Double Dipping in the Divorce Context Is Inherently Unfair

by Gerald Shanker and Alan Pralgever

This article was originally published in the New Jersey Law Journal, October 31, 2016 (Volume 222, No. 43, pg. 27). 

Double Dipping in the Divorce Context Is Inherently UnfairSince the seminal case of Steneken v. Steneken, 873 A.2d 501 (N.J. 2005), the New Jersey Supreme Court has consistently ruled on issues involving “double dipping” in matrimonial cases in a manner significantly different than virtually any other court in the nation. In our view, it has done so incorrectly, as the position makes little or no economic sense. The New Jersey Supreme Court’s position is simply not economically fair, justi­fied or sustainable in our view, and should be reconsidered. Instead of resulting in “equitable distribution,” the Steneken case actually functions effectively as an unfair financial penalty or tax.

The concept of “double dipping” concerns the double counting of a marital asset, once in the context of property for equitable division purpos­es, and once in the context of alimony and/or child support. The concept of “double dipping” is premised on the fact that the same cash flows capitalized to determine the present overall value of a spouse’s business for pur­poses of equitable distribution, is also considered as a component of that spouse’s income for purposes of alimony and child support calculations. For example, if a spouse gets half of the value of his/her spouse’s business, the theory is that he should not secure alimony and child support on the basis of all of the income that s/he makes from that business after the divorce is finalized because that would in effect be rewarding that spouse twice for the same valued asset. In most cases, one would have to borrow· or take more income out of the business to buy out his/her spouse as well, adding insult to injury with regard to the “double counting” of income.

A simple way to think about this would be to consider a real estate purchase. If the spouse in a divorce case bought his/her spouse out of the marital home and paid her for her 50 percent interest in equitable distribu­tion, he would not then also receive the increased value of the house when she later sells it, assuming the real estate market was to rise after the divorce. Yet, that is preciously what the New Jersey Supreme Court seems to suggest with regard to determining alimony and child support after the divorce, once a spouse secures half the value of the other spouse’s business as part of a divorce settlement or decision. Instead, the paying spouse’s post-marital income should be “nor­malized” so that the spouse who has been bought out for equitable distribu­tion purposes is not benefited twice. This concept, which recognizes the economic aspect of a buy-out, is the one espoused by virtually every state but New Jersey.

One of the leading cases on this issue comes from the Court of Appeals of the State of New York, Grunfeld v. Grunfeld, 94 N.Y. 2d 696 (2000). In Grunfeld, the court described the con­cept of double dipping in the follow­ing manner: “We agree with the defen­dant that the Supreme Court [the trial court in New York State] impermissi­bly engaged in the ‘double counting’ of income in valuing [the husband’s] business which was equitably distrib­uted as marital property, and awarding maintenance to the [wife]…”

In Grunfeld, the valuation of the husband’s business involved calculat­ing the husband’s projected future excess earnings. Thus, in valuing and distributing the value of the husband’s business, the Supreme Court convert­ed a certain amount of the husband’s projected future income stream into an asset, which is precisely what a dis­counted cash flow valuations analysis does. However, the trial court also calculated the amount of maintenance to which the wife was entitled based on the husband’s total income which must have included the excess earn­ings produced by his business. As the Court of Appeals concluded, this was improper.

Once a Court converts a specific stream of income into an asset, that income may no longer be calculated into the maintenance formula and payout.” Grunfeld, 94 N.Y. 2d at 705, citing McSparron v. McSparron, 87 N. Y. 2d 275 (1993) see also Rattee v. Rattee, 767 82d 415 (n.h. 2001) (business income exceeding “reasonable compensation” that was utilized to calculate value of business was properly disregarded for support calculation purposes thus avoiding “the double dip”).

Notwithstanding the fact that the concept of “double dipping” is widely discredited in most states, the New Jersey Supreme Court, commencing with Steneken v. Steneken, 873 A2d 501 (N.J. 2005), specifically, and in our view improperly, re-defined the concept of “double dipping” for pur­poses of setting alimony and child support. Justice Rivera Soto writing the majority opinion instead relied on a concept of what he referred to as overriding “fairness and equity” which he defined this as follows:

Because we embrace the premise that alimony and equitable distribution calcu­lations, albeit interrelated, are separate, distinct, and not entirely compatible finan­cial exercises, and because asset evaluation methodolo­gies applied in an equitable distribution setting are not congruent to factors relevant to· alimony considerations, we conclude that the circum­stances here present a fair and proper method of both award­ing alimony and determining equitable distribution.

