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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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husband indebting marriage with taxes for possible divorce

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my husband changed the status of his corp to an "s" corp. Can he passthrough tax stuff to our joint return without my permission? He is also waiting till April to pay taxes (he owns corp and employs himself) so he doesn't have to share the return but is taking out massive loans from the corp to do so, thereby indebting the marriage to the corp. Does this reek of oncoming divorce and is it legal? This is all being done w/o my permission.

Generally, in a non-community property state, the spouse's signature is not required in order to have a valid S election. Because of that, if one spouse owns the corp 100%, they can make a valid S election without the other's permission.

Depending on the exact nature of the business and your joint tax situation, there may or may not be anything illegal about it.

I would not think that this situation, alone, would "reek of oncoming divorce. However, if it is part of a bigger pattern of problem areas (non-communication, hiding of finances, etc), then it certainly could add fuel to the fire.

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Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Allow me to start off by thanking you, Jon, for your prompt attention to this matter and I apologize for the time in getting back to you. Perhaps I can clarify by stating that NM is a community property state. Approximately 10 fast food incorporated under one name. Joint taxes filed for the 10 yrs of marriage. On the 2003 and 2004 he did not file the page that estimates the following yrs taxes, so he is not taking out taxes monthly. This frightens me because this last April, we had to come up with an unGodly amount of money to pay our taxes instead of getting a refund check. To pay these tens of thousands of dollars, he has sold the rental property, stocks and bonds portfolio, etc. out of the marriage. He tried to take the equity of our home by taking a loan against it, also. I refused to sign. He now has taken massive loans from the business at one hundred times loan shark interest rates (tripleing the money) in which he is indebting the marriage to the business in an attempt to take any interest that I might have in the business away because of the debt owed to the business. He is doing this again and I feel like I am being forced to take on a precarious financial position. Can I force the issue for him to pay in taxes monthly? I found out that I was intitled to half of the refund check and wouldn't sign the check unless it was done at the bank so I would receive half of the check. He was livid. Before he had me endorse it and then cashed it through the business. I asked for some answers to what the so-called losses that were passed through to our joint return and he replied "none of your business it is my money, not yours". I know that the business did better than it ever has and that there was a great deal of profit. Most are in the million dollar earned club. Pays himself a salary of approx. $200,000. which was lowered from $350,000. the descrepancy is now classified as "distributions" which if I am not mistaken, was a dishonest move because distributions are considered "separate" income from the marriage. I think the business before taxes and expenses, etc is making approx. $8-$10,000,000. Our CPA does both the business and the personal taxes. I found out he gets paid approximately $50,000. for his services. The top paid supervisor only works part-time (he works full-time as a blackjack dealer at casino) he supposedly does bookkeeping, and signs checks. He makes a bonus of $4 - $5,000. per month besides his salary. Maybe 15 hrs per week. He has health plan and retirement equal to the 3 other supervisors who work full-time (maybe) who also make about the same bonuses. Bonuses are supposed to be the incentive for sales at the manager level. The business only offers retirement and perks to the 4 supervisors and my husband. Husband claims the business is just breaking even and that's all he can pay himself yet I found out he is building two more franchises and the business did the whole thing in cash--no loans. I feel that our marital income suffered so the the business could prosper. I feel that the end result is that he basically cleaned out the marriage. I have no control of any finances nor will he allow me to know what is in the accounts as he will not put my name on them. He refuses to show me the retirement acct paperwork and says it is his. My name is XXXXX XXXXX anything. He has recently put everything of a financial nature, marital and separate, in a trust that I haven't access to any information on. He has tied everything up this way and refuses to tell me who the benefisciary is. On his will, I am to recieve the "residual" part of our estate...nothing else. I fear that there isn't anything left for the residual. The cars are all titled to the company. The company is not even mentioned in the will. Our CPA (best man at our wedding) refuses to answer any of my questions pertaining to the taxes and tells me that he can not discuss without approval. Don't I have a right to know what kind of losses are being passed through to the marriage? If I am taking the responsibility of taxes passed through from the business, don't I have the right to also know what the losses as well as the profits are? I feel betrayed after 10 yrs of marriage, finding out that he has not invested in our marriage. I'm scared. Maybe this info will help for some answers that are not so vague
Customer: replied 11 years ago.
Jon, as far as accepting to pay you $10 -- I feel rather foolish in asking your expertise for such a nominal fee. I am not experienced in these matters and rely on you to include in your next reply a more fair monetary payment for your services and I will oblige. Thankyou.

I would like to preface the response with a word of caution - It is not unusual for a successful business man or woman to deal with home issues in the same manner as they are accustomed to dealing with work issues - that is, take control, make decisions, and not necessarily consult with anyone else. So I would recommend that, before taking any action described later, you make very sure that the situation is as it appears to be. If it is, there is action that is better taken sooner than later BUT if some of these feelings are based on misinterpretaton or lack of understanding, taking action will surely lead to unpleasant consequences. Proceed with caution.

Back to the first question first - Generally, if the stock is community property (i.e. the corp was formed during the marriage and not with separate funds), an S election would need to be signed by both spouses to be valid. If the corp is his separate property, your signature would not be required in order to have a valid S election.

