Last week’s BVWire reported on the Bohme divorce case, in which the Ohio Court of Appeals rejected the double dipping analysis. The article prompted the following comment from business appraiser Rob Levis (Levis Consulting).
“The double dip misconception in our profession is a thorn in my side,” says Levis. “It really is not complicated: if future expected cash flow represents a return on capital (i.e., value of business interest), it is not a double dip. But when the cash flow is a return of investment there is a double dip.” He continues: “Think income-generating real estate. How can anyone argue that net rental income on an appreciating real estate asset is not income available for spousal maintenance?”
In Bohme, the Court of Appeals observed that the double dipping framework was most appropriate when dealing with “fixed assets that produce an income stream such as a pension or annuity.” Levis agrees up to a point. He notes, however, that the court’s position fails to appreciate some important nuances. “A pension or annuity income stream is a combination of return on capital and return of capital. Once in payout status, there is more return on and less return of early on when the annuitant’s life expectancy is at its longest/highest. As the annuitant’s expected remaining life diminishes over time, the return on capital decreases and the return of capital increases.”
He adds that, in the case of businesses, the underlying assumption is usually an income stream into perpetuity. "All of the income is usually a return on capital, and therefore no return of the investment. It is not a depreciating asset like a pension. It really is similar to real estate in that respect, but for some reason I never hear anyone discuss that analogy,” he says.
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