York State chapter of NOW, has written recently, “No-fault can take away the bargaining leverage of the non-moneyed spouse—and that is usually the woman….In fairness, any partner to a marriage should be provided with notice that the other partner wants a divorce and given an opportunity to negotiate the terms for the divorce. Often, there is fault with ‘divorce on demand,’ not only can the more moneyed spouse begin hiding assets (which happens even under our current laws), but this spouse can proceed quickly with legal actions before the other spouse, with limited means, even has the time to find and hire an attorney.”

Until 2004, the Women’s Bar Association has also objected to no-fault divorce. But as Annette G. Hasapidis, co-chairwoman of the association’s legislation committee has said, “We came to the realization that forcing one party to either admit or be found at fault in the deterioration of a marriage provides no economic or other advantage to either party. And more importantly, it harms the children of the marriage.” The concern of advocates for women that there would be difficulty receiving appropriate alimony or child support was considered unsupportable by the Women’s Bar Association.

Both supporters and opponents have concerns regarding the creation of a formula that computes alimony. This mechanism, however, is intended to alleviate the conflict and legal jockeying commonly associated with the determination of spousal maintenance.

The Honorable Sondra Miller, currently Chief Counsel of the White Plains law firm McCarthy Fingar, has been advocating for an amendment to allow no-fault divorce for many years. Recently, we had the opportunity to interview Judge Miller for our podcast on this historic legislation. Some of the key questions she thoughtfully addresses include: Why is no-fault divorce still a hot-button issue for politically liberal groups, religious groups and even among certain members of the legal community? Why has it been such an uphill battle for New York legislators to simplify New York State's divorce laws? Is it possible to measure the impact on children without no-fault divorce?

Please visit our Web site to hear our edifying podcast interview with the Honorable Sondra Miller.

New York State Senate's Democratic Majority Passes Legislative Package To Approve No-Fault Divorce

Forty years ago, no-fault divorce was a controversial topic. Among the arguments made against it was that the full-time homemaker would lose leverage if unilateral divorce became a reality. But the American household has changed considerably over the years: more and more, two-parent earner households are the norm, and the working mom/stay-at-home dad model has become commonplace. Since 1969, when Gov. Reagan signed the nation’s first no-fault divorce law, the country has gradually fallen into place with no-fault divorce legislation—except for New York State.

But that seems about to change. On Tuesday, June 15, the State Senate’s Democratic Majority passed a legislative package that seeks to finally end New York’s status as the remaining state without no-fault divorce. The No-Fault Divorce bill restructures New York State’s matrimonial law to streamline the process and improve the outcome of divorce for New Yorkers. The bill, approved 32-29, would allow no-fault divorce after a marriage has “irretrievably” broken down for six months or more and after all financial and custody issues are resolved. The legislative package must still pass the State Assembly, which is considering two bills that would adopt some version of no-fault divorce.

Senator Ruth Hassell-Thompson, a Democrat from Westchester and the Bronx who was chief Senate sponsor of the bill, said after the vote, “What I’m hoping is that because the Assembly now has a partner in the Senate, that will give impetus to help the Assembly move along.”

Under current law, New York couples who want to divorce must fault their spouse on specific grounds, such as adultery or cruel and inhuman treatment. Otherwise, couples must legally separate for a year before being allowed to file for divorce. Proponents of no-fault divorce say a great deal of time and expense—often beyond the means of a spouse—is wasted on legal fees, making a difficult situation considerably worse. The New York Senate legislation—S3890—would permit spouses unilaterally to initiate divorce proceedings in which the court rather than the parties will resolve issues such as property division, alimony, child support and custody.

There have been many concerted efforts over the years to change New York State’s divorce laws, but to no avail. In 2006, for example, a panel appointed by Judith S. Kaye, then New York State’s chief judge, urged a major overhaul of New York’s divorce and child custody rules—including allowing, at long last, no-fault divorce. But opponents, including the National Organization of Women, the Catholic Church and, until 2004, the Women’s Bar Association of the State of New York, objected to change in the law because, among other reasons, it would raise New York State’s divorce rate and hurt women financially.

