letter-yamamoto-forensic-income-scope.docx

1035-00002 · Calderwood & Harkness LLP · Third-Party Correspondence

letter-yamamoto-forensic-income-scope.docx DOCUMENT M&A / Corporate

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CALDERWOOD & HARKNESS LLP Attorneys at Law 777 South Flower Street, Suite 3400 Los Angeles, California 90017 Telephone: (213) 555-8200 Facsimile: (213) 555-8201 www.calderwoodharkness.com

May 22, 2023

Harold K. Yamamoto, CPA/ABV/CFF Yamamoto Brace & Liu, LLP 333 South Grand Avenue, Suite 2800 Los Angeles, California 90071

Re: Forensic Income Analysis — Rafael J. Medrano / Medrano Visuals, LLC C&H Matter No. 1035-00002 Case No. 22STFL09847, Superior Court of California, County of Los Angeles

Dear Mr. Yamamoto:

1. Introduction and Purpose of Engagement

This firm represents Marguerite D. Fonseca ("Ms. Fonseca") in a custody and child-support proceeding currently pending before the Superior Court of California, County of Los Angeles, Case No. 22STFL09847. The matter concerns the establishment of child support for the benefit of two minor children: Isabela Luz Fonseca-Medrano (date of birth February 11, 2017) and Mateo Elías Fonseca-Medrano (date of birth August 29, 2019). Both children currently reside primarily with Ms. Fonseca in Los Angeles.

Ms. Fonseca and the children's father, Rafael J. Medrano ("Mr. Medrano"), were registered domestic partners under California law, having registered with the California Secretary of State on September 12, 2015 (SOS File No. DP-2015-038741). A judgment of dissolution of their domestic partnership was entered on November 3, 2022. Pursuant to that judgment, the court reserved jurisdiction over matters of custody and child support. On May 2, 2023, Ms. Fonseca filed a Request for Order regarding Custody and Child Support (Judicial Council Form FL-300), seeking establishment of a permanent child-support order consistent with the California guideline calculation.

The purpose of this letter is to formally retain your firm, Yamamoto Brace & Liu, LLP ("YBL"), to conduct a comprehensive forensic income analysis of Mr. Medrano's freelance earnings and the income flowing through his loan-out entity, Medrano Visuals, LLC, for the specific purpose of establishing an accurate income figure for use in the California guideline child-support calculation under Family Code sections 4050 through 4076. Mr. Medrano's income structure is complex and, we believe, not fully transparent from the face of his filed Income and Expense Declaration. A qualified forensic analysis is essential to ensure that the court is presented with a complete and accurate picture of Mr. Medrano's financial circumstances.

This letter sets forth in detail the scope, deliverables, fee, timeline, and other terms and conditions of the engagement. We ask that you review these terms carefully and, if acceptable, execute the acceptance and acknowledgment provision set forth at the conclusion of this letter.

2. Background on Respondent's Employment and Income Structure

By way of background, Mr. Medrano is a freelance cinematographer and director of photography who works primarily in the feature film and episodic television industries. He has been active in the entertainment industry for approximately fifteen years and maintains professional relationships with a number of major studios, independent production companies, and streaming platforms. His credits include work on several high-profile productions, and he is a member of the International Cinematographers Guild (IATSE Local 600).

Rather than receiving income directly as a W-2 employee of production companies, Mr. Medrano operates through a loan-out entity: Medrano Visuals, LLC, a California limited liability company. As you are no doubt aware, this is a common structure in the entertainment industry. Production companies contract with and remit payment to the LLC rather than to Mr. Medrano personally. Mr. Medrano is, upon information and belief, the sole member and manager of Medrano Visuals, LLC.

Mr. Medrano's income is inherently variable and project-based. In some periods, he may work on multiple overlapping productions; in others, he may experience gaps between engagements. Based on the preliminary financial information currently available to us — including his filed Income and Expense Declaration and limited informal discovery — his three-year average annual income appears to be approximately $340,000 per year. However, this figure has not been independently verified and requires careful forensic examination, which is the central purpose of this engagement.

The sources of Mr. Medrano's income are believed to include, but may not be limited to, the following:

• Project fees (i.e., "kit fees" and day rates or weekly rates) paid by production companies to Medrano Visuals, LLC under standard deal memos or loan-out agreements;

• Direct personal payments for smaller or non-union projects, if any;

• Residual payments received through applicable guild or union agreements;

• Equipment rental income earned by Medrano Visuals, LLC from the rental of cinematography equipment owned by the LLC to production companies;

• Any other pass-through income, reimbursements, or miscellaneous revenue flowing through the LLC.

A critical issue for this engagement — and ultimately for the guideline child-support calculation — is the distinction between the gross revenues of Medrano Visuals, LLC and Mr. Medrano's actual income available for support purposes. Under California law, the court is required to consider the actual income or earning capacity of each parent. See Cal. Fam. Code § 4058(a). Where a parent is self-employed or operates through a business entity, the court may look beyond the income reported on the parent's personal tax return to determine income available for support. See, e.g., Marriage of Loh (2001) 93 Cal.App.4th 325; Marriage of Blazer (2009) 176 Cal.App.4th 1438. Your analysis will be instrumental in assisting the court with this determination.

