Analyzing Tax Returns: C-Corporations

Although not commonly thought of as a "family law" issue, understanding and properly analyzing tax returns is an important part of a family law attorney's job. Specifically, an accuarate understanding of the varoius types of tax returns may have large implications in a family law matter when determining a party's income available for child and/or spousal support. The State Bar of California Family Law News periodical Issue 3, 2011, features an article addressing the important aspects of the various types of tax returns:


"When reviewing a Form 1120 for a C-Corporation, start by analyzing Line 12 on page 1 (Compensation of Officers); Schedule E on page 2, which also lists compensation of officers by each individual officer; and Line 30 on page 1 (Taxable Income). The balance sheet (Schedule L) on page 4 of the tax return should also be reviewed for increases in loans to shareholders or decreases in loans from shareholders, which may represent cash flow to the shareholders. Several years of the tax return should be reviewed in order to determine if the shareholders have intentionally decreased salaries pending the dissolution action. If this occurs, the information should be presented to the Judicial Officer in the case. In addition, the net income of the corporation will usually increase since the shareholder's salary is treated as an expense of the corporation. Unless there is a valid business reason, such as the requirement for upcoming capital expenditures, closely held C-Corporations rarely retain earnings."

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