Enhanced Earning Capacity: Is it an Asset?

New Jersey divorce article

---

Enhanced Earning Capacity:
Is it an Asset Subject To Equitable
Distribution Under New Jersey Law?

By: David M. Wildstein, Esq.
Charles F. Vuotto, Jr., Esq.*

INTRODUCTION

Individuals enter a marriage with certain skills, talents, education, and training which they acquired prior to their marriage. Economists and sociologists often refer to these personal attributes, which may lead to future income, as “human capital.”  Although both spouses enter a marriage with their distinct human capital, the attainment of additional human capital during the marriage will often lead to “enhanced earning capacity” for only one spouse.[i]  Typically, as one spouse (the “enhanced spouse”) acquires enhanced earning capacity, the other spouse (the “investing spouse”), may defer his or her own career opportunities and accept a temporary reduction in her standard of living to support the enhanced spouse.[ii]  In expectation of future income to be derived from her investment in her spouse’s human capital, the wife may be fully prepared to endure these sacrifices. When, however, the marriage ends due to divorce, the investing spouse will be left without a return on her investment unless the enhanced earning capacity of the other spouse is valued as an asset subject to equitable distribution.

Under New Jersey law a spouse’s enhanced earning capacity is typically subsumed in the valuation of a business entity. However, the enhanced earnings of a ___________

*The Authors acknowledge the assistance and contributions of Risa A. Kleiner, Esq. and Derry Riverdale, Esq. wage earner, whose income is not derived from a business entity in which he has an interest, is not subject to equitable distribution. To some scholars and courts, this disparity may be a distinction without a difference.

This article will explore and analyze the concept of valuing the enhanced earning capacity of a wage earner as an asset subject to equitable distribution.

I. SOCIAL AND ECONOMIC THEORY UNDERLYING THE CONCEPT OF ENHANCED EARNING CAPACITY

The concept of an enhanced earning capacity and the rationale for distributing it as property at the time of a divorce is rooted in both social and economic policy. Viewing the marital enterprise as a socio-economic unit, it is clear that the efforts of both parties during the marriage lead to the creation of marital property whether tangible like a bank account, or intangible like goodwill.

All wealth is a product of investment, and those investments made during marriage represent a sacrifice of current consumption power (capital) in anticipation of greater future income gained as a result of that sacrifice.

When a spouse invests in stocks, she gives up her current capital consumption power in exchange for a better return tomorrow. Similarly, a spouse who enters a graduate school program, a union apprenticeship, or a business training program invests not only the cost and fees of tuition, but also sacrifices other opportunities by spending her time gaining necessary tools for future advancement. These tuition and opportunity costs are invested with the expectation that the asset acquired from the training will yield future income gains above and beyond what would have otherwise been earned. Thus the spouses’ investment in human capital represents the diversion of income from their present needs in anticipation of future economic gains. “To the extent that an investment in such a program results in an identifiable or quantifiable increase in earning capacity, this enhanced earning capacity, whether it be a professional license or a certificate of membership in a recognized business society, may be valued as human capital.”[iii]  In some cases, the enhanced earning capacity may be the only real economic asset which the parties accumulate during their marriage.[iv]

Joyce Davis explicates the typical pattern:

For either party to acquire the knowledge, skills or education required to enhance their earning capacity, both spouses must contribute marital resources to the undertaking. These contributions may be financial as when the wife provides income from her employment while the husband works full or part-time toward an advanced degree. Alternatively, these contributions may be non-financial as when the wife cares for the home and children while the husband is improving his career. Often the wife also endures a lower standard of living during the marriage expressly to permit marital resources to be expended on enhancing the husband’s earning capacity. The wife who stays home and cares for the family does not create an asset that can be divided at the time of the divorce. The husband, on the other hand, may leave a marriage with enhanced education, skills and experience that permit him to function at a much higher economic level after the divorce.[v]

The argument, Ms. Davis concludes, can therefore be made that since marital resources were used to acquire the enhanced earning capacity of one spouse, the other spouse should be entitled to share in this asset at the time of the divorce.[vi]

Human capital, it has been argued, has enough of the attributes of property to fit comfortably within the traditional view of property. The physical manifestation of earning capacity, such as a professional degree or license, however, cannot be sold; only the capacity can be sold. For, “just as one can alienate the manual labor of one’s body, one can also alienate the abilities, skills, thoughts, ideas, i.e., the intellectual labor of one’s mind . . . so that a wife has a claim on future earnings because, in Lockean terms she owns the results of her labor, just at the husband does.”[vii]

Allen M. Parkman has commented:

The transformation of the American economy has made the traditional notions of what items should be treated as property in divorce settlements inappropriate. The wealth of an individual is the value of the income stream that he can anticipate from the assets that he owns.[viii]

“Alimony should reflect, along with Equitable Distribution, the nature of the marital partnership, how each party contributed to the success of the partnership and the sacrifices made to achieve partnership goals. The responsibilities of raising children and the consequent absence from the marketplace result in a measurable economic loss to the custodial parent.”[ix]

At least one commentator has argued from an employment perspective that a woman’s disadvantaged position in the labor market is not caused by discrimination, but instead by family responsibility. “Children depress women’s wages for three reasons: (1) child bearing frequently leads to interruptions in employment, which affect experience and training; (2) the responsibilities of mothers who are frequently not the primary wage earner forces them to find jobs compatible with the responsibilities of being both a homemaker and a parent; and (3) women who have a disproportionate share of housework and child care responsibilities are forced to make sacrifices in their employment, such as more frequent absences and time off, which adversely effects their advancement.”[x]

When wives are employed outside the home they frequently restrict their job hours, limit the geographic range of employment options, and forego opportunities for advancement to be available for homemaking and child care services, all in an attempt to accommodate the demands of their spouse’s employment.[xi]

According to the Bureau of Labor Statistics, approximately one-third of all employed married women with children have only part time jobs.[xii]  Statistics confirm that each year a woman remains out of the labor force results in a 1.5% reduction in life-term earning power for a woman with a high school education and 4.3% per year if the woman is college educated.[xiii]

Numerous studies were cited by the Crews Court which confirm that following a divorce, women and their children suffer a 30% decline in their standard of living while men enjoy an average increase of 10% in their living standard.[xiv]  “Marriage gives men the opportunity, support and time to invest in their own careers; thus marriage itself builds and enhances the husband’s earning capacity. For women, in contrast, marriage is more likely to act as a career liability.”[xv]

“Despite hopes that reliance on the qualified market principles of equitable distribution would address women’s financial needs at divorce, the years since the enactment of the initial no-fault divorce reforms have made it clear that women tend to fair far worse financially as a result of divorce than men.”[xvi]

Although women have historically suffered economically following a divorce, it was not until the 1970’s that many state legislatures, including New Jersey, began to focus on the economic disparity between the parties at the time of a divorce. According to the New Jersey Divorce Study Commission, the equitable distribution statute, N.J.S.A. 2A:34-23, was intended to focus on the economic impact of the marriage on the parties.

