Business Owner’s Bad Bookkeeping Criticized in Child Support Action

July 27, 2013 | Blog, Child Support, Court Decisions, Income Calculations

Icon for author Brian Vertz Brian Vertz

The Superior Court articulated its intolerance for a business owner’s shady bookkeeping practices in M.K.K. v. T.C.J., No. 129 WDA 2012 (July 25, 2013), a child support action arising from Washington County. The father in this case, who owned and operated a vacuum cleaner sales and repair shop as a Schedule C business for over thirty years, had not filed a tax return since 2007. His 2006 tax return reported revenues of $115,023, but his bank account statements showed deposits of $462,301 for the same time period. Father testified that there were interbank transfers involved, but did not verify this representation by documentary proof, nor did he offer an explanation as to why apparently unnecessary transfers between two business accounts were made.

Father’s 2007 tax return showed revenues of $118,606, while his bank account statements contained deposits of $1,034,899. Father produced no tax returns for 2008 or 2009, claiming that he earned net profits of $5,410.  Bank account statements contained deposits of nearly $600,000 in 2008 and 2009.

The hearing officer imputed an earning capacity of $48,000 to father, finding that his tax returns were not accurate and he failed to explain the discrepancies. Mother’s exceptions were denied by the trial court, and this appeal ensued. The Superior Court vacated and remanded, instructing Father to produce complete evidence of his business income and expenses, or else have his business income calculated by adding up the deposits without any deduction for business expenses. The Court also held that Father had intentionally reduced his income by transferring half of the stock to his new wife without consideration. The Court cited Labar v. Labar, 731 A.2d 1252, 1254 (Pa. 1999), which held that, when calculating a party’s “financial obligation to [their] children, a court must make a thorough appraisal of [that party’s] actual earnings and perquisites, and the true nature and extent of his property and financial resources.” The Superior Court also permitted mother to seek retroactive modification of the child support for the years 2007 and 2008, which the trial court had disallowed for technical procedural reasons.

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