AN ISSUE FOR SOLE SHAREHOLDER CORPORATIONS

It is not unusual, though unwise, for a sole shareholder corporation to deduct personal expenses as  etc. business expenses. Besides the tax issues, etc. that are raised, when the owner of a sole shareholder corporation is in litigation, such practices can be harmful.

Illustrative is a case that was brought to my attention on an email list. It is a matrimonial where the court imputed income to the owner and is cited as E.D. v J D. 2013 NY Slip Op 52204(U) (Decided on December 23, 2013, Supreme Court, Westchester County). Note the following:

"Moreover, Defendant was not credible with respect to the explanations he provided as to why certain expenditures of the Corporation constitute business expenses. For example, in 2010, Defendant paid each of his three sons, then ages 10, 15, and 19, $7,000.00 from the Corporation's coffers, and, in 2011, paid two sons $3,000.00 and the third $2,500.00, contending that they performed various jobs for the Corporation including modeling clothing, helping with videos, editing copy for advertising, and testing the gear manufactured by one of the Corporation's clients. Except for the checks paid to Defendant's sons and Defendant's testimony, no other [*5]evidence was submitted to support these activities.[FN5] Westenberger v. Westenberger, 23 AD3d 571, 571-72 (2d Dept. 2005)(court may impute income where reported income on tax return is suspect); F.M.C. v. F.A.C., 12 Misc 3d 1169A, 2006 NY Misc. LEXIS 1489, ***47 (Sup. Ct., Nassau Co. 2006)(where father paid personal expenses out of business and reported income on tax returns was suspect, court would impute income to father).

The Court also found that numerous other claimed business expenses of the Corporation actually were Defendant's personal expenditures. As noted above, his legal fees in this action have been paid by the Corporation. In addition, Defendant testified that he regularly charged restaurant meals with his children as a business expense to the Corporation, as well as monthly charges for the three children's cell phones, and the expense for use of Zip Cars, despite the fact that he used the cars to pick up and drop off his children. Defendant's claim that the transport of the parties' children was incidental to his business use of the Zip Cars was not credible; indeed, it appears that Defendant's business expenses were directly tailored to benefit his personal needs.

For example, in 2007, Defendant deducted travel expenses for a trip he took to Israel purportedly to meet with representatives of an Israeli clothing company, at the same time that his son's Bar Mitzvah was scheduled to take place there, and, in 2010, Defendant deducted expenses for a three week trip to Mount Everest, including costs for training to climb that mountain, purportedly because he was working on marketing for a company that sold mountaineering gear. Defendant's claim that "it was determined that he should go," was not plausible; instead, given his control of the Corporation, the Court finds that Defendant decided to go to Mount Everest and used corporate funds to pay for it. Notably, no receipts were produced to verify these "business" expenses nor evidence verifying the "business" nature of the trips taken.[FN6]

Moreover, even if such receipts had been provided by Defendant, the evidence shows that Defendant alone controlled the Corporation's travel decisions as well as all other expenditures and any such expenses reduced the amount of funds available to increase Defendant's salary had he wanted to increase his salary.

Moreover, Defendant testified that he lives and works out of his studio [*6]apartment, and that, since 2007, he has apportioned 75% of the rent for the apartment to the Corporation as an expense.

As the Court noted in its July Decision, the very items Defendant declared as corporate business expenses - travel, rent, phones, dinners - are expenditures that a court typically is mandated to consider in calculating child support to the extent that such business expenses reduce the personal expenditures of such party. DRL § 240 (1-b)(b)(5)(vi).

In light of Defendant's lack of credibility, his clear co-mingling of business expenditures with his own personal needs and the fact that he is the sole decision maker as to how much salary he earns from the Corporation, together with the precipitous drop in Defendant's reported income after 2007,[FN7] the year he formed the Corporation, this Court will impute income to the Defendant for the years 2008 through 2012. DRL § 240 1-b(b)(5(iv); Matter of Rubley v. Longworth, 35 AD3d 1129, 1130 (2006), app. denied 8 NY3d 811 (2007)(trial court may impute income based upon past employment experience, future earning capacity, and/or payment of personal expenses from business accounts); Kelly v. Bovee, 9 AD3d at 642; Brefka v. Dobies, 271 AD2d 876, 877, app. denied 95 NY2d 759 (2000). "