The public policy of equitable distribution was enunciated by Justice Mountain in Rothman v. Rothman:

The public policies sought to be served is at least twofold. Hitherto future financial support for a divorced wife has been available only by a grant of alimony. Such support has always been inherently precarious. It ceases upon the death of the former husband and will cease or falter upon his experiencing financial misfortune, disabling him from continuing his regular payments. This may result in serious misfortunate to the wife and in some cases will compel her to become a public charge. An allocation of property to the wife at the time of the divorce is at lease some protection against such an eventuality. In the second place the enactment seeks to right what many have felt to be a grave wrong. It gives recognition to the essential supportive role played by the wife in the home, acknowledging that as a homemaker, wife, and mother, she should clearly be entitled to a share of family assets accumulated during the marriage. Thus the division of property upon divorce is responsive to the concept that marriage is a shared enterprise, a joint undertaking, that in many ways is akin to a partnership. Only if it is clearly understood that far more than economic factors are involved, will the resulting distribution be equitable within the true intent and meaning of the statute.[xvii]

The public policy was further amplified six years later by the Appellate Division in Gibbons v. Gibbons:

. . . The extent to which each of the parties contributes to the marriage is not measurable only by the amount of money contributed to it during the period of its endurance but rather by the whole complex of financial and non-financial components contributed.

The function of equitable distribution is to recognize that when the marriage ends, each of the spouses, based upon the totality of the contribution made to it, has a stake in and a right to a share of the family assets accumulated while it endured, not because that share is needed but because those assets represent the capital product of what was essentially a partnership entity.[xviii]

Although the concept of valuing enhanced earning capacity is rooted in economic and social policy, the real question is whether it is “property” subject to equitable distribution pursuant to N.J.S.A. 2A:34-23.

II. LEGAL ARGUMENTS IN FAVOR OF VALUING ENHANCED EARNING CAPACITY AS AN ASSET UNDER NEW JERSEY LAW

A. Expansive interpretation of N.J.S.A. 2A:34-23 – Painter v. Painter

Pursuant to N.J.S.A. 2A:34-23, originally enacted in 1971, New Jersey courts were granted the power to equitably distribute property, real and personal, “which was legally and beneficially acquired by them or either of them during the marriage.”  Neither the statute nor the legislative history provides guidance as to the definition of property or assets that were subject to distribution.[xix]

In the seminal case of Painter v. Painter, [xx] the Supreme Court expansively interpreted the statute to encompass the equitable distribution of gifts and inherited assets from a third party. The Court interpreted the statute in an expansive manner and noted, “had . . . a more restricted meaning been intended, we believe that some confining language would have been employed to manifest this purpose.”[xxi]  Accordingly, the Painter Court held that “all property, regardless of its source, in which a spouse acquires an interest during the marriage shall be eligible for distribution. . . . “[xxii]  In interpreting this new statute, the Court made the following insightful comment:

We are under no illusion that what we have said above will provide certain and ready answers to all questions which may arise as to whether a particular property is eligible for distribution. We have sought only to implement the legislative intent as we discern it, by setting forth what we believe should be the general governing rules. Individual problems must be solved as they arise within the context of particular cases.[xxiii]

Painter further held that premarital property would not be subject to equitable distribution except for premarital assets that increased in value due to the “value contributed by the other spouse . . .”[xxiv]  Moreover, any property acquired during coverture, attributable to the efforts of either party, qualified as a distributable asset. Significantly, the Court noted that, “We have principally in mind the earnings of husband or wife; such assets are certainly comprehended by the statute.”[xxv]  Was the court saying that assets derived from earned income during the coveture are subject to equitable distribution or that income may be viewed as an asset?

Although the legislature amended 2A:34-23 to exempt inherited property from equitable distribution, with few exceptions, the progeny of Painter have interpreted N.J.S.A. 2A:34-23 in a comprehensive and expansive manner. Clearly, property subject to equitable distribution includes tangible and intangible assets, pensions and other retirement benefits.[xxvi]

In Moore v. Moore, the Court ruled that post-retirement cost of living increases were included in equitable distribution awards.[xxvii]  The Court reasoned that “the right to receive monies in the future is unquestionably . . . an economic resource subject to equitable distribution.”[xxviii]  The Court, relying upon a plethora of cases, emphasized that post-divorce benefits received by a spouse are subject to equitable distribution if they are related to joint efforts.

The Moore Court, relying on Whitfield v. Whitfield, held that “the includability of property in the marital estate does not depend on when, during the marriage, the acquisition took place . . . but depends upon the nature of the interest and how it was earned.”[xxix]  The Court observed that there would be no post-retirement cost-of-living increases if there were not past contributions and services by both parties.

The concept of valuing a future flow of income which had its origin in marital contribution and efforts was also addressed in Kruger v. Kruger. [xxx]  A military retirement plan, in pay status, was deemed property subject to equitable distribution and not considered income that would be available for support. The Court held that all property acquired during the marriage, regardless of its source, is distributable. Justice Schreiber, in an effort to define property observed that:

. . . a contract entitling a person to a certain number of dollars per week for services to be rendered over a fixed period is a valuable right and an asset, though the receipt of the weekly sum represents income. The equitable distribution provision is not concerned with income but with a person’s assets in an economic sense on a date certain. He noted that the right to receive future monies is an enormous resource which can be valued.[xxxi]

Therefore, Painter and its progeny, along with the line of pension cases, supports the characterization of enhanced earning capacity as an asset subject to equitable distribution.

