Dec 2019 : Ethical Responsibilities For Family Law Attorneys and Business Valuation Experts

View / Download December 2019 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


At an American Academy of Matrimonial Lawyers (AAML) and Business Valuation Resources (BVR) conference earlier this year in Las Vegas (where else?), the respective ethical responsibilities of family law attorneys and business valuation (BV) experts were discussed.

It was stated that an attorney’s charge is to apply legal theory to a case and to diligently advocate on the client’s behalf. Doing so with diligence means being committed to the client’s best interests and being a zealous advocate for the client.

However, it was then noted that a BV expert’s charge is to assist the trier of fact. This is done by educating the court by providing an analysis based on observable data and facts performed with unbiased objectivity.

So, the attorney is a zealous client advocate and the expert is the issuer of an unbiased opinion of value.

Obviously, these are potentially conflicting roles.

The example used at the Conference was similar to the following:

Facts

• Attorney, representing H, engages Expert to value H’s business.
• Expert uses an earnings multiple of 4 arriving at a preliminary value of $400,000.
• After reviewing the preliminary value, Attorney strongly suggests reasons for using a multiple of 3, resulting in a value of $300,000. He exerts pressure on Expert to revise the preliminary value accordingly.

Query 1

What are Expert’s ethical responsibilities under these circumstances?

One of the five Fundamental Principles of the Code of Ethical Principles for Professional Valuers is as follows:

  • Objectivity – not to allow conflict of interest or un-due influence or bias to override professional or business judgement.”

Two of the “Threats” listed in the Code of Ethical Principles for Professional Valuers are as follows:

  • Advocacy threat – the threat that a professional valuer will promote a client’s or employer’s position to the point that his/her objectivity is compromised.”
  • Intimidation threat – the threat that a professional valuer will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the valuation opinion.”
    So, the Expert should carefully consider Attorney’s reasons for a lower multiple and then use the multiple that the Expert, in his/her professional judgment, believes is appropriate.

Query 2

What are Attorney’s ethical responsibilities under these circumstances?

Attorney should persuasively present his reasons for a different multiple to the Expert.

Having done so, Attorney should respect Expert’s obligation to independently use his/her professional judgment in determining the appropriate multiple and resulting value.

Observations

  • Because business values are often subject to compromise in divorce settlements, it is natural for the attorney for the business owner to want to start low and the attorney for the non-owner to start high.
  • But, the BV expert cannot ethically slant a value one way or another to suit the interests of a party.
  • It is important that both experts have access to the same data. Often, the expert for the business owner has access to more data. Sharing all data reduces the chances that the two experts will arrive at substantially different values.
  • Because business values are often subject to compromise in divorce settlements, it is natural for the attorney for the business owner to want to start low and the attorney for the non-owner to start high.
  • But, the BV expert cannot ethically slant a value one way or another to suit the interests of a party.
  • It is important that both experts have access to the same data. Often, the expert for the business owner has access to more data. Sharing all data reduces the chances that the two experts will arrive at substantially different values.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Ethical Responsibilities For Family Law Attorneys and Business Valuation Experts”
View / Download December 2019 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

June / July 2019 : Oldie But Goodie – Tailored Installment Payments To Balance The Scales Without Breaking The Bank

View / Download June-July 2019 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


In a recent case in which I was involved, the problematic settlement issue was how the business owner could afford to pay the other spouse’s marital interest in the company within a reasonable time frame.

As in that case, it is not uncommon that the value of a closely held business or professional practice dwarfs the value of other marital assets. If there are not sufficient suitable assets to award the non-owner spouse to offset the business value, the problem is how to make the settlement work.

Usually in such situations, installments payments are used to balance the settlement. In structuring such payments, two objectives often compete with one another:

  1. Don’t Kill the Golden Goose—It is important not to impose an undue strain on the owner’s cash flow, part of which may also be required for spousal and/or child sup-port.
  2. Don’t Make Me Wait ‘Til I’m Old and Gray—On the other hand, it is generally not fair to require the non-own-er spouse to wait a long period of time to receive his or her share of the marital value of the business.

As noted years ago in this column, tailoring installment payments around other divorce obligations is a way to achieve both objectives.

Example

As part of their divorce settlement, H and W have agreed that he will pay her $200,000 for her half interest in his business. He will also pay combined transitional alimony and child support for their youngest child totaling $30,000 for each of the next three years.

