CPAs are routinely asked questions concerning economic issues when clients divorce. However, when a CPA is involved in his or her own divorce these issues take on special significance. As most CPAs understand, marital assets are not limited to the family home and some jointly owned bank accounts. Experience has taught that their practices and their pension and profit sharing plans are part of the property of the marriage and therefore subject to division at the time of divorce. However, even experienced CPAs are often shocked to discover that the courts in many jurisdictions have determined that the CPA's professional license may be considered marital property and must be accounted for in some way before a divorce can be finalized, whether the matter is settled through agreement or court order.

DIVORCE AND PROPERTY

Although we tend to think of property as something that is acquired through gift or purchase, the legal concept of property is much broader. The thrust of current divorce law contemplates that each spouse may have economic rights to any property if that property, or its appreciation in value, is earned during the marriage. At the time of divorce, the concept of ownership of property is not connected with title thereto. Such property may be titled in the name of one spouse, but in the court's view be of value to both.

Property under equitable distribution and community property divorce law includes many items not traditionally included as such. For example, pension rights vested and unvested, even when the pension is not yet available, are considered property in nearly all states. If the property was earned during the marriage, and both spouses contributed to its acquisition and increase in value, the property must be divided between the spouses. It is a major tenet of current divorce law that a spouse may contribute to the acquisition and increase in value of property without making an economic contribution. That is, the homemaker spouse who creates a stable and supportive environment so that the licensed spouse can devote energies to building assets, is entitled to a share of that property at divorce.

CPA LICENSE AS PROPERTY It is well settled that an individual's interest in a business or profession is subject to division at divorce. A CPA's partnership interest in an accounting firm will be considered marital property if partner status was achieved during the marriage. Even if the CPA became a partner before marrying, the appreciation in value of the partnership interest will be considered marital property,

That approach works if there is a professional practice involved. A problem arises when there is no practice and therefore it appears that there is no property to divide. This may occur in a marriage of short duration, where the licensed spouse has not begun a practice, or where the practice is in its infancy. Regardless, New York's highest court, in such a scenario, determined that a professional license, if earned during the marriage, is marital property.

The landmark case, 0 'Brien v. O'Brien, which determined that a license is marital property, concerned a medical, rather than CPA license. However, since the original decision, the New York courts have' determined that all professional licenses, as well as college and graduate school degrees, must be treated as marital property. In 0'Brien, the wife had spent nine years of the marriage working and supporting her husband, who eventually became a doctor. Two months after he became licensed to practice medicine, the husband filed for divorce.

The parties owned no property. Basically, everything earned by the wife went to pay the couple's living expenses as well as her husband's school costs. At the time of divorce, there appeared to be nothing to divide. The husband argued that the license was not propertyrather "a personal attainment in acquir-- ing knowledge." Nonetheless, the court determined that marital property is a. creation of the divorce laws. As such, it. includes all things that have been acquired during the marriage. It does not matter that the license does not fit into the traditional view as something that can be bought, sold, assigned, and transferred on the open market for a particular value. A license is "a valuable property right, reflected in the money, effort, and lost opportunity for employment expended in its acquisition and in the enhanced earning capacity it affords its holder, and may not be revoked without due process of law." The fact that it does not have a market value is not important.

The court wrote that in acquiring a professional license: working spouses are often required to contribute substantial income as wage earners, sacrifice their own educational or career goals and opportunities for child rearing, perform the bulk of household duties and responsibilities and forego the acquisition of marital assets that could have been accumulated if the professional spouse had been employed rather than occupied with the study and training necessary to acquire a professional license."

In New York State, the principle of equitable distribution has been extended beyond licensed professionals to include artists. The judgment of an appeals court in a recent case determined that the husband's contributions to the career of his wife of 17 years, an opera singer, were marital property and must be taken into account in their divorce settlement.

COMPENSATING THE NONPROFESSIONAL SPOUSE IN OTHER WAYS

Most states have refused to consider professional licenses as property because of the difficulty in valuation, the speculative nature of the asset, and its inability to be bought and sold. Practitioners in those states should not, however, be lulled into a false sense of security. Although their licenses are not subject to division, the courts have compensated the non-licensed spouse for efforts in assisting in the acquisition of the license.

A number of states attempt to balance the equities by providing the non-licensed spouse with a greater portion of the marital assets at the time of divorce than the spouse would otherwise be entitled to. In a state that does not consider a CPA license as property, a court, rather than awarding each spouse 50% of the marital home, might award the entire marital home to the nonlicensed spouse to compensate that spouse for the support given so that the CPA spouse could earn the professional license. However, providing the nonlicensed spouse with a greater percentage of the marital assets only works if there are marital assets to distribute. Such an approach really does not address the typical student'spouse/employed-spouse fact pattern where the parties divorce shortly after the license is obtained but before any significant marital assets are accumulated,

In some states the non-licensed spouse may be awarded monthly maintenance (alimony) for a period to compensate for the effort made so that the other spouse could acquire a professional license. However, an alimony award may present other difficulties. Alimony is a method of providing for a spouse who is otherwise unable to be self-supporting. In the scenario that accompanies a working spouse who supported the spouse who eventually received the professional degree, conventional alimony may not be an option because the spouse is able to earn a salary. Traditional alimony cannot be awarded to a spouse who is able to be serf-supporting.

