Restaurant Owner, Lifestyle Analysis, and Imputed Income
Marriage of 14 years. Drew owns 100% of a casual restaurant. Tax returns show net profit of $95,000, but the family spent $260,000 last year: $6,500 monthly rent, $1,800 monthly private school, two leased cars at $950 a month, $40,000 vacations, and $60,000 in credit-card payments. The business pays $48,000 a year in rent to a building owned by Drew's brother, $30,000 in depreciation, and $25,000 in meals and vehicle expenses. Drew's spouse, Parker, earns $58,000 as a dental hygienist. The restaurant has no independent appraisal; Drew says goodwill is zero. Bank statements show $70,000 in cash deposits not on the return. The couple has $220,000 in retirement and $85,000 in credit-card debt. Trial is in 90 days.
1. How should the CDFA determine Drew's income for child support and maintenance when reported profit is $95,000 but lifestyle is $260,000?
Read the worked answer
Reported net profit is a starting point, not the answer. The CDFA should reconcile three sources: the tax return, the bank statements, and the family's spending. A $95,000 net profit cannot support $260,000 of spending without debt, cash infusions, or unreported income; the $70,000 of unexplained deposits and the $60,000 of credit-card payments are red flags.
A defensible income analysis would:
- Start with $95,000 net profit.
- Add back $30,000 depreciation, a noncash expense.
- Add back personal meals, vehicle use, and other personal expenses run through the business if documented.
- Compare the $48,000 rent paid to Drew's brother with market rent; any excess is a related-party add-back.
- Add the $70,000 of cash deposits only if they are business receipts not already reported. If they are loans or transfers, exclude them.
- Compare the resulting cash flow with the $260,000 lifestyle and Parker's $58,000 income.
The CDFA should not simply annualize the lifestyle. Lifestyle analysis identifies unexplained cash; the support income must be tied to evidence. A forensic accountant may be needed, and the court may impute income if records are incomplete.
2. Which add-backs and normalization adjustments are defensible, and which should be rejected?
Read the worked answer
Defensible add-backs are those that (a) are noncash, (b) are personal, or (c) are above-market related-party expenses. For this restaurant:
- Depreciation, $30,000: add back because it reduces reported profit but not cash available.
- Related-party rent: if market rent for the space is, say, $36,000 and Drew pays $48,000, the $12,000 excess is an add-back. If the rent is at market, no add-back.
- Meals and vehicle, $25,000: only the personal portion is an add-back; a restaurant's food and vehicle costs may be legitimate business expenses. The CDFA needs receipts and a log.
- Cash deposits, $70,000: add only if they are unreported sales. If they are transfers from Drew's accounts, they are not income.
- Credit-card payments, $60,000: not an add-back by themselves; they show spending but may be financed by debt.
A reasonable adjusted income might be $95,000 + $30,000 + $12,000 + personal expenses + some cash, but the CDFA should present a range and explain each item. The goal is a support number the court can defend, not the highest possible number.
3. How should the CDFA value the restaurant and address the $85,000 credit-card debt?
Read the worked answer
Drew's claim that goodwill is zero is not a valuation. The CDFA should ask for a credentialed valuation using the income approach, with normalized owner compensation and normalized rent. If the restaurant's cash flow depends on Drew's personal relationships, some value may be personal goodwill and not divisible; if it depends on location, systems, and staff, enterprise goodwill may exist. A cash business with $70,000 of unexplained deposits needs a quality-of-earnings analysis.
The $85,000 credit-card debt should be traced. If it funded business operations or family living, it may be a marital debt; if it funded Drew's separate asset, the allocation changes. The CDFA should compare:
- Business value under a market rent and market salary.
- Business value with Drew's actual compensation and related-party rent.
- Liquidity: can the business pay a note to Parker, or must Parker receive retirement assets?
A practical settlement may give Parker the $220,000 retirement and savings, allocate the credit-card debt to Drew, and require a business valuation before any waiver of maintenance. The CDFA should not let the 'no goodwill' assertion close the case.