Variations on a Double Dip Theme: The Moore Case

The Tennessee Court of Appeals issued a decision in May 2006 that addresses the lingering question of whether gains from the sale of marital property may be included in income for child support purposes: the old “double dip” dilemma. In Moore (2006), the partial owner of a cycle shop settled his divorce in 1991, retaining his interest in the business as part of his equitable distribution. Child support was set at the time of the divorce, and modified later based on an increase in the owner’s salary.

Years later, the business owner sold his interest in the cycle shop to his sister, who was the other owner. In exchange for his interest and a non-compete clause, the seller received 20% of the sales proceeds up front and a five year note in monthly installments with interest. When the former wife of the seller filed a petition for modification of child support, alleging an increase in the father’s income due to the sale of the business, the trial court determined that the sales proceeds should not be included in his income for support purposes.

On appeal, the Tennessee Court of Appeals noted that the statutory definition of income in that state includes “capital gains.” Yet, the father in this case relied upon a Tennessee precedent that excludes “isolated capital gains” from income. Moreover, Father cited a Tennessee law which provides that “assets distributed as marital property will not be considered as income for child support or alimony purposes, except to the extent that asset will create additional income after the division.”

The Tennessee Court of Appeals remanded to determine what portion of the proceeds received by the husband from the sale of his business interest could be considered “additional income” under Tennessee law. At first blush, it appeared that the Tennessee court blurred the distinction between the net income or profits generated by a business (which are included in the value to be divided in an equitable distribution proceeding) and passive income such as interest, dividends and capital gains on marketable securities (which are truly “created” after the division of property).

Yet, the Moore opinion set forth a methodology which intentionally or unintentionally measures the portion of the sales proceeds that were not divided in equitable distribution. The appellate court held that the difference between the actual sales proceeds and the value used in equitable distribution should be divided pro rata over the five year payback period as “additional income.” In essence, the Tennessee court pro-rated the margin of error between the valuation and the actual sale price. That seems to be an appropriate way of capturing the difference between theory and practice.