Marital Property

Apr 2021 : Court of Appeals Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)

Posted by Joseph W. Cunningham, JD, CPA

View / Download April 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H, an orthopedic surgeon, had operated his practice out of a building he leased for most of the marriage. He had many employees.
    • But, in 2016, he sold his equipment to a hospital at which he began working on a contractual basis. He retained one employee, his secretary.
  • At the trial, H said the change was prompted by billing and insurance company issues.
  • H said his practice had no value because he was essentially an employee of the hospital, and, further, that he owned no equipment and had no accounts receivable.
  • He also said that he was easily replaceable and could not assign or sell his contractual position.
  • W’s valuation expert valued H’s practice at $600,000. However, he admitted that he did not have complete information based on which to calculate a value and testified that the $600,000 was in considerable part his “extrapolation.”
  • Further, the expert acknowledged that H was, as he claimed, essentially an employee of the hospital.
  • The trial court ruled that H was an independent contractor with the hospital and no longer operated a practice.
    Hence, there was nothing to value.
  • W appealed.

Court of Appeals Decision

  • The Court upheld the trial court’s ruling.
  • In doing so, the Court noted the concessions that W’s expert made noted above and stated “the evidence supported the trial court’s decision.”

Comments on the Case

  • As was noted in the case, there is a trend in the medical practice arena for doctors to form contractual relationships with a hospital instead of operating an independent practice.
  • Many groups of doctors have done this. It is often mutually beneficial in that:
    1. The hospital has the certainty of access to the doctors’ medical services and has control over the cost thereof.
    2. The doctors, in addition to significant relief from administrative matters now performed by the hospital, have a steady source of need for their services.
  • However, it can be a blurry line between a “practice” as such and being essentially “an employee of hospital.”
  • For example:
    • Assume a medical practice group consists of four doctors who make, on average, $400,000 each annually.
    • Depending on the nature of the practice, there may be a holder’s interest value to each doctor’s practice within the group.
    • For the most part, albeit, not exclusively, the group of doctors performs services for patients of one hospital.
    • The group and the hospital agree to enter a contractual arrangement which, essentially, formalizes the mode in which they had been operating.
    • The agreement provides that the doctors will each make $350,000 annually while being relieved of various administrative responsibilities.
    • So, from a de facto standpoint, are the doctors essentially in a very similar economic position as before entering the agreement with the hospital? Or, perhaps, a better position? If there was a holder’s interest value to their practice, has it disappeared?
  • Some relevant questions to consider in similar situations, under subject agreement, are:
    • Are the doctors in fact employees of the hospital or have they retained independent contractor status?
    • Are the doctors restricted from performing services for non-hospital patients?
    • To what degree are the doctors at the “beck and call” of the hospital?
    • Are the doctors on fixed salaries or is their compensation tied to the amount of services they provide?
    • To what degree does the hospital control the doctors’ schedules?
  • As with so many issues in divorce, the “practice” issue in circumstances where there is a contractual relationship with a medical institution is fact specific.

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 Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)”
View / Download April 2021 Article – PDF File

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

Read More “Apr 2021 : Court of Appeals Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)”

Dec 2020 : Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)

Posted by Joseph W. Cunningham, JD, CPA

View / Download December 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts:

  • As part of their 2005 Settlement Agreement, H was obligated to pay W $1,000 principal & interest payments a month over 12 years on a $175,000 debt to her.
  • The obligation was to be secured by certain real property and, further, H was to sign a “mortgage note” – which he never did.
  • Interest on the obligation was provided as “accruing interest as a traditional mortgage note in the amount of 3.75%.”
  • After the final payment in 2017, W claimed that H owed her over $50,000 in accrued interest.
  • H claimed that a simple interest rate should apply resulting in accrued interest of $6,250.
  • W’s expert testified that “a traditional mortgage note meant a bank mortgage calculated under an amortized interest schedule” – which means interest compounded monthly.
  • H’s expert testified that, without a note, he could not determine the interest owing.
  • In short, the trial court applied laches and ruled that, because W did not seek to enforce the provision that H sign a note, H’s interest calculation should apply.
  • W appealed.

Court of Appeals Decision

  • In pertinent part, the Court ruled that the language in the Settlement Agreement providing for “interest as a traditional
    mortgage note in the amount of 3.75%” was not ambiguous and, accordingly, that the trial court erred by adopting H’s calculated simple interest.
  • It also held that the trial court could not sua sponte raise the defense of laches. H had not claimed laches as a defense but rather that W’s calculation was incorrect.
  • The case was remanded so that the accrued interest owing would be calculated as it would be under a traditional mortgage note.

