During marital dissolution, family courts look closely at the spouses' compensation amounts for multiple reasons. One of the most common reasons is to help determine a spouse’s ability to pay alimony and other types of support.
In addition, if a spouse owns an interest in a closely held business, market-based compensation amounts are often needed so a valuator can estimate the fair value of that business interest. Since business owners may overpay or underpay themselves to avoid taxes and for many other reasons, valuators “normalize” each owner’s compensation amounts to better assess the profitability of the business. Normalizing may be viewed as determining how much the company would need to pay a replacement for that individual. To determine replacement compensation, we may begin by looking at databases and surveys of compensation amounts that have been paid by similar companies for similar services. But there may not be any similar businesses. And there are plenty of other factors to consider as well.
In many divorces, one spouse may not be working or may be working part-time. The court may also want to know that person’s earning capacity based on their qualifications.
Please note: Information on this website is provided to stimulate thought and discussion and is not advice for any situation. Each set of facts is unique.