Perhaps now, after decades of opposition, and the passage of the legislative package by a slim margin, divorcing spouses in New York State will finally be able to avoid the costly litigation and seemingly endless custody battles that have become all so common when a marriage irrevocably ends.


Panel of Experts Discuss New York State's Current Legislation To Develop Maintenance/Alimony Guidelines

On Wednesday, June 9, 2010, John Jay College, the New York State Council on Divorce Mediation, and the Family & Divorce Mediation Counsel of Greater New York sponsored a panel discussion on the Proposed Maintenance Guidelines. The panel was comprised of three attorneys, Steven Abel, Esq., Alton L. Abramowitz, Esq., Emily Ruben, Esq. and forensic accountant and business valuation expert, Mark S. Gottlieb, CPA. The program was moderated by Rod Wells, CFP.

While the panel and the audience primarily agreed the intent of the proposed legislation has merit - there was some concern whether the proposed legislation addresses the need of a mechanism to calculate maintenance awards.

Emily Ruben, Esq. (Attorney-in Charge of the Brooklyn Neighborhood Office of The Legal Aid Society) pointed out that many couples going through a divorce do not have substantial assets to divide and that their greatest asset of the marriage is frequently the income of the more-monied spouse.   That being said, moderate and low-income spouses usually cannot afford the often costly litigation required to establish a right to maintenance.

Considering the unpredictable and inconsistent climate of maintenance awards, the less-monied spouse will usually settle, albeit under some pressure, to avoid costly litigation.

The New York legislative houses are each considering possible legislation to establish guidelines for post-marital income sharing not dissimilar to the Child Support Standards Act. By establishing guidelines for both the amount of maintenance to be awarded and the duration of the award, post-marital guidelines would provide the consistency and predictability for spousal support that the Child Support Standards Act has provided for child support.

So we are prompted to ask: Is this Bill a long-awaited solution? Is it indeed the new approach consistent with Chief Judge Judith Kaye’s call for a “cultural revolution” to reduce drastically the time and costs—both financial and emotional—of matrimonial cases?

Senator Hassell-Thompson, who introduced the Bill in the Senate, has said, “Neither spouse should feel financially compelled into accepting potentially detrimental or unfair settlements. Post-marital income guidelines will simplify the basis on which a predictable and equitable settlement between two divorcing spouses may be reached.”

According to Senator Liz Krueger, “As it is, divorce is a very emotional and painful process, the State should not be making it more difficult through antiquated laws and a lack of guidance to our courts. As legislators, if we can help people during this difficult time by improving the process and making it easier for them to get on with their lives, then we need to explore these options.”

Many agree with these Senators’ views on setting guidelines. Currently, trial courts have broad discretion in deciding whether to award maintenance and in determining its duration and amount. It’s for this very reason that spousal maintenance often becomes one of the most contested issues in divorce proceedings.

“The real battleground for financial issues,” Catherine J. Douglas, Executive Director inMotion has said, “is maintenance (formerly called alimony), for which outcomes are troublingly unpredictable and inconsistent. A spouse who may well be entitled to substantial maintenance and who may badly need this income for basic economic security has two choices: engage in the ritualized battle that is litigation or abandon the claim for maintenance altogether.”

The goals of the proposed guidelines recognize that marriage as an economic partnership.  However, as Steven Abel, Esq. (founding member and President of the Board of Directors of the New York State Chapter of Association of Family and Conciliation Courts) stated, “the devil is in the details.”

To achieve a fairer version of what is now called maintenance, a formula will be used to arrive at a presumed award amount, and a second formula will be used to determine how long this amount will be paid. Judges can vary the formula results when the amounts seem unfair for specific cases.

The amount of the post-marital award will depend on the incomes of the divorcing spouses. In practice, their post-award incomes will range from a 30%-70% split of combined income (when one spouse has no pre-award income) to a 40%-60% split of combined income (when pre-award incomes are closer to equal). The divorcing parties can present reasons for deviating from the guidelines.

Post-marital income payments would be tax-deductible to the payor and taxable to the payee. As a result, the after-tax income for spouses making payments under the post-marital income guidelines will actually be higher than the 60%-70% of combined income and lower than the 30%-40% of combined income for spouses receiving payments.

Judges can vary the required time period for payments if deemed necessary. Suffice to say, the longer the marriage of the divorcing couple, the longer the post-marital payments will last.