B. Celebrity Goodwill – Piscopo v. Piscopo

In the landmark decision of Piscopo v. Piscopo, [xxxii] celebrity goodwill attributable to Joe Piscopo’s celebrity status was deemed an asset subject to equitable distribution.[xxxiii]  Although Piscopo, decided in 1989, is frequently cited by foreign states and scholars, it has not been cited by any New Jersey courts except for Seiler v. Seiler. [xxxiv]

Joe and Nancy Piscopo met in college and were married for 12 years. At the time of the divorce complaint, Joe was a successful entertainer and comedian. The parties stipulated that Nancy had contributed to his success by performing homemaking and custodial responsibilities and serving as a sounding board for his ideas. All of Joe’s income flowed through J.P. Productions, Inc., a corporation owned 51% by Joe and 49% by Nancy.

The Court-appointed expert valued the celebrity goodwill by calculating 25% of Joe’s average gross earnings over a three-year period. According to the expert, this method was commonly used in the industry when valuing celebrity goodwill.  The trial court did not apply an excess earnings analysis pursuant to Dugan, [xxxv] since it had insufficient testimony or evidence in the record to draw conclusions related to either the average earning rate of an entertainer of plaintiff’s age and experience or an appropriate discount rate for a person of plaintiff’s level of stardom.[xxxvi]

At trial, plaintiff claimed that the goodwill attributed to his celebrity status was not an asset subject to distribution. However, on appeal, he conceded that celebrity goodwill could be a distributable marital asset but, that in his case, it was too personal in nature and his reputation as a celebrity could not be related to probable future earnings but only to possible future earnings. In essence, he argued that his income as a celebrity was too volatile. Nancy argued that Joe’s celebrity status was an intangible asset and that the goodwill generated by his reputation could be valued in a manner analogous to Dugan, [xxxvii] where the court valued and distributed a sole practitioner’s law practice despite the ethical restraints prohibiting the sale of the practice and the dependency of the practice upon the personal skills of one person.

The Court also concluded that Joe’s history of prior earnings made it probable to assume he would acquire future earnings. Although Joe attempted to make a distinction between professional goodwill and from celebrity goodwill, this distinction was rejected by the Court. The trial court’s opinion is particularly insightful:

Plaintiff contends that professional goodwill is distinguishable from celebrity goodwill. He points out that the former has educational and regulatory prerequisites which any person with acumen can attain while the latter requires ineffable talent which can have no “average” against which to measure. Contrary to plaintiff’s assertions, neither an education nor a license is per se an asset in New Jersey . . . Rather it is the person with particular and uncommon aptitude for some specialized discipline whether law, medicine or entertainment that transforms the average professional or entertainer into one with measurable goodwill.[xxxviii]

The Court reasoned that Joe had the legal right, in a non-matrimonial context, to protect his property rights related to his celebrity status. If someone tried to appropriate his acts or material without his consent, he could seek relief from the Court. Therefore, the Court aptly stated:  “The Court cannot countenance the anomaly that would result if one branch of Chancery vigorously protected plaintiff’s person and business from another’s ‘unjust enrichment by the theft of . . . goodwill,’ while another branch deprived a spouse from sharing in that very same protectible interest.”[xxxix]

In essence, the Piscopo Court valued the personal skills, talents and experience of Joe Piscopo that were enhanced during the marriage by valuing probable future income that flowed through his corporation.

C. The Valuation Of A Sole Practitioner’s Law Practice – Dugan v. Dugan

In Dugan, [xl] the husband and wife were married for twenty years. The husband, a member of the New Jersey bar and sole practitioner, maintained his practice as a professional corporation. The wife worked as a secretary in the husband’s law office. The Court held that the goodwill of the husband’s law practice was subject to equitable distribution, notwithstanding the fact that the husband was a sole practitioner and there were ethical restraints which prohibited the sale of his practice. The Court supported its decision by the following conclusions of law:

(1) The equitable distribution statute N.J.S.A. 2A:34-23; 23.1 should be comprehensively interpreted. Goodwill is property and is an intangible asset that can be valued regardless of the nature of the enterprise, partnership, corporation, joint venture, individual, proprietorship.

(2) “Future earning capacity per se is not goodwill. However, when that future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value.”[xli]  The Court noted that, “After divorce, the law practice will continue to benefit from that goodwill as it had during the marriage. Much of the economic value produced during an attorney’s marriage will inhere in the goodwill of the law practice. It would be inequitable to ignore the contribution of the non-attorney spouse to the development of that economic resource.”[xlii]  Since the wife contributed to the value of the husband’s practice, she should be compensated “as if it were represented by the increased value of stock in a family business.”[xliii]  “When goodwill exists, it has value and may well be the most lucrative asset of some enterprises.”[xliv]

(3)  Most significantly, an “individual practitioner’s inability to sell a law practice does not eliminate existence of goodwill and its value as an asset to be considered in equitable distribution.”[xlv]

D. The Statutory Factors Set Forth In 2a:34-23.1 Mandate That The Court Consider Enhanced earning capacity As A Factor In Awarding Equitable Distribution

Pursuant to N.J.S.A. 2A:34-23.1, enacted in 1988 and amended in 1997, the court shall consider various factors in making an equitable distribution award. The relevant statutory factors, if read in pari materia, require the court to consider enhanced earning capacity as a factor in awarding equitable distribution. The most significant factors are:

g. the income and earning capacity of each party, including educational background, training, employment skills, work experience, length of absence from the job market, custodial responsibilities for children, and the time and expense necessary to acquire sufficient education or training to enable a party to become self supporting at a standard of living reasonably comparable to that enjoyed during the marriage;

h. the contribution by each party to the education training or earning power of the other ;

i. the contribution of each party to the acquisition, dissipation, preservation, depreciation or appreciation in the amount or value of the martial property as well as the contribution of a party as a homemaker;

*   *   *

o. the extent to which a party deferred achieving their career goals. . . .[xlvi]

The relevant portions of this statue indicate a desire on the part of the legislature to consider earning capacity and the contributions of the parties to earning capacity as a factor in distributing assets. If the statute is interpreted in an expansive manner, it can be argued that the Legislature intended the court to consider these statutory factors in determining an asset’s  eligibility as well as for guidance in distributing the assets to each party.

