Double Dipping — You Can’t Have Your Cake and Eat it Too!

By Heather Deskins, CPA/ABV/CFF, CFE, CVA

Double dipping occurs in a divorce when a spouse receives property in an equitable distribution and then it is also counted as a source of income for calculating spousal support. This often occurs when a pension, or other source of retirement, is counted as marital property and a source of income for support.

Another area where this becomes an issue is when the parties own a closely-held business. The business owner, let’s say it’s the husband, takes a salary of $500,000. In determining the fair market value of the business, the valuation expert may adjust the owners’ compensation to a normalized compensation level of $300,000. The value of the business is then based on the owner receiving $300,000 in compensation (all else being equal, this adjustment would increase the value of the business).

Even though the husband actually takes a salary of $500,000, the income used for support should be the adjusted compensation of $300,000, otherwise the difference of $200,000 is counted twice; once in the value of the business and again in the income for support. It’s important to be consistent and review the salary of the business owner, in order to avoid the double-dip.

An Ohio Appeals Court case Heller v.Heller, 2008 WL 2588064, reversed a trial court because it double dipped. The trial court awarded the husband his brokerage firm (H & S) with a value of around $700,000. The wife was awarded other marital assets to achieve an equal division. The husband’s normalized salary was $300,000 and his average annual income from the business was over $600,000. The trial court awarded spousal support of $8,000 per month, plus 20 percent of what the husband received over $300,000.

The Court of Appeals held that the trial court abused its discretion “in drawing twice from the same well — defendant’s share of H & S’s future profits — in dividing marital assets and ordering spousal support …. Trial courts may treat a spouse’s future business profits as a marital asset subject to division, or as a stream of income for spousal support purposes, but not both.” The compensation over and above the $300,000 was determined in the value of the business and should not be considered for support.

There are many other situations where double dipping can come into play. If you have questions about a particular situation or would like to discuss this topic further, please give me a call.

Heather Deskins, CPA/ABV/CFF, CFE, CVA

Heather Deskins,

Managing Member
P.D. Eye Forensics, LLC