Recent Articles

October 2017 : Court of Appeals Approves Trial Court’s (1) Disallowance of Some Business Expenses and (2) Imputation of Income to H in Determining His Income for Support – Bridge, No. 335453 (8/15/2017)

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were divorced in 2016 reaching a settlement with the assistance of a “conciliator.”
  • In 2015, H was an employee earning $300,000 as a salesperson.
  • But, in 2016, as an independent contractor, his income declined substantially to, H claimed, around $75,000.
  • Thus, he petitioned the court to reduce his spousal and child support obligations, and to do so retroactively.
  • The trial court acknowledged the steep decline of H’s income and that such was involuntary.
  • But the court disallowed some of H’s claimed business expenses and, further, imputed income to him based on what his partner, with whom he split commissions, was making, in deciding that his income was $132,000 for support purposes.
  • The reduction was not applied retroactively to extent petitioned by H.
  • H appealed.

Court of Appeals (COA/Court) Decision

  • The COA upheld the trial court decision.
  • Regarding business expenses disallowed, the COA cited the 2017 Michigan Child Support Formula Manual 2.01(E)(4)(e) which provides:

    For a variety of historical and policy reasons, the government allows considerable deductions for business-related expenses before taxes are calculated. Those same considerations are not always relevant to monies a parent should have available for child support. Therefore, some deductions should be added back into a parent’s income for purposes of determining child support ….

  • In this regard, the Court stated that H did not explain how expenses paid for a conference in Wyoming related to his Lansing based business.
  • There was also not an adequate allocation of his auto expenses to personal use.
  • The Court noted that “the trial court must add back into a parent’s income insurance, utility, entertainment, and automobile expenses, as well as travel expenses, unless they are ‘inherent in the nature of the business or occupation,’ even if those expenses are tax deductible. See 2017 MC- SFM 2.01(E)(4)(e)(iv).”
  • The COA also upheld the trial court’s imputation of $132,000 annual income to H. His partner, with whom he split commissions, testified that he made $76,604 for the first 7 months of the year – a monthly average of $10,943, and an annual total of $131,322.
  • Finally, the Court also ruled that modification of a support order that is part of a judgment of divorce may apply only for the period during which there is a pending petition for modification.

Comments on the Case

  • Money spent on necessary business expenses is not available for support.
  • But, if such expenses are not demonstrated as “inherent in the nature of the business or occupation” they may be added back to income available for support.
  • Further, as noted in 2017 MCSFM 2.01(E)(4)(e), “That the IRS may find the expenses reasonable is not determinative.”
  • With automobile and cell phone expenses, it is important to have a reasonable allocation to personal use.
  • And, for travel and entertainment expenses, it is required for tax purposes that documentation of date, business purpose, and expense is maintained. the same information should be on hand if requested for determining income for support.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

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Download the PDF file below… “Court of Appeals Approves Trial Court’s (1) Disallowance of Some Business Expenses and (2) Imputation of Income to H in Determining His Income for Support – Bridge, No. 335453 (8/15/2017)”
View / Download October 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

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Aug / Sept 2017 : In a Published Case, Court of Appeals Approves Entry of QDRO 12 Years Post Date of Divorce–JOUGHIN, No. 329993 (7/11/2017)

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were divorced on April 28, 2003.
  • The Judgment of Divorce (JOD) awarded W (1) 50% of H’s pension accrued as of April 30, 2002 and (2) $23,823 from his profit-sharing plan account.
  • The JOD provided that both parties “shall cooperate” in obtaining and processing the QDROs necessary to effectuate the transfers to W.
  • For reasons not apparent on the record, the QDROs were not promptly filed. Instead, W submitted the QDROs for entry with the trial court on June 30, 2015- more than 12 years post-divorce.
  • H objected claiming that W’s submission of the QDROs for entry was an attempt to enforce the 2003 JOD and, hence, was time-barred under MCL 600.5809(3), which provides a 10-year statute of limitations applicable to attempts to enforce a noncontractual money obligation.
  • W responded that because her claim did not arise until H reached retirement age, that the statute had not yet begun to run.
  • Because H had not retired nor received any of his retirement benefits, the trial court entered the QDROs.
  • H appealed.