Without quantifying enhanced earning capacity, how can the court properly consider the above statutory factors?

Moreover, the statute provides, “in every case, the court shall make specific findings of fact on the evidence relevant to all issues pertaining to asset eligibility or ineligibility, asset valuation, and equitable distribution, including specifically, but not limited to, the factors set forth in this section.”  Hence, it can be argued that the legislature intended that the asset eligibility should be considered in the context of the statutory factors.”[xlvii]

Whether the statute is given a broad or narrow interpretation, the litigants and the court have an obligation to present proofs pertaining to the relevant statutory factors. In presenting proofs to the court with respect to equitable distribution, enhanced earning capacity should be valued and presented as an asset. At the very least, if enhanced earnings are not viewed as an asset, the court should consider the quantification of earning capacity as a factor in distributing the other assets.

III. THE DECISIONAL LAW OF NEW YORK ALLOWS ENHANCED EARNING CAPACITY TO BE VALUED AS AN ASSET SUBJECT TO EQUITABLE DISTRIBUTION

New York State has been virtually alone in case law development concerning the classification, valuation and division of enhanced earnings.[xlviii]  New York’s decisional law concerning the valuation of enhanced earnings began with the Court of Appeals’ landmark decision in O’Brien v. O’Brien, [xlix] which addressed “professional licenses.”  O’Brien has evolved into a broader valuation of “enhanced earnings,” as illustrated in the cases following O’Brien, up through last year’s decision in Grunfeld v. Grunfeld.[l]  It is noteworthy that the New York statute, that lists various factors relevant to equitable distribution, does not include “earning capacity.”[li]

A. Expansive Definition of Property and Downplaying of Alimony

The line of cases running from O’Brien to Grunfeld are unique in the nation because, to a large extent, the New York legislature deliberately went beyond traditional property concepts when it formulated the Equitable Distribution Law.[lii]  The New York statute recognizes that spouses have an equitable claim to things of value arising out of the marital relationship and classifies them as subject to distribution by focusing on the marital status of the parties at the time of acquisition.[liii]  “Those things acquired during marriage and subject to distribution have been classified as ‘marital property’ although, as one commentator has observed, they hardly fall within the traditional property concepts because there is no common law property interest remotely resembling marital property.”[liv]

The key cases in New York are summarized as follows:

O’Brien v. O’Brien, [lv] held that the enhanced earnings associated with a professional license is property for equitable distribution purposes. The professional license involved was the husband’s newly acquired license to practice medicine.

Golub v. Golub, [lvi] involved the “renowned and celebrated film and television actress and model” Marisa Berenson. In that case, the New York Supreme Court held that the skills of artisans, actors, professional athletes or any person whose expertise in his or her career has enabled him or her to become an exceptional wage earner should be valued as marital property subject to equitable distribution. The Court valued and distributed the increase in value of Ms. Berenson’s career over the time of the marriage, in view of the husband’s contributions thereto.

Elkus v. Elkus, [lvii] held that the wife’s career as an opera singer and/or celebrity status constituted marital property subject to equitable distribution to the extent that her husband’s contributions and efforts led to an increase in the value of her career. The court held that even though certain “things of value” may fall outside the scope of “traditional property concepts” they still may be considered property subject to distribution. Further, even though enhanced skills may grow out of an innate talent, thereby enabling an artist to become an exceptional earner, those skills may be valued as marital property subject to distribution.

McSparron v. McSparron, [lviii] addressed the issue of whether a license that had been exploited by the licensee (i.e., a license to practice law) to establish and maintain a career may be deemed to have “merged” with the career and thereby lost its character as a separate distributable asset. To the extent that any “merger rule” existed, the McSparron court eliminated the concept and held that the merger doctrine should be discarded in favor of the common sense approach that recognizes the ongoing independent vitality that a professional license may have and focuses solely on the problem of valuing that asset in a way that avoids duplicative awards.

Hougie v. Hougie, [lix] is a one page decision, yet one of the most intriguing. New York Appellate Court held that a husband’s “enhanced earning capacity” as an “investment banker” was subject to equitable distribution.

Grunfeld v. Grunfeld, [lx] held that it was error to base both equitable distribution of one half of husband’s law license and his obligation to pay maintenance on the same projected professional earnings.

B. Analysis of O’Brien

The parties in O’Brien were married in 1971, but the husband did not obtain his license to practice medicine until 1980. Two months after he was granted said license, he commenced his action for divorce. Notwithstanding this chronology, the court felt it appropriate to view the husband’s license as an asset subject to distribution because of the wife’s contributions to the efforts expended in achieving said asset. It is important to note that the O’Brien Court emphasized the contributions by each party to their respective living and educational expenses during the marriage.

The wife’s expert valued the husband’s medical license at $472,000. He arrived at this figure by comparing the projected average income of a college graduate and that of a general surgeon between 1985, when plaintiff’s residency would end, and 2012, when he would reach age 65. After considering federal income taxes, an inflation rate of ten percent and a real interest rate of three percent, he capitalized the difference in average earnings and reduced the amount to present value. He also gave his opinion that the present value of the wife’s contribution to the husband’s medical education was $103,390.[lxi]  The lower court, after considering the lifestyle the husband would enjoy from the “enhanced earning potential” his medical license would bring and the wife’s contribution and efforts toward attainment of it, made a distributive award to the wife of $188,800, representing forty percent (40%) of the value of the license, and ordered it paid in eleven annual installments of varying amounts beginning November 1, 1982 and ending November 1, 1992.