Rehabilitative Alimony

In recent years, the courts have awarded rehabilitative alimony, given to a spouse for a fixed number of years so that the spouse is able to become seffsufficient. However, rehabilitative alimony may not be a viable choice for a spouse who is either unable or unwilling to pursue additional education or training so that the non-licensed spouse's income becomes more closely related to that of the degreed spouse. Some states have modified the traditional definition and function of alimony in an effort to provide for the working spouse who supported the student spouse for a number of years during the marriage. Those states have looked beyond the traditional definition of alimony and have determined that a spouse who contributed substantially to the other spouse's ability to obtain a professional license should be given alimony as a form of compensation and as a method of balancing the scales between the parties.

Those states have developed a new form of alimony, called reimbursement alimony; its purpose is to provide the non-licensed spouse with a monetary award in instances where there is inadequate property available to make a distributive award.

Unlike traditional alimony, the purpose of reimbursement alimony, as its name suggests, is to reimburse the nonlicensed spouse for the contribution to the now licensed spouse's enhanced earnings ability. Reimbursement alimony is not based on needs of the recipient spouse. Therefore, in most states it does not end if the recipient spouse remarries.

However, reimbursement alimony is not without its own problems. If a court makes a distribution of property at divorce, that cannot be changed at a later date because the circumstances of one of the parties have become materially different. Alimony, however, is subject to modification if circumstances change. Reimbursement alimony retains characteristics of both traditional alimony and property distributions. A number of courts have determined that reimbursement alimony may be subject to modification. This can be helpful if the court allows a spouse to petition for increased alimony should the licensed spouse's earnings become greater than originally anticipated. This might occur if at the time of divorce a CPA spouse worked for a public agency, but a number of years later developed a lucrative private practice. However, the ability to modify reimbursement alimony works both ways. Some states permit the payor spouse to petition the court if earning power drops substantially.

Essentially, most states acknowledge the contribution of the non- licensed spouse to the acquisition of the professional license. If evidence indicates that a sizable economic contribution was made, the courts will find a method of compensation whether or not the license is considered property.

Tax Implications

Such alternative alimony treatments of what would otherwise be license-based property settlements are not without tax consequences. Alimony is generally treated as deductible by the payor spouse and includible in the income of the payee spouse for individual income tax purposes (Sees. 215 and 71).

Property settlements, including ones that are licensed-based, are never considered alimony and are not so deductible and includible. Even for property settlements that are "disguised"as alimony, the alimony deduction recapture rules under Sec. 71 would generally "undo" the tax deductibility of excess deductions that substantially constitute a property distribution.

BEYOND THE LICENSE

The CPA license, if earned during the marriage, constitutes a valuable asset whether or not the license is classified as marital property. If it is established that the non-licensed spouse contributed in some significant fashion to the acquisition of the license, that spouse will be compensated.

A License and a Practice

Many argue that the CPA license and the CPA practice each had separate value. However, in a case in which the husband had been a partner in a CPA firm for nine years, the trial court determined that whatever separate value the license may have had, at this point it had "merged" with the value of the accounting practice and that a separate equitable distribution award was inappropriate. That decision has since been confirmed by later cases. For example, a medical license had no separate value where the physician has maintained a private practice for 30 years. The court, in reaching its decision, noted that a party should not have "two bites of the same apple." Most states agree with that reasoning. In a long-term marriage both spouses have enjoyed an increased standard of living due to the enhanced earning ability of the licensed spouse. In such a situation it is not necessary to speculate on the value of one spouse's investment in the career of the other spouse. The actual earning ability of the professional together with the assets of the business are a much more accurate measure of worth.

NO DETRIMENT

In most fact patterns, the non-licensed spouse argues that having suffered an economic detriment by supporting the student spouse until the student spouse received the professional license, he or she should be compensated for the sacrifice made. However, it does not always follow that one spouse suffers economically, loses economic growth, or is actually harmed in supporting the student spouse. In states in which this issue has been raised, the courts have reached different conclusions. In one state, the court concluded that the employee spouse was not entitled to any compensation although he provided support for his wife throughout the marriage while she obtained a number of graduate degrees. In that instance, the court determined that the husband was not entitled to any compensation as he had not suffered any economic harm by his wife's pursuit of graduate studies.

