CHAPTER 5

Standards of Value in Divorce

INTRODUCTION

In this chapter, we address the theory and application of the standards of value used in divorce. As in stockholder oppression and dissent cases, the standards of value in matrimonial matters are state specific and often case specific.

As one commentary has indicated:

Matrimonial actions are unique types of litigation. While people in litigation are people in conflict, people in matrimonial litigation are involved in conflicts that go to the very root of their existence.1

Divorce cases are often acrimonious and adversarial. It is the task of business valuation professionals to sort through these issues and evaluate a business based on the objective application of valuation methodology that is consistent with the laws of a given state.

In the absence of statutory guidance, the application of the standard of value is left to the courts within the individual states. These courts can often inconsistently apply the underlying assumptions of a standard of value, to achieve what they believe to be equitable solutions consistent with the policy expressed in each state's statutes.

When we compare the way valuation issues are viewed in the U.S. Tax Court to the way they are viewed in many matrimonial courts, we often find significant differences. In the Tax Court, precedents have fashioned a consistent premise, value in exchange, and a consistent standard, fair market value, and have provided guidance to practitioners as to the application of this standard. Because of this consistency, experts can differ in methodology but not on the premise or standard of value. For instance, valuation practitioners can opine on the size of the applicable discount for an interest lacking control, but not, in most instances, on its applicability.

In the same manner, fair value is the standard applied most often in stockholder dissent and oppression matters in most states. Again, the premise of value is a value in exchange, and the standard is fair value. In these matters, the most frequent valuation controversy involves the applicability of lack of control and marketability discounts. As we explained in Chapter 3, legal associations such as the American Law Institute (ALI) and the American Bar Association (ABA) have weighed in on the applicability of lack of control and marketability discounts under this standard of value.

As will be explained further in this chapter, we have found that there has been no consistent application of the premises and standards of value in divorce matters. In fact, even though the ALI has opined on certain valuation issues concerning divorce, its opinions have not been cited in matrimonial cases as frequently as in dissenters' and oppressed shareholder matters.

In divorce, the standard of value for each state is established by court cases that implement that state's marital dissolution statutes. Each state's legislature sets forth the property distribution policy in the statute. The courts attempt to implement the policy through their individual decisions. Generally, the statutes provide little guidance on valuation; one has to divine it from case law. Therefore, to more clearly understand the standards of value in this context, one needs to understand the definition of property in the particular state statute and the treatment of business and intangible value in that state's case law. In our analysis, we address the implied or stated standard of value as it is expressed in the court opinions regarding the treatment of assets such as enterprise and personal goodwill, the application of lack of control and marketability discounts, and the weight accorded buy–sell agreements.

We begin with a general background and history of the treatment of marital and separate property and then analyze the identification of marital and separate property. We then discuss the premises of value, the standards of value, and their theoretical underpinnings as stated or implied by statute or case law.

Premises of value are assumptions based on the set of actual or hypothetical circumstances applicable in a valuation. Standards of value represent the type of value being sought.2 In determining a premise of value, one must ask whether the business or business interest should be valued in a hypothetical exchange between a willing buyer and willing seller, or as a business in the hands of its current owners with no consideration of such an exchange.

In our view, standards of value in divorce can be seen to fall under two general basic premises: value in exchange and value to the holder. Value in exchange is the value arrived at in a hypothetical sale, with assumptions ranging from the seller departing immediately and competing with his or her former business, to the seller staying on to help transition management. Underlying value in exchange are two general standards: fair market value, where discounts for lack of control and lack of marketability, also referred to as shareholder-level discounts, are generally considered, and fair value, where the value of a fractional interest is generally seen to be, except under extraordinary circumstances, as its pro rata share of the enterprise without minority or lack of marketability discounts. The value to the holder premise is based on the assumption that the business or business interest will not be sold. Although frequently not articulated, the standard of value most often associated with the value to the holder is investment value, which in this context is also referred to as intrinsic value.

After a general discussion of the assumptions implicit in the two premises and three standards, we discuss the value in exchange premise and how personal and enterprise goodwill, shareholder-level discounts, and buy–sell agreements are viewed. Similarly, in states where these issues are addressed using a value to the holder premise, we discuss such issues as the difference between goodwill and earning capacity, the inclusion of such marital assets as a professional degree or license, enhanced earning capacity, celebrity status, and the issue of double dipping. We eventually use the premise and standard of value implied by the treatment of personal and enterprise goodwill, lack of control and marketability discounts, and the weight accorded buy–sell agreements to move toward a standard of value classification system.

Using these elements, we build a continuum of value that addresses the way courts view property by their treatment of goodwill, the application of shareholder-level discounts, and the adherence to buy–sell agreements, all under a stated or implied standard and premise of value. Note that this continuum is based on our view of the issues implicit in business valuations for the purpose of divorce, and that the lines between these classifications are not always clear. In some cases, even a state that appears to adhere strictly to one standard may use elements of another to achieve what the court believes to be an equitable result. Moreover, we are reviewing statutes and cases as valuation practitioners, not lawyers, and applying our suggested classifications to premises and standards of value in ways that are consistent with generally accepted valuation theory but may not have been contemplated by courts, the attorneys, and even many experts.

