“We agree with the defendant that the Supreme Court impermissibly engaged in the “double counting” of income in valuing the license, which was equitably distributed as marital property, and in awarding maintenance to wife… Once a court converts a specific stream of income to an asset, that income may no longer be calculated into the maintenance formula and payout. There is no double counting to the extent that maintenance is based upon spousal income which is not capitalized and then converted into and distributed as marital property.”
Other courts have addressed the “double dipping” issue with varying results. Some of the more recent cases are discussed in this article.
Facts of the Case: Elaine and Raymond Lee were divorced in 1993, having been married for 25 years. During the marriage, Mr. Lee accumulated benefits under various pension plans, some of which had been earned prior to the marriage. The portion of the benefits accrued during the marriage was divided equally between the parties.
Ms. Lee was awarded $700 per month in spousal maintenance, which was later increased to $850. Mr. Lee retired in 2005 and began collecting his pension benefits. At that time, he petitioned the court for a reduction in his monthly support obligation on the basis that his income had decreased.
Trial Court Decision: The trial court compared the incomes of the parties, finding that Mr. Lee’s total income was $4,023 monthly, consisting of $1,555 in Social Security benefits and $2,468 in pension benefits. Ms. Lee’s income consisted of $878 in Social Security benefits and $796 from her share of Mr. Lee’s pensions earned during the marriage. The court determined that Mr. Lee’s income available for support was $3,277 (the total minus $796 which had been awarded to him as property in the divorce settlement). As a result, Mr. Lee’s monthly support obligation was reduced to $700.
Mr. Lee appealed the decision to the Court of Appeals.
Appellate Court Decision: The Court of Appeals reversed the trial court, finding that the pre-marital pension benefits should be characterized as property rather than income. Further, the court held that Mr. Lee’s post-divorce pension benefits should not be considered income until Mr. Lee had received the full value of the marital portion of the benefits and that “for the foreseeable future, the monthly benefit payments will not equal that full value.” The case was remanded to the trial court with the instruction that “maintenance may not be ordered to be paid … until he has received from the pension an amount equivalent to its value as determined in the original property division.” Ms. Lee appealed to the Supreme Court.
Supreme Court Decision: The Supreme Court reversed the appellate court decision holding that Mr. Lee’s monthly pension payments represented the cumulative benefit earned before, during, and after the marriage. Further, any amount in excess of the $796 awarded to him as property settlement should be included in the income available to pay support.
Facts of the Case: At the time of the parties divorce in 2010, Mr. Loutts owned QPhotonics, a stock distributor of light emitting diodes (“LEDs”), laser diodes (“LDs”), and related products. After hearing testimony from experts on behalf of both parties, the court determined that the value of QPhotonics was $280,000 using a capitalization of income approach. In computing this value, Mr. Loutts’ market compensation was determined be $130,000 with the balance of the earnings capitalized into value. Ms. Loutts was awarded $140,000 as her marital share and awarded spousal support based on the $130,000 market compensation used in the valuation.
The court reasoned that the value of a business cannot be used for both property division and spousal support. Ms. Loutts appealed the decision.
Appellate Court Decision: The Court of Appeals reversed the trial court and remanded the case for further consideration. The Court of Appeals declined to “adopt a bright-line rule with respect to “excess” income and held that courts must employ a case-by-case approach when determining whether “double dipping” will achieve an outcome that is just and reasonable.” The case was remanded to the trial to determine whether the equities warranted utilizing the value of the company for both property division and spousal support.
Facts of the Case: The parties were married in 1982 and separated in 2002. Husband was a partner in Blazer-Wilkinson, LLC (BW), a brokerage company that bought and sold produce. Temporary spousal support was set at $57,224 per month during the pendency of the divorce.
Trial Court Decision: In 2004, the trial court valued the community interest in BW at $5,600,000. Wife received other property plus an equalizing payment of $1,340,000 for her share of the business.
Temporary spousal support was reduced to $52,000 per month pending further findings of the court.
In 2006, temporary spousal support was reduced to $30,000 per month retroactive to August 2004 and permanent spousal support was set at $20,000 per month beginning January 1, 2006. In determining Husband’s income available to pay support, the court excluded profits from the business, which were needed to maintain adequate capitalization and to diversify. All other profits were considered as available to Husband. The court specifically rejected Husband’s argument that his buyout of Wife’s interest in BW was a factor that should eliminate spousal support.
Wife appealed the decision, arguing that the trial court abused its discretion by excluding a portion of husband’s income when considering his ability to pay support. Husband cross-appealed on the grounds that the support order unfairly allowed the wife to double dip into the income stream from his business.
Court of Appeals Decision: The court disagreed with Wife, finding that there was a need to diversify and to maintain adequate capital in the business. In reaching its decision, the court relied in part on the California child support statute, which excludes income required for the operation of a business from income. Thus, amounts required to achieve such were not available to Husband.
The court also disagreed with Husband. The court’s decision was based primarily on the lack of evidence before it that BW had been valued using a stream of future income. Although Husband’s expert testified that he assumed that BW had been valued using the capitalization of excess earnings method that implicitly ties the value to Husband’s future earnings, the court was not convinced. In fact, the court stated that even though the expert’s testimony had not been contradicted, it was not conclusive to either the trial court or the Court of Appeals.