H receives an annual salary of $70,000, supplemented by a bonus depending on company profit. He proposes that he pay the $200,000 by transferring a sufficient amount of his 401(k) plan to net W $50,000 after tax and that the $150,000 balance be paid over 15 years with interest at 4%, resulting in monthly payments of $1,110.

W responds that this is unacceptable; that it is unreasonable to expect her to wait so long for her share of the marital value of the business. She demands payment over seven years, resulting in monthly payments of $2,050, almost twice what H proposed.

However, H claims he cannot afford to pay that much since the business has not been able to pay bonuses of late and the near future looks no brighter. And, he’ll be strapped for cash the next few years with the alimony and child support obligations.

The attorneys meet with their joint CPA expert and work out the following payment terms to achieve both objectives.

  • No payments of principal and interest for three years. Adding the $19,655 of unpaid compound interest brings the principal to $169,655 as of the beginning of the fourth year.
  • Years four and five – $1,500 per month
  • At end of year five – $50,000 balloon payment
  • Years six and seven – $2,000 per month
  • At end of seven years – $55,500 balloon payment.

Tailored to Fit – The above illustrates how payments can be tailored to accomplish both objectives. The use of balloon payments enables the non-owner spouse to receive his or her share within a reasonable time frame. It also gives the owner spouse time to make arrangements to fund the balloon payments.

Practice Pointers

  • Provide for Acceleration – It is generally advisable to provide for acceleration of the balance due in the event the owner sells his interest in the business or the company receives a substantial influx of cash available to the owner, such as from refinancing.
  • Restrictions May Be in Order – In addition to normal security provisions, it is sometimes advisable to place restrictions on (1) the amount of compensation and/or distributions to the owner spouse and (2) the investment of business funds in non-operating assets (e.g., cabin up north or Florida condo “used for business”). Usually this can be only done if the owner spouse has a controlling interest.
  • Provide for Prepayment Option – Finally, it is often appropriate to provide for prepayment of the obligation at the option of the owner spouse.

Saving the Interest Deduction

The IRS has taken the position that interest paid on a divorce related obligation from one ex-spouse to the other is “personal” interest and, hence, non-deductible. This results in a tax “whipsaw” since the payee ex-spouse receiving the interest must report it as taxable income notwithstanding that the payer cannot deduct it.

Aware of the IRS’ position, H’s CPA in the above example suggests that there is a way to avoid the loss of the interest deduction as follows:

Use “imputed” interest at a rate approximating the after-tax equivalent of the agreed upon interest rate. The IRS and U.S. Tax Court have ruled that the imputed interest rules otherwise applicable to below market or no interest loans do not apply to divorce related obligations between ex-spouses.

So, H’s CPA proposes using 2.75% unstated, “baked in” interest rate as the approximate after-tax equivalent of 4.00%. This is done by running the amortization schedule with 2.75% as the interest rate to determine the payments. And, in the settlement agreement, the obligation to make the resulting payments is stated without reference to any interest rate.

Substituting 2.75% for 4% on the $150,000 obligation results in the following changes – within the target seven year period:

2.75% 4%
Payments years 1-3 0 0
Payments years 4 and 5 1, 500 1,500
Ballon at end of year 5 40,000 50,000
Payments years 6 and 7 2,000 2,000
Ballon at end of year 7 40,219 55,500

A prepayment provision with unstated, “baked in” interest would include a prepayment discount equal to the unstated rate of interest (2.75% in this case) applied to the outstanding balance at the time of prepayment over the period during which the balance was otherwise scheduled to be paid.


About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Oldie But Goodie – Tailored Installment Payments To Balance The Scales Without Breaking The Bank”
View / Download June-July 2019 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

May 2019 : Food for Thought on Treatment of Appreciation in Value of a “Separate” Business During Marriage

View / Download May 2019 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


Background

This article considers the treatment of appreciation in value during marriage of a business enterprise that was owned by one party at the time of marriage.

Many seem to consider appreciation during marriage of value of a “separate” business as either 100% active – thereby marital – or 100% passive – thereby separate (assuming no commingling, etc.).

This “either/or” characterization seems overbroad and generally based on little or no analysis of the factors driving the increase in value. It is also out of sync with the equitable nature of divorce and the corresponding objective of address-ing the unique circumstances of each case as they are versus a “one size fits all” basis.

