Credit Card Rewards in Business Valuation for Divorce

Operating v. Non-Operating Assets

With the growth of the digital economy, new types of assets have emerged that may be subject to property division in divorce. An increasingly common example is credit card reward points. No one may actually “own” these points, since the written agreements for rewards programs commonly state that points are not the cardholder’s property, have no cash value, and cannot be transferred through a legal action (such as divorce). Even so, the points (which can be redeemed for cash, travel, merchandise, etc.) arguably have some value to the cardholder and thus can be considered marital property. This article discusses valuation issues that arise in this context.

With the growth of the digital economy, new types of assets have emerged that may be subject to property division in divorce. An increasingly common example is credit card reward points. No one may actually “own” these points, since the written agreements for rewards programs commonly state that points are not the cardholder’s property, have no cash value, and cannot be transferred through a legal action (such as divorce). Even so, the points (which can be redeemed for cash, travel, merchandise, etc.) arguably have some value to the cardholder and thus can be considered marital property. As with other types of assets, the key issue here is when the points were earned (before or during the marriage), not whose name the account is in. Once it is determined that the points are marital property, the issue becomes more complicated. First, unless the points are divided in-kind, a dollar value must be assigned to them. This is straightforward for cash rewards (including statement credit and gift cards), but less so for travel and merchandise rewards. Then comes the challenge of transferring “ownership,” which depends in major part on the rules of the various credit card companies. Given this complexity, leading to greater professional fees, it is generally not cost-effective to consider the issue unless the points balance is quite large.

An interesting question arises when the reward points are on a business credit card, and the business (or some interest therein) is marital property. Specifically, should the value of the points be captured in the business value, or as an individual asset? Either way, it would be marital property, but the distinction has significant ramifications as to how the value is determined and whether it is captured in full (100%) or in part. If the points are considered a business asset, and the cardholder spouse owns less than 100% of the business, only a fraction would be captured in the marital estate. Moreover, how the value of the points factors into the total business value depends on the choice of business valuation methodology used (more on that later).

To address the question at hand, we must first clarify that “business” in this context refers to a small business. For small businesses, credit cards usually require a personal guarantee, meaning that an individual (usually a business owner) is personally responsible for the debt. Even when applying with a business EIN, an individual SSN must also be provided for the credit inquiry. And, with some credit card companies, the business account activity (positive or negative) may be reported on the individual’s credit report. In contrast, large businesses (e.g., with revenue in the millions of dollars) may qualify for a corporate credit card, where credit is extended to the business itself, without a personal guarantee.

To illustrate, consider a divorce involving a small business owner who personally guaranteed a business credit card. At the time of separation, that card had accumulated $25k reward points. To simplify things, let us assume this is a cash-back card, so the points are clearly worth $25k. The cardholder spouse is 50% owner of the business, and the other owner has a different business credit card, also with accumulated points. Although the two cards are used exclusively for business purchases, each owner has historically used the points on his/her own card for personal spending. In this scenario, should the $25k points balance be considered an individual marital asset, or should it be baked into the value of the business? In a 50/50 ownership situation, where both cards have similar points balances, the characterization is not so important. This is because, if the full value of the points is reflected in the business value (which, again, will depend on the business valuation methodology used), the same value will be captured in the marital estate either way. In other words, the marital estate will include all the cardholder spouse’s points if an individual asset, or half of both owners’ points if a business asset (corresponding to 50% ownership of the business). However, in our scenario, we will assume the cardholder spouse’s points balance is more than three times that of the other owner, in which case the characterization does matter.[1]

In the eyes of the issuing credit card company, the individual cardholder generally controls redemption of reward points for a business credit card. This suggests individual ownership of the points, although, as previously noted, ownership is a misnomer because there may be no legal title. In a divorce court, where equity carries weight, I believe the historical practice for usage of the points would be the critical factor. In our scenario, because the points have historically been used for personal spending, I would argue they are an individual asset. This characterization results in greater value for the marital estate since the entire value of the points is captured. By the same token, if the points were historically used for business expenses, they would arguably be a business asset, to be included in the business valuation. The fractional value of the business, as determined by a valuation analyst, would be marital property, and the points would not otherwise be considered in the marital estate.

Earlier in this discussion, I noted that how the value of the points factors into the total business value depends on the choice of business valuation methodology used. A key issue here is whether the points constitute an operating asset or a non-operating asset. An operating asset supports the core operations of the business (and thus contributes to operating income), while a non-operating asset does not. For example, assets held for investment (e.g., excess cash, marketable securities, real estate) are non-operating assets.

The importance of this distinction is that the value of non-operating assets is added after application of the specific valuation method(s). In other words, the operating value of the business is determined via some valuation method, and then non-operating assets are added to determine the total business value. Thus, if the reward points are a non-operating asset, they are captured in the business value dollar-for-dollar. Although I have not yet had the opportunity to make the argument in court, this would be my position. In contrast, if the points are lumped in with the operating assets of the business, their independent value may not be considered at all. This distinction is more significant with the market and income approaches to valuation, where asset value does not translate directly to business value. It is less significant with the asset approach, where the business value is simply a combination of various asset values (minus liabilities).

Regarding reward points on a business credit card, another issue for valuation analysts to consider is the impact (if any) on reported business income. If the points are used for personal spending, there is probably no impact on reported business income—the expense is reported at full market value. If the points are used for business spending, however, there probably is an impact on reported net income, as the cash outlay for the expense is less than it would otherwise be (i.e., less than fair market value). I say “probably” because in either case, the effect could potentially be reversed via an accounting entry. Whether such an adjustment should (under accounting rules or tax law) be made is beyond the scope of the article. The idea is that the valuation analyst must understand the circumstances that are being reflected in the reported income and whether those circumstances are consistent with the standard of value being used. For example, with the fair market value standard, a hypothetical buyer is contemplated. Would this hypothetical buyer be assumed to operate the business in the same way (in terms of credit card usage, rewards, etc.)?

Although the subject scenario involving substantial business credit card points may not be common, I believe this discussion highlights principles that are more widely pertinent. With small business valuations in a divorce context, the valuation analyst must be cognizant of any assets that arguably have a dual (business and personal) nature, whether tangible or intangible. Legal title is, of course, relevant to the characterization. Also relevant is actual use, which bears on the proper treatment as an operating v. a non-operating asset. Finally, the chosen characterization should result in a business value that (whether market-based, income-based, or asset-based) reflects circumstances consistent with the applicable standard of value.

[1] Likewise, even if the points balances of the two owners were equal, the characterization would matter if the ownership was unequal.

---

Dr. Laura S. Miller, CFA, CVA, provides forensic accounting services in both consulting and expert witness roles; primarily in the areas of business valuation and economic damages. She has worked in this field since 2003, but recently opened her own firm, Miller Valuation & Consulting, LLC in Huntington, West Virginia. In addition to professional practice, Dr. Miller has also been involved in academia, including teaching forensic accounting at the graduate level and co-authoring a textbook on the subject.

Dr. Miller can be contacted at( 304) 522-8770 or by e-mail to laura.miller@millervaluation.com.