Novel Coronavirus COVID-19 UPDATE:
On March 15, 2020, the New York State Unified Court System announced state-wide closures of nearly all New York State courts. Family courts, however, still remain open to hear and handle issues concerning “support orders” (i.e., child support and spousal maintenance), and such services are expressly recognized as “essential services.”
Unless there is a good and legitimate reason to contest a divorce, our belief is that the parties should always work in good faith to proceed uncontested and reach a reasonable compromise between genuine difference of opinion regarding the value of certain assets. Contested divorces are both lengthy, more stressful than divorce already is on its own, and a lot more expensive to both parties. This is money that each individual could have to himself, herself, or for the future benefit of their children. So, parties are always urged to genuinely give collaboration a chance.
Unfortunately, from time to time, there are individuals who consider themselves smarter than everyone else (even the courts, who observe and judge this kind of human behavior dozens of times every single business day of the year). These individuals try to engage in dishonesty towards their spouse and the court by trying to hide assets, hide income, waste marital wealth, or outright lie to the court about any other financial aspect of the divorce. These are the kinds of contested divorce cases our office specifically handles.
Along with the laundry list of penalties and sanctions matrimonial judges almost always slap on to anyone who seeks to defraud his or her spouse, courts have noted outright that they have an obligation to report tax fraud directly to the Internal Revenue Service once it becomes apparent during the litigation.
See e.g. Beth M. v. Joseph M., 2006 NY Slip. Op. 51490(U).
Hiding Assets (i.e., Fraudulent Conveyances)
The two most common assets a person seeks to hide are real estate and interest in corporations or limited liability companies (i.e., businesses). Amateur fraudsters transfer ownership to a family member, a friend, or sometimes, even their current girlfriend. These fraudulent conveyances and instances of marital waste are relatively simple to prove once identified. More sophisticated fraudsters set up networks of off-shore irrevocable trusts, making very close friends and family the “beneficiaries” of such trust. On paper, they own nothing and are entitled to receive nothing. In reality, all one needs to do is follow the money and communications to quickly recreate the picture of exactly who “owns” the property in substance, notwithstanding the sham form.
Hiding Income (i.e., Tax Fraud)
The benefit to an aggrieved spouse of the defrauding spouse hiding income is that everyone has the annual obligation to accurately and truthfully report his or her true gross income. Just like any tax fraud case, hiding income usually involves some combination of understating (to the court and tax authorities) one’s income, and overstating (to the court and tax authorities) one’s expenses. Concealing business assets also necessarily involves shifting income tax attributes to a completely different taxpayer, which is, again, tax fraud. There are also tactics for hiding income that will not necessarily expose the defrauding spouse to the risk of tax fraud. For example, if the individual is a “cash basis” taxpayer, he may forego invoicing customers for what is “earned revenue” for services rendered or goods sold, and simply let the “account receivable” exist as a phantom on his books and remain uncollected (until the divorce is finalized).
Practice Commentary: While investigating concealment of income is generally forensic accounting intensive, the ultimate goal is to present the court with both a lifestyle analysis and a quasi-penal basis for imputing what the court can justify as the defrauding spouse’s “likely true income” or “earning capacity.” The result is often worse for the defrauding spouse than if he had just been honest with the court, which is the point as courts seek to incentivize parties to be honest and avoid clogging up matrimonial calendars with frivolous conduct.
Wasteful Dissipation of Assets
The offending spouse starts to pawn away valuable personal property at a steep discount (for cash), take cash advances on credit cards or payday loans with borderline usurious interest rates, and go on personal spending sprees.
Practice Commentary: hope they enjoyed it – that seems to be the attitude from the bench. Waste of marital assets is a factor to be considered in formulating both spousal maintenance and equitable distribution. Arguments from the offending spouse to the effect of, “What kind of life do I have left to live after I pay my taxes and my ex,” fall on deaf and unsympathetic ears.
Sudden Income Deficit Syndrome (SIDS)
SIDS is a joke between matrimonial lawyers and judges. Before the couple filed for divorce, business was doing well, growing and picking up steam. Coincidentally, as luck would have it, just as the couple filed for divorce, business is bad, things are just not the same as they were, and it’s nothing short of a miracle how the complaining spouse has been able to avoid filing for bankruptcy.
Practice Commentary: SIDS is different from hiding income. Unlike tax fraud, a spouse suffering from SIDS is genuinely shooting himself or herself in the foot. When a spouse intentionally decreases his or her “actual earnings,” he or she invites the court to award child support and spousal maintenance based on “earning capacity,” which often is much higher than what the clever spouse is “actually earning.”
If you find yourself seeking a divorce from a spouse who is engaging in dishonest or fraudulent behavior regarding his or her true income or assets, or engaging in waste of the marital assets, call us for a confidential and free consultation.