Can he manipulate his income in a divorce?

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In family law, understanding the difference between net income and cash flow is crucial, especially in support hearings. Payors often argue that cash flow, not net income, should determine support orders. However, recipients counter that cash flow can be easily manipulated, making net income a more reliable indicator of a business's true earning capability.

Manipulation Tactics

  1. Confusion Over Expenses and Expenditures:

    • Expenses: Transactions that immediately reduce accounting-based profits, which may or may not involve cash outflows (e.g., utility bills).

    • Expenditures: Transactions that reduce cash balances but might not affect net income (e.g., loan principal repayments).

  2. Strategies to Avoid Support Obligations:

    • Accelerated Expenditure Transactions: Payors might engage in transactions designed to temporarily reduce cash flow to minimize support obligations. These include paying off debts, purchasing unnecessary capital assets, or prepaying vendors.

Legal and Financial Definitions

  • Child Support:

    • Defined broadly to include income from various sources (e.g., wages, business receipts, rents, and dividends).

    • Courts can consider earning capacity and other relevant factors in determining support.

  • Spousal Support:

    • Factors include income, earning capacity, and the standard of living during the marriage. Unlike child support, it lacks a specific statutory definition for income.

  • IRS Definition of Income:

    • Similar to Family Code § 4058, gross income encompasses all income sources, excluding deductions like loan principal payments.

Addressing Manipulations

  1. Careful Analysis:

    • Distinguish between legitimate business expenses and manipulative expenditures designed to reduce support obligations.

  2. Statutory Definitions:

    • Understand and apply relevant legal definitions of income and expenses to accurately assess a payor's financial situation.

  3. Forensic Accounting:

    • Utilize forensic accountants to uncover nonrecurring transactions and adjust income calculations accordingly.

Case Example

Consider the hypothetical case of Mr. Deceitful, who manipulates his business's financials to appear less profitable and reduce his support obligations. By accelerating debt payments, purchasing excess capital assets, and deferring income, he creates a misleading picture of his financial status.

Conclusion

Family law professionals must be vigilant in identifying and addressing accounting manipulations. By leveraging forensic accounting techniques and understanding statutory definitions, attorneys can effectively advocate for fair support orders that reflect the true financial capabilities of the payor.

In navigating these complex financial waters, it is essential to present clear, evidence-based arguments to the court, ensuring that support determinations are based on accurate and recurring income, not temporary and manipulated cash flows.