What is a vice business? In general, a vice business is a business that is legal in some jurisdictions, but not in all jurisdictions. For example, while businesses that sell recreational marijuana are legal in some jurisdictions, it is not yet legal federally. In Connecticut, recreational marijuana becomes legal on July 1st. However, it will not be sold recreationally in Connecticut until 2022. What do you do if you are getting a divorce and one party owns (or has invested in) a recreational marijuana business?
Since the business is not federally legal, there are different tax concerns to take into consideration. It is imperative to consult with an accountant during your divorce and, it may be necessary to have the business valued so that you can ensure an equitable property division. Cannabis sales, as well as other “vice businesses,” such as bookmaking/gambling, prostitution and/or pornography can be difficult to forensically examine and/or assign value, which is why hiring experts is necessary. You should also make sure that the final dissolution agreement indemnifies you from back taxes owed if your spouse is the one involved in a business that is not federally legal.
If a business had not been deemed legal on a federal level, then the business cannot be federally taxed. Therefore, experts are concerned that there could be outstanding significant federal tax income liabilities since the Internal Revenue Code does not allow the deduction of ordinary and necessary operating expenses for illegal activities. Depending on the jurisdiction of the business, state and local taxes could also be at issue.
Due to the different aspects of selling and growing marijuana (for example the medical sale business versus recreational use versus the ability of a compassionate caregiver to grow or purchase), it can affect the economic basis of a marital estate in a variety of ways. This is especially true if one spouse is involved in such activities and the other is not, or, perhaps even if the other is morally opposed.
It is essential to do through financial production requests in any dissolution matter involving a vice business. This is because traditional banking may not be used and thus, one needs to request amounts of cash on hand (business and/or personal), Venmo and Bitcoin account statements, off-shore bank accounts and/or bank accounts that are diverted, either through other businesses or other individuals. Another aspect to consider is whether the vice business deals in trade/barter for other services. While you may not see funds or values from such on a financial affidavit, trade and barter could often be responsible for a significant amount of financial gain for an individual. Thus, during the production phase, your attorney may want to submit interrogatories, or, even depose your spouse, to get a better idea as to where other assets may lie.
Since most, if not all, of vice businesses are handled in cash, it is important to also consider whether or not there has been an increase in a party’s fixed assets. For example, if one party in a dissolution matter has obtained a new vacation home, a fancy car, a new boat, etc., then it is probably worth looking into how such were financed and/or where those funds originated. By “overturning” each of these “stones” during the dissolution matter, your lawyer will be better able to see the full picture and advocate for a fair and equitable settlement on your behalf.
You may also want to consider a “lifestyle audit” during your dissolution process if you suspect unreported income. You should discuss topics with your lawyers such as what does your spouse spend money on-clothing, vehicles, entertainment, travel (what is the travel for?), are there large purchases for gift cards, or significant pre-payments on things?
If you believe that any of these issues exist in your divorce, you should consult with an attorney right away. Even if you are not quite ready to file, it may be a good time to discuss options with your attorney so that you can begin to look for signs of the foregoing issues while you still reside in the same house with your spouse, and while you still share bank accounts and other information.
Ever Argue with a Woman? Contact Wolf & Shore Law Group to discuss how to be best prepared for your divorce involving a vice business. We are a full-service law firm, so we work hand-in-hand with our clients to connect you to accountants, financial planners, tax advisors, and other experts you may need through our divorce coaching, or out-of-court advisement services.