So much for clarity! Valuators working on divorce cases may remember the storied Heller divorce case in which the Ohio Court of Appeals decided the issue of double dipping. Now comes an opinion in a case with similar facts that shows the same court changing its tune and throwing the double-counting theory into question.
Focal point dental practice: The husband was a 44-year-old dentist and the sole owner of his practice. At divorce, the husband’s expert determined the practice was worth $689,000 using an income—capitalization of earnings—approach. Under a similar method, the wife’s expert arrived at a FMV of $1.1 million. The difference in value stemmed from the application of a 30% marketability discount.
When it came to calculating income for spousal support, the husband’s expert decided that, even though the annual corporate income was around $500,000, he would only attribute $261,000 to the husband. To consider the total annual income would be to use the income that served as the basis for valuing the business—of which the wife received her share—a second time as the basis for determining spousal support. The wife’s expert said the husband’s income “available to him through his dental practice” was $520,000.
The trial court held the practice was worth $689,000 and awarded the wife half of that amount. At the same time, it found the annual income was about $500,000 and ordered monthly spousal support of $9,000 for seven years.
No harm done: The husband appealed, arguing the trial court’s decision conflicted with Heller. There, the Court of Appeals specifically said it was under a statutory mandate “to keep marital property division and spousal support separate, and to consider the potential ‘double dip’ … in cases where one spouse’s ownership in a going concern is discounted to present value and divided, and where excess earnings arising from that ownership interest will constitute part of the spouse’s stream of income into the future.”
This time, the Court of Appeals had a different take. On its own accord, it computed the present value to the husband of the additional income stream. It assumed that the husband’s additional income was $300,000 per year and he was to retire in 10 years. At a 5% discount rate, the present value of the after-tax income would be over $1.6 million, the court concluded. This “is almost one million dollars more than the determined value of the business,” it noted. “Those computations alone demonstrate that valuing the business using an income methodology does not ‘double count’ income to [the husband’s] detriment.”
Takeaway: According to the appeals court, there is no double dipping because a reasonable person, looking at its calculation, would see no harm to the husband, says Jim Alerding (Alerding Consulting). But that computation is based on an “absurd” 5% discount rate, and it does not follow any of the business valuation principles applicable to the determination of a cost of capital. As Alerding sees it, this is another illustration of divorce courts’ putting together an “equity package that is fair to both parties at least in the eyes of the court.”
Find a discussion of Bohme v. Bohme, 2015 Ohio App. LEXIS 325 (Jan. 30, 2015) in the May edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.