Master Class: Top 5 Complex Income Issues in Colorado Divorce | Episode 191

Join Ryan and Amy as they unravel the complexities of determining income in divorce cases, a critical factor for calculating child support and maintenance in Colorado family law. They examine the challenges faced by individuals with minority business interests or trust beneficiaries with limited control over distributions and tackle the nuances of personal versus business expenses, shedding light on the ways these can skew income calculations. 
Ryan and Amy also dissect monthly P&L statements, uncover personal costs masquerading as business deductions, and debate the implications of depreciation methods in child support equations, inspired by the recent Schaefer court case. This episode aims to bring you expert insights with a comprehensive overview of the top five income issues encountered in family law, ensuring you're well-equipped with the knowledge to navigate these financial intricacies.

What is Divorce at Altitude?

Ryan Kalamaya and Amy Goscha provide tips and recommendations on issues related to divorce, separation, and co-parenting in Colorado. Ryan and Amy are the founding partners of an innovative and ambitious law firm, Kalamaya | Goscha, that pushes the boundaries to discover new frontiers in family law, personal injuries, and criminal defense in Colorado.

To subscribe to Divorce at Altitude, click here and select your favorite podcast player. To subscribe to Kalamaya | Goscha's YouTube channel where many of the episodes will be posted as videos, click here. If you have additional questions or would like to speak to one of our attorneys, give us a call at 970-429-5784 or email us at info@kalamaya.law.

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DISCLAIMER: THE COMMENTARY AND OPINIONS ON THIS PODCAST IS FOR ENTERTAINMENT AND INFORMATIONAL PURPOSES AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE. CONTACT AN ATTORNEY IN YOUR STATE OR AREA TO OBTAIN LEGAL ADVICE ON ANY OF THESE ISSUES.

Transcript

Ryan Kalamaya: 0:01

Welcome to Divorce At Altittude, a podcast on Colorado family law. I'm Ryan Kalamaya. Each week, along with my business partner and co-host, Amy Goscha, or an expert, we discuss a particular topic related to Divorce or co-parenting in Colorado. In addition, we have created a short series of lessons that will take you through the legal process of Divorce and answer your questions from simple to complex. Divorce isn't easy. The end of a marriage, especially when children are involved, brings a great deal of loss and change. We hope these practical tips and insights will help you on your journey to a new. And better life. Welcome back to another episode of Divorce at Altitude. I am your co-host, and this week I am joined by my partner and co-host Amy Gosha. Amy. What's what's going on? What are we talking about today? I.

Amy Gosha: 0:55

Oh, some interesting things about income and determining it for child support and maintenance. It's always, not as straightforward as most people think it is.

Ryan Kalamaya: 1:06

Some people could call this a masterclass. We're going to really dive in on five specific complex issues that we frequently see with. Income and then Amy, as you said income. It's really important in a Divorce because it impacts spousal maintenance. We recently recorded an episode on spousal maintenance and then, but it also impacts child support, so it can come into multiple issues in, in a Divorce. We have a How-to episode series on support, but we. Figured that it would be helpful to really dive in on some complex issues that frequently come up in divorces that we see. And even, Amy with allocation of parental responsibility situations where people, they're not even married and they're going through a custody kind of determination in child support income is relevant for that. To lead us off, what is the first topic or issue that we're gonna talk about with income?

Amy Gosha: 2:05

You're gonna have to take this out'cause I don't have the outline up. I have to, it's like still loading. So why don't I ask you that question? So Ryan when we, what is the first topic, of the five that we're gonna dive into? What is the first thing we're gonna talk about here?

