Clearing up the “quagmire” of impermissible double counting.
By Gregg Herman (Wisconsin)
As it appeared in the Wisconsin Journal of Family Law, Vo. 31, No. 1 (Winter, 2011)
To Read Part 1 Click Here
First, analyzing McReath in light of the history of Wisconsin law on double counting is difficult enough – synthesizing the complete history is impossible. Earlier cases seem to have established a black letter rule that it is simply unfair to utilize the same item for two purposes. Later cases, without overruling the earlier ones, have found that such a firm rule is not, in fact, the law. McReath, except for Judge Dykman’s dissent, appears to totally ignore the concept of fairness.
Second, the concept of prohibitive double counting is purely an equitable one. It finds no support in Wisconsin statutes. Rather, it relies purely on equity principles of fairness (A validation of Judge Dykman’s dissent).
Third, any analysis needs to differentiate between the nature of the issues to which this concept is applied. Most cases wrestles with the unusual concept of defined benefit retirement plans. Unlike most other assets, in a defined benefit plan there is no “hard” asset to be divided. Rather, there is an actuarial value, based on estimated life expectancy and future interest rates. As a result, the “value” is ephemeral. After all, if the employee gets hit by a truck walking out of his or her retirement party, as it turns out, the plan will have no value (assuming there is no survivorship benefit). On the other hand, if the employee lives to be a 100-years old, he or she becomes a big winner (in more ways than one!). Wisconsin courts have dealt with this issue by finding that double counting occurs only up to the level at which the defined benefit plan was valued. So, if the employee outlives the actuarial value, additional benefits have not been counted and, therefore, can be included in future maintenance. However, where the plan is divided equally by a QDRO, apparently it doesn’t matter how much the employee spouse receives from the plan; the pension is never available for maintenance. This is a good reason for lawyers who represent the employees in these cases to negotiate QDROs.
While other issues arise, such as accounts receivables or stock options, most of the other double-counting cases involve professional businesses. Given the complexity of the issue, it should be no surprise that cases from other states are all over the map. Some (often, inexplicably, citing Holbrook) hold that professional goodwill is not divisible. Still others hold that it is divisible when it is saleable. No trend or majority rule is discernable.
At first blush, it would seem that the middle road approach – that professional goodwill is divisible if it is saleable – makes the most sense. Perhaps this is where Judge Dykman’s dissent would lead. But it is not often clear when the goodwill is saleable, or for how much. Purchasers pay a price which is not broken down by pieces, just like a real estate purchaser does not identify how much of a purchase price is for the land as opposed to a building on the land.
One possible means of quantifying the “personal” part of the purchase is by isolating the price of a non-compete clause. A non-compete theoretically buys the personal services of the professional and is designed to ensure that the purchaser will realize the value of the personal goodwill. In practice, however, it is not always so simple. A non-compete may be a negotiated price for tax purposes (it is taxable as ordinary income to the seller) or other reasons unrelated to the personal value of the professional and therefore, may not reflect the actual value of the personal services. Further, to be enforceable, it must be time and geographically limited. These restrictions may, or may not, reflect the actual value of the professional’s service.
The geographical limitations alone may cause unique problems in family law valuations. After all, if a professional can sell the practice and open a new one outside the geographical limitations of the non-compete, what would be wrong with considering the new income for maintenance while valuing the prior business utilizing its income? Absent minor children, the answer may be “nothing.” But, if there are minor children whom the professional has an interest in seeing, the answer might be “everything.” While this issue might not change the valuation of a business, it certainly may effect whether a court would include the cost of a non-compete in the valuation and then calculate support based on the assumption that the professional could open up shop far away.
The simplest resolution, of course, would be to follow the course of many states and find no distinction between professional goodwill and commercial goodwill. But, there is clearly a difference as all family law attorneys well know. Our clients are loyal to their lawyers personally, not to the location or other attributes of the law firm. That loyalty to the person, unlike loyalty to a business name or location, cannot be transferred or sold.
Does the same assumption apply with all professional practices? To some extent, yes, but, it appears to vary greatly with the nature of the profession. Dental practices are highly saleable based on earnings, which leads to the conclusion that the personal loyalty, for some reason, attaches less to a dental professional than to a family law professional. But, even with dental practices, it is not always clear what is being sold. Certainly, the purchaser is buying the hard assets, but more importantly, the ability to generate a certain level of income. Separating that second component into personal and corporate goodwill cannot be done by a simple formula. There is no “one size fits all” answer.