Marital Property: General Background and History

The varying nature of the divorce laws of the states can be traced back to the turn of the twentieth century, when the National Conference of Commissioners for Uniform State Laws3 sought to unify divorce laws across the nation. The common sentiment at the time, endorsed by the public, the clergy, and even President Theodore Roosevelt, was that the unsettling increase in the divorce rate across the land had to be checked. Thus, in the same way the commissioners later attempted to create uniform triggering events for dissenting shareholders, they proposed certain laws that would create a uniform standard by which a married couple could get divorced. The states, however, wanted autonomy, as several already had more stringent grounds for divorce in place. For example, in New York, adultery was the only grounds for divorce. In South Carolina, divorce was not permitted on any grounds. Accordingly, despite being adopted by five states, the uniform divorce laws were viewed as a massive failure.4

It is generally agreed that the law of marital property in the United States has its origins in English common law. However, influenced by their French or Spanish heritage, eight states adopted the continental system of community property. Those original eight community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.5 Later the total increased to ten, when both Alaska and Wisconsin chose to treat marital property as community property.

Initially, most common law states looked exclusively to property law where title dictated ownership. This left the non-titled spouse at a severe disadvantage. In 1973, the Uniform Marriage and Divorce Act set an example for the states by abandoning the traditional treatment of property by common law and moved toward a system that would give the court discretion over how to divide property. Over the next 10 years, this principle was adopted by the remaining 41 common law states and the District of Columbia in their statutes as equitable distribution. This new standard for distribution divided marital property according to some principle of need or equity, without particular regard to title or ownership as determined by common law rules.6

By the early 1990s, all states had enacted statutes that provided for the distribution of property acquired during the marriage in accordance with equitable distribution or the continental system of community property. Equitable distribution states endeavor to divide marital property fairly, but not necessarily equally. Community property states more often seek to divide marital property equally, but in many cases also prefer an equitable arrangement for distribution.7

Marriage is now generally considered to be an economic partnership where title is irrelevant and property is acquired and maintained by the marital unit rather than separately by the individuals. In both community property and equitable distribution states, property acquired during the marriage through the time, skill, and labor of either spouse is considered part of the marital estate. Typically, anything acquired by gift or inheritance or acquired before or after the marriage is considered to be the separate property of the owner.

The states that adopted the equitable division method of property distribution now look to equitably distribute assets defined as marital property. As such, all states, whether by equitable distribution or community property, recognize that the noneconomic contribution of the non-titled spouse has value and the state legislatures have enacted statutes that provide for the fair distribution of property acquired during the marriage.

Dividing marital property as part of a divorce involves a three-step process:

There is an interrelationship among the three steps, with the term value mostly left undefined by statute. In fact, only the statutes of Arkansas and Louisiana explicitly address the standard of value to be used. Arkansas's statute, for example, establishes the standard of value only for certain assets:

When stocks, bonds, or other securities issued by a corporation, association, or government entity make up part of the marital property, the court shall designate in its final order or judgment the specific property in securities to which each party is entitled, or after determining the fair market value of the securities, may order and adjudge that the securities be distributed to one (1) party on condition that one-half (1/2) the fair market value of the securities in money or other property be set aside and distributed to the other party in lieu of division and distribution of the securities.8

Louisiana requires that the parties to a divorce list their community assets at their fair market value for distribution.9 No other state statute addresses the value of closely held businesses and business interests with even that much specificity. Some states refer to a particular standard in their case law; others suggest a certain standard by their treatment of certain elements of value. Often a case in a particular state may name one standard of value but attribute to it characteristics more commonly associated with another standard of value.

Identification of Marital Property and Separate Property

In our view, the ambiguity as to the appropriate standard of value in a state often is the result of differing interpretations of what constitutes property in general and marital property in particular. In fact, property is quite often undefined in most statutes. Community property states, typified by the statute in Arizona, define community property as:

All property acquired by either husband or wife during the marriage, except that which is acquired by gift, devise or descent is the Community Property of the husband and wife.10

Alternatively, an equitable distribution state, such as Pennsylvania, defines marital property as:

(a) all property acquired by either party during the marriage;

(b) including the increase in value, until the day of final separation of non-marital property acquired by gift, bequest, devise or descent; and (c) the increase in value of property owned prior to the marriage or property acquired in exchange for property owned prior to the marriage until the date of final separation.11

As can be seen, the definition of property is rather ambiguous, regardless of the property distribution scheme. This can lead to controversy with respect to certain assets that can be difficult to identify and value.

This ambiguity is most clearly seen in the treatment of intangible property. Identifying intangible assets can involve the valuation of an expected (or future) income stream, which may not be transferable and/or may require the continued efforts of a spouse after the end of the marriage. The courts in each state decide whether these types of assets may or may not be included as assets to be distributed. Their decisions will rely on their interpretation of the term marital property.

