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BEYOND THE 1040: FINDING HIDDEN SOURCES OF INCOME FOR SUPPORT
1998 National Legal Research Group, Inc.

I. INTRODUCTION

Family law practitioners have learned not to overlook unusual assets purposes of equitable distribution. Unusual assets that can be equitably divided include frequent flyer points, points for hotel programs, country club memberships (including golf clubs, swim clubs, tennis clubs, etc.), credit card points, season tickets to sporting or cultural events, equity in automobile leases, transferable government permits (e.g., Individual Fishing Quotas, taxi medallions), general powers of appointment, accrued vacation or sick time, book royalties less future postmarital marketing efforts, and, in some states, celebrity goodwill.

Family law practitioners must also learn not to be constrained when it comes to looking for income for purposes of spousal and child support. In a family law case, unlike other civil cases, a certain amount of disclosure is required by rule of court. The parties must, by the use of mandated forms, disclose income and certain expenses. Indeed, some states even require that this information be updated annually, even after the support order is entered. See Shofmaster v. Shofmaster, 138 N.H. 460, 642 A.2d 1361 (1994) (where financial statement is required by law, parties have ongoing duty to keep statement up to date); Walles v. Walles, 295 N.J. Super. 498, 685 A.2d 508 (App. Div. 1996) (if one party obtains a modification due to a decrease in income, then that party has to provide updated financial data to allow the other party to seek reinstatement of the original order if earnings then increase). Moreover, most states also require that the statements made concerning income and expenses be verified and documented, specifically denoting the type of verification that is sufficient. The most common forms of verification of income are pay stubs for at least three months, employer statements, or, in the case of a self-employed parent, receipts and expenses, and federal income tax forms. See, e.g., In re Marriage of Krone, 530 N.W.2d 468 (Iowa Ct. App. 1995) (father's 1992 tax returns and pay stubs verified his income); Young v. Muthersbaugh, 415 Pa. Super. 591, 609 A.2d 138 (1992) (father's pay stubs and letters from employers were sufficient to substantiate his income). The failure to comply with these requirements may result in a reversal on appeal and a remand to the trial court for a redetermination of support with the appropriate disclosure, Crefasi v. Crefasi, 628 So. 2d 1274 (La. Ct. App. 1993); Zayed v. Zayed, 100 Ohio App. 3d 410, 654 N.E.2d 163 (1995), or may preclude a party from appealing an adverse decision. Hackman v. Hackman, 847 S.W.2d 193 (Mo. Ct. App. 1993) (father was precluded from appealing modification of support where he had not completed the appropriate Form 14); In re Marriage of Bucklin, 70 Wash. App. 837, 855 P.2d 1197 (1993) (father was not entitled to a reduction in support even though his hotel business was destroyed by a hurricane, because he failed to verify his income). In at least one state, the failure to make the required disclosure can result in the presumption that the noncomplying parent's income is the greater of 150% of the most recently available annual average covered wage for all employment as calculated by the department of employment or training. Vt. Stat. Ann. tit. 15, 662.

Some attorneys mistakenly presume that because the basic income and expense information must be disclosed and because the support calculation may then be accomplished by means of a calculator, there is no need for further discovery in a child support case. This is not true for two basic reasons. First, the required disclosure only begins to tell the story of income and expenses. Tax law is simply not controlling on what constitutes "income" for purposes of support. E.g., Stepp v. Gray, 58 Ark. App. 229, 947 S.W.2d 798 (1997) (chancellor may not use definitions of income in federal Tax Code to find true disposable income of child support obligor); Beardsley v. Heazlitt, 654 N.E.2d 1178 (Ind. Ct. App. 1995) (tax law is not controlling on definition of income, especially where party is self-employed); In re Marriage of McBride, 166 Ill. App. 3d 504, 519 N.E.2d 1095 (1988) (tax law principles did not apply in computing father's net income for purposes of child support); Hudson v. Markham, 948 S.W.2d 1 (Tex. App. 1997) (court not bound by tax return; could discount business deductions that were really personal in nature). See generally Laura W. Morgan, Child Support Guidelines: Interpretation and Application 2.03[b] (Supp. 1998). Second, the fact remains that some parties will simply not tell the truth in the required forms, and further discovery may be necessary to check the accuracy of the other party's financial statement.