3. Scope of Forensic Income Analysis

We ask that YBL's forensic income analysis encompass the following specific areas of inquiry. Each subsection below is intended to describe a discrete category of analysis; however, we recognize that these areas are interrelated, and we trust your professional judgment to pursue additional lines of inquiry that may arise during the course of your work to the extent they fall within the general scope of determining Mr. Medrano's income available for child-support purposes.

3.1 Tax Return and Financial Document Analysis

The foundation of the forensic analysis should be a thorough review and examination of the following tax and financial documents:

(a) Mr. Medrano's individual federal income tax returns (Form 1040 and all schedules) for the three most recent tax years: 2020, 2021, and 2022. This review should include, without limitation, analysis of Schedules B, C, D, E, and K-1 (if applicable), as well as any supporting forms or statements filed with the returns.

(b) Mr. Medrano's individual California state income tax returns (Form 540 and all schedules) for the same three-year period (2020, 2021, and 2022), including any California-specific schedules reflecting income from the LLC or other sources.

(c) Medrano Visuals, LLC's tax returns for the same three-year period. Depending on the LLC's tax election, these may be filed as Form 1065 (U.S. Return of Partnership Income) with associated Schedule K-1, or the income may be reported on a Schedule C (Profit or Loss from Business) attached to Mr. Medrano's individual return if the LLC is a disregarded entity for federal tax purposes. If the LLC has elected to be taxed as an S-corporation, the relevant return would be Form 1120-S and associated Schedule K-1. We do not yet know Mr. Medrano's tax election for the LLC, and this should be determined as part of your initial review.

(d) Analysis of all K-1 distributions, guaranteed payments, owner draws, and any other forms of income reported through or derived from the entity. Special attention should be paid to reconciling distributions to Mr. Medrano with the income reported on his personal returns.

(e) Review and cross-referencing of any available IRS Forms 1099-NEC or 1099-MISC issued to Mr. Medrano personally or to Medrano Visuals, LLC during the relevant period. Comparison of total 1099 income with income reported on the tax returns may reveal unreported or underreported income.

3.2 Income Determination and Averaging

Based upon the document analysis described in Section 3.1, we request that YBL perform the following income determination and averaging work:

(a) Calculation of Mr. Medrano's three-year average annual gross income from all sources for the years 2020, 2021, and 2022. The calculation should clearly identify and itemize each source of income for each year, including but not limited to: project fees, residuals, equipment rental income, investment income, and any other sources.

(b) Determination of an imputed gross monthly income figure for child-support calculation purposes, consistent with California Family Code section 4058(b), which provides that the court may consider the earning capacity of a parent in lieu of the parent's actual income, consistent with the best interests of the children. For self-employed individuals, the court routinely relies on averaging of income over a representative period. Your report should address whether a three-year average is an appropriate and representative measure in this case, or whether an alternative period or methodology would more accurately reflect Mr. Medrano's income available for support.

(c) Identification and analysis of any income that may be understated, deferred, or sheltered through the LLC structure. This should include analysis of whether retained earnings or undistributed profits within Medrano Visuals, LLC represent income available for support even though not distributed to Mr. Medrano, as well as any deferred compensation arrangements or income timing strategies.

(d) Assessment of whether business deductions claimed through Medrano Visuals, LLC are legitimate, ordinary, and necessary business expenses, or whether any such deductions represent personal expenses that have been run through the LLC structure in a manner that reduces Mr. Medrano's reportable income. As you are aware, in the child-support context, courts in California regularly add back personal expenses that have been deducted as business expenses for tax purposes. See Cal. Fam. Code § 4058(a)(3); Marriage of Chakko (2004) 115 Cal.App.4th 104, 108.

3.3 Expense and Lifestyle Analysis

To supplement the tax return analysis, we ask that YBL conduct a review of bank and financial account records to identify income and expense patterns:

(a) Review of personal bank account statements for all accounts held by Mr. Medrano individually for the relevant three-year period (2020–2022), or for such portion of the period as statements are available.

(b) Review of business bank account statements for all accounts held in the name of Medrano Visuals, LLC for the same period.

(c) Identification and quantification of personal expenses paid through the LLC that should be added back as income for child-support purposes. Examples of such expenses commonly seen in loan-out structures in the entertainment industry include, without limitation: personal automobile lease or loan payments, personal insurance premiums, personal meals and entertainment, personal travel, personal technology and electronics, personal subscription services, household expenses, and clothing and grooming expenses.

(d) Analysis of equipment purchases, vehicle expenses, home office deductions, or other deductions that may have a dual personal-and-business-use component. Where such dual-use items are identified, we ask that you provide your best estimate of the personal-use percentage, supported by your analysis and any applicable IRS guidelines or industry norms.

(e) To the extent possible from available records, identification of any significant cash transactions, transfers to third parties, or other unusual financial activity that may be relevant to the income analysis.

3.4 Earning Capacity Assessment

Finally, we ask that YBL provide a professional opinion regarding Mr. Medrano's earning capacity:

(a) Based on Mr. Medrano's historical income patterns, the regularity and frequency of his engagements over the three-year period, and general industry norms for freelance cinematographers and directors of photography of comparable experience and credentials, please provide your opinion as to Mr. Medrano's earning capacity.

(b) Assess whether any periods of voluntary underemployment or reduced work activity can be identified during the relevant period. In particular, we are interested in whether there are periods during which Mr. Medrano appears to have voluntarily reduced his workload or declined available work, which may be relevant to an argument for imputation of income under Family Code section 4058(b).