The identification of tangible assets acquired during the marriage does not stir the same controversy as the identification of intangible assets. Essentially, tangible assets are physical things—things that may be valued based on use (the value one receives from owning an asset) or in exchange (the value at which it may be sold to a third party). Either way, with these assets, identification typically is not an issue.

Identification issues relating to intangible assets, the most common of which is often labeled goodwill, can be much more difficult. The controversies are manifold, but the main issue in the identification of marital assets becomes whether the intangible asset, if one exists, belongs to the person or the enterprise and whether that intangible asset was developed during the marriage. In order to understand the treatment of these assets in a given state, we must understand the nature of these assets and how they were developed.

Ultimately, a valuation professional determines the value of property based on valuation principles and analysis coupled with professional judgment, the guidelines set by the statutes, and the precedents set by the courts interpreting those statutes. From there, the courts will determine what is fair and equitable in distribution. Aside from the states that mandate equal distribution, the final outcome of “who gets what and how much” is left to the judgment of the courts.

Regarding the distribution of assets, a Michigan court stated:

The only requirement [for an award of marital assets in a divorce action] is that the award result in a fair and equitable distribution of the marital assets.12

As sound as these societal principles may be, they offer the valuation expert little guidance as to the application of valuation principles to a particular situation.

The standard of value varies from state to state and may vary even within a state. Some courts do not define and follow any one standard of value consistently. As will be seen, the courts often use the term fair market value and attribute to it elements and attributes more closely related to investment value. The courts may not fully understand the assumptions that underlie the particular standard that they are applying or even intend to apply a certain standard of value at all. They are identifying and distributing assets in a manner they consider to be fair and equitable. As another commentator stated:

No single standard could possibly encompass the multitude of considerations necessary for equitably dividing marital assets.13

In addition to the division of property acquired during the marriage, most states have statutes that address spousal support (alimony) and child support and a body of case law that implements those statutes. There is a relationship between alimony and property distribution, and the combination of these remedies is used by the courts, which, in theory, look to be fair and equitable, without a requirement to adhere strictly to the underlying assumptions of a given standard of value. Courts often have the opportunity to adjust alimony or the percentages of the property distribution to achieve what they view as a fair outcome for the parties involved. The judge may start with a certain standard of value in mind, but may end at a completely different standard based on his or her interpretation of the facts and circumstances of the case. Moreover, the courts generally adhere to their interpretation of the law and the equities in the particular case more rigorously than they adhere to the assumptions inherent in or classification associated with a particular standard of value.

Relationship between Valuation and Identification of Intangible Assets

While one may suspect that a business has intangible assets (goodwill in particular), often there is no way to know that goodwill exists until the business is valued or sold. In matrimonial matters, frequently used methodologies for valuing goodwill can include excess earnings14 or finding the sale price above the net asset value of a business.15

The Washington case of In re: Hall,16 which addressed the valuation of goodwill in a medical practice, provides an example of several methods that the courts may recognize in valuing goodwill. According to the case, three of the methods are: (1) the capitalization of excess earnings method; (2) the straight capitalization method; and (3) the IRS variation on the capitalization of excess earnings method. The other two methods discussed in the case are: (4) the buy–sell agreement method; and (5) the open market approach.

Simply stated, some form of the capitalization of benefits (the first three methods) can be employed to determine whether an intangible asset exists. From a strictly legal point of view, these methods have been criticized for placing too much importance on future earnings, thereby including the future efforts of the owner.17 Some experts contest this criticism, contending that the ability of the asset to continue to produce earnings in the future is attributable to the fruits planted during the marriage. Another criticism is that these methods may set high relative values for an unrealized intangible asset for which the titled professional gives up a tangible asset such as real property or cash. This could potentially overcompensate the non-titled spouse by trading liquid assets like cash and property for a relatively illiquid interest in the goodwill of a closely held business.

The fourth method referred to in the case, the utilization of a buy–sell agreement, is addressed later in this chapter. The utilization of a buy–sell agreement is often considered in the valuation of fractional interests in professional partnerships where an arm's-length agreement is in place. Courts may rely more heavily on a buy–sell agreement to determine value if transactions have been consummated under the terms of the agreement as partners have entered and exited the partnership. A court probably will not consider an agreement binding if it was signed shortly prior to divorce, or if partners have come and gone without exercising the explicit formula established by the agreement.18

The fifth method, the so-called open market approach, tries to establish value upon a hypothetical sale. In a value-in-exchange context, this is seen by some as the most relevant method for valuing goodwill, as a quantifiable asset that would be realizable upon the sale of the business.

Appreciation on Separate Property

Another central issue in many divorces is the treatment of separate property owned by a spouse prior to the marriage or gifted to, or inherited by, the spouse during the marriage. The majority of states do not include separate property as distributable assets.19 However, special provisions may apply to appreciation on that property that occurs during the marriage. For example, the Pennsylvania statute mentioned earlier includes the increase in value of separate property over the course of the marriage. Divorce statutes generally include a description as to the circumstances where the appreciation of separate property can be included in distributable assets. The circumstances often relate to the cause of the appreciation during the marriage and the efforts of the spouse who owned the separate property. The cause of the appreciation is often classified as active or passive. Active appreciation is that which is caused by the efforts of one or both of the spouses; passive appreciation is that which is caused by external forces such as market fluctuations or the efforts of other partners.

