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An Asset So Nice, It Should Be Counted Twice
December 1, 2011
Historically, Wisconsin courts have held that it is inherently unfair to use an asset both for property division and as income for support. More recently, however, this proposition has been watered down to the extent that it may not even exist any longer. The Wisconsin Supreme Court recently granted review to a published Wisconsin Court of Appeals case, providing an opportunity for the court to clear up an area the court of appeals referred to as a “quagmire.”
This article will first examine the historical development of the concept of impermissible double counting, next examine the recent case, and suggest what courts should do if the issue presents itself.
As far back as 1963, in Kronforst v. Kronforst the Wisconsin Supreme Court held that a profit-sharing plan could not be included as a principal asset in making a division of estate and also as income in determining alimony. While this case is old enough that the court also noted that “in general a third of the net estate is a liberal allowance to the wife…,” other cases made similarly broad sweeping holdings prohibiting double counting. For example, several cases have held that it was error to include accounts receivable as asset available for distribution where they were utilized as income for support.
While these cases seem to have established a black-and-white rule against double counting, subsequent cases found plenty of grey areas. In Maley v. Maley, the appellate court agreed that utilizing a taxable gain on real property for child support would count the asset twice, since the enhanced value was part of the property division. But the court added, in dicta, “[W]hether gains from the sale of an asset counted as property in the divorce judgment can be counted as income for support purposes is a fact-sensitive question to be resolved on a case-by-case basis.”
In Olski v. Olski, the supreme court held that while retirement benefit could not be double counted, an increases in the benefit due to post-divorce employment was available for maintenance as it had never been initially included in property division. In Cook v. Cook, the court held that the prohibition against “double counting” did not bar consideration of a military pension both in the property division and in calculating child support. The court found that child support differed from maintenance in that the children of divorced parents receive nothing from the property division. This holding must come as a great surprise to payors whose children live in the very house awarded as part of a property division.
In Seidlitz v. Seidlitz, the appellate court affirmed the trial court’s refusal to consider a former wife’s pension payments in a maintenance modification proceeding where the pension was awarded to her as part of the property division. The court noted that the “double counting” rule was not absolute, but in this case, the court said “the payments to Erna represent the payout of the asset itself.” (Emphasis in original).
The court of appeals went even further in Hokin v. Hokin, holding that the trial court properly exercised discretion in counting monthly retirement benefits as income to the wife when calculating maintenance, even though the retirement account was divided as part of the property division. Citing Cook, the court held that there was no absolute rule against double counting and that the retirement plan was a unique asset as it could not be sold or transferred, did not provide a benefit until payments began, and did not have a principal balance that was preserved.
In Weiler v. Boerner, the trial court imputed enhanced education income to the wife in order to equalize income for maintenance and property division. The wife appealed, arguing that the court wrongly double counted the value of her enhanced education benefit for both property division and maintenance. The appellate court disagreed, holding that there was no absolute rule against double counting. The appellate court cited Haugan v. Haugan, for the proposition that a trial court has the authority to consider enhanced education benefits in determining “maintenance payments, property division or both.” (Emphasis added in Weiler, not in Haugan). While the Weiler court relied on the wording in Haugan, there was no discussion in that case of the double-counting issue.
In Wettstaedt v. Wettstaedt, the defined benefit plan was divided equally by a Qualified Domestic Relations Order. The appellate court held that since no value was assigned to either spouse’s interest to be offset by other property awarded in the property division, a family court was not prohibited by the “double counting” rule from considering pension distributions in determining maintenance.
Finally, most recently in Wright v. Wright, the appellate court held that including income from assets awarded in property division is not double counting. Period.
The newest case involving double counting is McReath v. McReath, No. 2009AP639 (Wis. Ct. App. July 29, 2010) (Ordered published. Review granted). The decision starts by noting that the issue of professional goodwill has been characterized as a “quagmire.” One would reasonably expect that the court would then proceed to use the case to clean up the confusion. Instead, the appellate court explicitly states that its decision will not “pull Wisconsin out of the quagmire.”
The case involves Tim and Tracy McReath, who were divorced after a 20-year marriage. Tim was a dentist with a specialty in orthodontia. The circuit court included the full $1,058,000 valuation of his practice as divisible property.
For maintenance and child support, the court calculated Tim’s earnings from his orthodontic practice by looking at his average net cash flow over the five years preceding the divorce, with some minor adjustments. Based primarily on these earnings, the court ordered Tim to pay maintenance to Tracy at the rate of $16,000 per month for 20 years.
Most important to the issues on appeal, the trial court had no problem with using the same income for support as utilized in the property division, insofar as the value of the dental practice included personal goodwill. Not surprisingly, Tim appealed.
On appeal, Tim argued that the circuit court erred as a matter of law when it treated the professional goodwill portion of the valuation of his practice as divisible property. He contended that although he could sell his practice for just over $1 million, most of that amount was attributable to non-divisible professional goodwill. It followed, said Tim, that the circuit court applied an incorrect legal standard when it treated the full $1,058,000 valuation of his practice as an amount subject to division.
