Divorce Law in Idaho changed 2/3/07 James Stewart
The Idaho Supreme Court ruled for the first time, that professional goodwill is part of community property and can be divided at divorce. Professional goodwill is an asset, valued as the personal knowledge, training, reputation, work ethic, experience, name, and ability of a professional to attract clients, which results in earnings for services provided.
Previously, goodwill which had tangible value had been included in the determination of community property, but the court had excluded goodwill which was inherent to one spouse. The goodwill that is inherent to a spouse can not be bought or sold.

The court also increased the amount and duration of alimony that should be awarded when a couple has a large difference of income.

In a 2003 divorce case, Stewart vs. Stewart, Judge Comstock awarded about $800,000 of community property, including $110,000 (half) of professional goodwill in Dr. Stewart’s practice, to his wife. This award represented 64% of their real assets. He also awarded about $62,000 per year for 12 years to Mrs. Stewart. Dr. Stewart appealed the decision, ultimately, to the Idaho Supreme Court, arguing that award of professional goodwill is not supported by Idaho Law. The Supreme Court upheld Magistrate Comstock’s decision, on Jan 26, 2007.

Magistrate Comstock recognized that professional goodwill could be determined by a calculation based on the amount that a professional earns above the average of similar professionals. Dr. Stewart earned more than the average income of other physicians in his field. This “excess earnings”
was used to calculate the value of his professional goodwill, and half of this amount was awarded to his spouse. Prior Idaho law had stated that a professional’s knowledge, background and talent were not community property.
Dr. Stewart claimed that these factors contributed to his “excess earnings” and could not be divided at divorce.

Dr. Stewart also claimed that the Magistrate Court abused its discretion in awarding alimony to Mrs. Stewart, who is a teacher earning over $30,000 per year. The prior standard for the award of alimony was that it should not be awarded unless; the spouse was unable to meet her reasonable needs without it. Mrs. Stewart has a mild chronic disease, but the court found that she could work four days per week. Both physicians who testified at the trial stated that the future course of her illness was uncertain.

The Supreme Court decision overturns the ruling in Wolford v Wolford that “personal attributes are not property” and thus, “they cannot be classified as community property, nor can they be apportioned between spouses upon divorce.” In Wolford, the court stated that, “personal attributes are not property.”

Similarly, in the recent Chandler decision, the court stated:

A spouse’s personal attributes are not property, and they therefore cannot be classified as community property or apportioned between spouses upon divorce. A spouse’s knowledge, background, talents, abilities, reputation, work ethic, and self-worth, are not community property, even if they were enhanced during the marriage. Income earned after the divorce is separate property. Thus, income earned by a spouse after the divorce due to his or her knowledge, background, talents, abilities, reputation, work ethic, or other personal attributes, is not community property. It is separate property. Discounting estimated post-divorce income to a present value does not convert it into community property. For a business to have any value in goodwill, that goodwill must be something that can be sold. It must be
something for which the buyer is willing to pay money and could acquire upon purchasing the business, such as location or brand name. The purchaser of the business cannot acquire the knowledge, background, talents, abilities, reputation, work ethic, or other personal attributes of the seller.

Therefore, for a business to have “goodwill,” such value must be based upon the business ability to attract repeat customers independent of the personal attributes of the seller.

What factors contributed to the court’s decision?

Justice, Linda Trout, wrote for the majority that “there is no principled reason to treat the goodwill of a business differently when it is a professional services corporation.” The court concluded that it is appropriate to use a capitalized excess earnings method to calculate the value of professional goodwill that is community property. This method relies on whether a professional earns more than others in his or her profession. If so, then there is professional goodwill that may be divided, even though this might include goodwill related to personal attributes of the professional in the business. This decision reverses the Supreme Court’s Chandler decision which held that the personal attributes of a business owner are not divisible. For example, if an attorney earns more in her law firm than other comparable attorneys, she might owe her husband with lower income, half of the “professional goodwill” in her firm, in addition to alimony.

The court noted the difficulty of valuing professional goodwill, but stated that it exists. Justice Jones wrote that the “employment of personal attributes and skills … produce value in a business, whether professional or otherwise, that becomes community property.” The court rejected the argument that most professional goodwill is inherent to the professional, and can not be bought or sold. When a professional leaves a practice, clients (or patients) usually follow the professional to a new practice if it is located nearby. The accountant, who testified in favor of using a capitalized excess earnings method to value Dr. Stewart practice, also stated that all of Dr. Stewart’s earning ability would not change if he were to practice elsewhere. So, little professional goodwill would remain with his practice, if Dr. Stewart left. The court seemingly has stated that the skills, knowledge, ability, skills, and work ethic of a professional partially belong to his or her spouse. Perhaps a professional should be careful in Idaho, about exceptional performance, if married.