On one extreme, there are state statutes that do not differentiate between active and passive appreciation on separate property, suggesting that neither is to be distributed.20 For instance, Delaware's marital dissolution statutes state:

(b). . . For purposes of this chapter only, “marital property” means all property acquired by either party subsequent to the marriage except: (1) Property acquired by an individual spouse by bequest, devise or descent or by gift, except gifts between spouses, provided the gifted property is titled and maintained in the sole name of the donee spouse, or a gift tax return is filed reporting the transfer of the gifted property in the sole name of the donee spouse or a notarized document, executed before or contemporaneously with the transfer, is offered demonstrating the nature of the transfer. (2) Property acquired in exchange for property acquired prior to the marriage; (3) Property excluded by valid agreement of the parties; and (4) The increase in value of property acquired prior to the marriage21 [emphasis added].

On the other extreme, the statutes do not specifically include or exclude a particular type of appreciation. Colorado, for instance, provides for this to be included in the marital pot:

(4) Subject to the provisions of subsection (7) of this section, an asset of a spouse acquired prior to the marriage or in accordance with subsection (2) (a) or (2) (b) of this section shall be considered as marital property, for purposes of this article only, to the extent that its present value exceeds its value at the time of the marriage or at the time of acquisition if acquired after the marriage22 [emphasis added].

Most states deal with the issue between the extremes. In some states, the appreciation on separate property may be marital if that appreciation was a product of marital efforts (marital efforts being the contribution of either or both spouses to the increased value, not necessarily to the increased value of the asset itself, but to the marital partnership in raising children, keeping the home, etc.). This does not include appreciation on premarital property from dividends, interest, or general market conditions that occur without any action by either individual (passive appreciation). North Carolina, for instance, is one of these middle-ground states. The North Carolina statute specifically defines the circumstances that constitute active and passive appreciation:

Passive increases in value, such as those attributable to inflation or to market fluctuations, will be considered as part of the separate property, whereas active appreciation in the value of the property, such as that resulting from economic or noneconomic contributions by one or both of the spouses, is to be treated as part of the marital property23 [emphasis added].

Additionally, the courts must make decisions on commingled property. Commingling refers to the mixing of separate and marital property. In the case of separate property, the issue is whether separate property has been mixed with marital property and whether this mixing causes the separate property to lose its character and become marital property. This is often referred to as transmuted property. Separate property can be transmuted to marital property by commingling. A few states have specific statutory provisions on commingled property. Missouri, for instance, states:

Property which would otherwise be non-marital property shall not become marital property solely because it may have become commingled with marital property.24

The Alabama statute, however, includes property that may be separate but has benefited both spouses during the marriage as marital property:

. . . the judge may not take into consideration any property acquired prior to the marriage of the parties or by inheritance or gift unless the judge finds from the evidence that the property, or income produced by the property, has been used regularly for the common benefit of the parties during their marriage [emphasis added].25

Most states that have addressed commingling have done so in the courts. For instance, Alaska decided that commingling itself does not necessarily establish intent to hold property jointly, and therefore the court should consider the property's source when determining what assets are available for distribution.26

Going back to the definition of marital property, if an asset was created during the marriage, these issues are not addressed. However, if an asset preexisted the marriage, an appraiser may have to employ multiple valuation dates27 and determine the value of the asset at the beginning and the end of the marriage. The issues of active and passive appreciation, transmutation, and commingling arise somewhat independently from the premise or standard of value, but are nonetheless important considerations for the practitioner.

PREMISES AND STANDARDS OF VALUE IN DIVORCE

As mentioned, the valuation of marital assets falls under two basic premises that form the basis of a continuum of value: value in exchange and value to the holder.

Premises of Value

Value in Exchange

States following the value in exchange premise view the identification and valuation of marital assets in the context of a sale. Value in exchange presumes some sort of hypothetical transaction where the business or business interest is exchanged for cash or cash equivalent. To the extent that the conclusion of value depends on the continued efforts of one party, that portion of the value is excluded and viewed as separate property or not as property at all. States following a value in exchange premise reject the inclusion of intangible value reliant on an individual for several reasons, including the viewpoint that postmarital efforts are necessary to realize the value, and also that the “property” allegedly created is not capable of being separated from the person.

Value to the Holder

Value to the holder considers the value of a business or business interest in the hands of its owner, regardless of whether he or she intends to sell the business. It further assumes that the titled spouse will continue to enjoy the benefits generated by a business that was created or appreciated during the marriage, and contemplating a value upon sale would dilute the actual value that both spouses enjoyed during the marriage, as only the titled spouse would continue to benefit from that value after the marriage ends.

Exhibit 5.1 shows the first level of the continuum of value for these two premises, which have different underlying assumptions involving a state's determination of what constitutes property and how it should be valued.

