Any family law attorney involved in any financially sophisticated divorce case needs to be familiar with accounting concepts. For those of us familiar with accounting concepts, we are aware that accounting principles and definitions – especially in the area of what is “income” – are not synonymous with the application of the legal definition of these terms in family law cases.
Income for support purposes is a broad and sometimes amorphous concept, while for accounting purposes can be limited and technical. Just because someone declares on a tax return an income of X does not mean the income of X is their income for purposes of support (spousal support, child support, allocation of educational or other direct expenses for children, etc.). For a family where the earnings are solely a result of salary/bonus income (W-2 wage earners), what is declared as income for accounting/tax purposes may be black and white. For a family where there are businesses owned or investment interests, trusts, family gifting, etc., the cashflow that constitutes “income” exists in the grey area. One shade of grey is the cashflow that may never appear on a tax return but nonetheless is received and used; another shade is cashflow that may have little relationship to what is received and actually used by the parties to maintain their standard of living; another shade is the cashflow that is available to be received but controlled or withheld by one of the parties; the shades of grey continue on. In these situations, with this type of hybrid cash flow, what is income for accounting purposes versus income for support purposes can be dramatically different. For financially sophisticated divorce cases, the differences can be substantial.
The lawyer and the accountant must be working with the same definitions. Collaboration and discussions are necessary, especially when the accountant has little if any experience in family law situations. In the various disclosures that are required in family law cases (e.g., financial affidavits, interrogatory answers, calculations of support based on guidelines in the various statutes), it is critical that the disclosure be in accordance with the family law definitions and concepts, in essence CASHFLOW. Merely disclosing income declared on a tax return (the accountant’s black and white definition), which may be substantially different from the income for family law purposes, can affect the credibility of the party or his/her lawyer making the disclosure. For those parties interested in achieving a settlement in lieu of the time, costs, and uncertainty of litigation, once credibility is lost in the minds of the other party or his/her lawyer, settlements become far more difficult to achieve. For matters that are litigated, the credibility of the parties (i.e., which party the Judge believes) can make a substantial difference if the financial outcome.
It is often critical for the lawyer and his/her client to understand these differences. Creating positions based on the realities of the factual/financial situations serves to move the case forward to a realistic conclusion. Ignoring the obvious differences between the black and white accounting definition and the grey legal definition of income serves to prolong the process and create opportunities for chaos. Given what the family law statutes and the tax law provides, such chaos leaves the accountant, the client, and the lawyer exposed to adverse consequences for the client, which could have been easily avoided with open dialogues and shared definitions.