Ryan Kalamaya: 2:21

Yeah, so the first thing we're gonna talk about is income challenges for minority partners in a business. And this would apply to. Anyone that doesn't really have control over income, that could be that they're a beneficiary of a trust, that the trustee manages the income from the trust. There could also be, a business owner like you and I we're business owners. And if I have a 10% interest and you get to dictate. What the business kind of distributes that could be a situation with an LLC. We also have limited partnerships, and that oftentimes comes into play with family dynamics where, the general partner would have control. And so Amy, the general rule of thumb is what for limited partners. If they

Amy Gosha: 3:12

don't have control, like when you're looking at income or property essentially if you are a limited partner if you don't have control, that's not gonna be included when you're dividing property. But it could be different when it comes, to income. I have a case right now where we're having an argument whether or not just because. My client has a limited interest. Does she have more control than, it says on paper. So you really have to look at, like some of the decisions that are being made. So that does become, it becomes an issue. But Ryan, when it comes to someone who. Has limited control Is income considered. For purposes of determining maintenance and child support

Ryan Kalamaya: 4:02

really what we're getting into is a tax return, is that what we're going to use in determining income? And it used to be that, and just for people to understand a limited partner or a business owner, they frequently will get what's called a K-one, and that's the tax form. And it will for any sort of, business and they'll get their tax. Form K-one, and it will state that their income is, for example, a hundred thousand dollars. But if Eric Wolf is the person that we're talking about then the issue is his income a hundred thousand dollars? And if there is no control and the statute what it says is the income is. Calculated for child support. And in this case the same thing for maintenance, and that's income from general partnerships, limited partnerships closely held corporations or limited liability companies. However, if a parent is a passive investor, has a minority interest in the company and does not have any managerial duties or input, then the income to be recognized may be limited to actual cash distributions received. So if. Our, a hundred thousand dollars, scenario. If he only gets, let's say$20,000, then Amy, is it a hundred thousand dollars or is it$20,000? For purposes of calculating what Eric's income is for that entity in child support and maintenance.

Amy Gosha: 5:31

It would be 20,000. However, like when you're looking at those managerial roles, that's the, actually the argument I have in my current case. Does it go beyond, like what's in the capital account? Can that person have access to money in a capital account? What's considered. The burn rate of a company and are they holding cash back? That should be distributed or not, so that is also something that. Is frequently looked at.

Ryan Kalamaya: 5:59

And then if you get into, if Eric has, a handshake deal with, the other managerial or the ma the con the kind of general partner or whoever's making the decisions, and it all of a sudden becomes, Hey dad or brother, or best friend that I went to college with, that you control the money, this cut me off because I'm going through a Divorce that could, you can learn that in somewhat purposes or not so much, but discovery purposes. If all of a sudden the spigot shuts off, I. That's something that, certainly could be disputed because if you have a historical distribution and then it stops in a Divorce, we do see that, it's kind of part of that Divorce flu that we've referenced before. But really it can get, really complex. And one thing that I've thought about Amy that I'm unaware of any sort of case law on this is that if Eric, in that hypothetical a hundred thousand dollars. Scenario. Oftentimes what businesses will do is they will distribute money to Eric because he will get taxed on the a hundred thousand dollars, and if that tax is, let's say$25,000 because he's in the 25% tax bracket, a lot of times, especially the. Family partnerships, they'll distribute money enough to cover the taxes. And that is, it makes sense because you don't want to have someone just paying taxes and going out of pocket and having a net loss on an economic basis, year in a year. And so what they'll do is this, the partnership. Or the business, whatever it is, we'll say, Hey, we'll give you$25,000 that covers your taxes. And is, does that$25,000 still count even though it's going in Eric's right pocket and then going right out, the left pocket to the IRS. Is that really fair? Or is that really what we're gonna include? And there can be obviously some arguments about that.

Amy Gosha: 7:47

Yeah, exactly. And I've had where courts will sometimes include it and sometimes not.

Ryan Kalamaya: 7:53

Let's go on to the second topic. And that is the devil is always in the details. And when I say the devil's in the details Amy, what am I referring to?

Amy Gosha: 8:03

The devil's in the details because when we're talking about someone who is self-employed, we're looking at their gross receipts minus reasonable and necessary, like ordinary and necessary business expenses. And so just because you see a tax return where there is expenses that are taken out, those might not necessarily be considered ordinary, unnecessary. When it comes to whether or not those expenses would be allowable and deducted pursuant to, the child support statute and maintenance statute.