EXHIBIT 5.1 Continuum of Value: Premises of Value

In our view, these two premises form a continuum of value under which businesses or business interests are identified, valued, and eventually distributed in a divorce. In determining a value in exchange, those elements of skill and reputation attributed to the owner spouse that cannot be distinguished from the individual (and would no longer benefit the business if he or she departed) are typically not considered to be marital and should be separated from the value. One values only the assets of the enterprise that could be sold to a hypothetical buyer at the date of a hypothetical sale.

Under value to the holder, these issues typically do not come into play, as the presumption is that no sale will take place, and, therefore, the effect of the owner leaving is not relevant. Standards of value fall under these two premises, from fair market value, which is value in exchange, to investment value, which is value to the holder. Thus, the continuum of value moves from valuing only assets that may be sold to valuing assets that may have limited or no marketability absent the continued participation of the owner spouse.

The standards of value most often used by courts to value marital assets are fair market value, fair value (more commonly referred to in oppression and dissent cases), and investment value (also called intrinsic value or, colloquially, value to the holder).

In the remainder of this chapter, we explain how we analyze the premises and standards of value and their stated or implied application. We can use value in exchange and value to the holder as a framework to better understand the theory and application of the common standards of value used in divorce cases.

Standards of Value

Although a court may use the name of a particular standard of value, the assumptions normally associated with that standard of value are often treated inconsistently or not addressed at all. This can be more readily seen in the varying treatment of goodwill, shareholder-level discounts, and the weight accorded to buy–sell agreements. The valuation professional has to be aware of the precedent-setting case law in each state, including the underlying facts and assumptions of each case in addition to the exact words in the decision.

Fair Market Value

Fair market value is widely applied in divorce valuations. Several states have asserted through case law that fair market value is the appropriate standard; others have implied that it is the standard they are using by their treatment of personal goodwill and the applicability of shareholder-level discounts. Fair market value is defined by the Estate Tax Regulations as:

the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.28

Application of a fair market value standard for businesses or business interests in divorce focuses on those elements of the business value that are considered transferable. To a varying extent, the resulting value under this standard does not ordinarily include nontransferable elements such as personal goodwill. The extent to which this assumption applies varies in some states as to the consideration of the seller's participation in the transition. Some states view the application of fair market value as an immediate departure of the owner with an ability and willingness to compete. Other states consider a more orderly transition.

Simply stated, fair market value assumes a value in exchange: The buyer gets the asset and the seller gets cash or a cash equivalent. This value in exchange results in the identification and valuation of those elements that are normally transferable or capable of being transferred with no long-term participation on the part of the seller.

As we discussed in Chapter 2, certain assumptions are inherent in the application of the standard of fair market value. For example, since it falls within the value in exchange premise and contemplates a hypothetical sale of the business or business interests, discounts for lack of control and/or marketability are generally considered.

Fair Value

Fair value is defined mainly in connection with dissent and oppression cases in the corporation statutes and cases. Fair value in divorce is generally applied the same way as it is in dissent and oppression cases, in that it is a standard that is largely determined by case law.

Fair value is different from fair market value and investment or intrinsic value. Fair market value assumes a willing buyer and a willing seller. Investment value assumes that the business will not be sold and the owner will continue to receive benefits from the business or business interest (unless a sale is really occurring). In one context, fair value can entail an exchange, but not necessarily from a willing seller. Fair value may also assert that a lack of intention to sell a business prevents its valuation as a value in exchange. As we will show, some fair value cases adhere more to a value in exchange premise; others adhere to a value to the holder premise. Generally, if a valuation takes a pro rata portion of the enterprise value without shareholder-level discounts, we considered it to be fair value.

The 1950 Delaware dissent case, Tri-Continental v. Battye,29 defines fair value in this way:

The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder's proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents this true or intrinsic value, the appraiser and the courts must take into consideration all factors and elements which reasonably might enter into fixing the value.30

In this interpretation, the courts look to fairly compensate the departing party for that which has been unwillingly taken from him or her. To extrapolate this concept to divorce, under fair value, the courts may look to compensate the non-titled spouse for the value generated during the marriage but realized after the divorce. Most often, courts believe that absent extraordinary circumstances, it would be unfair in an oppression case to apply discounts to the value sought by the oppressing party, as the oppressed party has been mistreated and would otherwise be unwilling to sell. This would create an undeserved windfall for the oppressor. Similarly, in divorce (regardless of marital misconduct or fault), a court evaluating discounts may see the application of discounts as an unfair advantage to the party that will continue to enjoy the benefits of the asset.

In this respect, divorce and oppression may be similar in that they can both be seen in terms of the reasonable expectations of those entering into a partnership or contract (business or marital). A shareholder has the expectation of sharing in the benefits of the business for the course of his or her life or the term of the contract. Should those expectations be breached, the court looks to fairly compensate that individual. Marriage is viewed as an economic partnership in which each party has an expectation of sharing the economic benefits generated during the marriage. In this case, the court may view discounts, which lower the value attributed to the owner, as unfairly benefiting the owner spouse at the expense of the non-owner spouse.