(c) To the extent available, industry compensation data from sources such as the International Cinematographers Guild, the Bureau of Labor Statistics, or entertainment industry compensation surveys should be referenced in support of any earning capacity opinion.

4. Documents to Be Provided

We will provide you with all available financial documents obtained through the discovery process in this matter, as well as other documents in our client's possession that may be relevant to the analysis. The documents we currently anticipate providing include the following:

• Mr. Medrano's individual federal and California state income tax returns for the years 2020, 2021, and 2022, including all schedules and attachments;

• Medrano Visuals, LLC tax returns (federal and California) for the years 2020, 2021, and 2022, including all schedules and attachments;

• Personal and business bank account statements for Mr. Medrano and Medrano Visuals, LLC, to the extent obtained through discovery;

• IRS Forms 1099-NEC and 1099-MISC issued to Mr. Medrano or Medrano Visuals, LLC during the relevant period;

• Mr. Medrano's Income and Expense Declaration (Judicial Council Form FL-150) filed in this proceeding, together with any supporting documentation attached thereto;

• Any pay stubs, deal memos, production company contracts, or other engagement documentation reflecting the terms and compensation for specific projects performed by Mr. Medrano or Medrano Visuals, LLC;

• Ms. Fonseca's Income and Expense Declaration (Judicial Council Form FL-150), for reference purposes only, which reports her total annual compensation of approximately $870,000, consisting of a base salary of $485,000, an average annual bonus of approximately $210,000, and annual restricted stock unit (RSU) vesting of approximately $175,000 from her employer, Luminos Entertainment Group, Inc.

We note that additional discovery is anticipated. We have propounded requests for production of documents on Mr. Medrano's counsel, and responses are due in early June. To the extent additional documents responsive to the scope of this engagement are produced, supplemental materials will be forwarded to YBL as they become available.

5. Deliverables

The primary deliverable for this engagement is a comprehensive written forensic income analysis report prepared by YBL and signed by you as the engagement partner. The report should be suitable for use in the following contexts:

• As the basis for inputting accurate income figures into the California guideline child-support calculation software (DissoMaster or XSpouse), which will be used to generate a proposed guideline support amount for presentation to the court;

• As a supporting exhibit in mediation or settlement negotiations between the parties, which are anticipated to take place in the fall of 2023;

• If necessary, as an expert report for use in connection with court presentation and testimony. We note that expert testimony may be requested separately and is not included in the scope of this engagement, as discussed further in Section 6 below.

The report should include, at a minimum, the following components:

(a) An executive summary setting forth your principal findings and conclusions;

(b) A detailed summary of all income sources and amounts for each of the three years analyzed (2020, 2021, and 2022), broken down by source and cross-referenced to supporting documentation;

(c) A determination of Mr. Medrano's three-year average annual income, together with an explanation of the methodology employed and a discussion of any adjustments made;

(d) A calculation of the imputed gross monthly income for child-support purposes, which we anticipate will be approximately $28,333 per month based on a preliminary estimate of a $340,000 annual average, subject to your independent verification and any adjustments resulting from your analysis;

(e) Identification and quantification of any add-backs for personal expenses paid through Medrano Visuals, LLC that should be treated as income for support purposes;

(f) Your professional opinion regarding Mr. Medrano's earning capacity, supported by the historical income data, industry norms, and any other relevant factors identified during your analysis;

(g) Supporting schedules, work papers, and appendices that document and support the calculations, adjustments, and conclusions set forth in the report body.

We ask that the report be prepared in a manner that is clear, well-organized, and accessible to a judicial officer who may not have specialized accounting expertise. Charts, graphs, and summary tables are encouraged where they would aid comprehension.

6. Fee and Billing

The engagement shall be performed on a flat-fee basis of Fourteen Thousand Seven Hundred Fifty Dollars ($14,750.00). The flat fee covers all work described within the scope of this engagement as set forth above, including document review, analysis, preparation of the written forensic income analysis report, and one round of revisions to the draft report based on attorney review and feedback from this firm.

The flat fee does not include the following services, which would be billed separately at YBL's standard hourly rates should such services become necessary:

• Expert testimony at deposition;

• Expert testimony at trial or evidentiary hearing;

• Preparation for deposition or trial testimony beyond the preparation inherent in authoring the report;

• Supplemental analysis or report revisions necessitated by the production of significant additional documents beyond the initial document set, if such supplemental work would substantially exceed the scope described in this letter;

• Consultation or attendance at mediation sessions.

In the event that any of the above additional services are required, we will discuss the scope and estimated cost with you in advance and confirm in writing before authorizing such work.

Payment: Calderwood & Harkness LLP will advance the flat fee of $14,750.00 on behalf of Ms. Fonseca. Please direct your invoice to:

Calderwood & Harkness LLP 777 South Flower Street, Suite 3400 Los Angeles, California 90017

Attention: Devon Archer

Reference: Matter No. 1035-00002

Payment will be made within thirty (30) days of receipt of invoice.

7. Timeline

We propose the following timeline for this engagement, understanding that it is subject to adjustment depending on the pace and completeness of discovery production from Mr. Medrano's side:

(a) Document Production to YBL: We anticipate providing the initial set of financial documents to YBL within approximately two weeks of the date of this letter — that is, by approximately June 5, 2023. Supplemental documents will be forwarded on a rolling basis as they are obtained through discovery.

