Articles Posted in Business Interests

In divorce cases where the parties have offshore assets, those assets are generally not reported to the Internal Revenue Service (“IRS”). However, California family law imposes a strict fiduciary duty of disclosure on all divorcing spouses. Throughout the pendency of a divorce case, the parties are under an ongoing obligation to disclose all material facts and information regarding income, expenses, assets and debts.

This includes unreported income and assets hidden overseas. If a spouse has made efforts to conceal income or assets from the federal government he or she may feel very conflicted about disclosing that information in a state dissolution matter. Therefore, the spouse may be torn by a desire to cooperate with the divorce process and make full disclosures yet fearful of criminal and pecuniary penalties which may be imposed by the IRS. In many cases, both spouses may be aware of the offshore assets or at least suspect they exist.

If a California family court determines that a spouse has failed to meet the strict fiduciary disclosure requirements, he or she will likely be sanctioned in an amount sufficient to deter repetition of the impermissible conduct. In high asset/high income cases, the amount of the sanction could be staggering. In addition, failure to disclose an asset exposes the non-disclosing party to the possibility of the court awarding 100 percent or an amount equal to 100 percent of the asset to the other spouse. On the other hand, if a spouse’s failure to disclose offshore assets and/or reportable income to the IRS is discovered by federal authorities, the spouse will likely face time in jail in addition to substantial financial penalties.

In these cases, the client has limited options. The client could attempt to amend prior tax returns to fully comport with IRS requirements and immediately disclose all hidden assets/income in the divorce case. If a client pursues this option, there is still no guarantee of avoiding federal prosecution. If this option is no longer available, the client could enter the Offshore Voluntary Disclosure Program (“OVDP“). The OVDP was started in 2012 and allows taxpayers to voluntarily disclose offshore assets before they are uncovered by other means. Entering the OVDP can help taxpayers avoid criminal prosecution; however, they will likely still face harsh financial penalties for nondisclosure.

It is incredibly risky for a divorcing spouse with hidden assets or income to fail to make efforts to become compliant with IRS regulations. In a divorce proceeding, attorneys and clients spend substantial time and resources digging into the finances of both parties. It is unlikely that hidden assets or income will remain uncovered under such scrutiny.
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Funk music innovator, George Clinton, and his wife of 23 years, Stephanie Clinton, are now amidst a battle over spousal support. TMZ reports that Stephanie is now seeking Clinton pay up and is requesting the court to order both temporary and permanent spousal support. Clinton is reportedly not too pleased about this request because he had previously claimed that the couple had been separated for many years and they didn’t have any shared bank accounts or real estate. However, Stephanie is requesting that the court make Clinton disclose all of his finances, including taxes, bank accounts, etc. Stephanie wants to know exactly how much spousal support she is entitled to after their 23 years of marriage. The question remains, to what extent does Clinton really have to disclose?

As divorce attorneys know, declarations of disclosure are essentially the backbone of a divorce case. In California, Preliminary declarations of disclosure are mandatory. Final Declarations of disclosure, on the other hand, may be waived by both parties. With regards to disclosure, California Family Code Section 2100(c) requires complete disclosure of all assets and all debts that the parties may have any interest in. The disclosure must occur early in the divorce or legal separation process, and must occur together with a disclosure of all income and expenses.

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Types of Disclosure:

Such disclosure requires preparation of the following documents by divorce attorneys:

  1. Schedule of Assets and Debts;
  2. Income and Expense Declaration;
  3. Statement of material facts regarding valuation of all community property assets;
  4. Statement of material facts regarding obligations that the community is liable for; and
  5. Disclosure of any investment opportunity, business opportunity or other income-producing opportunity.

While these forms may seem fairly simple and straightforward, it is very important that divorce attorneys advise their clients to be extremely open and comply with the full disclosure requirement. This means that that ALL liabilities and ALL assets must be accurately disclosed. This often requires the client to spend a lot of time thumbing through old files of financial statements to find the most recent balances and accurate information. It is also vital that divorce attorneys remind their clients that the disclosure requirement applies to assets and liabilities that the client may have in the future, such as potential business opportunities that the client is aware of. Even though the client may think that an asset or debt is a separate property item, it must still be disclosed in accordance with California Family Code Section 2100.

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Failure to Disclose = Sanctions?!

Failure to comply with disclosure requirements can result in significant sanctions, so clients should think twice about leaving out an asset or two. For instance, in In re Marriage of Feldman (2007), 153 Cal. App.4th 1470, the Husband failed to disclose numerous transactions and the formation of new companies, which were all quite significant. Wife found out about these assets by other means and filed for sanctions pursuant to California Family Code Sections 1101(g), 2107(c) and 271(a). The court held that husband could be sanctioned, and as a result Wife was granted $250,000 in sanctions! The court reasoned that Husband had an obligation to fully disclose all material facts and information regarding all assets in which the community has or may have had an interest.