In previously writing on this issue, I presented an example similar to the following;

  • A and B own identical rental property management companies – with one exception – which they operate as LLCs.
  • The exception – A manages his company and draws a $50,000 salary. B has always used a full-time manager who is paid $50,000 a year by the company. B works at a machine shop earning $50,000 annually.
  • At the time of A’s and B’s respective marriages, their companies were each worth $100,000; and, at the time of their divorces each was valued at $250,000. The growth of both is attributable to (1) pay down of debt, (2) inflation, and (3) increase in market values exceeding inflation.
  • Both companies have always been owned separately by A and B, respectively. Company income was always de-posited in their separate accounts from which funds were drawn solely to pay taxes on company income.
  • Though A and B had essentially the same earnings, business values, and appreciation during the marriage, arbitrary application of “either/or” active/passive characterization results in the $150,000 appreciation treated as marital in A’s divorce but separate in B’s divorce.

Why this anomalous result? Because 100% of the appreciation of A’s company is attributed to her activity as the rental property manager notwithstanding that she brings no particular “value-adding” skills to the job. As noted, the appreciation in value is due to other factors, which are “passive” (except arguably income used to pay down debt).

This example does not address whether the income from the separate property is separate or marital or, correspondingly, as noted, whether the reduction of debt by use of such income is separate or marital. Rather, the purpose is to illustrate the fiction that, if the owner is actively involved, 100% of the appreciation in value is attributable to his/her efforts and thereby marital.

Michigan Case Law on the Issue

The following discussion focuses on pertinent decisions of Michigan Court of Appeals (Court) regarding the subject issue.

Hanaway, 208 Mich App 278 (1995)

The principal issue regarding the family business (Company) was whether Ms. Hanaway (W) contributed to its “acquisition, improvement, or accumulation.” The trial court ruled that she had not, apparently focusing on “direct” contribution. The Court ruled, essentially, that W, did in fact, contribute by tending to the household and the parties’ four children thereby enabling Mr. Hanaway (H), “the company president,” to devote “himself to the business, working long work weeks.” This case established the principle that “contribution” could be indirect as well as direct in the family partnership.

The Court stated that although H received the business as a gift from his father, “… the increased value of that interest necessarily reflected defendant’s investment of time and effort in maintaining and increasing the business, an investment that was facilitated by plaintiff’s long-term commitment to remain home to run the household and care for the children.”

The Court ruled that the appreciation was marital.

Observations
  • The Court made no attempt to identify factors for the increase in value other than H’s intensive efforts as the Company’s CEO who worked long hours in this capacity.
  • Also, the apparent demanding role served diligently by W – which was front and center as the prime issue of the case – likely had some effect on the ruling on appreciation in value.

Reeves, 206 Mich. App. 490 (1997)

In this case, Mr. Reeves (H) owned a minority interest in a shopping center before his marriage to Ms. Reeves (W). H also owned a condominium that he and W lived in and two rental properties that he purchased in both parties’ names while they co-habited before marriage.

The Court ruled that appreciation in value of the shopping center was separate because H’s interest was “wholly passive.” In so ruling, the Court noted – “[i]t cannot be stated, as was done in Hanaway, supra at 294, that the property appreciated because of defendant’s efforts, facilitated by plaintiff’s activities at home.”

Observations
  • In Reeves, the Court did not need to parse reasons for the increase in value because H had no involvement whatsoever. All appreciation was obviously due to passive factors.
  • The Court’s use of the term “wholly passive” described H’s relationship to the shopping center investment which supported its ruling.
  • Thus, because H had no involvement whatsoever in the asset at issue, this case sheds no light on a situation where there may be some involvement by the owner, however minimal.
  • The Court included as marital the appreciation during marriage of the value of the jointly owned rental properties.

Dart, 460 Mich. 573 (1999)

The principal issue in this Michigan Supreme Court case was jurisdiction involving enforceability of an English judgment.

The Court also addressed a claim by W that she was entitled to share in the appreciation in value during marriage of a large family company, Dart Container Corporation (Dart), at which H was employed. H also had a beneficial interest in a trust to which substantial gifts of Dart stock had been made. The English court had rejected W’s claim.

