All family law attorneys understand the basics of income taxation as it relates to a marital dissolution: Alimony is taxable to the recipient and deductible by the payor and child support is not taxable.
In complex cases with closely held businesses, it’s important the attorney (or an expert) review not only the business tax returns, but, the personal income tax returns as well.
If one spouse owns all or part of a pass-through entity such as a Subchapter S or Partnership, there may be hidden assets not usually found on the marital balance sheet. Those assets are called Net Operating Losses (NOLs) carry-forwards.
Taxpayers can carry back these losses two years (and get refunds) and/or elect to carry them forward against future income. (NOLs can be carried forward twenty years.)
Well, guess what? When assets are split, the NOLs travel with the business owner. And, assuming its material, they have a value which needs to be monetized. Why does it have value? Because it will save the business owner spouse $ X amount of taxes over the next twenty (or less).
A very, very simple example. The couple divorces and a $1,000,000 NOL travels with the husband. (No you can’t split the NOL) The non-titled spouse’s lawyer never thought to monetize the NOL (or even the expert CPA, who is a generalist without matrimonial litigation experience).
Two years after the divorce the company turns around and the owner spouse has income of $200,000. Pick your bracket, whether it’s 28% or 35% or 40% (I rounded.). The NOL was could be worth somewhere between $56,000 and $80,000. Three years after the divorce, the owner spouse has income of $200,000. Another $56,000 to $80,000. You get the picture. What if all the NOL is used? That can be a savings of possibly as much $400,000.
Failure to monetize this asset and award the non-titled spouse an off-set, can be the basis of a malpractice suit!