(b) Preliminary Draft Report: We request that YBL deliver a preliminary draft report within six (6) weeks of receiving a substantially complete document set from this firm. For purposes of this timeline, we will notify you in writing when we believe the document set is substantially complete. Based on current discovery deadlines, we anticipate this notification will occur no later than late June or early July 2023, which would place the preliminary draft deadline in approximately mid-to-late August 2023.

(c) Final Report: Following our review of the preliminary draft and submission of any comments or requests for revision, a final report should be delivered as soon as practicable. Ideally, the final report should be completed no later than late August or early September 2023, to allow sufficient time for the report to be used in any mediation or settlement discussions that are anticipated for the fall of 2023.

We understand and acknowledge that the timeline set forth above is contingent upon the completeness and timeliness of document production from Mr. Medrano's side. We will keep you apprised of any delays or difficulties in the discovery process that may affect the schedule. Similarly, we ask that you notify us promptly if, upon commencing your review, you identify any significant gaps in the available documentation that may require additional discovery or that may affect your ability to render a complete opinion.

8. Confidentiality and Privilege

All communications between YBL and Calderwood & Harkness LLP in connection with this engagement, including without limitation all written correspondence, emails, telephone consultations, draft and final work product, and any oral or written opinions or analyses, are made in furtherance of legal advice to our client, Ms. Fonseca, and are intended to be protected by the attorney-client privilege and the attorney work-product doctrine. YBL is being retained as a consulting expert at the direction of legal counsel, and all work product generated in connection with this engagement is attorney work product prepared in anticipation of litigation.

In light of the privileged nature of these communications, we respectfully direct that YBL observe the following protocols:

(a) YBL should not communicate directly with any party to this proceeding, including Mr. Medrano or Ms. Fonseca, without prior authorization from Calderwood & Harkness LLP.

(b) YBL should not communicate directly with opposing counsel — Kwan, Delacroix & Samuels LLP (lead counsel Gwendolyn R. Kwan, Esq.) — without prior authorization from Calderwood & Harkness LLP.

(c) YBL should not communicate directly with minor's counsel — Tessa L. Brannigan, Esq. — without prior authorization from Calderwood & Harkness LLP.

(d) YBL should not communicate directly with the court or any court personnel without prior authorization from Calderwood & Harkness LLP.

All communications regarding this engagement should be directed to the undersigned or to the individuals identified in Section 9 below.

Additionally, please be advised that the court file in this matter has been sealed pursuant to California Rules of Court, Rule 2.550 et seq. Accordingly, all materials provided to YBL in connection with this engagement — including financial documents, tax returns, pleadings, and any other court filings or discovery materials — should be treated as strictly confidential. Such materials should be stored securely, access should be limited to those YBL personnel directly involved in the engagement, and no materials should be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.

9. Confirmation and Next Steps

We kindly request that you take the following steps to confirm and formalize this engagement:

(a) Please sign and return a copy of this letter to confirm your acceptance of the engagement on the terms described herein. A signature block for this purpose is provided at the end of this letter. A signed copy may be returned by mail, by hand delivery, or by email in PDF format to the undersigned.

(b) If YBL maintains a standard engagement agreement, engagement letter, or terms of service that you customarily require clients to execute, please provide a copy for our review and countersignature. We are happy to review and execute any such document to the extent its terms are consistent with the engagement as described in this letter.

The primary contact at Calderwood & Harkness LLP for all matters relating to this engagement is:

Devon Archer Calderwood & Harkness LLP 777 South Flower Street, Suite 3400 Los Angeles, California 90017 Direct Telephone: (213) 555-8247

Email: darcher@calderwoodharkness.com

In addition, Nadia Petrov (associate) will be closely involved in coordinating document production, managing discovery logistics, and reviewing draft work product. Ms. Petrov can be reached at (213) 555-8263 or npetrov@calderwoodharkness.com. You should feel free to communicate with either Mr. Archer or Ms. Petrov regarding this engagement.

Closing

Thank you for your willingness to assist with this matter, Mr. Yamamoto. We have been impressed by YBL's reputation for thoroughness and reliability in forensic accounting engagements in the family law context, and we are confident that your analysis will be of significant value to our client and to the court. We look forward to working with you and your team.

Please do not hesitate to contact me if you have any questions regarding the scope of the engagement, the timeline, or any other aspect of this letter.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Devon Archer Partner Calderwood & Harkness LLP 777 South Flower Street, Suite 3400 Los Angeles, California 90017

cc: Priya Anand, Esq. (Calderwood & Harkness LLP) cc: Nadia Petrov, Esq. (Calderwood & Harkness LLP) cc: Marguerite D. Fonseca (via separate cover)

Enclosures: None (documents to follow under separate cover per Section 7)

ACCEPTANCE AND ACKNOWLEDGMENT

The undersigned hereby accepts the engagement described in this letter on the terms set forth herein and confirms that Yamamoto Brace & Liu, LLP will perform the forensic income analysis in accordance with the scope, deliverables, fee, timeline, and confidentiality provisions described above.