Ryan Kalamaya: 8:40

And so we kind get in, in, in essence, in the Divorce the business owner is going through an audit by the non-business owner's attorney and frequently CPA or for, some sort of forensic or valuation expert. And they'll go through the books and there could be expenses that the IRS or that they've claimed for deduction purposes. The most frequently, common things that get added back would be. Cell phone, auto expenses, office, equipment, meals and entertainment, and the cell phone's. Probably the best example. Amy, we run our cell phone. Our business pays for our cell phones. It's a fairly common deduction. We use our cell phones, we use our cell phone plan for business. But is some of it personal?

Amy Gosha: 9:28

Yes, it

Ryan Kalamaya: 9:29

is. So what oftentimes we do is we add back in, let's say 20%. And it's because there's also this concept that if there are these personal expenses that are reduced as a result of the business, where the business reimburses someone, and this can actually, be for an employee, but the those, get added back in. But when we get into the quote, ordinary and necessary, the Divorce court. Can go through and determine, Hey, you made this expense. It was a really nice car. And expensed it for purposes of, the IRS and the IRS because they're, woefully understaffed. They didn't audit you and you claim this on your tax return, but really it was not an ordinary and necessary business expense. Any kind of other examples? Amy, I can think of, a number of'em. One, I had a, a, a. A case involving a landscaper. And, there was a Victoria's secret expenditure in the books. It was deducted for business purposes. And I asked him on the witness stand, Hey, what kind of what kind of uniforms do you have your employees? And he was like, Carhartts and other things. And I was like Victoria's secret that it's safe to say that's not a business. It turned out it was for his girlfriend and he had expensed that, and that gets added back in. And when you total those up. It can really add to income. Any other kind of examples that listeners could latch on to?

Amy Gosha: 10:53

I think the biggest thing I see is sometimes people don't have a monthly P&L and L and they'll say, look at my tax return. That's the P&L. When you start going through those expenses, like cell phone, like maybe they have their kids on the plan, but it's run through the business. Some other things would be just even paying for, like your computer or marketing or travel. Travel like also maybe if you lease a vehicle that might be on there so you need to look at, like those expenses and you should look at year to year, is there an outlier or is it, seem like a lot. And then you should look into, those expenses further.

Ryan Kalamaya: 11:35

And what we do as Divorce lawyers. I think it really depends if Eric will, for example, if he owns his business and he's the only one. And he's actually the one running the books or he's making those decisions, that's gonna raise some major red flags as opposed to Eric is part of a publicly traded company and there's kind of auditing, or he has multiple partners that are looking over his. Shoulder. It also depends on Melanie. If Melanie, one, it is a common circumstance where Melanie could be the one that does the books for Eric, and she, knows not where the bodies are buried, but how aggressive they've been. The, if you're expensing all the gas and there's frequent trips down from the mountains. To the Broncos game for Denver, that is gonna be added back in. But it really depends. And what we do is we look at the books and we ask ourselves, I if it's a, a landscaping company, I. Are there going to be certain, for example, advertising costs,'cause you could have the ski pass that is buried in the marketing budget and you gotta go through and it really depends on the classification and the kinds of businesses, if it's one business that really doesn't have a lot of equipment, but. They're making these major expenditures, there, there might be something there. And so really we're gonna go back and look at the ordinary and necessary expenses and, it just do an analysis that can be added back in. That's the second thing, amy. The third thing would be the depreciation dilemma. What's that all about?

Amy Gosha: 13:12

So we have straight line depreciation, and we have accelerated. So essentially. We also have a case which Ryan you'll be talking to us about. But normally when you're looking at, when you're looking at K, one, so you're also looking for like the section 1 79 accelerated depreciation, which needs to be added back in. But Ryan, could you talk to us about, this recent case that. Did discuss straight line depreciation.