A Better to Way to Provide for Interest on a Divorce-Related Installment Obligation

  • The IRS has ruled that interest on an obligation between divorced spouses is “personal interest” and, hence, not deductible by the payor.
  • But, it is nonetheless taxable to the payee.
  • To avoid this tax whipsaw, the interest rate can be converted to its lower, after-tax equivalent and “baked in” to the payments.
  • For example, 2.5% is the approximate after-tax equivalent of a 3.5% pre-tax rate for an individual in a 25 percent tax bracket.
  • The first step is to calculate the payment by running an amortization schedule using the after-tax rate – 2.5% in the above example. Then provide in the divorce document for the payor to make the payments with no stated interest.
  • The use of an unstated after-tax rate avoids having the payee pay tax on interest the payor cannot deduct.
  • This is a viable approach since the IRS has stated that the imputed interest rules do not apply to divorce settlement obligations. Tech Adv Mem 200624065 (Dec 6, 2005); Priv Ltr Rul 8645082 (Aug 14, 1986).
  • Prepayment can be accommodated by providing for a discount equal to the after-tax rate applied to the remaining payments over the period they are scheduled to be paid. Here is a sample clause:

    “Plaintiff is entitled to prepay this obligation, either in full or in part, by making payments in excess of the required payments. If Plaintiff does prepay the obligation, in full or in part, [he / she] is entitled to a discount on the remaining balance of the installment payments equal to 2.5 percent of the amount prepaid for each year (prorated for a partial year) between when the prepayment is made and when such amount would otherwise be due pursuant to the terms provided above.”

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… “Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)”
View / Download December 2020 Article – PDF File

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

Read More “Dec 2020 : Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)”

Aug / Sept 2020 : Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download Aug-Sept 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W, who married in 2007, were both attorneys and maintained separate legal practices.
  • They also maintained separate bank accounts during their marriage.
  • In 2016, they purchased the marital home for $375,000. W paid the purchase price with funds from her account.
  • However, H arranged for $100,000 to be transferred to W’s account in connection with the purchase.
  • Both parties’ names were on the deed.
  • In addition to his law practice, H spent 15 hours or so a week working at his father’s business without getting paid. However, his father provided H with rent-free space.
  • W claimed that, citing Hanaway,1 some value of the father’s business should be imputed to H in the division of the marital estate.
  • The trial court treated the marital home as a marital asset and rejected W’s claim about the father’s business.
  • W appealed.

Court of Appeals Decision

  • The Court affirmed the trial court’s division of property.
  • In so ruling, the Court noted that the money in W’s account used to purchase the home consisted of her earnings during the marriage.
  • In this regard, the Court stated “that funds earned during a marriage are to be considered marital property.”
  • And, further, that “regardless of the parties’ intentions with their separate bank accounts, they agreed to jointly purchase the home by combining their separate funds and to hold the home in both of their names.”
  • On the other issue, the Court ruled that, unlike in Hanaway, H did not own a legal interest in his father’s business.
  • The Court also noted that H had testified that when his father died, his estate would pass to H’s mother and, further, that one of his brothers had special needs and that another had loaned money to the father over the years.
  • The Court said the trial court did not err in refusing to impute value to H of an asset in which he had no legal interest.

Comments on the Case

  • As the Court stated, money earned during marriage is marital regardless how disproportionately between the parties or whether it is deposited in a separate bank account.
  • However, a written separation agreement may provide that, as of a specified date, future earnings are no longer marital.
  • Regarding the other issue, there are cases involving family businesses owned by a parent but are essentially run by one of the parties who will clearly inherit the business.
  • If this has occurred during much of a long-term marriage, equity often screams that the business should be taken into account in a divorce settlement.
  • Should the mere fact that a party does not currently own a legal interest in a business of which he/she is CEO and certainly in line for future ownership be the overriding factor in fashioning an equitable divorce settlement in a long-term marriage?
  • That is the current state of the law which clearly frowns on any degree of speculation on what might happen going forward, despite how probable and significant it may be.
  • Of course, in “amicable” divorce settlements, provisions can be made to assure equitable results in such cases.

Endnote

1 Hanaway v Hanaway, 208 Mich App 278; 527 NW2d 792 (1995).

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… “Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)”
View / Download Aug-Sept 2020 Article – PDF File

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

Read More “Aug / Sept 2020 : Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)”

May 2020 : “Double Dipping”

Posted by Joseph W. Cunningham, JD, CPA

View / Download May 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Similar to Michigan law, the Ohio Court of Appeals rejected the arbitrary limiting of owner spouse’s income in determining spousal support to avoid “double dipping.” Kim v. Kim, 2020-Ohio-22 (1/8/2020).

