A business, professional practice, or (until recent statutory amendments) license may be valued as a asset for divorce purposes based upon the amount of income it generates for the owner/holder. That asset may then be equitably distributed by granting the non-owner a monetary award equal to some percentage of the value.
Double-dipping, or double-counting, is the term for using the same stream of income both to value the business/practice, and then, after distributing an award to the non-owner based on the asset’s value, using the stream of income generated by the business/practice to base an award of spousal support (or child support, for that matter). If the non-owner spouse receives a “piece” of the income stream as an asset award, should the spouse get another piece as spousal support (maintenance)?
The “law” is yes, no and maybe. There is a rule against double-dipping, except when there’s not.
For the most part, if the business/practice is recognized as a “tangible asset,” just as the court would characterize a piece of real property, or publicly-traded stock, or a privately-held company whose income is a result of the work of many people, then it is generally held that the rule against double-dipping does not apply. The non-owner would get a distributive award based on the asset. Maintenance may also be awarded based upon the income generated by the tangible asset business. The rule against double-dipping rule does not apply.
If however, the business value is recognized as an “intangible asset,” then the rule against double-dipping applies, and the same stream of income may not be twice used.
When will a business be recognized as an intangible asset? . . . when the business is a service business completely dependent upon the work of the spouse-owner/professional; when the asset’s value is totally indistinguishable from and has no existence separate from the income stream from which it is derived.
Personally, I think the tangible/intangible classification is distinction without a difference. Either the non-owner spouse is getting an award effectively transferring a piece of an income stream, or is not. Regardless of whether the asset is tangible or intangible, the owner has parted with a piece of the income stream. Regardless of whether the asset is tangible or intangible, the non-owner has received a monetary award reflecting a percentage of the present value of the income stream. The owner’s ability to pay maintenance; and the non-owner’s income other than maintenance should not be blinded by the classification of tangible or intangible.
Nevertheless, the classification rule exists.
A somewhat unusual effect of the rule appears in the April 13, 2016 decision of the Appellate Division, Second Department, in Palydowycz v. Palydowycz. The parties to this divorce action were married in 1989, and had two children, 17 and 19 years old at the time of trial. The husband is an eye surgeon who owns medical practices located in Middletown, New York, and Milford, Pennsylvania. He also owns a 9.7561% interest of an ambulatory surgical center.
In the midst of the trial, the parties entered an open-court stipulation resolving the issues of maintenance and child support. Pursuant to the stipulation, the husband agreed to pay the wife the sum of $14,000 per month for a period of six years. The parties further agreed that the husband’s payments would be denominated as spousal maintenance, although they were also intended to satisfy the husband’s child support obligation.
The husband subsequently moved to deny the wife any distributive award based upon the value of his medical practices and interest in the ambulatory surgical center. He contended that such an award would constitute impermissible double-counting of his income because his stipulated support obligation was based upon his full 2010 income of approximately $1,000,000.
While the motion was pending, the trial resumed and the wife presented the testimony of an expert accountant who used an income approach to value the husband’s medical practices and interest in the ambulatory surgical center. The wife’s expert concluded that the combined value of the two medical practices was $1,830,000, and that the value of the 9.7561% interest in the surgical center was $638,000.
Orange County Supreme Court Justice Lawrence H. Ecker granted the husband’s motion, denying the wife any distributive award based upon the value of the medical practices and interest in the ambulatory surgical center. Justice Ecker reasoned that awarding the wife a distributive share of these assets would constitute double-counting because the income streams the wife’s expert used to value the medical practices and ambulatory surgical center were the same income streams used to determine his maintenance obligation. Justice Ecker added that his discretion to award the wife a distributive share of these assets in addition to maintenance had been “permissibly taken away” by the parties’ stipulation. The wife appealed.
The Second Department reversed.
The appellate court noted that, here, the husband’s medical practices, which employed other individuals including several doctors, and his interest in an ambulatory surgical center, were not intangible “totally indistinguishable” from the income stream upon which his maintenance obligation was based. The valuation method used by the wife’s expert to determine the fair market value of these assets did not change their essential nature. Accordingly, the Second Department held the lower court erred when concluding that it had no discretion to award the wife any distributive share of the value of these assets.
As the husband had no opportunity to present evidence pertaining to the value of these assets, the matter was remitted for completion of the trial on the value the husband’s medical practices and interest in the ambulatory surgical center, and for a new determination on the issue of equitable distribution and the entry of an appropriate amended judgment thereafter. The trial court retained the discretion to consider the value of the husband’s medical practices and his interest in the ambulatory surgical center, together with the agreed upon maintenance award, in arriving at an equitable distribution of this marital property.
[Should the discretion not exist if the husband was in solo private practice and the practice was classified as an “intangible asset.” I think not, although the actual adjustments might be different. The practical effects should not be denied because of an artificial label.]
The Second Department noted that the problem, here, arose because the parties agreed to a maintenance award without addressing the equitable distribution of the husband’s medical practices and his interest in the ambulatory surgical center. For the Court, the better practice would have been for the parties to evaluate those assets and consider their value as tangible assets subject to distribution before agreeing to a permanent amount of maintenance, child support, and other expenses, together with a distributive award.