Ryan Kalamaya: 13:42

Yeah. So sh Schaeffer it came out from the Court of Appeals and it was in 2022 in September. And it had two significant holdings for, income and one of them was on depreciation. So for people that don't know depreciation it's, the concept is that when you buy something, let's say a car when you drive it off the lot, it loses its value and each year it loses its value. The same thing would be for equipment. A backhoe or a caterpillar, some sort of equipment that it's gonna lose value. And so the government through the tax code lets you deduct that reduction in the value of that particular. Thing. And the Schaeffer case allows and endorsed what's called straight line depreciation. And that was for rental properties. And in that case, there was a property that you know was rented out. And as frequently happens in real estate the, there was a straight line depreciation. And that means that every year for, 20 years. There'll be the same kind of deduction over the entirety of that particular time period. And the IRS has classifications without getting too down in the weeds, has different classifications depending on the equipment, but that is in contrast and what you referenced was accelerated depreciation. So a lot of business owners know this, but when you buy a heavy vehicle, and that can be. An SUV, it can be a truck a vehicle, you can take the entirety of that expense and depreciate it or deduct it for one the first year. And that was a recent change to the tax code that what the, what they Congress wanted to do was to incentivize businesses to buy. Equipment to buy, trucks to buy, to get, really get the economy moving. And so that$50,000 deduction for a truck and if it's a new Ford, iPhone 50, those things are going for 90 grand now. And so they can take 90 grand even though you know you could sell it for. Probably not 90 grand, but could you sell it for 85? Could you sell it for 80? And so the child support statute says you, you can't take that$90,000 deduction in the first year for purposes of determining income and child support. It's totally legit in terms of the IRS. The IRS allows you to do that. But Amy, what you were saying is the section 1 79. It's a little box in what we look for. Is there, I've seen it in dentist's office where they buy a bunch of equipment, x-ray machines and it can really make a material impact on income. So what's what's the upshot or what happens in that circumstance? Amy

Amy Gosha: 16:34

with the 1 79. Essentially it gets added back in. So essentially the income goes up for purposes of determining child support and maintenance in that given year, or if it's average? I guess in that given year.

Ryan Kalamaya: 16:47

And then for the Schaeffer case, what we now know, which was confirmed.'cause the statute doesn't say that straight line depreciation is fine. What it says is that accelerated depreciation is not allowed. And so there was this hole, but the Schaeffer case says. You can take straight line depreciation and what that means is that rental real estate, people that have commercial or, income producing real estate, they really get the benefit. And a lot of people think Donald Trump he refused to turn out his tax returns because he was taking these massive losses and you didn't really want. People to see that. But the reality is that real estate, from a tax perspective, we really give some benefits to those rental real estate and, there's some major tax benefits. But the key concept I think people should understand is that, that whatever the deduction is, if it's straight line depreciation, it's not money actually coming out of the bank account. So when you have that. A hundred thousand dollars depreciation for a rental, place in, let's say, Boulder on the hill. It's not actually coming outta the person's, pocket. And I do think that there's some kind of wiggle room or arguments to be made, especially in high income cases where you're not really actually looking, at the particularities of the income. You could be looking more at like the cashflow.

Amy Gosha: 18:06

Yeah. Yeah, I definitely agree with that.

Ryan Kalamaya: 18:09

So moving on to the fourth issue, Amy and that's the imputed income enigma. What is imputed income and how does that come up in a complex income situation with support? Yeah,

Amy Gosha: 18:25

so the child support statute essentially has that if you have a child that is twenty-four months or younger, you can't impute meaning like assign income to a parent when determining child support. But if you have a child that is twenty-four months or older, you can start looking at that. So when we're looking at imputing income. We're looking at, if someone is, for instance, underemployed then, what could they make? That's where we have certain experts come in, such as vocational evaluators to say, what could this person make? If they're going back to school, it has to be for something that is going to make their income higher than what they could make just going out and getting a job today. And it also has to be within a reasonable period of time for them to, I. To get and obtain that education or recertification. We do see certain parents who, for instance, maybe they were a teacher a long time ago, took time off need to get recertified, so the court usually does say that, that is allowed. When we're looking at these kind of higher. Asset cases and imputing income. Some people don't have to work. Maybe they have money from a trust coming in. They have like residual income. So it does get more complicated in that circumstance.