So, despite his reluctance, it looks like Clinton is going to have to fork over some financial paperwork so that a fair determination can be made regarding how much spousal support Stephanie is entitled to. If he fails to do so, looks like some pretty hefty sanctions may be in his future.
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Another Housewife is getting divorced. Bethenny Frankel, creator of the Skinnygirl franchise, is divorcing her Husband Jason Hoppy after only two years of marriage. For months Frankel has been fighting rumors that the couple is splitting but she has finally confirmed that a divorce is on the horizon. Frankel released the following statement regarding the divorce, “It brings me great sadness to say that Jason and I are separating. This was an extremely difficult decision that as a woman and a mother, I have to accept as the best choice for our family.”In 2008, Frankel agreed to join the cast of Bravo’s The Real Housewives of New York. At that time, only four short years ago, Frankel had a “mere” $8,000 in her bank account. To Frankel, The Real Housewives was an opportunity for her to build her own brand and advertise her Skinnygirl line of alcoholic beverages. It seems as if her plan worked because currently Skinnygirl is the number one fastest growing spirit in the United States. In addition, Frankel is now also a best selling author with her own skin, clothing and health products. Further, Frankel received a $40,000 check for each episode of her reality show. Considering the size and diversification of Frankel’s fortune, the first question surrounding her divorce is whether she will have to split everything with her husband. Because the Frankel and Hoppy signed an enforceable premarital agreement, all of Frankel’s empire should be safe from division.

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A premarital agreement is an important tool that can be used to protect assets of ambitious entrepreneurs. As a default rule, under California community property laws, any earnings or accumulations of a spouse during marriage is community property. Thus, one of the main functions of a premarital agreement is to alter that default rule and order that any earnings or accumulations of a spouse during marriage remain that spouse’s separate property.

A San Diego client recently asked me if the court could seize control of the parties community property business, which was started during marriage and is managed by his spouse.

His question was prompted by what recently happened to the Los Angeles Dodgers. The owners of the Dodgers, Frank and Jamie McCourt, are involved in a very public divorce. Ms. McCourt claimed the Dodges are a community property business. Mr. McCourt clamed they are his separate property. In December, the court threw out a post-marital agreement making the Dodgers his separate property. Although Mr. McCourt is appealing that decision and the parties are trying to negotiate a settlement, chaos now reigns in Dodger-Ville. Mr. McCourt borrowed $30 million to meet the Dodgers payroll obligations. Shortly thereafter, Major League Baseball seized control of the team and installed a trustee to oversee business operations. The team may not meet its May payroll obligations and Mr. McCourt may file for bankruptcy to keep control of the team.

Back to my clients question. While the divorce is pending, the managing spouse of a community property business usually has primary management and control of the business subject to fiduciary duties to the non-managing spouse. However, the court does have the power appoint a receiver to protect the non-operating spouse’s interest in the business. Where the parties jointly manage the business, they can keep jointly managing the business, or if unable to do so, either party may request the court order one party manage the business. Whomever the court orders to manage the business would have fiduciary duties to the other party.

If the parties cannot agree how to divide the business, the court may award the business on any conditions it deems proper to make a substantially equal division of the community estate. The court usually does one of the following:

(1) Awards the business to the managing spouse. This may even be done over the objection of the party the business is awarded to.

(2) Awards the business to the non-managing spouse. In one case, a Burger King franchise was awarded to the non-managing spouse over the objection of the managing spouse.

(3) Divides the business in-kind. In one case, shares of stock of a business were divided in-kind. However, the court will not make an in-kind division if it would impair the business.

(4) Orders the business sold.
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Do you think your spousal support payment is too high? A few weeks ago, the San Diego Union Tribune and the Wall Street Journal ran articles about the never-ending divorce saga of San Diego County’s wealthiest couple, Charles and Linda Brandes. According to Forbes, Mr. Brandes is ranked number 269 on its 2010 list of the 400 Richest People in America with an estimated net worth of 1.5 billion. The San Diego Union Tribune reported that Mr. Brandes income is $16 million per month and he pays $500,000 per month in spousal support to Ms. Brandes.

Some of you may be wondering how a judge determines how much spousal support a person must pay his or her former spouse. Unlike child support, which is generally calculated by a mathematical formula, spousal support is determined by a consideration of factors set forth in California Family Code Section 4320. The trial judge must both recognize and apply each of these factors when setting spousal support.

Translated into understandable terms, the factors include: the income of each party; the marketable skills of the supported party; whether the supported spouse did not work so he or she could tend to domestic duties; whether the supported party contributed to the other party’s education, training, license or career position; the ability of the supporting party to pay spousal support; the needs of each party based on the how the parties lived during the marriage; the assets and debts of each party; length of marriage; whether the supported party can work without interfering with the interests of the children; the age and health of the parties; domestic violence between the parties; tax consequences; a balance of the hardships; whether the supported party can be self-supporting within a “reasonable period of time;” the criminal conviction of an abusive spouse; and any other factors the court determines are just and equitable. That last factor is a catch-all provision, meaning whatever else the judge finds relevant.

When there is an existing spousal support order and one party is requesting a modification of spousal support, there generally needs to be a material change of circumstances since the last order. The court is required to reconsider the same standards and criteria set forth in Family Code Section 4320 it considered in making the initial long-term order at the time of judgment and any subsequent modification order. Although a showing of changed circumstances is necessary to obtain the court’s consideration of a modification of spousal support, it does not ensure that a modification will be granted.
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