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Monday, March 27, 2017

Double-Dipping In Divorce


Double-dipping is only awesome when you represent the outspouse.  The rest of the time, it sucks.  In divorce, "double-dipping" refers to when an asset (which was previously awarded to one spouse in equal division of the estate) is counted again for income for support purposes.

Double-Dipping is generally barred in pension/retirement.  Thus, if you are the payor, and you already paid your ex-spouse half your pension, when you finally receive it as an income stream, you would not have to then pay alimony based on its receipt.

What about for division of a business?  For example, when a business is valued and the owner spouse buys out the non­-owner spouse's interest, future support obligations to the spouse who relinquished his or her interest will be determined based upon the entire income stream produced by the business. This could occur with any income-producing asset (such as a pension or annuity) when it is valued based upon its projected, future income stream and assigned to the earner spouse after an equalizing payment to the non-earner spouse.

According to the California Court of Appeal in Marriage of 1Vhite ( 1987) 192 Cal. App. 3d 1022, 1026, the flaw in the ··double dipping" argument is that spousal support considerations  are separate and distinct  from  property  division concepts. The Court  found  that a spouse who wants pension benefits treated as income is not claiming entitlement as a co-owner, but instead is asserting that those payments cannot be ignored  when calculating  the ability of the pensioned  spouse to pay spousal support. Calling the double-dipping theory a "fallacy," the Court found "in every case where one spouse receives  pennanent  spousal  support  from  the other spouse, the  source is from the separate property  of the paying  spouse,  including  ... earnings or   property which were once the community property  of both  spouses.." Id  at  1028 (quoting  In re Marriage of Epstein, 24 Cal. 3d 76, 91 n.14).  Marriage of White remains good law.

However, distinctions can me made where business cash-flow is reinvested to capitalize or diversify a business. In 2009, the California Court of Appeal held that a trial court acted within its discretion in calculating an obligor's income for spousal support purposes without including funds derived from the obligor's company that he used to diversify the business so that it could remain a viable entity, thus attributing t hose funds to the business instead of the obligor, where the reinvested funds were reasonable expenses properly chargeable to the business. Marriage of Blazer (2009)  176 CA4th  1438, 1447-1448.

In Marriage of Blazer, the parties were married in 1982 and separated in 2002. Husband was a partner  in Blazer-Wilkinson,  LLC ( BW), a brokerage  company  that  bought and sold produce. Temporary spousal support was set at $57,224 per month during the pendency of the divorce.

In 2004, the trial  court valued the community interest in BW at $5,600,000. Wife   received other property plus an equalizing payment of $1,340,000 for her share of the business. Temporary spousal support was reduced to $52,000 per month pending further findings of the court.

In 2006, temporary spousal support was reduced to $30,000 per month retroactive to August 2004 and permanent spousal support was set at $20,000 per month beginning January 1 , 2006. In determining Husband's income available to pay support, the court excluded profits  from the business. which were needed to maintain adequate capitalization and to diversify. All other profits were considered as available to Husband. The court specifically rejected Husband's argument that his buyout of Wife's interest in BW was a factor that should eliminate spousal support.

Wife appealed the decision, arguing that the trial court abused its discretion by excluding a portion of husband's income when considering his ability to pay support. Husband cross­-appealed on the grounds that the support order unfairly allowed the wife to ''double dip" into the income stream from his business

The Court of Appeals disagreed  with  Wife,  finding that  there was a need  to diversify and to maintain  adequate capital  in the business.  In reaching  its decision, the court relied  in part on   the California child support statute, which  excludes income required  for the operation  of a   business from income. Thus, amounts required to achieve such were not available to Husband. It should be noted that credible expert testimony from a CPA to the effect that reinvesting the funds  was necessary  for Husband's business to survive likely swayed exercise of the trial court's discretion in Husband's favor without such credible testimony, a contrary result (i.e., charging Husband with the funds reinvested in the business for purposes of determining his ability to pay spousal support) may  well  have been reached.

The Court of Appeals also disagreed with Husband. The Court's decision was based  primarily on the lack of evidence before it that BW had been valued  using a stream of future  income. Although Husband's expert testified that he assumed that BW had been valued using the capitalization  of excess earnings method  that  implicitly  ties the val ue to Husband's  future earnings, the court was not convinced. In fact, the court stated that even though the expert's  testimony had not been contradicted, it was not conclusive to either the trial court or the Court of Appeals.

Based on the Court's explicit statement that the record was devoid of whether the business valuation included a stream of future income, I believe argument could be made that goodwill is the expectation of what will be earned in the future. Since goodwill is a component of the business valuation, this results in a "double dip" scenarios. 

Thus, "double dipping" appears to be permitted unless (i) the parties explicitly agree to an ··Anti-White''  order during negotiations; (ii) a portion of the business' cash flow is required to be reinvested to either capitalize or diversify the business; or (iii) sufficient evidence is presented that demonstrates a business is valued using a stream of future income. For the third possibility, credible CPA testimony will be key.