ACCEPTED AND AGREED:

YAMAMOTO BRACE & LIU, LLP

By: ________

Name: Harold K. Yamamoto, CPA/ABV/CFF

Title: Partner

Date: ________

CALDERWOOD & HARKNESS LLP Attorneys at Law 777 South Flower Street, Suite 3400 Los Angeles, California 90017 Telephone: (213) 555-8200 Facsimile: (213) 555-8201 www.calderwoodharkness.com
May 22, 2023
Harold K. Yamamoto, CPA/ABV/CFF Yamamoto Brace & Liu, LLP 333 South Grand Avenue, Suite 2800 Los Angeles, California 90071
Re: Forensic Income Analysis — Rafael J. Medrano / Medrano Visuals, LLC C&H Matter No. 1035-00002 Case No. 22STFL09847, Superior Court of California, County of Los Angeles
Dear Mr. Yamamoto:
1. Introduction and Purpose of Engagement
This firm represents Marguerite D. Fonseca ("Ms. Fonseca") in a custody and child-support proceeding currently pending before the Superior Court of California, County of Los Angeles, Case No. 22STFL09847. The matter concerns the establishment of child support for the benefit of two minor children: Isabela Luz Fonseca-Medrano (date of birth February 11, 2017) and Mateo Elías Fonseca-Medrano (date of birth August 29, 2019). Both children currently reside primarily with Ms. Fonseca in Los Angeles.
Ms. Fonseca and the children's father, Rafael J. Medrano ("Mr. Medrano"), were registered domestic partners under California law, having registered with the California Secretary of State on September 12, 2015 (SOS File No. DP-2015-038741). A judgment of dissolution of their domestic partnership was entered on November 3, 2022. Pursuant to that judgment, the court reserved jurisdiction over matters of custody and child support. On May 2, 2023, Ms. Fonseca filed a Request for Order regarding Custody and Child Support (Judicial Council Form FL-300), seeking establishment of a permanent child-support order consistent with the California guideline calculation.
The purpose of this letter is to formally retain your firm, Yamamoto Brace & Liu, LLP ("YBL"), to conduct a comprehensive forensic income analysis of Mr. Medrano's freelance earnings and the income flowing through his loan-out entity, Medrano Visuals, LLC, for the specific purpose of establishing an accurate income figure for use in the California guideline child-support calculation under Family Code sections 4050 through 4076. Mr. Medrano's income structure is complex and, we believe, not fully transparent from the face of his filed Income and Expense Declaration. A qualified forensic analysis is essential to ensure that the court is presented with a complete and accurate picture of Mr. Medrano's financial circumstances.
This letter sets forth in detail the scope, deliverables, fee, timeline, and other terms and conditions of the engagement. We ask that you review these terms carefully and, if acceptable, execute the acceptance and acknowledgment provision set forth at the conclusion of this letter.
2. Background on Respondent's Employment and Income Structure
By way of background, Mr. Medrano is a freelance cinematographer and director of photography who works primarily in the feature film and episodic television industries. He has been active in the entertainment industry for approximately fifteen years and maintains professional relationships with a number of major studios, independent production companies, and streaming platforms. His credits include work on several high-profile productions, and he is a member of the International Cinematographers Guild (IATSE Local 600).
Rather than receiving income directly as a W-2 employee of production companies, Mr. Medrano operates through a loan-out entity: Medrano Visuals, LLC, a California limited liability company. As you are no doubt aware, this is a common structure in the entertainment industry. Production companies contract with and remit payment to the LLC rather than to Mr. Medrano personally. Mr. Medrano is, upon information and belief, the sole member and manager of Medrano Visuals, LLC.
Mr. Medrano's income is inherently variable and project-based. In some periods, he may work on multiple overlapping productions; in others, he may experience gaps between engagements. Based on the preliminary financial information currently available to us — including his filed Income and Expense Declaration and limited informal discovery — his three-year average annual income appears to be approximately $340,000 per year. However, this figure has not been independently verified and requires careful forensic examination, which is the central purpose of this engagement.
The sources of Mr. Medrano's income are believed to include, but may not be limited to, the following:
•  Project fees (i.e., "kit fees" and day rates or weekly rates) paid by production companies to Medrano Visuals, LLC under standard deal memos or loan-out agreements;
•  Direct personal payments for smaller or non-union projects, if any;
•  Residual payments received through applicable guild or union agreements;
•  Equipment rental income earned by Medrano Visuals, LLC from the rental of cinematography equipment owned by the LLC to production companies;
•  Any other pass-through income, reimbursements, or miscellaneous revenue flowing through the LLC.
A critical issue for this engagement — and ultimately for the guideline child-support calculation — is the distinction between the gross revenues of Medrano Visuals, LLC and Mr. Medrano's actual income available for support purposes. Under California law, the court is required to consider the actual income or earning capacity of each parent. See Cal. Fam. Code § 4058(a). Where a parent is self-employed or operates through a business entity, the court may look beyond the income reported on the parent's personal tax return to determine income available for support. See, e.g., Marriage of Loh (2001) 93 Cal.App.4th 325; Marriage of Blazer (2009) 176 Cal.App.4th 1438. Your analysis will be instrumental in assisting the court with this determination.
3. Scope of Forensic Income Analysis
We ask that YBL's forensic income analysis encompass the following specific areas of inquiry. Each subsection below is intended to describe a discrete category of analysis; however, we recognize that these areas are interrelated, and we trust your professional judgment to pursue additional lines of inquiry that may arise during the course of your work to the extent they fall within the general scope of determining Mr. Medrano's income available for child-support purposes.
3.1 Tax Return and Financial Document Analysis
The foundation of the forensic analysis should be a thorough review and examination of the following tax and financial documents:
(a) Mr. Medrano's individual federal income tax returns (Form 1040 and all schedules) for the three most recent tax years: 2020, 2021, and 2022. This review should include, without limitation, analysis of Schedules B, C, D, E, and K-1 (if applicable), as well as any supporting forms or statements filed with the returns.
(b) Mr. Medrano's individual California state income tax returns (Form 540 and all schedules) for the same three-year period (2020, 2021, and 2022), including any California-specific schedules reflecting income from the LLC or other sources.
(c) Medrano Visuals, LLC's tax returns for the same three-year period. Depending on the LLC's tax election, these may be filed as Form 1065 (U.S. Return of Partnership Income) with associated Schedule K-1, or the income may be reported on a Schedule C (Profit or Loss from Business) attached to Mr. Medrano's individual return if the LLC is a disregarded entity for federal tax purposes. If the LLC has elected to be taxed as an S-corporation, the relevant return would be Form 1120-S and associated Schedule K-1. We do not yet know Mr. Medrano's tax election for the LLC, and this should be determined as part of your initial review.
(d) Analysis of all K-1 distributions, guaranteed payments, owner draws, and any other forms of income reported through or derived from the entity. Special attention should be paid to reconciling distributions to Mr. Medrano with the income reported on his personal returns.
(e) Review and cross-referencing of any available IRS Forms 1099-NEC or 1099-MISC issued to Mr. Medrano personally or to Medrano Visuals, LLC during the relevant period. Comparison of total 1099 income with income reported on the tax returns may reveal unreported or underreported income.
3.2 Income Determination and Averaging
Based upon the document analysis described in Section 3.1, we request that YBL perform the following income determination and averaging work:
(a) Calculation of Mr. Medrano's three-year average annual gross income from all sources for the years 2020, 2021, and 2022. The calculation should clearly identify and itemize each source of income for each year, including but not limited to: project fees, residuals, equipment rental income, investment income, and any other sources.
(b) Determination of an imputed gross monthly income figure for child-support calculation purposes, consistent with California Family Code section 4058(b), which provides that the court may consider the earning capacity of a parent in lieu of the parent's actual income, consistent with the best interests of the children. For self-employed individuals, the court routinely relies on averaging of income over a representative period. Your report should address whether a three-year average is an appropriate and representative measure in this case, or whether an alternative period or methodology would more accurately reflect Mr. Medrano's income available for support.
(c) Identification and analysis of any income that may be understated, deferred, or sheltered through the LLC structure. This should include analysis of whether retained earnings or undistributed profits within Medrano Visuals, LLC represent income available for support even though not distributed to Mr. Medrano, as well as any deferred compensation arrangements or income timing strategies.
(d) Assessment of whether business deductions claimed through Medrano Visuals, LLC are legitimate, ordinary, and necessary business expenses, or whether any such deductions represent personal expenses that have been run through the LLC structure in a manner that reduces Mr. Medrano's reportable income. As you are aware, in the child-support context, courts in California regularly add back personal expenses that have been deducted as business expenses for tax purposes. See Cal. Fam. Code § 4058(a)(3); Marriage of Chakko (2004) 115 Cal.App.4th 104, 108.
3.3 Expense and Lifestyle Analysis
To supplement the tax return analysis, we ask that YBL conduct a review of bank and financial account records to identify income and expense patterns:
(a) Review of personal bank account statements for all accounts held by Mr. Medrano individually for the relevant three-year period (2020–2022), or for such portion of the period as statements are available.
(b) Review of business bank account statements for all accounts held in the name of Medrano Visuals, LLC for the same period.
(c) Identification and quantification of personal expenses paid through the LLC that should be added back as income for child-support purposes. Examples of such expenses commonly seen in loan-out structures in the entertainment industry include, without limitation: personal automobile lease or loan payments, personal insurance premiums, personal meals and entertainment, personal travel, personal technology and electronics, personal subscription services, household expenses, and clothing and grooming expenses.
(d) Analysis of equipment purchases, vehicle expenses, home office deductions, or other deductions that may have a dual personal-and-business-use component. Where such dual-use items are identified, we ask that you provide your best estimate of the personal-use percentage, supported by your analysis and any applicable IRS guidelines or industry norms.
(e) To the extent possible from available records, identification of any significant cash transactions, transfers to third parties, or other unusual financial activity that may be relevant to the income analysis.
3.4 Earning Capacity Assessment
Finally, we ask that YBL provide a professional opinion regarding Mr. Medrano's earning capacity:
(a) Based on Mr. Medrano's historical income patterns, the regularity and frequency of his engagements over the three-year period, and general industry norms for freelance cinematographers and directors of photography of comparable experience and credentials, please provide your opinion as to Mr. Medrano's earning capacity.
(b) Assess whether any periods of voluntary underemployment or reduced work activity can be identified during the relevant period. In particular, we are interested in whether there are periods during which Mr. Medrano appears to have voluntarily reduced his workload or declined available work, which may be relevant to an argument for imputation of income under Family Code section 4058(b).
(c) To the extent available, industry compensation data from sources such as the International Cinematographers Guild, the Bureau of Labor Statistics, or entertainment industry compensation surveys should be referenced in support of any earning capacity opinion.
