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Determining the true monthly take-home income of a business owner has to be calculated correctly so that it does not include what is known as phantom income. Phantom income appears when income from a partnership or limited liability company (LLC) flows through to a personal tax return and reflects more income for a business owner than he or she actually receives. Whether you are in court or trying to settle your case out of court, it is important that the business owner’s income is not misrepresented to include income he or she never receives.
In a recent case, the member of an LLC was in court where his wife was suing for alimony. The wife’s lawyer continued to waive the husband’s tax return around proclaiming that the husband made $1,000,000. Although there was taxable income of $1,000,000 per year, the cash remained in the company or was distributed to the husband only in an amount sufficient to pay taxes. The court did not understand this concept and commented, “I don’t know why his tax return is any different than mine.” The court in that case awarded the wife $25,000 per month in alimony.
It is important for your legal team to retain an accountant experienced in calculating net after tax cash flow in divorce cases and is an experienced testifying expert that can explain the phantom income concept to the court in a way that it can understand. An independent third party expert also lends credibility to the amount of actual take home pay received by the business owner.
Yes, if either spouse has filed a lawsuit, meaning the parties are not trying to settle their issues out of court, both parties’ lawyers can issue discovery requests requiring you to produce emails, text messages, and phone records. A spouse may also issue a subpoena to a company to take possession of electronic devices for copying or to require the company to produce emails, texts, and phone records. A spouse who receives such request for his or her work email or phone records could file a written objection, claiming that the request seeks privileged or protected information or is otherwise unreasonable and burdensome. However, a Court will likely order the objecting spouse or his or her company to nonetheless produce the requested information. If you don’t want your company dragged into your personal divorce, don’t use a work email for non-work purposes.