After more than 20 years of marriage, a lawyer and his wife divorced. The wife hired a CPA expert, who testified that the husband’s practice had no real assets but a bank account with nearly $120,000—and that was the value of the enterprise, he said. The court found that the husband earned approximately $270,000 per year and the value of his law practice was $65,000, and awarded each party half. The husband appealed, saying the court erred by considering the goodwill value of his practice.
The appellate court disagreed, finding that the trial court did not consider goodwill or the husband’s future income in its valuation of the law practice. However, it did not properly characterize the cash account, which did not “change from income to asset” merely because it had not been distributed by the time of trial. The husband’s income, “past and projected into the future, should be (and was) considered in addressing . . . spousal support,” the court held, in finding that the law practice had no appreciable value. Read the complete digest of In re the Marriage of Jackson, 3925703 (Iowa App.)(Sept. 8, 2011) in the December Business Valuation Update; the court’s unpublished opinion will be posted soon at BVLaw.
The quandary of the double-dip: Clearly, the law practice in that case did not generate more than a “living” for the practitioner-spouse. But what happens when a thriving professional practice is valued under an income or earnings approach for purposes of distribution—and the court also considers the professional’s income to determine support? See, e.g., McReath v. McReath (also available at BVLaw), in which the Wisconsin Supreme Court said it wasn’t too worried about double counting, because “when a trial court assigns an income-earning asset to one spouse, it is awarding the full, fair market value of that asset at the time of the property division. Presumably, that spouse could turn around and sell the asset next day, attaining the same value; or he/she could retain the asset for its income-producing properties.”
For currency and clarity on this complicated issue, tune in to: Asset or Income? Double Dipping in Divorce, featuring Don DeGrazia (Gold Gocial Gernstein) and Stacy Preston Collins (Financial Research Associates) on Thursday, Nov. 17.