The Court noted that it was possible “that plaintiff might have shown a nexus between defendant’s work at the company and the underlying trust assets.” … “However, we conclude that the possibility of prevailing was remote.”

The Court also noted that, apparently under general separate property principles, “[t]he trust income from the Dart Container Corporation was never marital property.”

Observations
  • Though the Court did not need to decide whether H’s active involvement at Dart was sufficient to include appreciation during marriage, the fact that it stated that there needs to be a “nexus” between the two is significant. Though not an express statement to this effect, it indicates that it may take more than active involvement to result in active appreciation.
  • The Court’s statement regarding trust income from Dart is noteworthy since there is little definitive law on the status of separate property income that is not commingled.

Uygur, Mich. App. No. 258207 (6/8/2006)

H was an executive at Giffels, a large company. He owned Giffels stock before his marriage to W. The Court ruled that, despite H’s active, high level involvement, appreciation in value during the marriage of his pre-marital Giffels stock was passive, hence, his separate property.

In supporting its decision, the Court stated:

“The value of defendant’s stock rose and fell based on the net worth of Giffels. The success of the company, and thus its stock value, rested on all of the company’s employees, of which defendant was only one. Because defendant worked for the company, his performance necessarily affected the company’s success to some degree. However, we cannot conclude that defendant’s employment caused the stock values to appreciate. Because the defendant’s ability to affect the company’s stock value was limited, the nexus between defendant’s employment and the company’s success was necessarily attenuated.” (Emphasis added.)

Observations
  • The Court ruled that the appreciation was passive notwithstanding that H actively worked at the Company at a high level and, further, that his work “necessarily affected the company’s success to some degree.”
  • Also, the Court indicated that there must be a nexus between the owner’s activity and the success – that is, increase in value – of the company.
  • Thus, according to this court, simply being actively involved does not automatically result in “active” appreciation.
  • This case is significant for the acknowledgement that factors other than the owner spouse’s active involvement may be responsible for increase in value.

Henderson, Mich. App. No. 295765 (6/9/11).

H was actively involved on a day-to-day basis in a management capacity at a family company founded by his father.
In this regard the Court stated:

“Plaintiff worked a regular schedule and maintained an office at the company. He oversaw multiple departments and performed necessary functions.”

H’s counsel relied on Uygur in support of his claim that the appreciation was passive. The Court did not consider Uygur, in large part, apparently, because it is an unpublished opinion.

The Court noted that, unlike with the shopping center in Reeves, H’s position at the company was not “wholly passive at all times.” And, further, that he “was not merely one of several employees at BNP. As co-CEO, the record demonstrates that plaintiff bore responsibility for many of the company’s major functions.”

Thus, the Court reversed the trial court decision saying that the “trial court clearly erred in finding that the appreciation was passive and could not be classified as marital property.” The case was remanded for further proceedings.

Observations
  • This appears to be an excellent case for allocating increase in value to various factors, one of which is H’s active involvement. The Court did not expressly rule that all of the appreciation was marital.
  • The Court’s reference to “wholly passive” from Reeves is unfortunate since it is not at all clear that the court in Reeves intended anything more by that phrase than to describe the undisputed lack of any involvement of Mr. Reeves in the shopping center.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Food for Thought on Treatment of Appreciation in Value of a “Separate” Business During Marriage”
View / Download May 2019 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

October 2018 : Stock Redemptions

View / Download October 2018 Article – PDF File

— With the Elimination of Taxable/Deductible Section 71 Payments Effective January 1, 2019, the Use of Stock Redemptions by which a Business Owner Spouse Buys Out the Other Spouse’s Marital Interest Will Be a Good Fit in Many Situations.

General

Section 71 payments have provided a means by which one spouse buys out the other’s marital interest in a business with pretax dollars. But, with the 2017 Tax Act’s repeal of the alimony deduction, this method will no longer be available beginning in 2019.

However, use of a stock redemption can be a “tax-smart” way to structure the buy-out. To do so, the owner spouse transfers stock to the non-owner, and it is then immediately redeemed by the corporation. The difference between what the non-owner receives and the owner’s carryover tax basis in the stock is taxed favorably as a capital gain or loss. Stock redemptions can be particularly suitable in the following circumstances:

  • The company has excess liquidity.
  • The stock has a relatively high tax basis (which is not uncommon if the company is an S corporation).
  • The spouse who will not end up with the business individually owns stock.
  • The owner spouse may not draw more compensation because of “reasonable compensation” tax constraints or legal restrictions.
  • The dilution, if any, caused by the redemption will not be problematic for the owner spouse.