The family law practitioners must therefore learn to go beyond the 1040, take additional discovery, and think of income that will not be reflected on tax records or even on financial disclosure forms. See Laura W. Morgan, Child Support Guidelines: Interpretation and Application ch. 6 (Supp. 1998).

II. TAKING ADDITIONAL DISCOVERY

Discovery should be undertaken with the following goals in mind: marshalling the facts necessary to prepare for trial; confirming the initial good-faith judgment that suit is warranted; narrowing and clarifying the issues; refining the theory and presentation of the case; previewing the trial demeanor of witnesses and counsel; avoiding surprise at trial; and preserving evidence. L. Hampton, L. Moskowitz, S. Moskowitz & F. Silberberg, Discovery, Family Law Litigation Guide with Forms (Matthew Bender 1993) (discussion of general purposes of discovery).

The only general limitation imposed on the admissibility of evidence is that it be relevant; that is, the evidence must be rationally related to the issues in the case in that it tends to prove or disprove the issues which have to be decided. Relevance is thus the fundamental limitation on discovery. Further, evidence can be relevant and inadmissible if it is prejudicial, misleading, or confusing.

One particular issue regarding discovery has arisen on which the reported case law is split. The issue concerns how much discovery regarding a person's assets and income is permissible where the person is very wealthy and admits he can pay any reasonable child support order. In Estevez v. Superior Court, 22 Cal. App. 4th 423, 27 Cal. Rptr. 2d 470 (1994), the court accepted the "millionaire's defense" to discovery, and held that in the case of an extraordinarily high earner who stipulates that he can and will pay any reasonable amount of child support, discovery of the earner's lifestyle and net worth is not warranted. Rather, the only issue before the court is the reasonable needs of the child. On the other hand, in Miller v. Schou, 616 So. 2d 436 (Fla. 1993), the court rejected this argument. There, the court held that without knowing what the parent's financial status is, it is impossible for the court to determine what the reasonable needs of the child are. Accord In re Marriage of Shivers, 557 N.W.2d 532 (Iowa Ct. App. 1996) (party is entitled to inquire into other party's income, even though total incomes were above the highest amount, because ultimate award is in the court's discretion and the court has the right to be informed); Jeffress v. Johnson, No. 279 (Md. Ct. Spec. App. Oct. 25, 1996); Chambers by Cochran v. Sanderson, 107 Nev. 846, 822 P.2d 657 (1991); Shaw v. Cameron, 125 N.C. App. 522, 481 S.E.2d 365 (1997). But see Woodward v. Berkery, No. 97-0938 (Fla. 4th Dist. Ct. App. Dec. 17, 1998) (restricting mother's access to complete financial information of father, singer Tom Jones, because of mother's specific statement that she would turn over all information to the press).

III. GOING BEYOND THE 1040: INCOME THAT WILL NOT BE REFLECTED ON TAX FORMS

Normally, a 1040 form will reflect salary and wages, including tips, commissions, bonuses, profit-sharing, deferred compensation, severance pay, cost of living allowances, over-time pay, pay from second jobs, and income from investments. Tax forms will also include payments that are intended to take the place of wages and salary, such as workers' compensation, unemployment insurance, disability insurance, and disability pensions.

