Starting Over

EXECUTIVE SUMMARY

CPAs’ SPECIALIZED SKILLS put them in a unique position to help divorcing individuals and their attorneys organize financial issues related to property settlements and support awards. Some practitioners are developing a domestic-relations-consulting niche. CPAs ANALYZE FINANCIAL DATA according to a range of statutes, regulations, rulings and case law. Local matrimonial statutes and case law are in general less complicated than many regulations practitioners interpret daily. IN DIVORCE WORK, CPAs DELVE into a couple’s financial records to determine the worth of their domestic and business assets, jointly and individually; whether assets are encumbered; who earns how much; who spends what; and what tax liabilities are incurred under one asset distribution scenario vs. another. CPA/ABVs VALUE DIVORCING COUPLES’ business interests, and such expertise can be used to assess other financial assets such as notes, mortgages and retirement plans. Divorce case law and local statutes may require specific methods. CPAs can help structure the payout to provide the greatest tax advantage. SOMETIMES DIVORCING PARTIES, through error or deception, do not accurately disclose assets in the discovery process. CPAs can use forensic skills to find them. A CPA CONSULTING IN A DIVORCE CASE will address tax issues such as the taxability of support, the basis of property to be divided, the impact of the allocation of the dependency exemptions and the timing of the divorce or separation. Knowledge of the divorce provisions in the Internal Revenue Code and how to apply them can help clients find liquidity.

THOMAS F. BURRAGE, CPA, is the litigation and valuation services partner in charge at Meyners & Co. LLC in Albuquerque, New Mexico. His recent book, coauthored with Sandra Morgan Little and published by John Wiley, is Divorce and Domestic Relations Litigation. He is a member of the AICPA family law task force and the litigation and dispute resolution subcommittee. His e-mail address is tburrage@meyners.com .

hen marriages hit the skids—and in the United States almost 50% of them do—divorcing individuals must position themselves for a radically different future than they envisioned when they vowed to “love and honor.” Under tremendous stress, often while angry and grieving for the past, they will make financial decisions affecting the rest of their and their children’s lives. Because such emotions tend to crowd out rational self-interest, these folks can benefit from a steadying hand, which CPAs’ specialized tax, audit, valuation and forensic skills put them in a unique position to provide. Advising this growing segment of the population and their attorneys about the money issues of ending a marriage is the basis of domestic relations consulting. Here’s how what practitioners know can help people undergoing a divorce to organize the information courts use in determining support awards and dividing a marital estate.

QUALIFICATIONS WITH A CAVEAT
In simple terms, dividing a divorcing couple’s property involves identifying, valuing and apportioning assets, and CPA tax and audit expertise is a natural foundation for discovering the most relevant information to complete that process. Practitioners routinely determine owners’ equity and cash flow, income and the value of any noncash benefits, according to a range of statutes, regulations, rulings and case law. CPAs can’t practice law, but they do apply it when analyzing financial data. Local matrimonial statutes and case law are, in general, less difficult to understand than many regulations practitioners interpret daily.

In divorce work, CPAs compile data to determine
What a couple’s personal assets are worth, both jointly and individually.
What their business holdings are worth, both jointly and individually.
Whether assets are encumbered (by debt or legal restrictions, for instance).
Who earns how much.
Who spends what.
What tax liabilities are incurred under one asset distribution scenario vs. another.

“Those financial research and interpretive skills are exactly what divorce attorneys and their clients need,” says William B. Stewart Jr., CPA/CVA, CFE, of Houston. “Our work in domestic relations is a microcosm of everything we do as CPAs,” he says.

RECORDS, RESOURCES AND NEEDS
It isn’t unusual for a divorcing couple’s financial records to be in disarray and spread between two households, with important papers stuffed in a shoe box, for instance. That shoe box often contains brokerage and bank statements, deeds, titles, invoices and tax returns along with other important records. In divorce consulting, a CPA organizes and analyzes those financial documents, outlines the couple’s holdings and income, relates findings and explains the tax and other issues to the hiring attorney, the parties and the judge.

When particular circumstances require CPAs to check such claims’ accuracy, they can use business valuation methods to do the job. Practitioners may compare performance for investments or individuals with appropriate benchmarks or peer productivity figures or assess whether a business or asset is under- or overperforming by looking for consistent, reasonable data about that type of entity. To learn whether assets have been invested appropriately, CPAs can compare them with other suitable investments. CPA/ABVs often obtain comparative business valuation data from the Internet and other information sources (see “ Signed, Sealed, Delivered, ” JofA , Nov.02, page 30).

Although divorcing couples usually disagree about how to divide their property, local statutes and case law largely determine value and proportionate ownership. If the ownership interest in property is disputed because it has been acquired, partially or completely, with separate funds, CPAs can trace the sources of funds through the financial records of both individuals. Janet M. McHard, CPA/ CVA, of Meyners & Co. LLC in Albuquerque, New Mexico, gives an example: “I recently traced funds through 60 bank accounts spanning 14 years to prove that more than $1 million in property and securities were directly traceable from gifts and inheritances my client had received. When we started, the opposition claimed all of it was community property. When we finished they conceded it was separate.”

Expertise such as what practitioners use to value businesses also can be employed to value financial assets such as notes, mortgages and retirement plans, which may be affected by conditions such as a holding period, rate of return, interest rates and the amount and timing of income generated. Part of valuing those financial instruments includes researching the appropriate levels of premium or discount allowable under the local law.

UNCOVER FINANCIAL DECEPTION
The emotional turmoil that affects divorcing individuals often causes them to lose trust. It’s easy to understand. Many times divorces are precipitated by one party’s belief that the other has kept information from him or her, and allegations of financial deception are common. Sometimes misrepresentations occur, whether by intentional or unintentional conduct.