Court of Appeals Decision

  • The Court disagreed with the parties’ position that MCL 600.5809 applied to entry of a QDRO.
  • Rather, the Court cited a previous decision that “when a judgment of divorce requires a QDRO to be entered, the QDRO is to be considered as part of the divorce judgment.”
  • Accordingly, the Court stated that “because the QDRO is part of the judgment, it necessarily cannot be viewed as enforcing the same judgment.” *** “Instead, we hold that under these circumstances, the act to obtain entry of a proposed QDRO is a ministerial task done in conjunction with the divorce judgment itself.”
  • Thus, the Court concluded that entry of the QDROs was not time-barred
  • Judge Kathleen Jansen wrote a vigorous dissent claiming, for various reasons, that entry of the QDRO after 10 years was barred by the statute of limitations.

Comments on the Case

  • Obviously, the case is a “poster child” for the importance of preparing and processing QDROs promptly – either contemporaneous with entry of the divorce judgment or soon thereafter.
  • Based on many years’ experience of preparing QDROs for legal aid clients under a pro bono program administered by the State Bar, QDROs unfiled for years following divorce are not uncommon. This case – a rare family law published case – indicates that the passage of 10 years or more does not bar entry of a QDRO.
  • However, in Joughin, the participant had not begun to receive benefits. Had he done so, or remarried, or died, the situation would likely have been much more problematic for the alternate payee.
  • And, the Joughin judgment provision reprinted in the Court’s opinion did not provide that W’s share of H’s profit-sharing plan account would be adjusted proportionately for gains or losses of plan investments. With the sharp advance of the stock market from 2003 through 2015, W paid a high price for not timely attending to the QDROs.
  • In this regard, there is no precedent regarding whether the right to receive a proportional share of plan gains and losses passes automatically under state law with the transfer via QDRO of an interest in an account balance plan such as a 401(k) or profit-sharing plan as in Joughin.
  • Unless transferring a set dollar amount, it is highly advisable to include such a provision in both the JOD and the QDRO.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download PDF file below… “In a Published Case, Court of Appeals Approves Entry of QDRO 12 Years Post Date of Divorce–JOUGHIN, No. 329993 (7/11/2017)”
View / Download Aug-Sept 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Aug / Sept 2017 : In a Published Case, Court of Appeals Approves Entry of QDRO 12 Years Post Date of Divorce–JOUGHIN, No. 329993 (7/11/2017)”

June / July 2017 : Expediting the Business/Professional Practice Valuation Process

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

When a business or professional practice is involved in a divorce, there is often considerable difficulty and expense in determining a settlement value acceptable to both parties. This frequently is a major impediment to reaching settlement.

The fees to value a business or professional practice – and time required – can be significant, especially if two – or three – valuation experts are involved.

The following presents two methods to facilitate resolution of the valuation issue on a cost-effective, expeditious basis.

Abbreviated valuation analysis for mediation and/or settlement negotiations is often effective at providing a reliable value without “going the whole 9 yards” on the valuation process.

Essentially the business valuation expert performs a sufficient level of analysis to enable him/her to provide a reliable estimate of value–or range of values–for settlement purposes. The expert will provide well-footnoted valuation schedules and a summary report if requested.

The expert will generally be available for mediation to explain the valuation analysis.

The expert could be a “neutral” working on behalf of both parties; or, each party may hire an expert to perform an abbreviated valuation analysis. If the case is not resolved at mediation, the expert(s) can perform a more comprehensive analysis and report letter for trial or arbitration – generally with no duplication of effort.

Not all businesses are suitable for this approach. Some have too much uncertainty about the future such that an in depth analysis is required. However, based on the author’s experience, the abbreviated valuation approach applies to the vast majority of companies and professional practices.

If effective, this approach saves time and fees. The cost is generally about half the fee for a comprehensive valuation analysis and report.

Use of a neutral appraiser working on behalf of both parties is often an effective method for resolving the valuation issue on an expeditious, cost-effective manner.

It is common for each party to retain a business valuation expert. But, it is not uncommon that the values calculated by such experts are meaningfully different. If they cannot resolve the disparity in values, often a third expert is engaged to opine on value–causing considerable delay and additional fees.

However, if the parties can agree on one business appraiser at the outset, they can avoid the possible “battle of experts”. They can also save time, fees and emotion. Experienced family law practitioners know and can usually agree on a business appraiser with a reputation for competence and integrity.

When using a neutral, it is often advisable to reserve the right to have his/her valuation analysis reviewed for reasonableness by another expert. This offers some protection against a valuation analysis performed erroneously by the neutral. But, to preserve the benefits of using a neutral, the review should be limited to a “reasonableness check,” not a full-blown valuation analysis.

