Honesty Issues and Imputed Income

The C.R.Z. v. D.E.Z court's holding that the husband had misrepresented salient facts may have also contributed to its findings of the parties' respective credibility and decision not to impute income to the wife, as discussed previously. Among the factual inconsistencies in the husband's testimony were deposits into the parties' accounts between $127,655 and $146,676 per year (while claiming income of between $25,000 and $50,000 per year); unabashed admissions of paying for personal expenses through the business, including, without limitation, the mortgage securing the family residence and lease payments on the wife's luxury automobile; and the fact that the parties' spent $65,000 on a party for their younger daughter when the defendant claimed his business was failing.

The court imputed income to the defendant by starting with the average of funds deposited into the parties' joint checking account over a four-year span between 2005 and 2008 ($141,014), then adding to that the personal expenses routinely funneled by the defendant through his business, for an annual total income approaching $200,000. His imputed income was eventually decreed $190,000 annually.

In Fabrikant v. Fabrikant, 62 AD3d 585 (1st Dept. 2009), again the court held against a party who had not been candid. The court determined that the husband intentionally did not fully or properly disclose his income ' particularly distributions from his company and payment of personal expenses therefrom ' in order to avoid support obligations. The Appellate Division found that the special referee properly relied on the compelling testimony of the independent forensic accountant, who stated that numerous companies with which the husband was affiliated or of which he was the sole owner were used to pay his personal expenses or to “repay” “loans” allegedly made by him to the companies, and these companies ' with cash flows that were not reflected on their income tax returns and with no apparent business purpose ' reflected his deliberate effort to reduce his visible income so as to avoid his obligations to his wife and children.

The court also imputed income because of the pattern of substantial gifts to the husband from his father. Furthermore, the husband's purported injuries and ailments were not supported by medical evidence that he was unable to work, especially given that he had contradicted himself with testimony about traveling on business at a time when he was supposedly unable to travel or work, and about his minimal requirements for work ' a laptop and a telephone. The special referee properly rejected the testimony of the husband and his father, both convicted felons, that nearly $3 million provided to the husband by his father, unsupported by documentation except a promissory note prepared two days before the commencement of the hearing, constituted loans and not gifts.

Also, to the extent the husband attempted to argue that his felony conviction caused a reduction in his earning capacity, the court found the reduction to be self-imposed, which did not warrant a reduction in his obligations to his wife and children ( see Knights v. Knights, 71 NY2d 865, (1988); Commissioner of Soc. Servs. v. Darryl B., 306 AD2d 54, (2003)).

Conclusion

Although it is difficult to derive any consistent rule of when, or to what extent, a court will impute income to a party in any given case, it appears that judges tend to be guided by an overriding sense of fairness, instead of a formulaic algorithm. It may be comforting to certain parties that fairness will play a part in, if not drive, the court's decision. But as practitioners, we continue to be left to argue and present the facts to our client's best advantage with little certainty of (or ability to predict) the result.

Marcy L. Wachtel, a member of this newsletter's Board of Editors, is a partner in the firm of Katsky Korins LLP. Lori Meyer, of Meyer Law Offices, P.C., was formerly a partner of Katsky Korins.

In Part One of this article, we looked at some of the factors courts use in determining whether to impute income to a divorcing spouse, and how much. But one of the most powerful influences on a court's decision to impute income may be its suspicion that a party simply is not being as forthcoming with the truth as he or she should be.