The family law practitioner should look for the following types of "income" that will not necessarily be reflected on a tax form:


IV. CHECKLISTS FOR DISCOVERY

CHECKLIST FOR DOCUMENTED INCOME


[ ]Gross income from employment

[ ]Tips

[ ]Commissions

[ ]Bonuses

[ ]Profit-sharing

[ ]Deferred compensation

[ ]Severance pay

[ ]Cost of living allowances

[ ]Overtime

[ ]Second jobs

[ ]Part-time jobs

[ ]Contract income

[ ]Investments

[ ]Interest and dividends

[ ]Pensions

[ ]Trust and estate income

[ ]Royalties

[ ]Annuities

[ ]Structured settlements

[ ]Capital gains

[ ]Social Security benefits

[ ]Veterans' benefits

[ ]Military personnel fringe benefits

[ ]National Guard and reserves drill pay

[ ]Workers' compensation

[ ]Unemployment insurance

[ ]Strike pay

[ ]Disability insurance

[ ]Retirement/pensions

[ ]Gifts

[ ]Prizes, lottery winnings

[ ]Educational grants

[ ]Income of new spouse or live-in companion

[ ]Alimony received

[ ]Support from cohabitant

[ ]Business income from sources such as self-employment, partnership, close corporations, and independent contracts

[ ]Type of business expenses claimed to arrive at net business income

[ ]Rental income

[ ]Public Assistance

CHECKLIST FOR HIDDEN INCOME

[ ]Employment perquisites, including use of car, yacht, housing, reimbursed expenses such as moving and relocation costs, business and professional memberships, medical services, subsidized travel, paid vacations, first-class air travel, recreational facilities, barber/beauty shop services, home entertainment allowance, and tickets for theater and sports

[ ]Forgiveness of debt

[ ]Use of property at less than customary charge

[ ]Profit and loss statements of closely held business

[ ]Excessive deductions

[ ]Excessive prepayment of debts

[ ]Unusual expenditures

CHECKLIST FOR DEDUCTIONS

[ ]Federal, state, and local income taxes

[ ]FICA or self-employment tax (annualized)

[ ]Mandatory union dues

[ ]Mandatory retirement

[ ]Health insurance payments

[ ]Court-ordered support payments for children actually paid

[ ]Alimony actually paid

CHECKLIST FOR IMPUTED INCOME

[ ]Lifestyle of parent vs. stated income

[ ]Work history

[ ]Mental and physical condition

[ ]Educational background

[ ]Efforts to find and retain employment

[ ]Current job market

[ ]Voluntary vs. involuntary act resulting in diminution of earnings

V. SAMPLE DISCOVERY TOOLS: INTERROGATORIES, REQUEST FOR PRODUCTION OF DOCUMENTS, AND REQUEST FOR ADMISSIONS

A. SAMPLE INTERROGATORIES


1. State your full name and any other name by which you have been known.

2. State your present residence and employment or business addresses and telephone numbers.

3. State your Social Security number.

4. State your birth date.

5. List all business, commercial, and professional licenses which you now hold or which you have held in the last three years.

6. List all of your education after high school, including but not limited to vocational school, specialized training, college, and graduate school.

7. For each place of your employment or self-employment during the last three years, state the following information:


8. If you have been unemployed at any time during the last three years, list the dates of unemployment, reason for unemployment, and all efforts made to secure alternate employment.

9. State whether you have any disability which at any time renders you unable to perform work or in any way limits your ability to work or otherwise earn a living.

10. If you have been engaged in or associated with any business, commercial, or professional activity within the last three years not detailed above, state the following information for each activity:


11. For each of the last three years, list all sources of income, along with the amount of income received from each source, including but not limited to: gross income from employment; tips; commissions; bonuses; profit-sharing; deferred compensation; severance pay; cost of living allowances; overtime; second jobs; part-time jobs; contract income; investments; interest and dividends; pensions; trust and estate income; royalties; annuities; structured settlements; capital gains; Social Security benefits; veterans' benefits; military personnel fringe benefits; National Guard and reserves drill pay; workers' compensation; unemployment insurance; strike pay; disability insurance; retirement/pensions; gifts; prizes or lottery winnings; educational grants; income of new spouse or live-in companion; alimony received; business income from sources such as self-employment, partnership, close corporations, and independent contracts; rental income; employment perquisites, including use of car, housing, and reimbursed expenses; forgiveness of debt; and use of property at less than the customary charge.