Investment Value

Another widely used standard of value in divorce matters is investment value, which is often also referred to as intrinsic value. This standard commonly falls under the value to the holder premise. Application of this standard contemplates value not to a potential hypothetical buyer but rather to a particular buyer, which in the case of divorce is the current owner, hence, value to the holder. This standard also recognizes that there may or may not be an intention to sell or leave the business, and as it continues, the business will enjoy the benefits and the value derived from the owner's continued presence.

In this context, investment value differs from fair market value in that it will provide a going-concern value to the current owner, not a hypothetical buyer. Some courts refer to this standard as the value of a going concern to the owner. This standard of value identifies assets that have an inherent or intrinsic worth to the owner, which may not be transferable to another individual. Some argue that the existence of this asset, regardless of its transferability, was created or germinated during the marriage, and this value is partially attributable to the efforts of the non-owner spouse. During the marriage, both spouses benefited from that earning ability. After the marriage, only the owner will continue to benefit. Several states consider these types of assets marital; many do not. California's landmark case, Golden v. Golden,31 for example, gives the reasoning behind using the characterization of property that leads to the application of an investment value standard:

. . . in a matrimonial matter, the practice of the sole practitioner husband will continue, with the same intangible value as it had during the marriage. Under the principles of community property law, the wife, by virtue of her position of wife, made to that value the same contribution as does a wife to any of the husband's earnings and accumulations during marriage. She is as much entitled to be recompensed for that contribution as if it were represented by the increased value of stock in a family business.32

There are various assumptions involved in a determination of investment value. For example, the transferability (and therefore marketability) of personal goodwill is often not at issue, as there is likely no intention to sell. To illustrate, we can look at the example of a law firm in New Jersey, when the clients (goodwill) of the law firm could not be sold to another lawyer.33 Under a fair market value standard, the goodwill of a law firm in New Jersey at that time would have no value.34 However, under an investment value standard, the ability to sell is not as important as it is under the fair market value standard in determining the business's ongoing value to its current owner. The use of the investment value standard suggests that the court is attempting to compensate the non-titled spouse for the economic benefits the titled spouse will receive in the future, regardless of whether that spouse can sell those benefits. This appears to be the reasoning followed in New Jersey's Dugan v. Dugan.35

Also, when determining the investment value, discounts are typically not taken because investment value does not contemplate an actual or hypothetical sale, but only the value to the current owners.

Exhibit 5.2 presents the continuum of value for the premise of value and standards of value.

EXHIBIT 5.2 Continuum of Value: Premises and Standards of Value

Premises of Value Revealed through the Valuation of Insurance Agencies

Two cases involving captive State Farm insurance agencies demonstrate the difference between a value in exchange premise and a value to the holder premise. The Washington case of In re: Zeigler36 presents a value in exchange, whereas the Colorado case of In re: Graff37 reveals a value to the holder.

In this case, the business was seen as an entity independent from (but still reliant on) the products it sold. If Mr. Zeigler terminated his relationship with State Farm, the agency would have no goodwill value. Because the goodwill belonged to State Farm, Mr. Zeigler did not have any right to sell it, and therefore it had no value to him.

The opposite was seen to be true in the Colorado case In re: Graff. Shortly after the Zeigler decision, the Colorado Court of Appeals decided a case involving another State Farm agency, with a similar contract as the agency discussed in Zeigler.

In the case of Seiler v. Seiler,39 New Jersey also addressed the value of a captive insurance agency, in this case, an Allstate agency. The court found that there was no goodwill owned by the individual, as the husband was an employee of the firm, rather than a sole proprietor of his individual business. Any goodwill was associated with Allstate, rather than Mr. Seiler. As applied to the valuation of businesses and business interests, it appears that New Jersey is a fair value state,40 as the courts regularly reject discounts but include the value of goodwill, even in businesses that cannot be sold. However, because Mr. Seiler was an employee of the firm rather than a sole proprietor or a stockholder, the court found that there was no business and no value to goodwill.

As this shows, two states may view the exact same business in very different ways. When approaching a valuation, one of the most important indicia of value is whether the asset in question qualifies as a business. As we explain, only in New York41 is the value of goodwill in the form of a professional degree, license, enhanced earnings capacity, and celebrity status, without the associated business entity, considered divisible marital property.

Concepts of Value under the Two Premises

The continuum of value represented by the two premises, value in exchange and value to the holder, can be examined by looking at the treatment of goodwill and whether a particular state views this personal intangible asset as marital or separate property. Let us first look at value in exchange through the prism of two closely related issues: personal and enterprise goodwill and the applicability of a covenant not to compete, or the right to compete.

These differing assumptions of the seller's post-sale behavior can result in significantly different values for the business. Moreover, with regard to the valuation of professional practices and other types of businesses under value in exchange, this view of the covenant not to compete will form one of the bases of the difference between personal and enterprise goodwill. Under value to the holder, a sale is not necessarily contemplated. Therefore, the owner's participation in the transition is moot.

In the case that an actual sale occurs (at or prior to divorce), the court would have to consider whether the covenant's value was marital property. As the covenant's value affects an individual's behavior, under value in exchange, it would not likely be included in marital property. Under value to the holder, the issue is rarely addressed as there is an assumption that there is no sale.