Taking the easy road out, as some states have done, due to the difficulty of separating the professional and corporate goodwill, ignores the very concept of fairness our legal system is supposed to be all about. Frequently, the only means the professional has to buy out the other spouse’s interest in the business is from generating future income. To require that professional to use that same income to also pay maintenance, when that stream of income is not independently saleable, would be inherently unfair.
This “quagmire” as the McReath court puts it, leads to the conclusion that the states that take the middle road – valuing professional goodwill only when it is saleable – is the preferable approach. Yes, this may take some analysis by the court. But, it is consistent with Judge Dykman’s dissent to assess the fairness of each individual circumstance. Which is, after all, exactly what courts are supposed to be doing.
Gregg Herman is a family law attorney with Loeb & Herman, S.C. He is a past chair of the State Bar Family Law Section and was Editor-in-Chief of the Wisconsin Journal of Family Law from 2003-04. He was chair of the ABA Family Law Section from 2007-08. He thanks CPA Gregory Ksicinski of SVA Certified Public Accountants for his assistance.
- 21 Wis. 2d 64, 123 N.W.2d 528 (1963)
- Id. At 61
- Johnson v. Johnson, 78 Wis. 2d 137, 143, 254 N.W.2d 198 (1977); Ondrasek v. Ondrasek, 126 Wis. 2d 469, 377 N.W.2d 190 (Ct. App. 1985); Hubert v. Hubert, 159 Wis.2d 803, 465 N.W.2d 252 (Ct. App. 1990)
- 186 Wis.2d 125, 519 N.W.2d 717 (Ct. App. 1994)
- Id. At 128.
- 197 Wis. 2d 237, 540 N.W.2d 412 (1995)
- 208 Wis. 2d 166, 560 N.W.2d 246 (Ct. App. 1997)
- 9. 217 Wis. 2d 82, 578 N.W.2d 638 (Ct. App. 1998)
- Id. At 91.
- 231 Wis. 2d 184, 605 N.W.2d 219 (Ct. App. 1999)
- 2005 WI App 64, 280 Wis. 2d 519, 695 N.W.2d 833
- 117 Wis. 2d 200, 343 N.W.2d 796 (1984)
- Weiler at 528
- 2001 WI App 94, 242 Wis. 2d 709, 625 N.W.2d 900
- 2008 WI App 21, 307 Wis. 2d 156, 747 N.W.2d 690
- Wisconsin courts have been inconsistent, with some cases holding that family courts have only those powers conferred by statute (Zawistowski v Zawistowski, 2002 WI App 86, 253 Wis.2d 630, 644 N.W. 2d 252; Koeller v. Koeller, 195 Wis.2d 660, 536 N.W.2d 216 (Ct. App. 1995)) and others allowing courts broad powers of equity (In re Custody of H.S.H-K, 193 Wis.2d 649, 533 N.W.2d 419 (1995))
- Gaskill v. Robbins, 282 S.W.3rd 306 (Ky. 2009); Marriage of McTiernan, 35 Cal. Rpts, 3d 287 (Cal. App. 2005); Marriage of Schneider, 824 N.E.2d 177 (Ill. 2005); Yoon v. Yoon, 711 N.E. 2d 1265 (Ind. 1999); Marriage of Hershewe, 931 S.W.2d 198 (Mo. App. 1996); Walton v. Walton, 657 So.2d 1214 (Fla. App. 4 Dist. 1995): Tortorich v. Tortorich, 902 S.W.2d 247 (Ark. App. 1995); Sonek v. Sonek, 412 S.E.2d 917 (N.C. App., 1992); Prahinski v. Prahinski, 582 A.2d 784 (Md. CtApp., 1990); Donahue v. Donahue, 384 S.E.2d 741 (S.C. App., 1989).
- Helfer v. Helfer, 656 S.E.2d 70 (W. Va. 2007): Baker v. Baker, 733 N.W. 2d 815 (Minn. App. 2007); Strauss v. Strauss, 647 A.2d 818 (Md. Spec. App. 1994); Antolik v. Harvey, 761 P2d 305 (Hawaii App, 1988); Taylor v. Taylor, 386 N.W.2d 851 (Neb. 1986); Clark v. Clark, 782 S.W.2d 56 (Ky. App., 1990)
- See Don DeGrazia and Stacy Preston Collins, “Controversial ‘Double Dipping’ Issue in Divorce, 21 A.J.F.L. 1 (Spring 2007).