The Wisconsin Court of Appeals held that prior case law did not address whether salable professional goodwill may be treated as divisible property. The appellate court agreed with Tim that if he continued in his practice there would be some double counting. But it declined to adopt Tim’s proposed blanket prohibition on including salable professional goodwill as divisible property.
The court held that if Tim’s blanket prohibition were adopted, unfairness would plainly be the result in some circumstances. Second, the appellate court found that it had no basis on which to conclude that double counting was a significant problem. Moreover, it had no reason to think that completely excluding the value of salable professional goodwill from divisible assets made economic sense. The court highlighted the lack of economic information before it.
What remained was the approach advocated by Tracy and effectively adopted by the circuit court: Include all salable goodwill, both corporate and professional, as a divisible asset and then, essentially, ignore the fact that Tim’s earnings are intertwined with part of the divisible assets.
Presiding Judge Charles P. Dykman filed a dissenting opinion, believing that the matter should be remanded to the trial court for a finding of whether the double counting was fair.
First, analyzing McReath in light of the history of Wisconsin law on double counting is difficult enough – synthesizing the complete history is impossible. Earlier cases seem to have established a black letter rule that it is simply unfair to utilize the same item for two purposes. Later cases, without overruling the earlier ones, have found that such a firm rule is not, in fact, the law. McReath, except for Judge Dykman’s dissent, appears to totally ignore the concept of fairness.
Second, the concept of prohibitive double counting is purely an equitable one. It finds no support in Wisconsin statutes. Rather, it relies purely on equity principles of fairness (A validation of Judge Dykman’s dissent).
Third, any analysis needs to differentiate between the nature of the issues to which this concept is applied. Most cases wrestles with the unusual concept of defined benefit retirement plans. Unlike most other assets, in a defined benefit plan there is no “hard” asset to be divided. Rather, there is an actuarial value, based on estimated life expectancy and future interest rates. As a result, the “value” is ephemeral. After all, if the employee gets hit by a truck walking out of his or her retirement party, as it turns out, the plan will have no value (assuming there is no survivorship benefit). On the other hand, if the employee lives to be a 100 years old, he or she becomes a big winner (in more ways than one!). Wisconsin courts have dealt with this issue by finding that double counting occurs only up to the level at which the defined benefit plan was valued. So, if the employee outlives the actuarial value, additional benefits have not been counted and, therefore, can be included in future maintenance. However, where the plan is divided equally by a QDRO, apparently it doesn’t matter how much the employee spouse receives from the plan; the pension is never available for maintenance. This is a good reason for lawyers who represent the employees in these cases to negotiate QDROs.
While other issues arise, such as accounts receivables or stock options, most of the other double-counting cases involve professional businesses. Given the complexity of the issue, it should be no surprise that cases from other states are all over the map. Some (often, inexplicably, citing Holbrook) hold that professional goodwill is not divisible. Still others hold that it is divisible when it is saleable. No trend or majority rule is discernible.
At first blush, it would seem that the middle road approach – that professional goodwill is divisible if it is salable – makes the most sense. Perhaps this is where Judge Dykman’s dissent would lead. But it is not often clear when the goodwill is salable, or for how much. Purchasers pay a price which is not broken down by pieces, just like a real estate purchaser does not identify how much of a purchase price is for the land as opposed to a building on the land.
One possible means of quantifying the “personal” part of the purchase is by isolating the price of a non-compete clause. A non-compete theoretically buys the personal services of the professional and is designed to ensure that the purchaser will realize the value of the personal goodwill. In practice, however, it is not always so simple. A non-compete may be a negotiated price for tax purposes (it is taxable as ordinary income to the seller) or other reasons unrelated to the personal value of the professional and therefore, may not reflect the actual value of the personal services. Further, to be enforceable, it must be time and geographically limited. These restrictions may, or may not, reflect the actual value of the professional’s service.
The geographical limitations alone may cause unique problems in family law valuations. After all, if a professional can sell the practice and open a new one outside the geographical limitations of the non-compete, what would be wrong with considering the new income for maintenance while valuing the prior business utilizing its income? Absent minor children, the answer may be “nothing.” But, if there are minor children whom the professional has an interest in seeing, the answer might be “everything.” While this issue might not change the valuation of a business, it certainly may effect whether a court would include the cost of a non-compete in the valuation and then calculate support based on the assumption that the professional could open up shop far away.
The simplest resolution, of course, would be to follow the course of many states and find no distinction between professional goodwill and commercial goodwill. But, there is clearly a difference as all family law attorneys well know. Our clients are loyal to their lawyers personally, not to the location or other attributes of the law firm. That loyalty to the person, unlike loyalty to a business name or location, cannot be transferred or sold.
Does the same assumption apply with all professional practices? To some extent, yes, but, it appears to vary greatly with the nature of the profession. Dental practices are highly salable based on earnings, which leads to the conclusion that the personal loyalty, for some reason, attaches less to a dental professional than to a family law professional. But, even with dental practices, it is not always clear what is being sold. Certainly, the purchaser is buying the hard assets, but more importantly, the ability to generate a certain level of income. Separating that second component into personal and corporate goodwill cannot be done by a simple formula. There is no “one size fits all” answer.