LICENSE VERSUS CAREER

The courts continue to address new issues concerning professional licenses and degrees. A current issue before the courts concerns professional licenses, earned during the marriage, where the professional has continued to work as an employee. In such instances, it is unclear whether the license maintains a separate value, one based on increased future earnings, or whether the value of the license merges into the career that has been created.

The issue has been resolved in a number of lower courts, but with no definitive answer emerging. In one instance, involving a teaching license, the trial court determined that the license merged with the teaching career over 15 years, therefore, the license had no independent value. The court determined that the non-licensed spouse had benefitted from the increased earnings and improved lifestyle over those 15 years because her husband had become a teacher. Whatever value the teaching license once had, that value had been achieved and was merged into his career.

In contrast, the CPA license was determined to have an independent value that was retained although the CPA continued to work as an employee. The husband completed his undergraduate education and earned his CPA license during the marriage. He currently is employed for a CPA firm. The court determined that the enhanced earning ability enjoyed by the husband because of his license is a separate asset. Although both parties enjoyed the benefit of the license during their marriage, the license had a value separate and apart from his career. The court noted that it was the husband's "enhanced earning capacity" that was being valued.

In making the valuation, the court rejected the wife's position that the value of her husband's increased earnings should include the possibility of her husband becoming a partner. The court said such a determination was too speculative, acknowledging that the decision has "great consequences." The value of a CPA license is quite different when it is being valued on the basis of the individual becoming a partner or based on the CPA remaining an employee.

PROFESSIONAL GOODWILL

Another issue before the courts is the question of the value of professional goodwill. In valuing professional licenses and practices, the courts have reached different conclusions. Some courts have concluded that professional goodwill is not the same as the goodwill of a business. The value of professional goodwill is based in large measure on the professional's reputation and continuing presence. If that definition is used, goodwill is the same as future earnings ability. As such, it can be considered in awarding the non-licensed spouse alimony, but cannot be considered in dividing marital property. If professional goodwill is to be considered an asset subject to division at the time of divorce, the court must be convinced that the goodwill has a value that is separate and apart from the ability or reputation of the practitioner.

VALUATION METHODS

Applying the property concepts and entitlement principles indicated to the valuation of a CPA license, the courts employ valuation methodologies which, because the valuation involves future income, necessarily involves estimates. However, such valuation must result in an actual, not speculative, monetary figure. Testimony dealing with the methodology of valuation addresses circumstances present at the time of divorce and values the license at a reasonably certain present value.

One approach that has gained acceptance is to determine the present value of the CPA's enhanced future earnings which are associated with the license as marital property. Giving due consideration to all relevant facts and circumstances at the time of the divorce, this method can be summarized as follows:

* Determine whether the CPA license is marital property. This determination will depend on whether the license was obtained before or after marriage, and whether any appreciation in its value occurred during the marriage.

* If the license is determined to be marital property, determine the percentage which each spouse contributed to its value.

* Estimate the present value of the license. As indicated in the examples in Figure 1, this phase involves the following steps:

1. Estimate the CPA's "baseline income." This is the annual income the CPA would currently earn based on educational/professional status at the inception of the marriage.

2. Determine the CPA's "actual income." This is the annual income the CPA is actually earning at the time of divorce.

3. Compute the current "annual enhanced earnings," by subtracting the baseline income from the actual income.

4. Subtract income taxes on the annual enhanced earnings to determine "net enhanced earnings."

5. Estimate the CPA's number of years to retirement by subtracting the CPA's age at the time of divorce from the CPA's estimated retirement age, usually 65,

6. Compute the CPA's "total enhanced earnings" by multiplying the net enhanced earnings by the number of years to retirement.

7. Consider present value factors. Here, the two relevant factors are the CPA's estimated increase in earnings rate forward to retirement age, and the implicit present value discount rate from the retirement age back to the age of divorce. These two factors are inversely related and thus tend to counterbalance each other.

8. Apply the net present value factors to the total enhanced earnings to determine the estimated present value of the enhanced earnings associated with the CPA license.

* Apply the non-licensed spouse's per - centage contribution to the estimated

present value of the CPA's enhanced

earnings to determine that spouse's por - tion of the CPA license.

A PERSONAL NOTE

CPAs, faced with divorce either in their own lives or the lives of their clients, must be aware that their professional credentials will be part of the negotiations, settlement, and court orders connected with the divorce. It must be stressed that all facts and circumstances will be considered by the court. Their licenses, jobs, and practices will be scrutinized carefully. Where the nonlicensed spouse contributed financial support through working as well as noneconomic support through caring for the home and children, a sizable portion of the value of the practice or license may be awarded to the non-licensed spouse, either through a required annuity, a compensating distribution of other property, or through increased maintenance awards.

Eugene T. Maccarrone is Assistant Professor of Business Law at Hofstra University.

Martha S. Weisel is Assistant Professor of Business Law at Hofstra University.