The O’Brien Court took into consideration the legislative intent to make an effort to sever the economic ties between the parties by an equitable distribution of the marital assets. Thus, the concept of alimony, which often served as a means of lifetime support and dependence for one spouse upon the other, long after the marriage was over, was replaced with the concept of maintenance, which seeks to allow “the recipient spouse an opportunity to achieve [economic] independence.”[lxii]

The O’Brien Court noted that:

few undertakings during a marriage better qualify as the type of joint effort that the statute’s economic partnership theory is intended to address than contributions toward one spouse’s acquisition of 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.[lxiii]

Additionally, the New York court did not place any weight on the fact that Dr. O’Brien had not yet started his practice. The Court continued , “An established practice merely represents the exercise of the privileges conferred upon the professional spouse by the license and the income flowing from that practice represents the receipt of the enhanced earning capacity that licensure allows.”[lxiv]

However, outside the framework of the New York statute, the O’Brien Court did note that “a professional license is a valuable property right, reflected in the money, effort and lost opportunity for employment expended in its acquisition, and also in the enhanced earning capacity it affords its holder, which may not be revoked without due process of law.”[lxv]

The New York Court entertained the concept of “rehabilitative maintenance or reimbursement for direct financial contributions” as an alternative remedy to recognizing the license as property and distributing it in a divorce case. The Court responded by stating that “the statute does not expressly authorize retrospective maintenance or rehabilitative awards and we have no occasion to decide in this case whether the authority to do so may ever be implied from its provisions. . . . It is sufficient to observe that normally a working spouse should not be restricted to that relief because to do so frustrates the purposes underlying the Equitable Distribution Law.”[lxvi]  In opposing the concept that an award of spousal maintenance could compensate the non-professional spouse, the O’Brien Court stated,

Maintenance is subject to termination upon the recipient’s remarriage and a working spouse may never receive adequate compensation for his or her contribution and may even be penalized for the decision to remarry if that is the only method of compensating the contribution.

By parity of reasoning, a spouse’s down payment on real estate or contribution to the purchase of securities would be limited to the money contributed, without any remuneration for any incremental value in the asset because of price appreciation. Such a result is completely at odds with the statute’s requirement that the court give full consideration to both direct and indirect contributions ‘made to the acquisition of such marital property by the party not having title, including joint efforts or expenditures and contributions in services as a spouse, parent, wage earner and homemaker’.[lxvii]

C. Celebrity Status Under NY Law

The parties in Golub were married on February 14, 1982. At the time of the marriage, Marisa Berenson enjoyed enormous entree to the world of arts and fashion both in her own right and as the granddaughter of Elsa Schiaparelli, the celebrated couturier. [lxviii]

The Court recognized that throughout the marriage the wife appeared to have been engaged in pursuing her career both in the United States and abroad, concededly successfully.[lxix]  The Court recognized that the husband made the following contributions:

a) supervising the home making services;

b) supervising renovations made to marital real estate, as well as the negotiations and litigation necessary to vacate the rental apartments that were contained therein;

c) assisting the wife, inter alia, by getting her personal financial affairs in order at the inception of the marriage and making efforts throughout the marriage to advance her career.

Specifically, the Court stated:  “Indeed, plaintiff’s income has significantly increased during the marriage to a point where she earned in excess of $150,000 in 1987.”[lxx]  The wife opposed the characterization of the increase in value in her career as an asset by stating that “her celebrity status is neither ‘professional’ nor a ‘license’ and hence not an ‘investment in human capital subject to equitable distribution.'”[lxxi]  Moreover, the wife in Golub argued that because a career in show business is subject to substantial fluctuation, it should not be considered. In disagreeing with the plaintiff’s position, the Court cited to the decisions in O’Brien and McGowan.[lxxii]

The next celebrity case involved Frederica von Stade Elkus.[lxxiii]  The parties were married for seventeen years and had two children. Ms. Elkus moved for an order determining, prior to trial, whether her career and/or celebrity status constituted marital property subject to equitable distribution. The Appellate Court held that the wife’s career as an opera singer and/or her celebrity status constituted marital property subject to equitable distribution to the extent that the husband’s contribution and efforts led to an increase in the value of her career. Contrary to the facts in Golub, at the time of the Elkuses’ marriage, the wife had just embarked on her career, performing minor roles with the Metropolitan Opera Company. During the course of the marriage, her career succeeded dramatically and her income rose accordingly. In the first year of the marriage, she earned $2,250; in 1989, she earned $621,878.[lxxiv]  She had become a celebrated artist with the Metropolitan Opera, as well as an international recording artist and concert and television performer.[lxxv]  The Court noted the husband’s contributions to his wife’s career:

a) Traveling with his wife throughout the world, attending and critiquing her performances and rehearsals;

b) photographing her for album covers and magazine articles;

c) acting as her voice coach and teacher for ten years of the marriage;

d. sacrificing his own career as a singer and teacher to devote himself to his wife’s career and to the lives of their young children.

The husband claimed that these efforts enabled her to become one of the most celebrated opera singers of the world.[lxxvi]

In rejecting Ms. Elkus’s arguments and relying on the cases of O’Brien, Golub and the New Jersey decision of Piscopo, the Court found that the enhanced skills of an artist such as Ms. Elkus, albeit growing from an innate talent, enabling her to acquire exceptional earning capacity which may be valued as marital property subject to equitable distribution.

Ms. Elkus argued that she had already become successful prior to her marriage. However, the Court noted that in the first year of marriage only she earned $2,250. By 1989, however, her earnings had increased more than 275- fold.[lxxvii]  The Court found that although Ms. Elkus was born with talent, during the course of the marriage the defendant’s active involvement in the plaintiff’s career in teaching, coaching, and critiquing her, as well as caring for their children, clearly contributed to the increase in its value. Accordingly, to the extent the appreciation in her career was due to the husband’s efforts and contributions, this appreciation constituted marital property.[lxxviii]  It is noteworthy that the Court does not provide a valuation methodology to effectuate their ruling.

D. New York Valuation Methodologies

There is truly a paucity of decisional authority giving precise and clear valuation approaches concerning enhanced earnings. When addressing valuation, the O’Brien Court stated that although fixing the present value of the enhanced earning capacity may present problems, the problems are not insurmountable.[lxxix]  The Court likened the valuation process to those involved when computing tort damages for wrongful death or diminished earning capacity resulting from injury. Unfortunately, the high Court in O’Brien did not provide detail concerning the methodology used by the wife’s expert in determining a value for her husband’s medical license.