CPAs regularly analyze clients’ organizational and financial information to determine the possibility or existence of corporate financial fraud, and the skills for uncovering whether matrimonial income or assets are being hidden are the same. Lori E. Bunker-Leary, CPA/CVA, of Financial Investigative Services in Montclair, Virginia, offers an anecdote: “I represented the wife of a CEO of a major corporation and part of my engagement was to determine the value of his retirement vehicles and estimate her interest in those accounts. He wasn’t uncooperative, but he didn’t have a lot of time to answer my questions. He requested I speak with corporate counsel to get answers.

“I felt I wasn’t getting the whole story, so I called the pension department and spoke with a clerk there who divulged the existence of an annuity from a closed retirement plan. The annuity, worth over $650,000, had not been disclosed in discovery. When questioned, the husband said he was quite surprised to learn of its existence, as was his attorney. My client was thrilled she would be getting a percentage. I learned from this case that you can’t always depend on the records produced—and CPAs’ forensic skills come into play in all forms of investigations,” says Bunker-Leary.

CPAs are trained to pay attention to detail and to be persistent about resolving inconsistencies, and the ability to serve clients’ interests well depends on these qualities. Educated clients understand, however, that the CPA’s best efforts and techniques can’t guarantee they will discover every dollar of income or every well-hidden asset that may be buried in the backyard. When given a choice, practitioners must strike a cost-benefit balance between dedication and knowing when to call a halt so clients aren’t saddled with outlandish bills. Communicating an expectation of realistic results is essential to a domestic relations practitioner’s long-term success.

TAX TREATMENTS CAN UNLOCK LIQUIDITY
A CPA consulting in a divorce case will address tax issues such as the taxability of support, the basis of property to be divided, the impact of the allocation of the dependency exemptions and the timing of the divorce or separation. However, after the valuation and disposable income reports are on record and the divorcing parties and their counsel turn their thoughts to settlement and, one hopes, away from litigation, liquidity becomes an issue. A careful financial solution addresses concerns about alimony recapture, contingencies affecting the classification of payments as alimony or child support, meeting requirements to qualify payments as deductible alimony and how best to use tax rules in settling the case. CPAs who practice in this discipline have solid knowledge of the divorce provisions in the Internal Revenue Code and how to apply them to help create liquidity.

Donald J. DeGrazia, CPA/ ABV of Gold Meltzer Plasky & Wise in Moorestown, New Jersey, says: “Often we are able to generate liquidity or sources of collateral that aren’t apparent to the spouses and their attorneys. For example, in several cases I worked on there was liquidity inside the company but little in the marital estate, yet a dividend or bonus would have created either double taxation or a 45% tax rate.” His firm recommended a stock redemption to halve the tax rate and free up the liquidity inside the C corporation.

In another case a wife’s concern that the husband would default on an equitable distribution note made a collateral interest in his closely held company unacceptable. In that instance the firm recommended use of a qualified domestic relations order (QDRO) of the husband’s interest in his retirement plan as collateral, which also collateralized his alimony obligation. “A 1992 IRS private letter ruling provided the road map to implementing this strategy,” DeGrazia says.

In yet another case his firm demonstrated to participants how the three-year alimony recapture period could be shortened to 367 days, allowing more money to be classified as alimony in a much shorter period and taking advantage of the wife’s lower tax bracket, all in compliance with tax law. “Finally, by using the revenue ruling 2002-22 guidelines, we’ve been able to help counsel successfully lower the tax bracket on deferred compensation and nonqualified stock options (those still above water) by shifting them from the employee spouse to the nonemployee spouse for exercise in a lower tax bracket,” says DeGrazia. Taxes can vary dramatically based on the wording of an order, the type of asset divided or the completion of an appropriate form.

Practitioners who understand how taxes affect divorcing couples have a unique opportunity to structure agreements to improve their clients’ cash flow and the value of the assets they receive. In this arena CPAs can deliver solid financial benefits to clients.

TOWARD A HUMANE RESOLUTION
CPAs’ commitment to integrity and objectivity for litigation services practice as mandated by professional ethics and their clients’ trust in them sometimes position practitioners to mediate divorcing couples’ disputes without litigation. Many jurisdictions across the country use CPAs as settlement facilitators, arbitrators and mediators, says L. Gail Markham, CPA/ABV, a certified family mediator with Markham Norton Stroemer & Co. in Fort Meyers, Florida. She says, “CPAs are a natural fit for mediation in domestic relations cases.” She cites CPAs’ training and experience in problem solving and analysis as applicable strengths. “Our experience has taught us to evaluate inconsistencies and search for the missing pieces in each engagement,” she says. “Because the CPA profession, as a whole, continues to command a high level of trust, our work is well-respected and usually is given a great deal of consideration in the mediation process. Early and consistent advice from a CPA can save divorcing parties many thousands of dollars and a great deal of trauma.”

THE PLEASURE OF HELPING
Practitioners say they are careful to remain objective with divorcing clients but nevertheless take great pride in using their experience and skills to help clients organize their finances and get their new lives in order. Most CPAs have the knowledge to perform domestic relations financial consulting yet hesitate for fear of having to deal directly with a client’s distress or concern they won’t have a good enough grasp of the “rules of engagement” under local law. CPAs who wish to do divorce consulting can avoid emotional issues by dealing primarily with attorneys, and they can learn more about jurisdictional rules from local counsel, fellow accountants and their state bar associations.

Fact-finding interactions offer an excellent opportunity to learn about resources and events where CPAs can make gatekeepers aware of their services. Another way to market services is by teaching lawyers and other gatekeepers how CPAs can maximize financial strategies to give clients the best possible resources for starting over once the divorce is final. Says Stewart, “We quite literally hold our clients’ futures in the palm of our hand.”