Facts of the Case: Husband owned 49.6% of Capitol Fire Protection Company (CFP), a company founded by his father. Husband’s earnings from CFP in the five years prior to filing for divorce ranged from a high of $577,800 to a low of $255,600. Both child support and spousal support were at issue in the case.
Trial Court Decision: In its final decision, the trial court considered the Husband’s average income of $369,000 in determining monthly child support. However, for purposes of determining spousal support, the court limited Husband’s income to $100,000, finding that his income in excess of $100,000 had already been taken into account in valuing his interest in the company.
In his appeal, Husband argued, in part, that the court had abused its discretion by double counting a portion of his income by using the same income to value the company and to determine his income available to pay child support.
Supreme Court Decision: The court affirmed the trial court decision reasoning that while each parent receives something in a division of property, children receive nothing from the property division. Thus, there can be no double counting when determining the amount of income available to pay child support.
It is of particular interest that both the trial court and the Supreme Court found it appropriate to limit Husband’s income available for spousal support to the $100,000 salary used to value the business. Both courts acknowledged that to include income in excess of $100,000 would double count income taken into account in valuing his business interest.
Facts of the Case: This is the second appeal in this case. Husband was the sole owner of Esco Corporation, a manufacturer of optics and optical components. The original trial court found that the value of Esco was $768,000 based on a capitalization of excess earnings and awarded Wife 35% of the value. The court also awarded Wife alimony based on assuming income for Husband of $150,000, the amount considered reasonable compensation in the valuation of Esco.
Wife appealed from the amount of alimony and distribution awarded to her, as well as from the valuation of Esco. The Superior Court affirmed the equitable distribution award and valuation of Esco but remanded the alimony issue to the trial court. The Superior Court found that it had not been provided sufficient findings of fact and conclusions of law to make a meaningful determination regarding the alimony.
Trial Court Decision: On remand, the trial judge interpreted the Superior Court decision to mean that it was error to limit Husband’s income for spousal support to the $150,000 and issued a revised award based on Husband’s entire income. This increased monthly spousal support from $4,000 to $5,500.
Husband appealed the decision, arguing that the use of his actual earnings was inappropriate because earnings in excess of $150,000 were considered in the value of the business and his Wife had received a 35% distributive share.
Superior Court Decision: The court denied Husband’s appeal. In its opinion, the court discussed the methodology used to value Esco, finding that the calculation involved Husband’s past earnings, not future earnings. Thus, there was no double counting because the valuation did not include future earnings.
Finally, although the court denied Husband’s appeal, it did not summarily dismiss the double dipping concept, stating:
“We decline to adopt the ‘either-or’ notion inherent in the so-called double-counting rule, certain that in appropriate instances, proper adjustment to equitable distribution on the one hand, or the alimony award on the other, or both, may be made to satisfy its underlying goal of fairness. In our view, the extent to which the asset may be looked to as a source of support should be influenced by the extent to which its value was distributed to the supported party as part of the equitable division of marital property. Although in certain circumstances it would be unfair to look to a marital asset as a source for both alimony and equitable distribution, it is simply too categorical to conclude that because an asset is treated as marital property for purposes of equitable distribution, it can never be regarded as a partial source of alimony.”
Facts of the Case: The parties were married in 1974 and divorced in 2007. Two of the primary issues in the divorce were the value of Husband’s 39.5% interest in H&S Forest Products (H&S) and the amount of spousal support to be awarded to Wife. Husband and Wife each employed experts to value H&S, both of whom valued H&S using a capitalization of earnings method.
Trial Court Decision: Based on the expert testimony, the court found that the value of H&S was $700,000 and awarded other marital assets totaling $350,000 to equalize the division of the marital property. Wife was awarded spousal support of $8,000 a month based on Husband’s “normalized” earnings of $300,000 used in the valuation of H&S. In addition, the court awarded Wife 20% of each additional payment of gross income paid to Husband by H&S. Husband appealed, arguing that the court had abused its discretion by basing additional spousal support on his entire income, including his share of future profits.
Court of Appeals Decision: The Court of Appeals agreed with Husband, stating, “It is basic valuation theory that the value of a business is equal to the present worth of the future benefits of ownership. The concept of the time value of money is at the core of the income valuation approach. Namely, the income streams or cash flows the buyer of the business anticipates he or she will receive in the future can be translated into their present worth.”
The court added that trial courts may treat a spouse’s future business profits either as a marital asset subject to division, or as a stream of income for spousal support purposes, but not both. When the trial court treated Husband’s share of H&S’s future profits as both an asset and as income for spousal support purposes, this constituted an abuse of discretion.
The case was remanded to the trial court, which again awarded Wife 20% of Husband’s future income from H&S. Husband filed a second appeal.
Court of Appeals Decision After Remand (Heller v. Heller, 2010 Ohio 6124 – Ohio Court of Appeals): The Court of Appeals remanded the case for a second time finding that the trial court had used a methodology that contained an unfair double dip.
As evidenced by the few cases discussed in this article, there is no consensus as to how to address the double dipping. Depending on the jurisdiction, double dipping may be prohibited completely, allowed in total, or allowed in part based on the facts and circumstances of a particular case.