4. Documents to Be Provided
We will provide you with all available financial documents obtained through the discovery process in this matter, as well as other documents in our client's possession that may be relevant to the analysis. The documents we currently anticipate providing include the following:
•  Mr. Medrano's individual federal and California state income tax returns for the years 2020, 2021, and 2022, including all schedules and attachments;
•  Medrano Visuals, LLC tax returns (federal and California) for the years 2020, 2021, and 2022, including all schedules and attachments;
•  Personal and business bank account statements for Mr. Medrano and Medrano Visuals, LLC, to the extent obtained through discovery;
•  IRS Forms 1099-NEC and 1099-MISC issued to Mr. Medrano or Medrano Visuals, LLC during the relevant period;
•  Mr. Medrano's Income and Expense Declaration (Judicial Council Form FL-150) filed in this proceeding, together with any supporting documentation attached thereto;
•  Any pay stubs, deal memos, production company contracts, or other engagement documentation reflecting the terms and compensation for specific projects performed by Mr. Medrano or Medrano Visuals, LLC;
•  Ms. Fonseca's Income and Expense Declaration (Judicial Council Form FL-150), for reference purposes only, which reports her total annual compensation of approximately $870,000, consisting of a base salary of $485,000, an average annual bonus of approximately $210,000, and annual restricted stock unit (RSU) vesting of approximately $175,000 from her employer, Luminos Entertainment Group, Inc.
We note that additional discovery is anticipated. We have propounded requests for production of documents on Mr. Medrano's counsel, and responses are due in early June. To the extent additional documents responsive to the scope of this engagement are produced, supplemental materials will be forwarded to YBL as they become available.
5. Deliverables
The primary deliverable for this engagement is a comprehensive written forensic income analysis report prepared by YBL and signed by you as the engagement partner. The report should be suitable for use in the following contexts:
•  As the basis for inputting accurate income figures into the California guideline child-support calculation software (DissoMaster or XSpouse), which will be used to generate a proposed guideline support amount for presentation to the court;
•  As a supporting exhibit in mediation or settlement negotiations between the parties, which are anticipated to take place in the fall of 2023;
•  If necessary, as an expert report for use in connection with court presentation and testimony. We note that expert testimony may be requested separately and is not included in the scope of this engagement, as discussed further in Section 6 below.
The report should include, at a minimum, the following components:
(a) An executive summary setting forth your principal findings and conclusions;
(b) A detailed summary of all income sources and amounts for each of the three years analyzed (2020, 2021, and 2022), broken down by source and cross-referenced to supporting documentation;
(c) A determination of Mr. Medrano's three-year average annual income, together with an explanation of the methodology employed and a discussion of any adjustments made;
(d) A calculation of the imputed gross monthly income for child-support purposes, which we anticipate will be approximately $28,333 per month based on a preliminary estimate of a $340,000 annual average, subject to your independent verification and any adjustments resulting from your analysis;
(e) Identification and quantification of any add-backs for personal expenses paid through Medrano Visuals, LLC that should be treated as income for support purposes;
(f) Your professional opinion regarding Mr. Medrano's earning capacity, supported by the historical income data, industry norms, and any other relevant factors identified during your analysis;
(g) Supporting schedules, work papers, and appendices that document and support the calculations, adjustments, and conclusions set forth in the report body.
We ask that the report be prepared in a manner that is clear, well-organized, and accessible to a judicial officer who may not have specialized accounting expertise. Charts, graphs, and summary tables are encouraged where they would aid comprehension.
6. Fee and Billing
The engagement shall be performed on a flat-fee basis of Fourteen Thousand Seven Hundred Fifty Dollars ($14,750.00). The flat fee covers all work described within the scope of this engagement as set forth above, including document review, analysis, preparation of the written forensic income analysis report, and one round of revisions to the draft report based on attorney review and feedback from this firm.
The flat fee does not include the following services, which would be billed separately at YBL's standard hourly rates should such services become necessary:
•  Expert testimony at deposition;
•  Expert testimony at trial or evidentiary hearing;
•  Preparation for deposition or trial testimony beyond the preparation inherent in authoring the report;
•  Supplemental analysis or report revisions necessitated by the production of significant additional documents beyond the initial document set, if such supplemental work would substantially exceed the scope described in this letter;
•  Consultation or attendance at mediation sessions.
In the event that any of the above additional services are required, we will discuss the scope and estimated cost with you in advance and confirm in writing before authorizing such work.
Payment: Calderwood & Harkness LLP will advance the flat fee of $14,750.00 on behalf of Ms. Fonseca. Please direct your invoice to:
Calderwood & Harkness LLP 777 South Flower Street, Suite 3400 Los Angeles, California 90017
Attention: Devon Archer
Reference: Matter No. 1035-00002
Payment will be made within thirty (30) days of receipt of invoice.
7. Timeline
We propose the following timeline for this engagement, understanding that it is subject to adjustment depending on the pace and completeness of discovery production from Mr. Medrano's side:
(a) Document Production to YBL: We anticipate providing the initial set of financial documents to YBL within approximately two weeks of the date of this letter — that is, by approximately June 5, 2023. Supplemental documents will be forwarded on a rolling basis as they are obtained through discovery.