We find no inequity in the use of the individually fair results of paying due to the use of an asset valuation meth­odology normalizing salary in an on-going close corporation for equitable distribution pur­poses, and the use of actual salary received in the calculus of alimony. The interplay of those calculations does not constitute “double counting.” Steneken v. Steneken, 873 2d 501, 507 (N.J. 2005).

This reasoning however was rejected in a lengthy dissent by Justice Virginia Long, joined by Justices Barry Albin and James Zazzali, who suggested that “double dipping” was inappropriate and referred to the New York decision, Grunfeld v. Grunfeld, and New Hampshire case, Rattee v. Rattee, 146 N.H. 44, 767, A.2d 415 (N.H. 2001). As Justice Long concluded:

To me, the answer is neither to allow the unfettered dual use of a single income stream nor to require the regular reconciliation adopted by the trial judge who felt compelled to use the same figure in both calculations. Rather; judges should be able to use the “real” income for alimony and the “normalized” income for corporate valuation so long as the ultimate outcome recognizes that a single income source (the difference between the real and normalized income) played a part in both.

In reality, once the buy-out of an interest in a business or partnership is determined in order to determine the “buy-out” price, it should not be con­sidered again for purposes of calculat­ing alimony and child support. Thus, absent some effort to “normalize” that income stream for purposes of calculating alimony and child support, “double dipping” inevitably occurs.

What makes the Steneken decision even more inequitable and unfair is the fact that Mr. Steneken’s business valuation was used in determining that he had a reasonable, normalized compensation of $150,000. However, because Mr. Steneken had received annual distributions of $208,000, far in excess of the normalized com­pensation, which his wife had ben­efitted from during their marriage, the trial court determined that he had excess earnings of $58,000 per year, and capitalized this money to deter­mine the value of the business. Mr. Steneken retained the business, and Mrs. Steneken was given other marital assets as an offset for her share of the value of the business. The trial court was then confronted with the issue of whether the future excess earn­ings from Mr. Steneken’s business, income that had already been valued and divided in equitable distribution, should still again be considered for purposes of establishing his alimony obligation. The trial court determined that the excess income stream should not be included precisely because Mrs. Steneken had received her share of the value of excess income by way of equitable distribution; and thus based Mr. Steneken’s support obliga­tion on his normalized compensation of $150,000.

To illustrate this point, consid­er the treatment of qualified retire­ment plans. Once the qualified plan assets are divided, the retirement ben­efits received by each spouse are not considered in support calculations, because to include such distributions would give the recipient an improper second bite of the apple. Yet, the New Jersey Supreme Court seems to ignore this equitable and legal concept when it awards a spouse half the value of a business for the purpose of equi­table distribution, and then fails to “normalize” income for purposes of alimony and child support. All this is clearly economic, so that as a function of equity, the income derived from the buy-out should not be counted twice. Thus, by using the “actual,” as opposed to “normalized,” income to evaluate alimony and child support, the Supreme Court in Steneken in effect then made the “double dipping” calculus. The husband in effect was unfairly forced to pay “twice” for the wife’s equitable interest in the busi­ness.

Although we most frequently encounter business valuations that employ an income approach, busi­nesses are also valued using transac­tion or market based approaches. In those situations, the double dipping issue should be addressed on a case­-by-case basis.

It should also be noted that both New Jersey and New York prohibit “double recovery” in the valuation of businesses when buying out share­holders. See Balsamides v. Perle, 160 N.J. 352 (1999), and its compan­ion case, Lawson Mardon Wheaton v. Smith, 160 N.J. 383 (1999), which deal with corporate/partnership split ups relating to oppression and find the oppressors should not be rewarded for their oppression by double counting. See Musto v. Vidas, 333 N.J. Super 52 (App. Div. 2000); Cawley v. SCM Corp., 72 NY2d 465 (1988). In both states, a party gets bought out of the business, but is not entitled to dou­ble recovery from the future business income.

It seems to us that this issue warrants reconsideration by the New Jersey Supreme Court, and that absent same, some kind of legislative action would be desirable as a function of equity and fairness to avoid “double recovery.”

Alan Pralgever is a partner at Greenbaum Rowe Smith & Davis in Roseland, NJ. Gerald Shanker is a CPA and a partner at Kreinces Rollins & Shanker in Paramus, NJ.