Now on to the heart of the issue(s) - IF (that is a big IF) things are truly as you describe, I would suggest that you contact a lawyer immediately. There are significant legal issues aside from any tax issues. Having said that, here are a few items that, in my opinion, should be discussed.

1. The CPA may not be able to discuss the corporate returns/finances with you if the corp is separate property. However, you have every right to know and understand EVERYTHING that is on a joint return. In fact, you could potentially be held liable for understated taxes and related penalties - not likely, but possible. You should refuse to sign ANY further tax returns until you have received explanations that are satisfactory to you (and your counsel) of each and every item of income and expense reported.

2. It should not be possible for one spouse to put joint assets into a trust that the other spouse does not have access to. If that is what has been represented to you, you need to have the trust documents examined, among other things.

3. If the business is making enough profit that you have that kind of tax liability, it should be generating sufficient cash to pay the related taxes. If joint assets have been used to pay taxes related to separate property, the marital estate, generally, has a right to reimbursement. There are also numerous theories of "separate property enrichment" that many times are used to get some of the value of the separate property reclassified to marital value.

4. Generally, any retirement account that is earned during the marriage is community property. As such, you would normally be entitled to half (at least) if the marriage were to terminate.

5. There are legitimate reasons to reduce salary in favor of distributions. In general, distributions would only be separate if they were considered a return of capital. Normally, interest and dividends earned are community property even if the underlying asset is separate property.

6. It seems, based on the information provided, that something is amiss. If the business is passing through losses,you should not be having large balances of tax due. If the business is passing through income, it should, in general, have enough cash flow to pay the related taxes.

The fee arrangements for this site are such that the customer can select whatever value they think the answer is worth. There is an "accept" button and also the ability to pay a "bonus". I will provide whatever information and assistance I can knowing that you put a value of $10 on the answer. If you now feel like the answer is worth more than that, you can do whatever you feel is appropriate.

I would be happy to discuss the situation further with you and/or your attorney. I also have some CPA contacts in ABQ that are experienced in dealing with these types of matters if that becomes necessary or desirable.

[email protected]

Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience: I deal with all levels of tax planning and controversy - from the ordinary to the complex.
Jon Andrews and 2 other Tax Specialists are ready to help you
Customer: replied 10 years ago.
I know that this reply is a few months later. My husband did exactly as I had suspected: he filed for a divorce a couple of weeks ago, only it is far worse than I thought. He lowered his salary to $26,500/year. The rest is what he calls "distributions", in which his attorney has informed me that the corporation's CPA (who is also our personal accountant) has requested to that attorney that the corp needs to stop the distributions. I believe now that in the 9 years and 11 months that we have been married that the corp grossed over $100,000,000. in which my husband only paid to the marriage maybe... maybe... $2,200,000. in the same amount of years. He used to pay himself a salary and bonuses of over $200,000./year until the change to S corp status, then he told me that he changed his salary to distributions for tax advantages. The only advantage, of course, was to him for the divorce to show a lower income for alimony purposes and such. Question 1: Isn't there a law that states that a business owning spouse should pay himself a fair percentage salary to the marriage? If not, then couldn't someone like that just pay a salary of $5/wk to an unsuspecting spouse in the marriage? Question 2: The CPA was the best man in our wedding and best friend to husband. Is it possible that he could change the corporate books of the last 10 years to give my spouse an advantage? How long would it take and how hard would it be? Would a forensic accountant be able to tell? I suspect they have been planning for this divorce for more than a year. Question 3: My husband claims my car as a business car (he told me for a better insurance rate), although I have only driven to his office once to discuss something about the yard. Am I going to get in trouble with the IRS? Will he get all the cars in the divorce because I found out that he bought them with the business even though I flew to pick up my car and signed the bill of sale made out to me? Will I be walking? Question 4: Another car (in the same situation) was a Christmas present to my son, who almost has his license. Will he lose his car because of the divorce too? We saved the Christmas card signed by my husband and I, giving my son the car. I have signed titles for both cars, but I never titled or registered them in our names because of my husband's insistance regarding the insurance. Question 5: I have a Q-Claim Deed signed, notorized, and witnessed transferring the house to me (a year ago). Thank God I recorded it last April (someone told me to do it) with the county clerk's office, but I didn't know that I also had to go to the tax assesser's and change the ownership of the house. Will I lose the house too? I found that the taxes are up to date, paid by my husband. Does this create a potential problem with the IRS? Question 6: Can I request from the CPA: originals, hard copies, computer disks, computer hard drives, back-up disks, etc. as well as all tax returns, amended returns and worksheets of the corp for this divorce? Will he still have them? Can he get away with saying that he doesn't have any of the above? Question 7: I notice on the one paycheck stub of my husband's that I was given, that he is paid from only one of the fastfood stores out of nine, as it is printed on the bottom, "Home Store 6520-3". Does this mean that he is profiting separately from the other nine fast food restaurants and only paying a pittence to the marriage from one? Can he get away with this in divorce court? Will the CPA try to only show the numbers from this one store and not include the others? My husband has closed all my credit cards except one which he lowered the $10,000. limit to $1000. I have no accesss to anything financial as everything is in his name. I am devastated. Do other women go through this with business owning husbands or am I just stupid and naive? I will be glad to compensate your time spent for once again helping me, for I don't know where to turn as my husband knows (owns) and golfs with everyone here. Thankyou.

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