(b) Preliminary Draft Report: We request that YBL deliver a preliminary draft report within six (6) weeks of receiving a substantially complete document set from this firm. For purposes of this timeline, we will notify you in writing when we believe the document set is substantially complete. Based on current discovery deadlines, we anticipate this notification will occur no later than late June or early July 2023, which would place the preliminary draft deadline in approximately mid-to-late August 2023.
(c) Final Report: Following our review of the preliminary draft and submission of any comments or requests for revision, a final report should be delivered as soon as practicable. Ideally, the final report should be completed no later than late August or early September 2023, to allow sufficient time for the report to be used in any mediation or settlement discussions that are anticipated for the fall of 2023.
We understand and acknowledge that the timeline set forth above is contingent upon the completeness and timeliness of document production from Mr. Medrano's side. We will keep you apprised of any delays or difficulties in the discovery process that may affect the schedule. Similarly, we ask that you notify us promptly if, upon commencing your review, you identify any significant gaps in the available documentation that may require additional discovery or that may affect your ability to render a complete opinion.
8. Confidentiality and Privilege
All communications between YBL and Calderwood & Harkness LLP in connection with this engagement, including without limitation all written correspondence, emails, telephone consultations, draft and final work product, and any oral or written opinions or analyses, are made in furtherance of legal advice to our client, Ms. Fonseca, and are intended to be protected by the attorney-client privilege and the attorney work-product doctrine. YBL is being retained as a consulting expert at the direction of legal counsel, and all work product generated in connection with this engagement is attorney work product prepared in anticipation of litigation.
In light of the privileged nature of these communications, we respectfully direct that YBL observe the following protocols:
(a) YBL should not communicate directly with any party to this proceeding, including Mr. Medrano or Ms. Fonseca, without prior authorization from Calderwood & Harkness LLP.
(b) YBL should not communicate directly with opposing counsel — Kwan, Delacroix & Samuels LLP (lead counsel Gwendolyn R. Kwan, Esq.) — without prior authorization from Calderwood & Harkness LLP.
(c) YBL should not communicate directly with minor's counsel — Tessa L. Brannigan, Esq. — without prior authorization from Calderwood & Harkness LLP.
(d) YBL should not communicate directly with the court or any court personnel without prior authorization from Calderwood & Harkness LLP.
All communications regarding this engagement should be directed to the undersigned or to the individuals identified in Section 9 below.
Additionally, please be advised that the court file in this matter has been sealed pursuant to California Rules of Court, Rule 2.550 et seq. Accordingly, all materials provided to YBL in connection with this engagement — including financial documents, tax returns, pleadings, and any other court filings or discovery materials — should be treated as strictly confidential. Such materials should be stored securely, access should be limited to those YBL personnel directly involved in the engagement, and no materials should be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
9. Confirmation and Next Steps
We kindly request that you take the following steps to confirm and formalize this engagement:
(a) Please sign and return a copy of this letter to confirm your acceptance of the engagement on the terms described herein. A signature block for this purpose is provided at the end of this letter. A signed copy may be returned by mail, by hand delivery, or by email in PDF format to the undersigned.
(b) If YBL maintains a standard engagement agreement, engagement letter, or terms of service that you customarily require clients to execute, please provide a copy for our review and countersignature. We are happy to review and execute any such document to the extent its terms are consistent with the engagement as described in this letter.
The primary contact at Calderwood & Harkness LLP for all matters relating to this engagement is:
Devon Archer Calderwood & Harkness LLP 777 South Flower Street, Suite 3400 Los Angeles, California 90017 Direct Telephone: (213) 555-8247
Email: darcher@calderwoodharkness.com
In addition, Nadia Petrov (associate) will be closely involved in coordinating document production, managing discovery logistics, and reviewing draft work product. Ms. Petrov can be reached at (213) 555-8263 or npetrov@calderwoodharkness.com. You should feel free to communicate with either Mr. Archer or Ms. Petrov regarding this engagement.
Closing
Thank you for your willingness to assist with this matter, Mr. Yamamoto. We have been impressed by YBL's reputation for thoroughness and reliability in forensic accounting engagements in the family law context, and we are confident that your analysis will be of significant value to our client and to the court. We look forward to working with you and your team.
Please do not hesitate to contact me if you have any questions regarding the scope of the engagement, the timeline, or any other aspect of this letter.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Devon Archer Partner Calderwood & Harkness LLP 777 South Flower Street, Suite 3400 Los Angeles, California 90017
cc: Priya Anand, Esq. (Calderwood & Harkness LLP) cc: Nadia Petrov, Esq. (Calderwood & Harkness LLP) cc: Marguerite D. Fonseca (via separate cover)
Enclosures: None (documents to follow under separate cover per Section 7)
ACCEPTANCE AND ACKNOWLEDGMENT
The undersigned hereby accepts the engagement described in this letter on the terms set forth herein and confirms that Yamamoto Brace & Liu, LLP will perform the forensic income analysis in accordance with the scope, deliverables, fee, timeline, and confidentiality provisions described above.
ACCEPTED AND AGREED:
YAMAMOTO BRACE & LIU, LLP
By: ________
Name: Harold K. Yamamoto, CPA/ABV/CFF
Title: Partner
Date: ________

CALDERWOOD & HARKNESS LLP

ACCEPTANCE AND ACKNOWLEDGMENT

ACCEPTED AND AGREED:

YAMAMOTO BRACE & LIU, LLP

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