STANDARDS OF VALUE IN DIVORCE AMONG THE 50 STATES

Lack of Statutory Insight

As we have mentioned, there is a substantial lack of statutory insight as to the standard of value in divorce proceedings. In dissenter's rights and oppressed shareholder suits, there is little doubt that fair value is the generally accepted standard. When it comes to divorce, only two states, Arkansas and Louisiana, provide any statutory guidance as to the standard of value. The Arkansas statute says:

§ 9-12-315.(4)—When stocks, bonds, or other securities issued by a corporation, association, or government entity make up part of the marital property, the court shall designate in its final order or judgment the specific property in securities to which each party is entitled, or after determining the fair market value of the securities, may order and adjudge that the securities be distributed to one (1) party on condition that one-half (1/2) the fair market value of the securities in money or other property be set aside and distributed to the other party in lieu of division and distribution of the securities [emphasis added].

The Louisiana statute more generally applies the fair market value standard:

§ 9:2801—(1)(a) Within forty-five days of service of a motion by either party, each party shall file a sworn detailed descriptive list of all community property, the fair market value and location of each asset, and all community liabilities [emphasis added].

Further, Louisiana's statute prevents the valuation of personal goodwill in the distribution of community assets:

§ 9:2801.2—In a proceeding to partition the community, the court may include, in the valuation of any community-owned corporate, commercial, or professional business, the goodwill of the business. However, that portion of the goodwill attributable to any personal quality of the spouse awarded the business shall not be included in the valuation of a business [emphasis added].

Most states do not recommend or require any particular standard with which to value assets upon the dissolution of marriage. For example, New Jersey's equitable distribution provision states:

§ 2A:34-23h. In all actions where a judgment of divorce or divorce from bed and board is entered the court may make such award or awards to the parties, in addition to alimony and maintenance, to effectuate an Equitable Distribution of the property, both real and personal, which was legally and beneficially acquired by them or either of them during the marriage. However, all such property, real, personal or otherwise, legally or beneficially acquired during the marriage by either party by way of gift, devise, or intestate succession shall not be subject to Equitable Distribution, except that inter-spousal gifts shall be subject to Equitable Distribution [emphasis added].

Although the Arkansas statute is specific regarding the applicable standard of value in divorce, the New Jersey statute, along with the majority of others, states that property is to be distributed but does not state how the property is to be valued or the standard of value to be used in the process.

In the course of our research, we found that eight states made reference to fair market value in their equitable distribution statutes/community property statutes, but not with regard to the value of a closely held businesses or business interest. These states are: Montana, North Carolina, Oregon, Pennsylvania, Tennessee, Vermont, West Virginia, and Wisconsin.

Revealing Standard of Value through Case Law

Many states appear to view the valuation of marital property based on the circumstances of the case or the precedents previously set by the courts with respect to certain elements of value. Because of this, clarity about the applicable standard of value suffers from the valuation practitioner's point of view. We can begin to look at the decisions made by each state as a means of suggesting which standard or combination of standards may apply. Later we will further discuss the continuum of value as it applies to these decisions and the actual classification of states into standard and premise of value categories.

Whereas, with few exceptions, state statutes do not address the standard of value, a review of relevant case law can provide further insight as to the application of a standard of value in a particular state. A few states, including Hawaii, Florida, and Missouri, more clearly apply fair market value as the standard of value in their case decisions. For example, Hawaii's statute does not provide guidance on the standard of value:

§ 580-47—Upon granting a divorce, or thereafter if, in addition to the powers granted in subsections (c) and (d), jurisdiction of those matters is reserved under the decree by agreement of both parties or by order of court after finding that good cause exists, the court may make any further orders as shall appear just and equitable (1) compelling the parties or either of them to provide for the support, maintenance, and education of the children of the parties; (2) compelling either party to provide for the support and maintenance of the other party; (3) finally dividing and distributing the estate of the parties, real, personal, or mixed, whether community, joint, or separate; and (4) allocating, as between the parties, the responsibility for the payment of the debts of the parties whether community, joint, or separate, and the attorney's fees, costs, and expenses incurred by each party by reason of the divorce. In making these further orders, the court shall take into consideration: the respective merits of the parties, the relative abilities of the parties, the condition in which each party will be left by the divorce, the burdens imposed upon either party for the benefit of the children of the parties, and all other circumstances of the case.

Accordingly, the statute provides only a general outline for the dissolution of the marital estate. However, in the 1988 Hawaii case, Antolik v. Harvey,42 the court clearly applies fair market value as the standard with which to value businesses.

No state specifically uses the terms investment value or fair value as the standard of value in their statute, but various case decisions in a state might provide the insight so as to generally establish a given standard of value. New Jersey's Brown v. Brown43 (discussed in detail later) uses the language of fair value and refers to New Jersey dissent and oppression cases to determine fair value.