Not all divorcing couples, however, will use the proposed guidelines. Couples with combined assets over $1,000,000 will have their cases resolved differently since marital assets are likely to include much more than the future ability of the former spouses to earn income—including significant property that will subject to equitable distribution.

The guidelines would help those who do not have the means to pay for lengthy, expensive divorces. Under the existing law, it is so difficult to make a claim for maintenance that the majority of lower-earning spouses from low and middle income families simply give up claims for maintenance.

One of the more controversial aspects of the current New York law is the assumption that all a spouse requires after a marriage, no matter how long its duration, is a brief period of “rehabilitative” maintenance. But even a short time out of the labor market has repercussions. And for older individuals who have not been employed for years at a time face rather bleak prospects in the labor market.

Still, there are those distinguished members of the legal community who feel that the proposed changes are problematic. In a series of articles for the New York Family Law Monthly, Alton L. Abramowitz, Esq. (partner in the law firm Mayerson Stutman Abramowitz, LLP) has written that, among other things, the proposal does not constitute a comprehensive approach to reforming the current equitable distribution law; rather it alters one aspect of the law without considering the overall effect on each party.

Mr. Abramowitz also says that it is readily apparent that this is not a proposal for support of a spouse following a divorce, but is disguised “wealth distribution” or, even worse, “compensation” for having been married.

So is the possible legislation to establish guidelines for post marital income sharing a long overdue “just due,” especially for those many litigants who have no real choice. Or, in Mr. Abramowitz’s words, would the legislation create “mischief of untold proportions” by tinkering with discrete portions of the financial aspects of our divorce laws—without making adjustments to the other aspects of those laws—so as to allow a court to piece together all of the parts in an equitable fashion?

After each attorney on the panel provided their comments on the proposed bill, Mark S. Gottlieb, CPA provided a calculation template he designed to compute the maintenance award as prescribed in the existing bill. This exercise, as well as the comments from the members of the panel, made this program both informative and practical.

We will continue to keep a watchful eye on the progress of this bill, as well as comments offered by its supporters and critics.

Major Changes in New Jersey's Palimony Law

In recent years, we have seen an increasing number of cases dealing with palimony filed in the New Jersey courts. Palimony has long been based on the law of contracts, where an oral promise can be enforced if a party relies and acts on it to their detriment. But a new law came into being during the last days of the Corzine Administration, requiring that in order for a palimony agreement to be enforceable, it must now be in writing and be executed with the independent advice of legal counsel.

Recently, forensic accounting expert, Mark S. Gottlieb,  met with Stephanie Hagan, a Family Law attorney and Partner in the firm Donohue, Hagan, Klein, Newsome and O'Donnell PC, to discuss the enactment of the Statute and its effect on couples. Both of these professionals have extensive experience in matrimonial and family law matters.


Although early palimony decisions found that cohabitation was a necessary element in a palimony action, this concept was eventually overruled by the New Jersey Supreme Court in 2008 when the Court ruled in Devaney v. Esperance .  In this case cohabitation was no longer a required factor. The Court found that a marital-type relationship is essential to any palimony claim; however, cohabitation is not essential to a determination of a marital-type relationship.  In many instances married couples may be separated by employment, military, or educational opportunities. Hence, not all married couples live together on a full-time basis.

According to Ms. Hagan, there is no doubt that the L'Esperance decision was the catalyst for the Legislature in passing the new law. Effective January 2010, the law requires all "promises" of support to be made in writing. As a result, many people who have entered into a long-term committed relationships without being married may find themselves in financial jeopardy.  Ms. Hagan emphasizes this issue for those of modest means. Without recourse, many individuals, regardless of financial capacity, may find themselves vulnerable when living with someone without a written agreement..

These written agreements are still considered "contracts" between two parties and can be held invalid for any number of reasons--including being "unconscionable" or "void" as against public policy. The legislation also says the written promise will not be binding unless it was made with independent legal advice for both parties.

To learn more about the new palimony law in New Jersey, please listen to Mark S. Gottlieb's  podcast with Stephanie Hagan.

We welcome your thoughts and comments on this issue.

