Unreported Income Disclosed to IRS in Divorce Case

July 25th, 2011

Patricia Spence V.S. Walter Guy Chalow

Patricia, the plaintiff, and Walter, the defendant, were divorced in January 1995, with two children. The PSA (property settlement agreement) incorporated into their final judgment a child support obligation upon the defendant of $150 week. The PSA noted that this amount was not “based on the child support guidelines because both parties are self-employed”(Walter was a contractor; Patricia, a “credit searcher”)  their incomes fluctuate and cannot be precisely determined.”  The court determined that the defendant’s annual income was $153,199 and set a child support obligation of $267 per week.

This calculation included an imputing of $21,755 in income as a “write-off of dues and other charges”. These write offs were amounts that were due to the Sand Barrens Club and Driftwood RV Center. In 2010, the defendant filed an appeal that raised several challenges to the judge’s calculation, including his decision to impute the previously written off $21,755. He challenged that this figure represented a debt that the clubs, which are related entities, refused to pay. The only evidence presented in defense of this claim was a letter from Driftwood, stating that “before making any payment related to this balance [on an enclosed statement], [the club] would appreciate the opportunity to discuss a few invoices.” The lack of sufficient evidence led the plaintiff’s expert, Pelosi, to conclude that a barter relationship existed between the defendant and these entities. At the hearing, Pelosi testified that when the defendant was reimbursed by the services of these entities, he would incorrectly write the amount off of revenue, instead of recording it as an expense. The judge concluded that “[t]he inference that [defendant] received a personal benefit has not been overcome” and upheld his decision to impute the additional $21,755 of additional income to him.

In addition, the judge found that the defendant had underreported his income as a result of his incorrect accounting, and therefore decided to send a copy of his decision to both the New Jersey and Federal Taxing Authorities for their consideration.  This decision was pursuant to the case of Sheridan v. Sheridan, a case in which a serendipitously discovered tax aversion was reported to the taxing authorities.

For a copy of this divorce case click here:Unreported Income

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