Taking the easy road out, as some states have done, due to the difficulty of separating the professional and corporate goodwill, ignores the very concept of fairness our legal system is supposed to be all about. Frequently, the only means the professional has to buy out the other spouse’s interest in the business is from generating future income. To require that professional to use that same income to also pay maintenance, when that stream of income is not independently salable, would be inherently unfair.
This “quagmire” as the McReath court puts it, leads to the conclusion that the states that take the middle road – valuing professional goodwill only when it is saleable – have the preferable approach. Yes, this may take some analysis by the court. But, it is consistent with Judge Dykman’s dissent to assess the fairness of each individual circumstance. Which is, after all, exactly what courts are supposed to be doing.
This article originally appeared in the Wisconsin Journal of Family Law, Vo. 31, No. 1 (Winter, 2011)
1 – Gregg Herman is a family law attorney with Loeb & Herman, S.C. He is a past chair of the State Bar Family Law Section and was Editor-in-Chief of the Wisconsin Journal of Family Law from 2003-04. He was chair of the ABA Family Law Section from 2007-08. He thanks CPA Gregory Ksicinski of SVA Certified Public Accountants for his assistance.
2 – Kronforst v. Kronforst, 21 Wis. 2d 64, 123 N.W.2d 528 (1963)
3 – Id. at 61
4 – Johnson v. Johnson, 78 Wis. 2d 137, 143, 254 N.W.2d 198 (1977); Ondrasek v. Ondrasek, 126 Wis. 2d 469, 377 N.W.2d 190 (Ct. App. 1985); Hubert v. Hubert, 159 Wis.2d 803, 465 N.W.2d 252 (Ct. App. 1990)
5 – In re Marriage of Maley, 186 Wis.2d 125, 519 N.W.2d 717 (Ct. App. 1994)
6 – Id. at 128.
7 – In re Marriage of Olski v. Olski, 197 Wis. 2d 237, 540 N.W.2d 412 (1995)
8 – In re Marriage of Cook v. Cook, 208 Wis. 2d 166, 560 N.W.2d 246 (Ct. App. 1997)
9 – In re Marriage of Seidlitz v. Seidlitz, 217 Wis. 2d 82, 578 N.W.2d 638 (Ct. App. 1998)
10 – Id. at 91.
11 – In re Marriage of Hokin v. Hokin, 231 Wis. 2d 184, 605 N.W.2d 219 (Ct. App. 1999)
12 – In re Marriage of Weiler v. Boerner, 2005 WI App 64, 280 Wis. 2d 519, 695 N.W.2d 833
13 – In re Marriage of Haugan v. Haugan, 117 Wis. 2d 200, 343 N.W.2d 796 (1984)
14 – Weiler at 528
15 – In Re Marriage of Wettstaedt v. Wettstaedt, 2001 WI App 94, 242 Wis. 2d 709, 625 N.W.2d 900
16 – Wright v. Wright, 2008 WI App 21, 307 Wis. 2d 156, 747 N.W.2d 690
17 – Wisconsin courts have been inconsistent, with some cases holding that family courts have only those powers conferred by statute (Zawistowski v Zawistowski, 2002 WI App 86, 253 Wis.2d 630, 644 N.W. 2d 252; Koeller v. Koeller, 195 Wis.2d 660, 536 N.W.2d 216 (Ct. App. 1995)) and others allowing courts broad powers of equity (In re Custody of H.S.H-K, 193 Wis.2d 649, 533 N.W.2d 419 (1995))
18 – Gaskill v. Robbins, 282 S.W.3rd 306 (Ky. 2009); Marriage of McTiernan, 35 Cal. Rpts, 3d 287 (Cal. App. 2005); Marriage of Schneider, 824 N.E.2d 177 (Ill. 2005); Yoon v. Yoon, 711 N.E. 2d 1265 (Ind. 1999); Marriage of Hershewe, 931 S.W.2d 198 (Mo. App. 1996); Walton v. Walton, 657 So.2d 1214 (Fla. App. 4 Dist. 1995): Tortorich v. Tortorich, 902 S.W.2d 247 (Ark. App. 1995); Sonek v. Sonek, 412 S.E.2d 917 (N.C. App., 1992); Prahinski v. Prahinski, 582 A.2d 784 (Md. CtApp., 1990); Donahue v. Donahue, 384 S.E.2d 741 (S.C. App., 1989).
19 – Helfer v. Helfer, 656 S.E.2d 70 (W. Va. 2007): Baker v. Baker, 733 N.W. 2d 815 (Minn. App. 2007); Strauss v. Strauss, 647 A.2d 818 (Md. Spec. App. 1994); Antolik v. Harvey, 761 P2d 305 (Hawaii App, 1988); Taylor v. Taylor, 386 N.W.2d 851 (Neb. 1986); Clark v. Clark, 782 S.W.2d 56 (Ky. App., 1990)
20 – See Don DeGrazia and Stacy Preston Collins, “Controversial ‘Double Dipping’ Issue in Divorce,” 21 A.J.F.L. 1 (Spring 2007).