After discarding the concept of “merger,” the McSparron Court also commented upon valuation methodology. The first admonition is that any valuation must avoid “duplicative awards.”[lxxx]  The McSparron Court noted that “even after the licensee has had the time and opportunity to exploit the license and to realize a portion of the enhanced earning potential it affords, the license itself retains some residual economic value, although in particular cases it may be nominal.”[lxxxi]  As to the precise valuation method, the McSparron Court stated:

That value can be measured and distributed just as a newly acquired license is valued through various actuarial techniques that are well known to valuation experts.[lxxxii]

The Court provided the following guidance:

a) The value of a newly earned license may be measured by simply comparing the average lifetime income of a college graduate and the average lifetime earnings of a person holding such a license and reducing the difference to its present value; or

b) Where the licensee has already embarked on his or her career and has acquired a history of actual earnings, the foregoing theoretical valuation method must be discarded in favor of more pragmatic and individualized analysis based on the particular licensee’s remaining professional earning potential.

The McSparron Court provided the following caveat:  Care must be taken to ensure that the monetary value assigned to the licensee does not overlap the value assigned to other marital assets that are derived from the license, such as the licensed spouse’s professional practice. The Court must also be meticulous in guarding against duplication in the form of maintenance awards that are premised on earnings derived from professional licenses.[lxxxiii]  This admonition would later be repeated in the Grunfeld decision.

As the Court of Appeals reasoned in O’Brien over 15 years ago, the complexity of calculating the present value of a partially exploited professional license is no more difficult than the problem of computing wrongful death damages where the loss of earning potential that is occasioned by a particular injury.[lxxxiv]  Nor does it lead to significantly more speculation than which is involved in the now routine task of valuing a professional practice for the purpose of making a distributive award.[lxxxv]  Unfortunately, the McSparron court noted that the matter had to be remanded to the trial court so that a new distribution of the marital assets taking into account the value of the husband’s law license, could be made.

The intricacies of valuation of enhanced earnings under New York case law was addressed in an article entitled “Enhanced Earnings Capacity in View of Grunfeld,” submitted in the course of the Fall 2000 Matrimonial Seminar by John R. Johnson, CPA, CBA, BCFA. To paraphrase Mr. Johnson, the challenge of an enhanced earnings valuation has been to properly convert a future earning stream into property subject to equitable distribution and then to assure that the value of other items of property, as well as maintenance and support awards, do not incorporate the same earnings in their determination.

Mr. Johnson delineated the valuation process as follows:

a) determining the tax impacted enhanced earnings capacity of the holder attributable to the license or degree, and

(b) the calculation of the present value of these enhanced earnings over the expected work life of the holder.

Mr. Johnson notes that the preferred practice in New York is to value the professional practice first and to value the professional license second. Since the value of the professional practice can be determined within the parameters of actual practice sale transactions and the risks associated with the professional practice are more easily identified, the valuation of the practice is somewhat less subjective than the valuation of enhanced earnings associated with licenses and degrees.

IV. ARGUMENTS AGAINST THE CONCEPT OF VALUING ENHANCED EARNING CAPACITY UNDER NEW JERSEY LAW

In Stern v. Stern, [lxxxvi] the husband was a partner in a well-known and highly respected law firm. His income and capacity to earn money was thoroughly proven. The wife argued that, after 26 years of marriage, her husband’s earning capacity should be valued as an asset subject to equitable distribution. The trial court agreed and noted “defendant’s potential to earn in or out of the law partnership was demonstrated by his past record.”[lxxxvii]  It is noteworthy that the trial court opinion rendered by Judge Consodine relied on non-matrimonial case authority.[lxxxviii]  The trial court further reasoned that the husband’s earnings could be pledged as security for loans and that the concept of divided future earnings was compatible with the partnership theory referred in Tucker v. Tucker.[lxxxix]

The trial court opinion was reversed by the New Jersey Supreme Court. Justice Mountain, without relying on any authority,  held that earning capacity is not a separately identified and distinct asset eligible for equitable distribution. The Court stated

. . . a person’s earning capacity, even where its development has been aided and enhanced by the other spouse, as is here the case, should not be recognized as a separate, particular item of property within the meaning of N.J.S.A. 2A:34-23. Potential earning capacity is doubtless a factor to be considered by the trial judge in determining what distribution will be ‘equitable’ and it is even more obviously relevant upon the issue of alimony. But it should not be deemed property as such within the meaning of the statute.[xc]

It is noteworthy that Stern pre-dated the enactment of the equitable distribution factors delineated in N.J.S.A. 2A:34-23.1. Hence, the holding may be viewed as inconsistent with our current statutory scheme. However, nevertheless, it is important to note that the court emphasized the importance of considering potential earning capacity in making equitable distribution awards.

A. A Captive Insurance Agent – Seiler v. Seiler

In Seiler v. Seiler, [xci] the husband was an employee of Allstate Insurance Company and was a “captive agent” of Allstate rather than an independent entrepreneur. The Court concluded that the husband was an employee and had no transferable asset. The Court observed that the “defendant’s ability to earn a substantial income must not blind us to the fact that he is an employee of a major insurance company selling its insurance products in accordance with the terms and conditions established by his employer.”[xcii]  Significantly, the Court relied on Piscopo in concluding that “when goodwill is recognized as a distributable asset, goodwill is usually a facet of the larger asset such as the law practice in Dugan and the entertainment career in Piscopo.” [xciii]  The Court appeared unwilling to value the wage earners income unless it was derived from an enterprise in which he had an ownership interest. The Court continued, “We have discovered no case in this State in which goodwill has been recognized as an asset unassociated with the business entity.”[xciv]  The Court’s decision was influenced by the form of the husband’s working arrangement, not his probable future earnings. This should be contrasted with Dugan, [xcv] where the Court clearly noted “variances in the forms of an enterprise do not eliminate goodwill, though they may affect its worth.”[xcvi]

B. Professional Degrees – Mahoney v. Mahoney

In Mahoney v. Mahoney, [xcvii] the parties were married for seven years. During a sixteen-month period of the marriage, the husband attended the Wharton School at the University of Pennsylvania and received an MBA degree. During his schooling, the wife contributed $24,000 to the household while the husband was a full-time student. At the time of the divorce, both parties were earning approximately the same amount of income.