Background

So-called “double dipping” occurs if these four conditions are met:

  1. The business or professional practice (enterprise) owned by one spouse (owner spouse) is valued by capitalizing excess earnings (or cash flow).
  2. Part of such excess earnings results from reducing owner spouse’s actual compensation from the enterprise to a “market” – or, “normal” level, reasonable compensation.
  3. The capitalized value of the enterprise is included in the marital estate divided between the parties.
  4. The total amount of the owner spouse’s compensation is included in determining income available for spousal support.

Example: H owns 100% of ABC Company (ABC). His average compensation from ABC is $200,000 annually. Reasonable compensation for his services, based on industry statistics, is $100,000.

If H’s actual compensation of $200,000 is used for determining spousal support, “double dipping” occurs since $100,000 of his actual compensation has been incorporated in the $1,200,000 value of ABC included in the marital estate divided between him and W. To avoid double dipping, H’s income for determining spousal support would be limited to $100,000.

Kim Case

Facts

  • H owns and works at two businesses from which his average compensation is $520,000 annually.
  • In calculating the value accepted by the trial court, H’s expert determined H’s “reasonable” or “market” compensation at $416,000.
  • The trial court used H’s total compensation – $520,000 – in determining spousal support.
  • It stated that, based on the circumstances of the case, equity does not require limiting H’s income for support purposes to avoid double dipping. In this regard, the court noted various factors indicating that H was in a much stronger financial position than W.
  • H appealed the court’s decision.

Court of Appeals Decision

  • The Court of Appeals (Court) upheld the trial court decision.
  • In so ruling, the Court stated that it agreed with the analysis made in another Ohio case that the statute “precludes an outright prohibition of double dipping” and that the trial should, “in the interest of equity,” consider the effects of double dipping.
  • In Kim, the Court noted that the trial court cited circumstances that were “overriding the unfairness of double dipping.”

Relevance to Michigan

Ohio, like Michigan, is an “equitable distribution” state. As we know, equitable distribution does not mean equal distribution to divorcing parties. Rather, trial courts have considerable discretion in tailoring a settlement to the equities of a case.

Double Dipping in Michigan – Loutts v. Loutts, Mich App No. 297427 (9/4/12)

  • The Michigan Court of Appeals (COA) published decision in Loutts is consistent with the Ohio Kim decision and COA decisions in four previous Michigan unpublished decisions on “double dipping.”
  • Essentially, the COA ruled that:
    • The effect of “double dipping” can be taken into account in determining spousal support to achieve a proper balancing of incomes and needs.
    • Hence, arbitrary limiting of the owner spouse’s income to avoid double dipping on a “bright line” basis is improper pursuant to MCL 552.23 and case precedents on using formulaic approaches to determining spousal support.
    • However, if not needed to achieve a proper balancing of incomes and needs, double dipping should be avoided.

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… “Double Dipping”
View / Download May 2020 Article – PDF File

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

Read More “May 2020 : “Double Dipping””

Jan 2020 : State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property

Posted by Joseph W. Cunningham, JD, CPA

View / Download January 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

General

For most Michigan transfers of ownership of real property, there are two tax adverse consequences:

  1. The Michigan Real Estate Transfer Tax imposes a tax of $3.75 for every $500 of value transferred. Additionally, the county transfer tax rate is $.55 for every $500 of value transferred.
    .
    So, the total transfer tax on $50,000 of property transferred is $2,150.
  2. Transfers of Ownership result in the “uncapping” of the taxable value of the transferred property.
    .
    This can be significant since the annual increase in taxable value for property tax purposes is otherwise limited by law to 5% or the rate of inflation, whichever is lower.
    .
    So, for property held for several years which has appreciated significantly in value, a transfer will likely result in a substantial increase its taxable value for property tax purposes.

Exemptions Applicable to Divorce Related Transfers

The following are exemptions that avoid both (1) imposition of a transfer tax and (2) the uncapping of taxable value.

  1. Transfers pursuant to a judgment provided no money is ordered by the court to be paid as consideration for the transfer are exempt. MCL 207.526(l); MCL 211.27a(7)(h)
  2. Transfers between spouses creating or disjoining a tenancy by the entireties are also exempt. MCL 207.526(j); MCL 211.27a(7)

Observations

  1. Apparently, a divorce related transfer occurring after divorce–when the parties are no longer spouses–for which money consideration is paid–does not fall within either exemption.
    .
    In such an instance, no consideration should be specifically provided for the transfer.
  2. And, if relying on the “pursuant to judgment” exemption, it seems advisable to provide for the transfer in the divorce judgment instead of, or in addition to, the property settlement agreement.

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… “State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property”
View / Download January 2020 Article – PDF File

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

Read More “Jan 2020 : State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property”