The maintenance award (alimony) affirmed by the Supreme Court also reversed statutory law (laws made by the legislature) as well as precedent of the Idaho courts. The statute ruling the award of alimony states that it may be awarded if two conditions are satisfied: “(1) the spouse’s separate property and community property awarded in the divorce decree must be insufficient to meet his or her reasonable needs; and (2) the spouse must be unable to support himself or herself through employment.” If these two conditions are met, then the court may consider the duration of the marriage; the age, physical condition, resources, and employability of the spouse seeking the award; the ability of the spouse from whom the award is sought to provide it; the fault of either party; and any tax consequences.

T he meaning of “reasonable needs” was changed by the court in its decision.

The Idaho Supreme Court in the past reversed many awards for alimony, often because the community property was sufficient to meet the needs. Needs were interpreted to mean food, shelter, etc.. The Idaho Supreme Court in the past reversed many awards for alimony, often because the community property was sufficient to meet the needs. However, in this case, the court found that despite a substantial award of about $800,000 in community property to Mrs. Stewart, alimony was needed to support her current standard of living.

The lower court found that a 5% rate of return could be obtained on her property, on a long term basis, per the testimony of one of the accountants.

That would generate $40,000 per year. At the time of legal separation, Mrs. Stewart worked full time. At the time of the trial, she reduced her work to 80%. The court found that she could continue to work 80%. With her employment earnings of over $30,000 per year, she would have $70,000 per year without alimony. Most Idahoans can pay for their reasonable needs with $70,000 per year. But the Supreme Court felt that Mrs. Stewart needed to have enough income to support her pre-divorce standard of living. Chief Justice Trout wrote that “reasonable needs”, under Idaho law, account for the standard of living established during the marriage.

Justice Jim Jones wrote, “We (judges) do not shrink back from considering a spouse’s earning capacity, in determining the amount of future spousal maintenance”. In other words, he says that the award of alimony is partly related to how much a spouse can pay, rather than how much a spouse needs.

With the alimony award of $62,000 per year, she could have $132,000 per year, even without touching the principal of her estate.

Why did the court award this alimony for 12 years?

The Stewarts were married for 22 years, were both college educated and about 50 years old at the time of divorce. Dr. Stewart had an average income of about $400,000 per year over 4 years prior to divorce. Duration of marriage and income may be considered as a factor for the award of alimony, if a spouse does not have sufficient assets to meet reasonable needs.

Sally has a mild chronic illness which often is slowly progressive, limiting the muscle strength in an arm and leg. The illness does not affect her cognitive (thinking) or speaking ability, which she primarily used in her work as a teacher. Two expert physicians testified during the trial that the progression of her disease was uncertain. Sally might have plateau periods as long as ten years without any decrease in strength. Justice Trout mistakenly wrote that “…the only certainty of which is that it (her ability) will decline…” when actually, there is great uncertainty whether Sally can not work part time for the remainder of her career. Most persons with her condition continue to work until normal retirement. The mild physical activity of a teacher does not worsen Sally’s condition.

The court mistakenly believed that the community property awarded to Mrs. Stewart would incur significant penalties if withdrawn from the accounts.

However, of the property awarded to Mrs. Stewart, only $72,000 was in Schwab IRA accounts and was subject to early withdrawal payments. $446,920 was in Schwab One account that had already been taxed, and was awarded to Mrs.
Stewart. The $141,300 equity in her house was already taxed money. The remainder of the nearly $800,000 was paid to Sally in cash. Justice Comstock knew that the majority of the community property awarded to Mrs. Stewart would not incur any penalty if it were spent by Mrs. Stewart, before retirement. The Supreme Court could have requested this information from the lower court. However, this penalty issue is beside the point, because, as stated in the Supreme Court decision, “the court set the level of support based on the assumption that there would be no withdrawals from the accounts”. Thus the Supreme Court also has established that, the community property principal need not be used for support, prior to retirement.

The 4200SF home of the Stewarts was awarded to Sally. She is the only person who resides at the house, since mid- 2003. A large part of her “reasonable needs” include mortgage loan payments and upkeep on the house.

There was no fault of the Stewarts, cited in the courts’ decisions. Dr. and Mrs. Stewart were faithful to one another, until the legal date of separation. The divorce occurred because of irreconcilable differences regarding lack of common goals, lack of respect, life style differences, plans for live in guests, and unhappiness.

Did Mrs. Stewart contribute to Dr. Stewart’s skills? Dr. Stewart’s medical education was paid for from an Air Force scholarship, which also provided a monthly stipend for living expenses during his education. Following medical school, Dr. Stewart eventually served in the USAF, to fulfill his service commitment incurred by the scholarship. The Stewarts gave birth to two children, while Dr. Stewart was in medical school. The children grew to adults. The eldest was in college and the younger graduated from high school within 3 months of the divorce decree. So, child support had little bearing on the court’s decision.