The issue before the Court was whether an MBA degree is property acquired by either spouse during the marriage subject to equitable distribution. The Court held that the professional degree was not property subject to distribution and created the new concept of “reimbursement alimony” to compensate the contributing spouse. In reaching its holding, the Court made the following conclusions:

(1) The statute’s legislative history shed no light on whether a degree was subject to equitable distribution;
(2) A degree is not property because it lacks elements associated with property:

It does not have an exchange value or any objective transferable value on an open market. It is personal to the holder. It terminates on death of the holder and is not inheritable. It cannot be assigned, sold, transferred, conveyed or pledged. An advanced degree is a cumulative product of many years of previous education combined with diligence and hard work. It may not be acquired by the mere expenditure of money. It is simply an intellectual achievement that may potentially assist in the future acquisition of property.[xcviii]

(3) Valuing a professional degree is speculative in that future earning capacity is being predicted . Valuation “would involve a gamut of calculations that reduces to little more than guesswork.”[xcix]

The Court emphasized the individual differences among persons qualified by an education or a professional degree and unforeseen circumstances which may occur . A given individual “may choose not to practice, may fail at it, or may practice in a specialty, location or manner which generates less than the average income enjoyed by fellow professionals.”[c]  The Court further noted, “The potential for inequity to the failed professional or one who changes careers is at once apparent; his or her spouse will have been awarded a share of something which never existed in any real sense”.[ci]

(4) The Court was also concerned with the finality of an equitable distribution award which cannot be modified. If the valuation was unfair, it could not be remedied.[cii]

Nevertheless, the Court felt that various inequities required a remedy to rectify an unjust result. The equitable distribution in cases of this nature “derives from the proposition that the supporting spouse should be reimbursed for contributions to the marital unit that, because of the divorce, did not bear its expected fruit for the supporting spouse.”[ciii]

Where a partner to a marriage takes the benefit of his spouse’s support in obtaining a professional degree or license with the understanding that future benefits will accrue and inure to both of them and the marriage is then terminated without the supported spouse giving anything in return, an unfairness has occurred that calls for a remedy.[civ]

The Court felt it was unfair that a supported spouse keeps not only the degree but also the financial and material rewards flowing from it. The Court emphasized that the parties had an expectation that both parties would enjoy material benefits flowing from the professional degree. The Court underscored other inequities experienced by the wife that had to be remedied: (a) the husband’s cessation of employment, in order to go to school, prevented the parties from accumulating additional income and assets that would be distributed during the marriage; (b) the wife’s postponement of a higher standard of living for the future prospect of greater support and material benefit. “The supporting spouse’s sacrifices would have been rewarded had the marriage endured and the mutual expectations of both of them fulfilled.”[cv]

The Court created the concept of “reimbursement alimony” to compensate a supporting spouse for “a loss or reduction of support, or a lower standard of living, or the inability to obtain a better standard of living in the future.”[cvi]  The reimbursement alimony claim would cover all financial contributions toward the former spouse’s education, household expenses, educational costs, school travel expenses and any other contributions used by the supported spouse in obtaining his or her degree or license. The Court limited the concept to mutual and shared expectations that both parties would derive from the increased income or material benefits from a license or degree. The Court stated that they leave for future cases questions as to changed circumstances modifying a reimbursement alimony award.[cvii]

The Court sagaciously observed that “Marriage is not a business arrangement in which the parties keep track of debits and credits, their accounts to be settled upon divorce.”[cviii]  However, it may be unfair for one spouse to benefit in obtaining a professional degree with the understanding that future benefits will accrue and inure to both of them. In that case, when the marriage is terminated, the supported spouse is unjustly enriched.[cix]

Clearly, Mahoney provides many reasons for denying the valuation of enhanced earning capacity. At the same time, it leaves the door open for valuing enhanced earnings under different factual circumstances. The Court, in dicta, said:  “Where the parties to a divorce have accumulated substantial assets during a lengthy marriage [the Mahoneys were only married for seven years], the Court should compensate for any unfairness to one party who sacrificed for the other’s education, not by reimbursement alimony but by an equitable distribution of the assets to reflect the parties’ different circumstances and earning capacities”.[cx] Therefore, the reimbursement alimony remedy may be insufficient in a long term marriage. The Court’s recognition of the underlying unfairness resulting from failing to appropriately consider enhanced earning capacity in equitable distribution awards echos, to a large degree, the underlying premise of this article.

V. SUMMARY OF ARGUMENTS AGAINST VALUING ENHANCED EARNINGS CAPACITY AS AN ASSET

There are a myriad of arguments that have been submitted by courts and commentators against the concept of valuing enhanced earnings as an asset subject to distribution in divorce cases. These arguments are summarized as follows:

1. Enhanced earning capacity Is Not Property; It Is Too Personal:  Enhanced Earnings or licenses do not fit within the traditional legal conceptions of property. They cannot, for instance, be assigned, sold, transferred, conveyed or pledged. Enhanced earning capacity also lacks the attribute of joint ownership because it is “personal” to the holder and has no current exchange value because it is a mere expectancy of future income. For example, in Landwehr v. Landwehr, [cxi] the Court determined that a wife was entitled to equitable distribution of a personal injury settlement that was intended to cover her per quod claim and one-half of the portion of the settlement that reimbursed the injured party, her husband, for lost wages. The Court, however, did not distribute her husband’s award for pain and suffering as property because it was so “inherently personal and not jointly acquired.”[cxii]

There are at least 14 states in the nation which differentiate between the good will of a business entity that is subject to equitable distribution and “personal goodwill.”[cxiii]

2. Double Dip:  Since the value of the asset depends upon the future labor of the holder and the probable flow of future income derived therefrom, the asset is totally indistinguishable from, and has no existence separate from, the holder’s projected earnings. Therefore, where the same income flow is used to calculate two or more of the following:  (a) alimony; (b) the value of a business or (c) enhanced earning capacity, the same income is being distributed at least twice, and perhaps even more.