Example

(see PDF below for example details)
……

Continued in PDF file below… “Expediting the Business/Professional Practice Valuation Process”
View / Download June 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

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May 2017 : Valuing a Small Minority Interest in a Large Personal Services Firm

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

In recent columns (October 2016 and March 2017), various aspects of using “value to the owner,” sometimes referred to as “Holder’s Interest” value, were presented.

Background

As noted in the October column, the Michigan Court of Appeals has ruled in a number of cases that if a business providing personal services is worth more to the owner than the price at which it could be sold, the value for divorce purposes is value to the owner, unless there is reason to believe the enterprise will be sold. Kowalesky v. Kowalesky, 148 Mich App 151; 384 NW2d 112 (1986), and several other Court of Appeals (COA) cases cited in the column.

As noted in the March column, the underlying logic is as follows:

If there is no intent to sell or discontinue a business or professional practice, it should be valued for divorce based on its intrinsic value to the owner on a going concern basis. The financial benefits from that value are what have been conferred on the family while intact and will be conferred solely on the owner post-divorce.

If there is no intent to sell, under what rationale should any value other than the value based on current financial benefits provided by the enterprise be used in a divorce settlement?

No other value is relevant to this family or, hence, to this divorce.

Application to Small Minority Interest in a Large Firm

There are many large law firms, accounting firms, engineering firms, medical practices, etc. operating in Michigan. How is the “value to the owner” determined for a member holding a minority interest in such an enterprise?

Binding “Buy/Sell” Agreements Generally Not Applicable

Most large personal service firms require individual members to sign binding agreements providing (1) restrictions on transfer and (2) a set price or formula to determine the price of a member’s interest on termination. Quite often such prices include no goodwill value.

It is well established that such agreements are not determinative of value for divorce because none of the events to which they apply–death, disability, or termination of interest for other reasons–are occurring.

Valuing Entire Firm and Applying Member’s Ownership Percentage Is Generally Not Representative of Value

For example, assume two partners—A and B—work at a large accounting rm. Both own 1% of the practice. But, A makes $500,000 annually while B makes $300,000. This disparity is due to different performance levels which may ultimately result in A being awarded a higher ownership interest than B, but currently they both own 1%.
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Continued in PDF file below… “Valuing a Small Minority Interest in a Large Personal Services Firm”
View / Download May 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

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April 2017 : Estimated Tax Payments; Tax Refunds / Overpayments

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Estimated tax payments made–and/or taxes withheld – during the year of divorce may be a marital asset. Tax refunds, or overpayments applied to next year’s tax, attributable to tax payments made during marriage may also be a marital asset.

Or it may cut the other way–that is estimated tax payments and/or taxes withheld may be less than the actual tax on marital income received and shared during the year of divorce.

In this regard, note the following:

  1. Separate Returns for Year of Divorce – Whether divorcing parties can file a joint return or must file separate returns depends on their marital status as of December 31. If divorced as of that date, they must file separate returns for their respective separate incomes and deductions.
  2. Estimated Payments are Automatically Credited to the Husband – Since the husband’s social security number (SSN) is generally listed first on joint estimated payment vouchers (Form 1040ES) made during marriage, such payments will automatically be credited to him unless there is a written alternative provision agreed on by the parties.
     
    – The same applies to tax overpayments on the parties’ last joint return applied to the following year’s tax.
  3. Estimated Tax Payments and Taxes Withheld during Marriage are Marital Funds – Absent unusual circumstances, estimated tax payments and taxes withheld during marriage are made with marital money – essentially half by each party.

The above matters are often not addressed in divorce settlements. The following presents (1) observations on such tax payments and (2) applicable tax law.

Tax Payments Made during the Year of Divorce

Example – Assume the following alternative facts for joint estimated tax payments made by – and/or withheld on behalf of – H during the year of a divorce for which the judgment is entered on December 30.

[… Table with Example Data (see PDF below) …]

So, in Case #1, H will receive a windfall unless W’s attorney identifies the overpayment and makes an offsetting adjustment. Half of H’s $10,000 overpayment was made with W’s share of marital funds.
In Case #3, it is H’s attorney who needs to (1) identify that H will pay $10,000 of his own funds on income equally shared with W and (2) make an o setting adjustment. When paying the $10,000, H will, in effect, be paying both his and W’s $5,000 shares of the tax on marital income.

Agreement to Apportion Joint Estimated Tax Payments

IRS Publication 504 – “Divorced or Separated Individuals” – provides that divorced parties may agree on the division of joint estimated tax payments made during marriage.
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Continued in PDF file below… “Estimated Tax Payments; Tax Refunds / Overpayments”
View / Download April 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

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