Madoff Scam Hits the Divorce Court

Over on New Jersey Family Legal Blog, I saw a post that editor Eric Solotoff, a family law attorney at Fox Rothschild wrote that struck my interest.

Upon reading the post, Madoff Mess Hits Divorce Court, I knew I had to sit down with Eric for a podcast, to discuss what all this means in respect to forensic accounting.



For context, Justice Saralee Evans in Manhattan recently decided on a case regarding a divorcing spouse who attempted to revise his agreement with his wife.

First, some background for our readers who may not be that familiar with the case:

After thirty years of marriage, a husband and his ex-wife spent nearly two years debating the value of their home in Scarsdale, The husband's law partnership, and their Manhattan apartment. The two agreed on at least one thing: an account they opened during their marriage with Bernard Madoff Investment Securities LLC was worth $5.4 million.

As part of a 2006 equitable distribution agreement, the husband claimed he paid his wife some $2.7 million, which represented what he thought was his ex-wife's fair share of their investments with Madoff. But after Madoff's arrest in December 2008, the husband attempted to redo the agreement, claiming it was based on a "material, mutual mistake" and resulted in a windfall for his ex-wife.

After the husband learned that he and his wife had "been tricked by a sophisticated fraudster," he sought to reform the divorce agreement. The husband claimed the agreement did not accomplish the parties' goal of ensuring that each would keep approximately half of the marital assets.

The husband alleged that because the Madoff account turned out to be valueless, the spirit of the agreement was broken. But according to Justice Evans, there was no evidence that defendant was unjustly enriched.

Justice Evans last December held that while the husband's decision to hold on to the Madoff account may have been "improvident," that did not give the Court an equitable basis to set the agreement aside. In dismissing the suit, Justice Evans wrote, "There is no evidence that defendant was unjustly enriched. In 2006, at the time of their agreement, each of the parties received the benefit of his or her bargain."

Justice Evans rejected the husband's argument that the mutual releases of both parties signed as part of their divorce agreement were based on a mutual mistake. The husband had liquidated part of his Madoff investment to fund his wife's equitable entitlement. So in 2006, and several years after, that the husband maintained this investment, the account could have been redeemed for cash, presumably in excess of its 2004 value. The wife's attorneys said Justice Evans' ruling underscored the importance of ensuring that both sides in a divorce agreement waive future claims against each other.

The lesson of this case is that clients and their divorce attorneys should be very careful in fashioning settlement agreements. Even when significant mistakes are made at the time the agreements are entered into, it's very difficult to set them aside--even in such extreme circumstances as being a victim of a historic scam.

To learn more about this decision please listen to our podcast with Eric.

Parenting Plans Considerations When Divorcing

I recently sat down and did a podcast with Leonard Florescue, a family law attorney at Blank Rome LLP, who advises clients primarily in complex matrimonial matters. We discussed the role parenting plans play in the divorce process.



Among the most important aspects of family law are custody and parenting plan issues. The family law practitioner is expected to take great care to work with his or her clients to create a viable parenting plan, which is an agreement between parents, who are either divorcing or who have never married.

In the simplest terms, a parenting plan establishes who will spend time with the children and when and under what circumstances. The parenting plan also determines who makes the major decisions about education, medical care and other important issues.

A good parenting plan is necessary in promoting harmony and alleviating stressful situations for both parents and children. There can be serious repercussions when parents have either a poorly though-out parenting plan or no plan at all.

In an organizational or government hierarchy, there's a single person or group with the most power and authority, and each subsequent level represents a lesser authority. Parents must create a "hierarchy" of their own.

Time sharing is often a very stressful topic for parents. When outlining shared parenting schedules, parents must try their best to avoid potential areas of stress.

It's also advisable for parents to create a formula for the events they are anticipating for the first years of the parenting plan's existence.

I know parental death is a subject a lot of parents don't want to consider, but we're all mortal, and one or both parents may die during children's minority. By incorporating clauses in a parenting plan that address times of tragedy in a family as the passing of a parent, conflicts over relatives spending time with the children can be pre-empted.

When the parents, for whatever reasons, can't agree to a mutually agreed parenting schedule, the final arbiter in this situation is the Court.

To learn more about parenting plans, please listen to our podcast with Leonard.