What can you do when your judgment debtor seems to work for, or owns part of a tiny or family business; and seems to live well, yet does not get much of, or any conventional paycheck? In a community property state, would it be possible to also levy the income going to the debtor’s spouse, if they also worked or get benefits from that business?
This article is my opinion, and not legal advice. I am a judgment broker, and am not a lawyer. If you ever need any legal advice or a strategy to use, please contact a lawyer.
Regular wage levies only reach W2 income from conventional employment. Common levies cannot reach benefits, perks, payments for personal expenses, money under the table, or any other income or asset transfer-related shenanigans. If the debtor’s non-W2 income turns out to be income that is reported on a 1099 form, then a proposed assignment order to attach that income stream might work.
If the debtor’s income stream or perk is not reported on a W2 or a 1099 form, then it is likely to be imputed (sometimes called impuned, and after the transfer of a benefit occurs, impugned) income, which might be taxed one day. Impugned income is non-W2 or 1099 income, which could be certain or uncertain payments, commissions, bonuses, or benefits. Most impugned income has a cash value, which if discovered by the IRS, may become taxable.
One example of impugned income would be a hotel employee that receives W2 income of $35,000 a year, and also the opportunity to stay 5 nights in the best suite at the hotel free. Those 5 nights are a form of impugned income. When executives drive around in cars that a company pays either the monthly lease payment, insurance payment, or both, that is impugned income. Another example is an airline employee that gets to fly free, on flights other than the ones they are working on.
Not every company reports impugned income, because then they would likely have to pay taxes on the value of that impugned income. Sometimes the impugned benefit has little or no cost to the employer. Some impugned income is considered a perk. Examples of perks are coffee at work, donuts on Friday, or pizza when you work on a weekend. Such perks usually have no taxable liability to the employee, and are a full tax write-off for the employer. The IRS has historically not been focused on perks that give employees free goods or services, as long as they are inexpensive.
If your debtor’s impugned benefit is free rent, free meals, free use of a car, free travel, free internet, free gasoline, etc.; that might interest the IRS, however those kinds of impugned benefits are not usually available to creditors. Even if impugned income is cash or checks given to your judgment debtor, attaching that revenue (except by levying your debtor’s bank account) requires a new lawsuit and court trial; and then getting a proposed order approved by a judge.
Company expense accounts provide many impugned income opportunities. Higher-ranking employees often get a corporate credit card to pay for necessary expenses. Impugned income happens when the company pays for the personal expenses of the employee (or through shenanigans, some non-employee).
Sometimes debtors earn no income, although some company’s credit card records may show that debtor charging $7,000 a month, including many withdrawals for “walk-around” cash. Perhaps the creditor can eventually persuade a court to approve an assignment order for 25% of that 7K per month impugned benefit.
One type of small-company shenanigan situation which might interest a judgment creditor, would be if their debtor works for a small or family business that provides your debtor a company credit card to pay for their personal expenses. By scheduling a judgment debtor examination, one can probably subpoena that third-party company, to get copies of your debtor’s credit card statements.
It takes some work to discover how much of a business’s assets or income is going into your debtor’s pocket. It usually requires two debtor/third-party examination hearings with document production requests. The first examination is to get a copy of the company’s credit card statements.
On the second round of examinations, one might hire a court reporting service. At the examination hearing, ask the company representative and your judgment debtor about the payments made to the debtor using the corporate credit card. Their recorded answers can later be used on a transcript, which describes the credit card payments and the calculation of impugned income.