Washington state court clarifies double-dip analysis

BVWireIssue #172-1
January 11, 2017

Double dip, like goodwill, is a challenging issue for valuators because different states have handled it differently, which makes it hard to keep up with the various approaches. A recent appeals court decision from the state of Washington explains the key principle at work in that jurisdiction’s double-dip analysis.

The issue arose when the husband appealed the trial court’s decision to award the wife both half of the value of a management consulting business the husband had set up and grown during the marriage and $640,000 in spousal maintenance over 44 months.

No unfair burden: Both parties’ experts used an income approach to value the company. The trial court split the difference in the value determinations and found the company “has significant goodwill and profits, has experienced significant growth and will, more likely than not, continue to enjoy significant growth in the near future.”

The husband contended the maintenance award represented double recovery. The state Court of Appeals disagreed. Under the applicable maintenance statute, the division of the community’s property is one of many factors a trial court should consider in determining maintenance. “The only limitation … is that the award be ‘just.’” Relatedly, “when maintenance and property awards are paid from the same asset in a manner that unfairly burdens the payor spouse, the maintenance award duplicates the property division of that asset.”

Unfairness comes into play where the divided asset is a diminishing asset that does not generate significant or any future income for the owner spouse with which to pay maintenance, the court explained. In the instant case, however, the business was a going concern that promised to generate considerable income for the husband into the foreseeable future. The husband, therefore, was not required to erode the company’s value to pay maintenance, the appeals court pointed out. It upheld the maintenance award.

Takeaway: According to Rob Levis (Levis Consulting), the Washington Court of Appeals got it right. The court, interpreting precedent, correctly differentiates between a business whose future cash flows represent a return of the assets already reflected in the marital estate and an ongoing business that is expected to grow and where the future cash flows are a return on the asset. Future income growth is an underlying assumption in the vast majority of income-based approaches to value applications in the business appraisal field, Levis says.

The case is In re Marriage of Cheng, 2016 Wash. App LEXIS 2854 (Nov. 22, 2016). A digest of the decision and the court’s opinion will be available soon at BVLaw.

Extra: Levis will participate in a webinar, The Double Dipping Debate, on January 25. Donald DeGrazia (Gold Gerstein Group) and Kim Willoughby will join him.

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