deposition of the self-employed

[nala_mia8]

I live in TX, ex lives in OH with my 7 yr old daughter. Child support is managed through TX. We have joint legal, she has primary physical. I see my daughter on school breaks and summer. I am re-married and have a 1 yr son.

In Nov 2004, I opened my own business while still maintaining my FT job. Jan 05, my wife gave birth to our son. In May 05, I got laid off from my FT job (SBC/ATT merger) and continued to work my business. I immediately filed for lower CS due to the lay-off, decreased paycheck, and additional child. My CPA put together very detailed financial statements for each quarter of 2005. They were completed a few weeks ago and are in the process of getting submitted to the court and to the other attorney.

My ex believes I am hiding money and classifying personal expenses as business expenses. She also thinks I'm purposely underemployed. In TX, it was my understanding that expenses aren't considered in CS calculation. CS is only a calculation of the net income of the NCP. As for being underemployed, I started this business before I got laid off. I didn't start a business from scratch when I got laid off just to evade child support.

I am being deposed by opposing counsel on March 23rd. My lawyer and I are kinda curious as to why since they didn't submit questions, request any additional financial information (they already have quite a bit), so we're thinking I'm going to be questioned about my legitimate business expenses and how they might be twisted into personal expenses.

Questions:

1) Is there anyway to find out what they are fishing for before the deposition?

2) If you were opposing counsel going after a self-employed person, what areas would YOU attack? I thinking this might help me prepare for what might be in store for me.

3) I think the major business expense in question is the company truck I drive. If the IRS says it's a business deduction, then how can it be classified differently for purposes of child support?

4) Are there other items we should be aware of that can be classified as legitimate IRS deductions but not so for CS calculations?

[socrateaser]

>Questions:
>
>1) Is there anyway to find out what they are fishing for
>before the deposition?

No.

>
>2) If you were opposing counsel going after a self-employed
>person, what areas would YOU attack? I thinking this might
>help me prepare for what might be in store for me.

I'd look to see whether any particular business expense could be more fairly characterized as personal. In order to have a clue, though, I'd need to know what kind of business you're in, and what kind of thinks you enjoy outside of work, which might ordinarily not be viewed as personal items. Examples:

1. Home office deduction.
2. Furniture for the home office (Audio/Visual equipment, etc.).
3. If you are an electronics tech, but you build radio controlled airplanes, for fun, then there may be certain tools or equipment that are actually purchased for personal use, but which may appear to be business related.
4. Entertainment expenses (golf memberships, restaurant bills, sporting event box seats, tax seminar on a cruise around the Carribean, etc.).
5. Vehicle lease. If you sell real estate, but you like to offroad, so you bought a Hummer, then your lease payment is not really all about real estate sales.
6. An office with living quarters which also happens to be located in a resort area.

And, so on and so forth.


>3) I think the major business expense in question is the
>company truck I drive. If the IRS says it's a business
>deduction, then how can it be classified differently for
>purposes of child support?

Because this ain't the IRS -- it's family court, and the judge has broad discretion to determine the actual work value of a particular piece of equipment.

Furthermore, the IRS doesn't determine that something is deductable -- you do. The IRS reads the amount deducted and compares it to the amount of income generated, and if the deduction appears out of proportion to the income generated, then the IRS may audit your return and your business activities to determine the actual use.

Opposing counsel will be doing similarly. Frequently this sort of thing is a huge waste of money, because the amount of money that support is increased by is washed out by the increased litigation costs.

But, if your ex doesn't trust you, then she will spill all the money on demonstrating that you're a lying prick, rather than just looking at the numbers and making an unemotional decision in the child's best interests.

And, her attorney, and yours, will happily litigate because the extra money will find its way into their respective pockets, and well, hey, we all gotta eat, don't cha know?

>4) Are there other items we should be aware of that can be
>classified as legitimate IRS deductions but not so for CS
>calculations?

Depreciation is the biggie, because it's phantom debt, i.e., it doesn't actually come out of your pocket until you have to replace the depreciated item in the future.

So, depreciation on a home office in a very expensive home, could work against you. Same for a luxury vehicle purchase like your truck, if it's some huge beast that's entirely unnecessary for the kind of business you're in, but it's terrific for hauling your trailer and ski boat to the lake.

If you have a business, a vehicle lease is always better, because there's no depreciation for the court to come after. You have an actual out of pocket expense every month that's unavoidable.

The other biggie is just that you're doing a load of business in cash or barter, and as a result, your actual income is not fairly represented by your profit and loss statement. If I suspected this were the case, and that the amount of hidden income were substantial, then I'd want to see your business and your personal checking account(s) and all of your credit card statements, and I'd try to determine how much you spend every month, and if the amount was substantially greater than the amount you claim you earn, then I would have my smoking gun, because nobody can spend more than they earn continuously without either lying about what they actually earn, or being scheduled for Bankruptcy Court in the near future.

[nala_mia8]

Type of business: Retail hockey shop. I sell all things ice hockey related. I also do a ton of team sales and delivery and setup of big items like goals, which is where the truck comes in. Hockey equipment is big and bulky. No boat or trailer to haul.

No home office. I have a laptop, so I can work at home with it when needed.

All computer equipment is leased.

Entertainment expenses include a $55/yr Hockey News magazine subscription and occasional lunches with vendors. We have season tickets to our local NHL team, but we pay for those out of our personal account.

The truck is leased.

Things I enjoy outside of work: playing hockey. I pay for my fees from my personal account. Other than that, I enjoy my family which of course is never a business expense.

We've already provided extensive business statements, and copies of our personal checking accounts.

It sounds like we have all our bases covered as well as we can and it looks like my ex is just wanting to go on a fishing expedition so our lawyers can buy that boat or lake house they've always wanted. ;)

ONE QUESTION:

In a situation like this, I think we should try to come to some sort of agreement/settlement to avoid all the costly litigation. I was thinking about proposing that we setup a process where my income is reviewed every year for the next 3 years without the involvement of lawyers.

This will allow my ex to see a slow increase in CS over the next 3 years without having to involve lawyers and without having to wait the normal 3 year waiting period before re-evaluation.

1) Good idea? Do you have a better idea or better suggestions? Something fair for both and preferably without the involvement of lawyers.

Thanks!

[socrateaser]

>1) Good idea? Do you have a better idea or better suggestions?
>Something fair for both and preferably without the involvement
>of lawyers.

You can have whatever you can negotiate as long as it doesn't violate public policy. My advice is to take your anticipated litigation costs and divide them by 36 months. Then, if you can negotiate a deal that gets you a cheaper outcome than would exist were you to litigate and win a lower support order, take the deal, because it's actually cheaper to cut your losses.