Ryan Kalamaya: 19:53

Yeah. We'll come back to the realized versus unrealized gains in investments.'cause there's certainly some major disputes that can occur on that, but I think that some ex other examples, I always explain to clients that. The voluntary Underemployment or unemployment is, there's a series of cases that came out in Colorado and there're all these crappy lawyer cases is what I call them. And it's these lawyers going through a Divorce. It's the worst. And they then try to game and in spite and to spite their. Significant other, they just quit their job. And one, for example, in Enron, Roger Breger, he became, he quit his job as a lawyer and became an Apple picker. And he said, I've always wanted to be an Apple picker. And it just so happens that it resulted in just a substantial loss of income and. Oh, it was not because he was trying to screw over Melanie Wolf and pay her less. It was because he really wanted to be an Apple picker, and another circumstance that that the lawyer, he wanted to become a cattle rancher and like a cowboy. And really I. Check that box and channel his inner Yellowstone, Kevin Costner the desire. And the court said, listen, like you can't do that. Like you, the, there is you're shirking your responsibility as a husband and as a father. And the same concept exists, but the flip side also, and Amy, we frequently, Melanie, Wolf will be a stay at home mom and she raised the kids and up until 24 months, she's allowed to do that. But then when her kids, I have a nine and a 7-year-old and the kids are at school and it is busy, but. You know the Melanie Wolf, she's often surprised'cause she's going to be imputed income. And you said you know that you can have a vocational rehabilitation expert to determine what that is and the court's gonna be patient. But there is often an expectation that, Melanie is gonna have to work at some point.

Amy Gosha: 21:52

Yeah. And you mentioned usurping your obligation. That's voluntary under employment, along the lines of the Martinez cases. But yeah, I think the court's standpoint is it's expensive to be in two households and both parents have an obligation to support their children. That might be a different number depending on, ability and what's happened. But yes, like a parent just can't continue usually. To be a stay at home parent. They have an obligation, a basic obligation to support their child

Ryan Kalamaya: 22:23

financially. Yeah. And we can get into issues on if there's a child that has special needs we had recorded Yeah. A podcast on that, where Melanie has historically had to, take care of a special needs child or she, if Melanie had an injury or was physically or mentally incapacitated. So we do get into a job, if Melanie is. 60 years old, that's gonna factor in compared to Melanie is 30 years old. So we do get into those issues, but that underemployment or unemployment it, it really can be a disputed issue, but to kinda round things out with our top five. The fifth is realized versus unrealized gains in an investment account. So for listeners, Amy, before this kind of relates to the Schaeffer case, can you paint a picture of what would we normally do and what do A lot of Divorce lawyers that I've seen recently are still doing, what are they doing when they're calculating income, when there's investment accounts associated with it?

Amy Gosha: 23:27

I think a lot of times just the un, the notion has always been unrealized gains, essentially, I don't think that people really know what to do exactly with the unrealized I. Investment gains. A lot of times people just assume it's not income or it's not it's not, it couldn't be considered a property interest. So we have this case Ryan Schaefer you mentioned. Why don't you explain to us what did that case, did it give us any additional guidance on, unrealized versus realized gains when determining

Ryan Kalamaya: 24:02

income again, this is that September, 2022 case, and I think that this was the more significant holding of that case. And in essence, really what it used to be is that if Melanie Wolf was allocated$4 million in investment count and in Schaeffer, what happened was, the wife, she received an investment account. And we had several million dollars, and there was expert testimony on what was the amount of money that she could expect from the investment gains in that account. And so there was testimony on, for example, what if it generated a 5% rate of return? What about a 7.5% rate of return? What about 15? And so the court heard this evidence and it was very common. We would have this and I've, previously talked about that you do have to divide property when you're, before you calculate maintenance and child support. And that is still the case. And but in, in the Schaeffer case, they went through and they had this expert. And then the court said I'm going to impute the wife a particular amount based on the investment or the potential income from this investments. And these were stocks and bonds. And the issue is whether or not that was a proper, and the court of appeals seemingly said. You can't do that. It's because the Melanie or in, in that circumstance, her name wasn't Melanie, but in that circumstance, she had the parties had never used the account to, for a source of income. So there wasn't this historical, where she, the parties drew down or used it. It's not like it was a retirement account and they were in retirement and they had always relied on it. And really the kind of significance is that if it's just paper money, going back to our original discussion on the minority business owner, if you know it's paper money and you just show, I. A gain because like right now Bitcoin is up 160% if that account holds Bitcoin, but there's no sale, there's no distribution, you don't rely on that gain. It could be down a hundred percent next year. And really what it's called into question is whether or not you can impute a particular amount of, income if it's not going to be realized.