12. For each of your present employment, self-employment, business, commercial, or professional activities, state the following:


13. If you are the owner, participant, or alternate payee in any pension, profit-sharing, deferred compensation, or retirement plan, state the following:


14. List all accounts, including checking, money market, brokerage, or any other investments that you have had any legal or equitable interest in within the last three years.

15. State the location of all safes, vaults, or other similar depositories in which you maintained property at any time during the last three years. 16. List all other assets that you own, have an interest in, or have the use or benefit of, not listed above, including but not limited to all real and personal property.

17. For the last three calendar years, list any inheritances you have received. Further list any inheritances you expect to receive in the next three years.

18. List any debts you owe to any person, corporation, or partnership that exceed $1,000.

19. List any right, interest, prospect, or pecuniary advantage you have under any contract or interest in any suit in the courts of this state or any other state or federal court.

20. List any direct or indirect interest in any property or thing of value whatsoever, including but not limited to royalties, copyrights, trademarks, expectations, or awards.

21. List any gifts or funds, monies, property, or property rights in excess of $100 you have made to any person other than your children in the last three years.

22. Describe your current state of health and provide the name, address, and telephone number of each physician, medical clinic, or nurse practitioner you have consulted during the last year. State the date of each consultation, its purpose, the diagnosis, and any treatment prescribed.

23. Describe the children's current and projected educational needs. Specify whether the children have any particular educational and/or vocational needs that cannot be satisfied by public school education.

24. Describe the children's current and projected extracurricular activities.

25. Describe the children's current and projected health needs, specifying whether any child has extraordinary or unusual physical, psychological, or other needs related to health and well-being.

26. List any interest any of your children may have in any monies, assets, stocks, bonds, savings accounts, checking accounts, certificates of deposit, brokerage accounts, real estate, deeds, mortgages, corporations, partnerships, business entities, joint ventures, patents or copyrights, and/or any income therefrom.

27. State the names and addresses of all persons who have, or may have, knowledge of the relevant facts related to this case. 28. Complete the Child Support Guideline Worksheet and state what you believe to be the appropriate amount of child support.

29. List any individual you expect to call as a witness at trial and for each one state the subject matter on which he or she is expected to testify, the substance of the facts and opinions relating to the testimony, and a summary of the grounds for each opinion.

30. If any proposed expert witness has rendered a written report with respect to any matter relevant to this case, state the substance of this report and the date on which it was made.

31. List all tangible evidence you intend to offer into evidence at trial, and describe and identify the subject matter contained therein. 32. Set forth in detail the factual contentions supporting each defense you have asserted in this action.

33. If you presently live with another adult person, detail the extent to which such person contributes to your living expenses.

34. Detail the extent to which you contribute to the support of any other adult person.

35. Detail the extent to which you contribute to the support of any other child not at issue in the present action.

B. SAMPLE REQUEST FOR PRODUCTION OF DOCUMENTS

1. Copies of your federal and state income tax returns and any communications regarding your tax returns from the Internal Revenue Service or state tax department for the three most recent tax years, including all supporting schedules, along with Forms W-2 and W-4 for corresponding years.

2. Copies of the federal income tax returns of any corporation or partnership in which you have a financial interest exceeding 10% for the three most recent tax years.

3. Copies of any gift and sales tax returns filed by you or any corporation or partnership in which you have a financial interest exceeding 10% for the three most recent tax years.

4. Copies of any patents and copyrights held by you or held by any corporation or partnership in which you have a financial interest exceeding 10%.

5. Copies of the balance sheets and profit and loss statements of any corporation in which you have more than a 10% financial interest for the three most recent fiscal years.