Supporting Spouse's Income Claims Not Credible

Often, it has been the parties' standard of living which had led courts to impute a higher income than reported because the court deems such income necessary to afford the historical expenditures. For example, in C.R.Z. v. D.E.Z, 200558/09, NYLJ 1202503772255 (Supreme Court Suffolk County, Referee A. Jeffrey Grob), discussed in Part One, the husband made his living as a diamond merchant, marketing stones under several corporate entities. He gave testimony with respect to the sources of his income, which the court found “conflicted and equivocal.” The court held that it need not rely upon a party's own account of his or her finances, but may impute income based on the party's past income or demonstrated future potential earnings. Citing Brown v. Brown , 239 AD2d 535 (2d Dept. 1997) (court may impute income to a party based on employment history, future earning capacity, educational background, or money received from friends and relatives) and Collins v. Collins , 241 AD2d 725, 727 (3d Dept. 1997) (where a party's account is not believable, the court may impute a true or potential income higher than alleged). See also 1 308 A.D.2d 435 (2nd Dept. 2003) (“here, the court, in an exercise of its discretionary authority, finds it appropriate to impute income to the defendant based, inter alia , on the defendant's transparent efforts to conceal his true income to avoid familial obligations.”).

The C.R.Z. v. D.E.Z court's holding that the husband had misrepresented salient facts may have also contributed to its findings of the parties' respective credibility and decision not to impute income to the wife, as discussed previously. Among the factual inconsistencies in the husband's testimony were deposits into the parties' accounts between $127,655 and $146,676 per year (while claiming income of between $25,000 and $50,000 per year); unabashed admissions of paying for personal expenses through the business, including, without limitation, the mortgage securing the family residence and lease payments on the wife's luxury automobile; and the fact that the parties' spent $65,000 on a party for their younger daughter when the defendant claimed his business was failing.

The court imputed income to the defendant by starting with the average of funds deposited into the parties' joint checking account over a four-year span between 2005 and 2008 ($141,014), then adding to that the personal expenses routinely funneled by the defendant through his business, for an annual total income approaching $200,000. His imputed income was eventually decreed $190,000 annually.

In Fabrikant v. Fabrikant , 62 AD3d 585 (1st Dept. 2009), again the court held against a party who had not been candid. The court determined that the husband intentionally did not fully or properly disclose his income ' particularly distributions from his company and payment of personal expenses therefrom ' in order to avoid support obligations. The Appellate Division found that the special referee properly relied on the compelling testimony of the independent forensic accountant, who stated that numerous companies with which the husband was affiliated or of which he was the sole owner were used to pay his personal expenses or to “repay” “loans” allegedly made by him to the companies, and these companies ' with cash flows that were not reflected on their income tax returns and with no apparent business purpose ' reflected his deliberate effort to reduce his visible income so as to avoid his obligations to his wife and children.

The court also imputed income because of the pattern of substantial gifts to the husband from his father. Furthermore, the husband's purported injuries and ailments were not supported by medical evidence that he was unable to work, especially given that he had contradicted himself with testimony about traveling on business at a time when he was supposedly unable to travel or work, and about his minimal requirements for work ' a laptop and a telephone. The special referee properly rejected the testimony of the husband and his father, both convicted felons, that nearly $3 million provided to the husband by his father, unsupported by documentation except a promissory note prepared two days before the commencement of the hearing, constituted loans and not gifts.

Also, to the extent the husband attempted to argue that his felony conviction caused a reduction in his earning capacity, the court found the reduction to be self-imposed, which did not warrant a reduction in his obligations to his wife and children ( see Knights v. Knights , 71 NY2d 865, (1988); Commissioner of Soc. Servs. v. Darryl B. , 306 AD2d 54, (2003)).

Conclusion

Although it is difficult to derive any consistent rule of when, or to what extent, a court will impute income to a party in any given case, it appears that judges tend to be guided by an overriding sense of fairness, instead of a formulaic algorithm. It may be comforting to certain parties that fairness will play a part in, if not drive, the court's decision. But as practitioners, we continue to be left to argue and present the facts to our client's best advantage with little certainty of (or ability to predict) the result.

Marcy L. Wachtel, a member of this newsletter's Board of Editors, is a partner in the firm of Katsky Korins LLP. Lori Meyer, of Meyer Law Offices, P.C., was formerly a partner of Katsky Korins.