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)
Historically, Wisconsin courts have held that it is inherently unfair to use an asset both for property division and as income for support. More recently, however, this proposition has been watered down to the extent that it may not even exist any longer. The Wisconsin Supreme Court recently granted review to a published Wisconsin Court of Appeals case, providing an opportunity for the court to clear up an area the court of appeals referred to as a “quagmire.” This article will first examine the historical development of the concept of impermissible double counting, next examine the recent case, and suggest what courts should do if the issue presents itself.
As far back as 1963, in Kronforst v. Kronforst the Wisconsin Supreme Court held that a profit-sharing plan could not be included as a principal asset in making a division of estate and also as income in determining alimony. While this case is old enough that the court also noted that “in general a third of the net estate is a liberal allowance to the wife…,” other cases made similarly broad sweeping holdings prohibiting double counting. For example, several cases have held that it was error to include accounts receivable as asset available for distribution where they were utilized as incodme for support.
While these cases seem to have established a black-and-white rule against double counting, subsequent cases found plenty of grey areas. In Maley v. Maley, the appellate court agreed that utilizing a taxable gain on real property for child support would count the asset twice, since the enhanced value was part of the property division. But the court added, in dicta, “[W]hether gains from the sale of an asset counted as property in the divorce judgment can be counted as income for support purposes is a fact-sensitive question to be resolved on a case-by-case basis.”
In Olski v. Olski, the supreme court held that while retirement benefit could not be double counted, an increases in the benefit due to post-divorce employment was available for maintenance as it had never been initially included in property division. In Cook v. Cook, the court held that the prohibition against “double counting” did not bar consideration of a military pension both in the property division and in calculating child support. The court found that child support differed from maintenance in that the children of divorced parents receive nothing from the property division. This holding must come as a great surprise to payors whose children live in the very house awarded as part of a property division.
In Seidlitz v. Seidlitz, the appellate court affirmed the trial court’s refusal to consider a former wife’s pension payments in a maintenance modification proceeding where the pension was awarded to her as part of the property division. The court noted that the “double counting” rule was not absolute, but in this case, the court said “the payments to Erna represent the payout of the asset itself.” (Emphasis in original).
The court of appeals went even further in Hokin v. Hokin, holding that the trial court properly exercised discretion in counting monthly retirement benefits as income to the wife when calculating maintenance, even though the retirement account was divided as part of the property division. Citing Cook, the court held that there was no absolute rule against double counting and that the retirement plan was a unique asset as it could not be sold or transferred, did not provide a benefit until payments began, and did not have a principal balance that was preserved.
In Weiler v. Boerner, the trial court imputed enhanced education income to the wife in order to equalize income for maintenance and property division. The wife appealed, arguing that the court wrongly double counted the value of her enhanced education benefit for both property division and maintenance. The appellate court disagreed, holding that there was no absolute rule against double counting. The appellate court cited Haugan v. Haugan, for the proposition that a trial court has the authority to consider enhanced education benefits in determining “maintenance payments, property division or both.” (Emphasis added in Weiler, not in Haugan). While the Weiler court relied on the wording in Haugan, there was no discussion in that case of the double-counting issue.
In Wettstaedt v. Wettstaedt, the defined benefit plan was divided equally by a Qualified Domestic Relations Order. The appellate court held that since no value was assigned to either spouse’s interest to be offset by other property awarded in the property division, a family court was not prohibited by the “double counting” rule from considering pension distributions in determining maintenance.
Finally, most recently in Wright v. Wright, the appellate court held that including income from assets awarded in property division is not double counting. Period.
The newest case involving double counting is McReath v. McReath, No. 2009AP639 (Wis. Ct. App. July 29, 2010) (Ordered published. Review granted).
The decision starts by noting that the issue of professional goodwill has been characterized as a “quagmire.” One would reasonably expect that the court would then proceed to use the case to clean up the confusion. Instead, the appellate court explicitly states that its decision will not “pull Wisconsin out of the quagmire.”
The case involves Tim and Tracy McReath, who were divorced after a 20-year marriage. Tim was a dentist with a specialty in orthodontia. The circuit court included the full $1,058,000 valuation of his practice as divisible property.
For maintenance and child support, the court calculated Tim’s earnings from his orthodontic practice by looking at his average net cash flow over the five years preceding the divorce, with some minor adjustments. Based primarily on these earnings, the court ordered Tim to pay maintenance to Tracy at the rate of $16,000 per month for 20 years.
Most important to the issues on appeal, the trial court had no problem with using the same income for support as utilized in the property division, insofar as the value of the dental practice included personal goodwill. Not surprisingly, Tim appealed.
On appeal, Tim argued that the circuit court erred as a matter of law when it treated the professional goodwill portion of the valuation of his practice as divisible property. He contended that although he could sell his practice for just over $1 million, most of that amount was attributable to non-divisible professional goodwill. It followed, said Tim, that the circuit court applied an incorrect legal standard when it treated the full $1,058,000 valuation of his practice as an amount subject to division.
The Wisconsin Court of Appeals held that prior case law did not address whether salable professional goodwill may be treated as divisible property. The appellate court agreed with Tim that if he continued in his practice there would be some double counting. But it declined to adopt Tim’s proposed blanket prohibition on including salable professional goodwill as divisible property.
The court held that if Tim’s blanket prohibition were adopted, unfairness would plainly be the result in some circumstances. Second, the appellate court found that it had no basis on which to conclude that double counting was a significant problem. Moreover, it had no reason to think that completely excluding the value of salable professional goodwill from divisible assets made economic sense. The court highlighted the lack of economic information before it.
What remained was the approach advocated by Tracy and effectively adopted by the circuit court: Include all salable goodwill, both corporate and professional, as a divisible asset and then, essentially, ignore the fact that Tim’s earnings are intertwined with part of the divisible assets.
Presiding Judge Charles P. Dykman filed a dissenting opinion, believing that the matter should be remanded to the trial court for a finding of whether the double counting was fair.