A closely held corporation owned by one spouse may be the most valuable asset in a divorce proceeding and may cause financial hardship to the business owning spouse. Traditionally, a divorce includes dividing assets, awarding spousal support, and if joint children are involved, awarding child support. The concept of double dipping complicates this divisional split. Double dipping traditionally applied to the division of assets for pensions. Double dipping, however, is now being applied in the context of businesses. Double dipping occurs when the business is categorized as property subject to equitable distribution and again as a stream of income subject to the spousal award.
As an illustration, assume a spouse owns 100% of a closely held corporation that is valued at $1,000,000 and has a projected cash flow available to the owning spouse at $450,000 per year. The non-owning spouse receives 50% of the business worth (i.e. $500,000) and is awarded another $100,000 in alimony from the same cash flow. Is it fair and equitable that both the $500,000 for equitable distribution and the $100,000 for support are taken from the same income-producing asset, namely, the cash flow of the business?
The first step in the process during a divorce is the valuation of the business. A common valuation method that results in double dipping is the normalization of income approach. This approach adjusts the business’ income to determine the economic benefit of the business, which may include adjustment of the owner’s compensation. For example, when an owner is paid a salary in excess of the market rate for the job, the excess is added into the business’ income for valuation purposes. If the owner’s salary from the business is used to calculate alimony or child support, the excess salary amount used in valuating the business is counted twice—once in the property division and once in the support award, thus, the double dipping.
Further complicating the issues resulting from valuation is the calculation of intangible assets. Intangible assets in a business include enterprise goodwill and personal goodwill. Enterprise goodwill relates to the business itself, including its location, qualified work force, and other relevant factors. Personal goodwill is the value dependent upon the owner’s presence and work effort. States are currently split on whether personal goodwill constitutes property subject to the valuation of the business for property division.
Double dipping is a hotly debated topic and one that is not officially resolved in Ohio. As with any hotly debated topic, there are two extreme arguments on both sides. On one hand, support and equitable distribution are separate from one another, thus, the income produced should not be ignored when valuing the financial position of spouses for spousal award purposes. Whereas those against double dipping of marital assets argue valuing a business once for support and again for property division from the same stream of income allows the non-business owning spouse to benefit twice from the same marital asset. The laws on double dipping vary by state and have fallen on both sides of the debate.
In Ohio, O.R.C. 3105.171 statutorily mandates the division of marital property to be equal. If an equal division of marital property would be inequitable, the court shall not divide the marital property equally, but instead shall divide it between the spouses in the manner the court determines equitable. In making a division of marital property, the court shall consider all relevant factors, including but not limited to, the duration of marriage, the assets and liabilities of the spouses, the economic desirability of retaining intact an asset or an interest in an asset, and any other factor that the court expressly finds to be relevant and equitable. With that in mind, the question presented in Ohio is when does double dipping, if at all, offer a fair and equitable split?
The most recent Ohio Supreme Court case on the matter in 2012, Heller v. Heller, held that the spousal support award cannot include bonus income in excess of the husband’s salary, thus, the Court prohibited double dipping. In Heller, the court’s initial award for spousal support constituted approximately 75% of the normalized stated annual income. Because the wife already received the value of the excess earnings through the property distribution, the Court held that she was not entitled to receive any portion of the excess earnings for the purposes of satisfying the spousal support obligation.
The Heller Court recognized the problems associated with double dipping and prohibited it because it would not be equitable and fair to do so. In Heller, the court noted that “there was no language in our decision to suggest that this court intended to promulgate a flat prohibition against double dipping applicable to every income-producing asset; rather, this court addressed the double dip issue only as it applies to the facts of this case.” The idea behind this statement is that a court must analyze each case separately within the context of its own unique facts to determine whether double dipping is fair and equitable.
So, should every case in Ohio prohibit double dipping as Heller did? Both sides of the debate entirely for and against double dipping are equally persuasive, but seem equally extreme. Double dipping did not make sense in the Heller case specifically, but the division of marital assets is not a one size fit all problem. A bright-line rule allowing or prohibiting double dipping is unwarranted and ineffective. The courts should instead determine the fair and equitable amount on a case-by-case basis. This can be done by weighing all relevant factors, including but not limited to, the lifestyles both spouses are accustomed, job prospects, work and educational history, whether the business’ value includes business or personal goodwill, marketability of the business, business valuation discounts, work expectancy of both spouses, risks associated with the business, length of the marriage, and potential market for the corporation.
When brainstorming all the factors that may be relevant, the natural question is whether the kind of business has an impact on the fair and equitable value to split? A manufacturing business is judged based on quality of the product offered, whereas a business providing services, such as legal services, is judged based on the individual person providing the services. A business providing services is dependent on the individual for value (i.e. personal goodwill). In such a circumstance, should the court weigh the individual’s added value to the corporation as a relevant factor?
To be consistent with Ohio law, the issue of double dipping should turn on a highly fact specific inquiry into what is fair and equitable. Double dipping may be acceptable in certain circumstances, but exactly what those circumstances are remain unclear and ripe for argument.
Written by Law Clerk Mandy McNabb.