Amy Gosha: 26:32

And that kind of dovetails into this Supreme Court case. Why don't you tell our listeners about that case and how that could give us some, direction on this?

Ryan Kalamaya: 26:43

Yeah. At the time of this recording, there was a US Supreme Court case that has been in the news and it was about it was a really complicated issue, but it was about whether or not. Income from the, as far as I understand it, the couple, it was a couple that lived in the United States and they had a business in India. And there were these complicated provisions involving the tax code and whether or not you tax income and if it was brought into the United States. And really it's that same concept that I just talked about with Schaeffer. And that's the difference between realized and unrealized income and. The thing that I think is fascinating is that here in 2023, we are still talking about what is or is not income. It's not as simple as what's on your taxes. It is not as simple as what is re, in your bank account or what is received in your bank account because, it could be a return on capital versus return of capital. And like if I loan you Amy. A hundred thousand dollars and you pay me back a hundred thousand dollars. That return of the a hundred thousand dollars, that's the income. If I charge you interest and you pay$10,000 of interest, the a hundred thousand dollars return is not income, but the$10,000 is, and in the U.S Supreme Court case, the this, the justices are deciding whether or not unrealized gains in a foreign company. Income and the justices, by the news reports are questioning like, we're gonna have to rewrite the entire tax code.'cause there's these various assumptions. And I think that's one of the key takeaways is that we do have these disputes, but there is a body of law out there about, for example, depreciation versus accelerated depreciation. And it can be really complex and we guide our clients and, go through and the judges, they may not understand it. It can be really complicated, we now, as of, 2023, we're still trying to figure out what is income. And I think it's, telling that we have a US Supreme Court case and it was just the. Motivator to record a episode such as this on some of the income issues that we frequently deal with. And I think in the future we're gonna continue to have, more and more of these as kind of financial products and other issues. Come up. And how do we, address these in. Support cases involving maintenance and child support.

Amy Gosha: 29:14

And also I think, what's I, what's important is not just even like in that determination, are you gonna average when there's varying income? And I know we talk about this a lot in other episodes, but is it just the current year? Is it the last three years? Is it the last five years? So it's just it, the takeaway is it can be complicated and there's a lot of lenses that you can look at it from.

Ryan Kalamaya: 29:39

So in conclusion, there are, these are just five, I we thought about including executive compensation and stock options and deferred compensation. Whether retirement income or retirement contributions are not, I. Income and, we can certainly look forward to recording certain episodes. We do have a how-to Series. I'll break down various, issues related to income, but hopefully that gives people an idea of some of the top five issues that we frequently see, the minority business partners, the ordinary necessary business expenses, the accelerated versus straight-line. Imputed income. And then finally, the realized versus unrealized gains in investment accounts. But until next time, thanks for joining us on Divorce. At Altitude. See you Amy.

Amy Gosha: 30:27

I didn't wanna just say bye.

Ryan Kalamaya: 30:29

hey everyone. This is Ryan again. Thank you for joining us on Divorce at Altittude. If you found our tips, insight, or discussion helpful, please tell a friend about this podcast. For show notes, additional resources or links mentioned on today's episode, visit Divorce at Altittude dot com. Follow us on Apple Podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube. You can also find Amy and. Law or 9 7 0 3 1 5 2 3 6 5. That's