Material for National Business Institute Lecture, February 2002

A. Use of Financial Declarations

A well-crafted financial declaration aids an attorney in presenting the client’s financial situation to the court; a poorly crafted financial declaration becomes devastating cross-examination material for opposing counsel.

The key to a well-crafted financial declaration is verifiability. If there is a figure in the financial declaration that will be important at the temporary hearing, attach documents that verify the figure. Thus, if a client’s income will be at issue, attach a recent paycheck stub or last year’s W-2. If why a particular debt was incurred is at issue, attach a statement showing when and how the debt was incurred.

With the increased consumer use of programs like Microsoft Money or Quicken, it is easy to create reports that, while not necessarily matching up with the financial declaration categories, can verify the figures for these categories. For example, a client may categorize vacations, recreation and entertainment separately in Quicken but doing a Quicken cash flow report and noting that the three are combined into the financial declarations “entertainment” category would give the court credible evidence that the entertainment figure used is accurate.

For clients who do not use these programs it may make sense for the client (or his or her accountant) to create a table categorizing the monthly expenses for the past two years for each expense item in the financial declaration and cross reference it to the client’s household account. These tables then become demonstrative exhibits to the account statements. The goal, again, is to give the court some confidence in the client’s expense figures.

If the key to a well-crafted financial declaration is verifiability, the corollary is updating. Often the figures in the initial financial declaration will be little more than an educated guess. If your client has recently moved out of the marital home and is sleeping on his sister’s couch, it is best to estimate some rental expense (otherwise the court may find a greater ability to pay alimony than he has). Food and household supplies are another expense that often needs to be estimated as a family breaks apart. If your client did not handle the household finances, he or she may be ignorant of basic credit card or vehicle expenses. Thus, even if done carefully, the initial financial declaration can be highly inaccurate.

But that is no excuse for relying on that inaccurate financial declaration at trial. As discovery is taken and as a client begins to sort his or her post-separation life out, a more accurate assessment of expenses can be made. At that time, especially if a court hearing will be taking place in which financial declarations will be used, an amended declaration should be filed. Having a client’s credibility attacked based on an inaccurate financial declaration because a more accurate declaration was not created is a sign of sloppy or lazy lawyering.

In amending financial declarations, make sure that listed expenses accurately reflect anticipated expenses and not current expenses. For example, if due to a post-separation reduction in living standards the client has substantially reduced a discretionary expense (such as entertainment), be clear that the listed entertainment expense reflects the marital history and not the current expense. I once handled an appeal in a case in which wife’s post-separation living standard declined significantly. She was cross-examined by comparing her post-separation living expenses (as gleaned from her bank records) to her financial declaration. Because she did not provide the court with bank records from the last few years of her marriage, it appeared that she was seriously overstating her expenses and the court denied her alimony. Had her attorney presented evidence of what her expenses had been during the last few years of marriage, it may have been powerful evidence that she needed alimony to sustain her marital lifestyle and that her post-separation lifestyle had been diminished.

Finally, whenever child support or alimony is at issue, one should make it a habit of subpoenaing the other’s party’s wage, employment and personnel records immediately upon filing an action or being retained to defend an action. If the court has access to these records, it will generally utilize a party’s employer’s records, as opposed to the financial declaration, in setting support.

B. Interpretation and Use of Tax Records

For purposes of determining income pursuant to the child support guidelines there are two major distinctions between income for tax purposes and income for child support purposes.

First, the court should count as income expense reimbursements or in-kind payments received by a parent from self-employment or operation of a business if they are significant and reduce personal living expenses, such as a company car, free housing, or reimbursed meals. S.C. Reg. Ann. §114-4720 (A)(3)(c). In reviewing a party’s corporate or personal tax returns, look for business expenses that reduce that parties personal expenses. In personal returns, the Schedule C shows the business expenses. Look for Schedule C expenses that the party would have even if the party did not run a business. If a party’s business pays for his or her car, and the car is used 30% of the time for personal use, 30% of the deducted expense should be added back into the party’s income figure. If a party is charging his business rent for a home office make sure that the rent is reasonable and necessary and that the home office does not have a personal use component too.

Second, in calculating income, one needs to deduct out accelerated depreciation of business expenses. S.C. Reg. Ann. §114-4720 (A)(4). In doing so, one needs to add back in straight-line depreciation of business expenses for the current tax year and prior tax years. This can be quite confusing. Take the example of a party who accelerated $3,000.00 of depreciation each of the last 3 years when the items being depreciated normally depreciate over five years. Looking at the most recent year’s tax return, one would need to add in $2,400.00 of income to the current tax year, as the $3,000.00 of current tax year depreciation should be reduced to $600.00 (one-fifth of $3,000.00). However, the prior two tax years would have created depreciation in the current tax year if the items being depreciated had been depreciated on a straight-line basis. In this case, the party would be entitled to additional depreciation of $600.00 for each of the two prior tax years into the current tax year for $1,800.00 total depreciation. Thus, income would only increase by $1,200.00. These tables may make the scenario clearer:


Year 1999 2000 2001 2002 2003 2004 2005
Item 1 $3,000 $0 $0 $0 $0 $0 $0
Item 2 $0 $3,000 $0 $0 $0 $0 $0
Item 3 $0 $0 $3,000 $0 $0 $0 $0
Total $3,000 $3,000 $3,000 $0 $0 $0 $0
Year 1999 2000 2001 2002 2003 2004 2005
Item 1 $600 $600 $600 $600 $600 $0 $0.00
Item 2 $0 $600 $600 $600 $600 $600 $0
Item 3 $0 $0 $600 $600 $600 $600 $600
Total $600 $1,200 $1,800 $1,800 $1,800 $1,200 $600

The point is that in removing accelerated depreciation from the current tax year to increase current income for child support purposes, do not forget to add in straight-line depreciation from previous tax years in reducing current income for child support purposes. While these conversions of taxable income to child support income are only explicitly used in determining income for child support purposes, there is no reason they cannot be used in calculating income for alimony purposes. The same accounting concepts that make these revisions desirable in determining income to pay child support are just as applicable in determining income to pay (or show need for) alimony.


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