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Unreported Income and Hidden Assets
Unreported income and hidden assets are often alleged in divorce proceedings, with the spouse who is not running the business claiming that unreported income should increase both the spousal support award and the valuation of the family business. In civil litigation, it is often a partner or shareholder that is alleging that someone in his business is hiding income. The process of finding and proving unreported income or hidden assets is often one of the most difficult assignments of a forensic professional, and the costs must be weighed carefully against the potential benefits. However, in some cases, the process is much easier than one might think, as the following case histories illustrate.
Unreported Beer Sales
A large restaurant sold Southern food and beer, with the beer being sold in a prominent part of the restaurant. The beer sales were a major part of the business. The owner reported approximately $50,000 of annual income from the business, and yet he and his wife, drove expensive cars, their children attended private schools, and he was buying significant amounts of real estate.
Records of the local beer distributors were subpoenaed. Those records detailed exactly how much beer, and what types of beer (kegs, bottles, etc.) were sold to the restaurant during the prior two years. A member of our firm went to the restaurant, ordered a drink at the bar, and took note of all of the prices of the beer by type (Bud, Miller, regular, light, etc) and size (8 oz, 12 oz, etc.). The amount of beer purchased per the subpoenaed records of the beer distributor was then priced out. For example, if 1,000 cases of Miller ten ounce light were purchased each year, and each case held 24 bottles, and that item would sell in his restaurant for $2.00, then the sales for that item would amount to $48,000 per year. After pricing out each item of the purchased beer, we arrived at an expected total sales for the year. (Inventory was assumed to have remained constant at the beginning and the end of the year, and we adjusted the current prices to reflect probable lower prices for the prior year.) We then compared this computed total sales of beer with what was reported on the books, and found that the reported sales was around five hundred thousand dollars lower than our computed amount.
As a result, at trial the court found that the gross income available for support was vastly higher than what was reported on the tax returns, and the value of the business was much higher due to the higher level of income and profits that were previously not identified.
The Hidden Factory
We were asked to value a certain California manufacturing company. The document production was going very slowly, and then we were provided with approximately thirty boxes of documents at the opposing attorney's office. As expected, many of the boxes contained useless information, and we went through those quickly. However, one box contained miscellaneous files, including correspondence between the company and its patent attorney. The file contained a letter from the company's patent attorney pointing out that the trademark of a particular unrelated Florida company was similar to a trademark of a product made "in the Atlanta facility". Until then, there had been no mention of an Atlanta facility and nobody was aware of any business location besides the California facility. We notified counsel, and soon enough, full details of the "hidden factory" were produced.
A manufacturer of personal products made massive improvements to his home, so that the additions were larger and more costly than the original structure. Extensive landscaping was also done, including the transplanting of large trees. An analysis of the personal banking records showed that the remodeling was not paid from personal funds. The business records were then analyzed, and it was noted that there were many corporate payments to home remodeling contractors and landscapers, but the supporting invoices all indicated that the work was done at the company. Even the massive landscaping invoices showed that the work was done at the company's office, which was located in an industrial park that had virtually no landscaping. Furthermore, the industrial park was not even owned by the company, so it was peculiar for the company to be apparently paying for the landscaping of someone else's property. Something was obviously out of order, but the necessary proof was missing.
The document production procedure being followed was that all of the documents requested were provided in xerox form. Because the home remodeling was apparently not paid by the homeowner or his business, which was bizarre, and because of the unusual landscaping situation, we specifically demanded the original home remodeling invoices. We were eventually shown the original invoices for all of the home remodeling, and it was clear that the job locations and some of the work descriptions had all been whited out and changed. When the whited out documents were held up to a light, the original writing was legible, and it showed that the remodeling work and the landscaping were done at the family residence. The remodeling deductions were added to the gross income available for support and to the valuation calculations.
Techniques Used to Find Unreported Income and Hidden Assets
The above examples demonstrate that finding unreported income and hidden assets is not a matter of guesswork. While success is never guaranteed, the use of certain techniques may produce successful results. Here are a few tips to consider:
In summary, while it is often very difficult to find unreported income and hidden assets, sometimes clues are left that are very meaningful to a trained eye. The problem then becomes a matter of proving the allegation, rather than determining it.
To file for divorce, one spouse must have lived in California for the last six months, and the county where the action is filed for the last three months. Spouses who have lived in California for at least six months, but in different counties for at least three months can file in either county. These California residency requirements must be met in order for the court to have jurisdiction of the case.
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