6. For closely held businesses and professional practices in which you have an interest, corporate tax returns, corporate credit card statements, travel and entertainment records and receipts, records of reimbursements of medical expenses, and records of the existence of trade cards or bartering of services.

7. Copies of all savings bank books and certificates of deposit and statements concerning savings accounts held in your name, singly or jointly, for the three most recent calendar years and the present calendar year to date.

8. Copies of all canceled checks and statements concerning checking accounts held in your name, singly or jointly, for the three most recent calendar years and the present calendar year to date.

9. Prepare and produce a copy of a sworn financial affidavit in accordance with the court rules or statutes of this state.

10. Copies of all books, records, accounts, monthly statements, statements of transactions, and other papers or memoranda of stock brokers for accounts held in your name, singly or jointly, for the three most recent calendar years and the present calendar year to date.

11. Copies of all contracts for the rental and/or lease of safe deposit boxes or vaults for the three most recent calendar years and the present calendar year to date.

12. Copies of all deeds or conveyances of real property in your name individually or in conjunction with any other person in which you have a legal, beneficial, or equitable interest for the three most recent calendar years and the present calendar year to date.

13. Copies of all records, documents, papers, and memoranda pertaining to monies received and being received by you from all sources, including but not limited to: gross income from employment; tips; commissions; bonuses; profit-sharing; deferred compensation; severance pay; cost of living allowances; overtime; second jobs; part-time jobs; contract income; investments; interest and dividends; pensions; trust and estate income; royalties; annuities; structured settlements; capital gains; Social Security benefits; veterans' benefits; military personnel fringe benefits; National Guard and reserves drill pay; workers' compensation; unemployment insurance; strike pay; disability insurance; retirement/pensions; gifts; prizes, lottery winnings; educational grants; income of new spouse or live-in companion; alimony received; business income from sources such as self-employment, partnership, close corporations, and independent contracts; type of business expenses claimed to arrive at net business income; rental income; employment perquisites, including use of car, housing, and reimbursed expenses; forgiveness of debt; and use of property at less than the customary charge for the three most recent calendar years and the present calendar year to date.

14. Copies of all records of membership or contributions to any charity, or any other organization or association, including private and professional clubs or associations, and the amount of dues or contributions to such organizations for the three most recent calendar years and the present calendar year to date.

15. Copies of all loan applications or financial statements filed with or provided to any person, corporation, business, financial institution, or government agency for the three most recent calendar years and the present calendar year to date.v 16. Copies of any written employment contracts into which you have entered for the three most recent calendar years and the present calendar year to date.

17. Copies of all trust instruments of which you are settlor, trustee, or beneficiary.

18. Copies of all your credit card or charge account statements for the three most recent calendar years and the present calendar year to date.

19. Copies of any reports, memoranda, or other documents prepared by experts who may testify at trial.

20. Records of educational expenses for the children of the parties, including tuition, room, board, books, contracts, and loans.

21. Travel records, including itineraries, tickets, bills, and receipts for the last three years.

22. Any agreements entered into between you and __________ [opposing party].

C. SAMPLE REQUEST FOR ADMISSIONS

1. [Number of children] child[ren] were born to [father] and [mother].

2. The child[ren] born to the parties are named [state child[ren]'s name[s]] and were born [state child[ren]'s birthdate[s]], respectively.

3. The child[ren] currently reside with [mother or father] at [address].

4. __________ earns __________ per year.

5. __________ has worked for [employer] for [how long].

6. ________ has __________ in [his/her] retirement account.

7. __________ is able to contribute to the support of the minor child[ren], [children's names].

8. A reasonable amount of support for the parties' minor child[ren] is $__________ per month.

9. ________'s employer provides health insurance for the parties' minor child[ren] and will continue to do so.

10. All costs of the [noncustodial parent's] visitation with the minor child[ren] will be borne by __________.

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