Other than in a divorce context, this approach would be treated by the IRS as a step transaction—the non-owner spouse’s stock ownership would be considered merely transitory and lacking independent legal significance, which would result in a constructive dividend to the owner spouse. However, this technique is available in a divorce setting because of an expansive IRS interpretation of IRC 1041 incorporated in regulations the IRS issued in 2001. Treas Reg 1.1041-2.

Regulations and Illustrations

The following example explains the essential provisions of the regulations by way of illustration:

  • H and W each own 50 percent of ABC Company. They agree that H will continue to own and operate the company while W will tender her stock for redemption.
  • H has at no time assumed a “primary and unconditional obligation” to acquire W’s stock.
  • He has agreed, however, (1) to cooperate in his role as a corporate officer and shareholder so that the company implements the planned redemption and (2) to guarantee the company’s payment of the redemption proceeds.
  • Because H does not have a “primary and unconditional obligation” to acquire W’s stock before ABC redeems it, the redemption is not a constructive distribution to him.
  • Thus, W will be taxed at the long-term capital gain rate on the difference between the redemption proceeds she receives and her tax basis in the stock.

In the above illustration, both spouses own stock in the company. It is more common, of course, for the interest in the company to be owned by only one of the spouses. The regulations do not directly address the situation involving (1) one spouse—say, H—owning 100 percent of the stock and (2) a divorce settlement providing for the following transactions:

  • H’s transfer of 50 percent of his stock to W
  • W’s tender of the stock to the company for redemption of her newly acquired stock interest

Though not specifically addressed in the regulations, it appears that the tax treatment for this fact pattern would be the same as that which applies when both spouses initially own stock as follows:

  • The form of the transactions—(1) the nontaxable transfer under IRC 1041 of stock from, in our example, H to W, followed by (2) the redemption of W’s stock taxable at capital gains rates—will be honored provided H does not have a primary and unconditional obligation to pay W for her interest in the stock.
  • Alternatively, if there is such a primary and unconditional obligation, the redemption distribution would be deemed constructively received by H and taxed to him as a dividend.

To illustrate, assume that H is the sole owner of the company and that, as part of his divorce settlement with W, they agree he will transfer a 50 percent interest to her which she will tender to ABC in exchange for redemption proceeds. Though not expressly covered in the regulations, this fact scenario would appear subject to the following tax treatment:

• Provided H does not have a preexisting primary and unconditional obligation to pay W for her marital interest in the stock, the form of the two-step transaction will be honored for tax purposes.
• In effect, the transfer of the 50 percent interest from H to W as part of the divorce settlement will be tax free under IRC 1041, and the redemption distribution.

A principal reason to assume the above tax treatment will apply when one spouse owns all the stock is the following statement in the background section of the regulations:

“By enacting the carryover basis rules in section 1041(b), Congress has, in essence, provided spouses with a mechanism for determining between themselves which one will pay tax upon the disposition of property outside the marital unit. For example, assume Spouse A owns appreciated property that he or she wishes to sell to a third party. The spouses may agree that Spouse A will sell the property to the third party and recognize the gain. Any subsequent transfer from Spouse A to Spouse B of the sales proceeds will be nontaxable under section 1041. In the alternative, the spouses may agree that Spouse A will first transfer the property to Spouse B. This transfer is nontaxable under section 1041, with Spouse B taking a carryover basis in the transferred property. Spouse B will then recognize the gain or loss on the sale of the property to the third party because a sale to a third party is not covered by section 1041. In this latter scenario, the tax consequences of the sale are shifted to Spouse B.”

 

66 Fed Reg 40,659 (2001).

Viability of Redemptions in Divorce

Certainty of Tax Treatment. Provided there is no such primary and unconditional obligation, the parties may structure a divorce-related redemption with certainty of the tax treatment. Nonetheless, because things change, including the minds of divorcing parties, a savings clause appears advisable.

Guarantee Allowed. With the IRS’s clear statement that a primary and unconditional obligation does not include a guarantee
of another party’s performance, there should be no concern to provide that the remaining shareholder guarantee the corporation’s performance under the redemption agreement.