3. Too Difficult to Value:  “Enhanced earnings” cannot be easily quantified.

4. Compensated by Alimony:  The investing spouse can be compensated for her contributions to the enhanced earning capacity by some form of alimony award.[cxiv]

5. Compensated by Skewed Equitable Distribution:  Although the enhanced earning capacity may be valued, it need not be specifically distributed but rather, it may be considered as a factor under the equitable distribution scheme, which may result in a skewed distribution in favor of the non-professional spouse. Pursuant to N.J.S.A. 2A:34-23.1, earning capacity is a factor in awarding equitable distribution. Other jurisdictions take enhanced earning capacity into account when distributing the marital property and awarding spousal maintenance.[cxv]

6. Unforeseen Future Events:  One of the main problems with classifying enhanced earning capacity as marital property is that property distribution awards may not be modified. If a person wishes to change careers or if some unforeseen disaster intervenes, there is no longer a basis for the award. As stated by the concurring opinion in O’Brien, “equitable distribution was not intended to permit a judge to make a career decision for a licensed spouse still in training.”[cxvi]  In the case where the professional ex-spouse wishes to do something else, a property classification would transmute the bonds of marriage into the bonds of involuntary servitude. There is always a high level of speculation as admitted by the wife’s expert in O’Brien. When asked whether his assumptions and calculations were in any way speculative, the wife’s expert replied:  “Yes. They’re speculative to the extent of, will Dr. O’Brien practice medicine?  Will Dr. O’Brien earn more or less than the average surgeon earns?  Will Dr. O’Brien live to age 65?  Will Dr. O’Brien have a heart attack or will he be injured in an automobile accident?  Will he be disabled?  I mean, there is a degree of speculation. . . . “[cxvii]

7. Lack of Ongoing Concern or Enterprise:  Although seeming to raise form over substance, it cannot be contested that enhanced earning capacity is not connected to any ongoing concern or enterprise. Therefore, similar to the “captive insurance agency” in Seiler, [cxviii] there may be goodwill, but does it belong to the employee?

8. Cannot Divide Post-Martial Efforts:  Present valuing future earnings, derived from enhanced earning capacity, is distributing post-marital efforts.

VI. VALUATION METHODOLOGY

The fact that an asset is difficult to value, does not mean that it should not be valued.[cxix]  The goal is to value the asset in a fair and equitable manner.[cxx]  By analogy, future earnings losses in wrongful death cases are typically calculated by economists in the following manner:  A base salary will be selected, which will represent the plaintiff’s actual earnings at the time of the accident or death, or in some cases, an average of his earnings over a period of several years.  In cases where there is little earnings history, government statistics can be used to estimate the person’s average earnings potential based on age, education, etc. That base income will be projected over the work life expectancy of the plaintiff, which can be age 65, or earlier, or even later, depending upon the plaintiff’s vocation. Wage increases are factored in using statistics released by the government. Also, the gross wage loss is reduced by the income tax liability. Fringe benefits are also calculated into the loss. Finally, the future loss must be reduced to present value.[cxxi]

We propose that enhanced earning capacity may be calculated utilizing the following formula:

1. Calculate the Current Income of the higher earning spouse (i.e., Enhanced Earning Spouse (hereinafter “EES”).

2. Subtract from Step 1 the total of the following:

•     Income Level at time of Marriage of EES, plus
•     Portion of EES’s Current Income attributable to Cost of Living Adjustments during the marriage, plus
•     Portion of EES’s Current Income attributable to Standard Merit Increases, plus
•     Cost to EES of Alimony and Child Support paid by EES, plus
•     Income needed for EES’s reasonable needs.

3. The difference between 1 and 2 is considered gross “enhanced earnings”;

4. Reduce the gross enhanced earnings by estimated income taxes;

5. Multiply the result of Step 4 by the number of years of anticipated work life remaining for the enhanced earner (the end of the marriage to age 65 would be typical) and reduce it to present value.[cxxii]

6. Perform steps 1 through 5 for the investing spouse;

7. Subtract the result of step 6 from step 5 to obtain “Net Enhanced Earnings” subject to distribution.

For example, if parties were married for 25 years where the enhanced spouse (age 50) earned $50,000 at the time of the marriage and earned $500,000 at the time of the divorce and the dependent spouse was unemployed throughout the marriage, the calculation could appear as follows:

•     Current Earnings: +$500,000
•     Earnings at time of Marriage: – $50,000
•     Merit/COLA increase: -$200,000[cxxiii]
•     Cost of Alimony/Child Support to EES: -$75,000
•     EES’s reasonable needs: -$75,000
•     Gross enhanced Earnings = $100,000
•     Estimated Taxes: -$40,000
•     Enhanced Earnings post-tax: $60,000
•     Calculate Present Value of Future post-tax Enhanced Earnings to EES’s work/life expectancy (15 years at $60,000 per year): $900,000
•     Perform same analysis for other spouse:   -$0[cxxiv]
•     Net Enhanced Earnings subject to Equitable Distribution: $900,000

VII. CONCLUSION

Clearly, arguments can be made for and against the concept of valuing enhanced earning capacity as an asset subject to equitable distribution. Proponents will argue that the valuation of enhanced earning capacity is consistent with the intent and spirit of the equitable distributions statutes which acknowledge the contributions and joint enterprise of the parties during the marriage. Perhaps the most significant contribution is made by an investing spouse in her husband’s earning capacity. Without valuing enhanced earning capacity as an asset for at the very least a factor relevant to equitable distribution, an unjust result may ensue.

If we compare two litigants whose earning history is the same, where one is self-employed and the other is an employee for a company in which he has no interest, the equitable distribution awards at the conclusion of a divorce will be disparate. For example, where a computer consultant doing business as a Sub S Corporation earns $50,000 a year at the time of his marriage and $300,000 per year at the time of his divorce, it is likely that his business would be valued and subject to equitable distribution. However, another person earning the same money as an employee for a large corporation, where he has no ownership interests, would not have his enhanced earning capacity valued or distributed as an asset.

The arguments against valuing enhanced earning capacity as an asset are equally persuasive and have been summarized in Point V of this article. Stern v. Stern expressly held that earning capacity is not, per se, subject to equitable distribution. Even Piscopo v. Piscopo, which valued the personal skills of a comedian, can be interpreted to mean that only income that flows through a business entity is subject to equitable distribution.

Finally, some scholars might argue that the valuation of enhanced earnings as an asset is a natural and progressive evolution of the case law leading to the creation of spousal parity. Others might argue that in an effort to correct a wrong, a draconian remedy will be created. In either event, the bench and bar should be sensitive to the concept of valuing enhanced earning capacity and fashion remedies which will be fair and just. At the very least, if enhanced earning capacity is not valued as an asset per se, our law mandates that it be valued and considered in equitably distributing other assets.

---