By Michael Stover, CPA/ABV
The Ohio Court of Appeals in Gallo v. Gallo, 2015-Ohio-982, rendered March 17, 2015, took a second dip into the issue of double-dipping. The landmark case of Heller v. Heller defined the “double dip” as the double counting of a marital asset, once in the property division and again in the spousal support award. More specifically, when a court uses a business owner’s “excess earnings” to value the interest in the business and also fixes support on that spouse’s total income, inclusive of the “excess earnings” used to the value the business, a double dip occurs.
The Court, in this recent case, is now rethinking its position. The current argument is that the future income stream, not the marital asset, is the subject of the doubling in the double dip. Thus, if the marital asset is valued without specific reliance on a future income stream… say, through a market based or asset based approach… then no double dipping occurred. However, Ohio R.C. 3105.18(C)(1)(a) precludes the court from adopting an outright prohibition of double dipping. In fact, the Wisconsin Supreme Court said that the value of investment property is separate from the income it generates because as the owner earns income, he or she does not lose the value of the property and always has the option to sell the property for fair market value.
But, in Gallo v. Gallo, the value of the closely held business was stipulated between the parties. Mr. Gallo contended that the value resulted from the methodology set out in the company’s operating agreement, but because the full operating agreement was not introduced at trial the only evidence concerning value came from the expert witness who testified that the valuation was done using a multiple of three times EBITDA. So it appears that double dipping occurred in this case… but not so fast.
As a final matter, the Court addressed the application of the double dipping argument to the calculation of the child support obligation. As explained earlier, double dipping occurs when a court dips into a future income stream to value a marital asset and then again to determine the capacity to pay spousal support. Unlike a spouse, a child receives nothing in the property division so the court can only dip once when it calculates the parent’s income for child support purposes.
How a business interest is valued can have a big impact on the determination of whether the future income stream from that asset can be used in setting spousal support. If you have a potential valuation issue, please call us. We actually like doing this.