This is highly significant because, without a guarantee, it is conceivable, particularly where the remaining spouse would transfer a minority interest to the other spouse, that the remaining spouse would use his or her influence to obstruct the redemption, leaving the other spouse with a minority interest in a closely held company.

More Useful Post 2017 Tax Act. Though rarely used in the past, the redemption approach to a buyout will be the best alternative in many situations from a tax standpoint beginning in 2019. That said, redemptions are a good fit presently in some divorce settlements.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Stock Redemptions”
View / Download October 2018 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

May 2018 : Court of Appeals Rules on Effect of Corporate Business Debt on Spousal Support. BOCKART V BOCKART, Mich App No 335833 (3/20/18) (Unpublished)

View / Download May 2018 Article – PDF File

— Facts

  • During the parties’ 11 year marriage, H operated a successful business of which he was the sole corporate shareholder.
  • W was a stay-at-home mom tending to the parties’ two young children.
  • At the time of the divorce, W was earning $11,000 annually for part-time work at a charter school. She testified she was seeking a full-time job.
  • H drew $43,216 from the business in the most recent year.
  • During the pendency of proceedings, H paid W $500/month spousal support and paid all household/family bills pursuant to a status quo order.
  • H incurred substantial debt (1) to make the required support and status quo payments, (2) to pay his and W’s attorney fees, and (3) to pay business expenses. At the time of divorce, the business owed $108,000 including rent in arrears and tax deficiencies.
  • The trial court imputed $20,000 earnings to W and $40,000 to H.
  • The trial court awarded no spousal support to W because:
    • She had a Bachelor’s Degree in Fine Arts while H had just a high school education.
    • H had paid all family expenses during the pendency by incurring substantial business debt.
    • Since W benefitted from this, she was “partially responsible” for such debt.
    • Because H was assuming full responsibility to repay the debt, the trial court viewed this as a “favorable outcome” for W.

Court of Appeals (Court) Decision

  • The Court stated that the trial court failed to make a determination (1) “as to the origin of the debts” of H’s business and (2) “who was responsible for their creation.”
  • Further, the Court noted that W had little, if anything, to do with H’s business and, hence, likely had little, if anything, to do with incurring the debts.
  • The Court remanded the case for reconsideration of (1) W’s responsibility, if any, for the debts after thoroughly reviewing the origin of the debts and (2) the lack of a spousal support award to W.

Comments on the Case and on Treatment of Debts in Determining Money Available for Support

  • The Michigan Child Support Formula Manual (Manual) provides in Section 2.01(B):

    “The objective of determining income is to establish, as accurately as possible, how much money a parent should have available for support. All relevant aspects of a parent’s financial status are open to consideration when determining support.”
    (Emphasis added.)

  • Thus, if H in Bockart had to incur debts to pay family expenses, money used to make payments on the debts is simply not “available for support.”
  • If a business is required to pay on business loans incurred in the ordinary course of business, such as working capital loans or equipment purchase installment payment loans, then the money used to make payments is not available for support.
  • Such payments are not deductible in determining business net income and so must be separately identified when determining money available for support.
  • This is the flip side of adding back deductible depreciation (1) above straight line on personal property or (2) on real property – that is, converting net income to money available.
  • The Court’s focus on the “origin” of the debt seems misplaced. Whether W had any “responsibility” for creation of the debts should not be a deciding factor. Neither should whether the debts were incurred by H or by his company.
  • Rather, of significance is whether the funds from the debts were used for marital purposes. If so, they are debts of the marriage, however incurred.
  • This may not apply to debts to provide for payment of divorce attorney fees. Responsibility for such fees is generally separately considered in divorce settlements.

Concluding Comments

  • Like so many matters in divorce, determining money available for support is a case specific exercise.
  • This is particularly so if one party owns a business or professional practice – both (1) to ensure all items of “indirect” income (excessive perks, etc.) are identified and (2) that legitimate debt payments are excluded from money available for support.
  • Often balance sheets need to be reviewed in addition to income statements.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Court of Appeals Rules on Effect of Corporate Business Debt on Spousal Support. BOCKART V BOCKART, Mich App No 335833 (3/20/18) (Unpublished)”
View / Download May 2018 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)