Similarly, in Grelier v. Grelier,44 the Alabama Civil Appeals Court, in a case of first impression, referred to Brown in addressing whether a divorce court should use minority and marketability discounts when assessing the value of a divorcing spouse's interest in a closely held business organization. Coming to a conclusion that no discount for minority interest and lack of marketability should be applied and referring to Brown from New Jersey, the Alabama Civil Appeals Court indicated:

Because the Alabama Supreme Court has adopted the same reasoning that is applied in New Jersey in dissenting-shareholder cases, it seems reasonable to conclude that it would follow the same reasoning in divorce cases involving minority ownership of closely held business organization.45

California's Golden v. Golden,46 although never specifically mentioning investment value, clearly lays out what appears to be a value to the holder treatment of assets that embodies most of the elements found in investment value.

As Exhibit 5.3 shows, we begin with two premises of value and place the standards of value under the applicable premises. Fair market value is a value in exchange, and investment value is a value to the holder. Fair value may fall under either premise in that it may contain elements of both. The three cases we have mentioned in terms of the standard of value used are placed on the continuum as examples.

EXHIBIT 5.3 Continuum of Value: Standards of Value with Case Examples

Toward a Standard of Value Classification System

To perform this analysis, we first looked to the statutes of all 50 states and the District of Columbia for guidance on the standard of value applied in each jurisdiction. We found that only Arkansas and Louisiana provide direction in their statutes. We then moved to the case law in each jurisdiction, and through this review, we found clearer guidance in 24 additional states. Including Arkansas and Louisiana, 25 states direct the use of fair market value in their case law, and one state, Alabama, uses the term fair value.

The standard of value in the remaining 25 jurisdictions must be inferred from the use and application of certain concepts. In these jurisdictions, we examined the treatment of personal versus enterprise goodwill, shareholder-level minority and lack of marketability discounts, and the weight accorded buy–sell agreements. In value in exchange states, we looked at the language of cases and the use of discounts to determine whether a fair market value standard or a fair value standard was being followed. Additionally, by reviewing the language of the case and the treatment of goodwill and covenants not to compete, we have tried to determine whether a state followed a walk-away fair market standard or a more traditional fair market value standard.

In some states, the standard of value is less clear and the body of case law does not imply adherence to any particular standard or valuation principle, perhaps to intentionally allow the court a higher degree of flexibility to pass judgment based on the facts, circumstances, and equities of a given case.

Although the standard of value in each state is often not an absolute, for analytical purposes it is helpful to categorize states based on our earlier assumptions. Although this should not be seen as a hard-and-fast determination of the application of a specific standard of value, this classification system should provide a reasonable starting point from which to analyze how value is viewed in a particular state. As always, the valuator must be conscious of the nuances in any given case or state that may affect how value is determined.

We begin with the manner in which states view intangible value, specifically goodwill. The treatment of goodwill can be an indicator of how a court views marital property, the premise of value, and the standard of value. Just as the fair market value standard implies the exclusion of personal goodwill (because it cannot be transferred upon sale), prior case law demonstrating the consistent exclusion of personal goodwill implies that the state follows a value in exchange premise and the use of a fair market value standard.

The listed states, either through statute or specific language contained in case law, specifically mention the standard of value that should be used in a divorce valuation. Following this concept, we cite cases where the standard of value is specifically mentioned.

For the remaining unclassified states, we can look at the manner in which certain issues are treated to reveal the standard of value. Additionally, we can look at the way the states that use specific language treat certain issues in their case law to make a more specific assessment of their standard of value.

First, we can look at whether a state chooses to follow a value in exchange or value to the holder premise by its treatment of goodwill. If nonmarketable or personal goodwill is excluded, the state falls under a value in exchange premise. If a state does not distinguish enterprise and personal goodwill in its case law (or specifically includes personal goodwill), we categorize it under a value to the holder premise.

Under this classification system, a value in exchange state may be either fair market value or fair value based on its consideration of goodwill, discounts, buy–sell agreements, and case-specific language.

In terms of case-specific language, some cases use concepts that imply fair value rather than fair market value, such as an unwilling buyer, unwilling seller, fairness, or instruction to take a pro rata share of the enterprise. Other cases use language of how much a willing buyer would pay or how much a willing seller would accept, indicating a fair market value standard. Courts seeking to determine a value to the holder often use language indicating that a sale is unlikely or the value of a business or business interest should be its value to its current holder.

Under the value in exchange premise, following a fair market value standard of value, the language used may further delineate fair market value into a so-called walk-away standard where very little, if any, goodwill is considered a marital asset. Similarly, a value to the holder state will reveal either fair value or investment value based on the same principles of language.

The application of discounts may also reveal the standard of value. If shareholder-level discounts are applied, the case generally falls under fair market value. Under a value in exchange, if discounts are rejected, the case generally falls under fair value. Under value to the holder, discounts are generally not contemplated. However, some cases include goodwill without distinguishing personal and enterprise goodwill and reject the application of discounts. This also suggests a fair value standard.

The analysis of the weight accorded buy–sell agreements depends more on the context and language in the decision. If the language in the decision indicates that great weight should be accorded the buy–sell agreement because it is the amount that the individual will actually receive, that would be a strong indication of value in exchange. If the language in the decision measures the weight associated with the buy–sell agreement in terms of its fairness, it indicates that the continuum is moving from value in exchange to value to the holder. If the language in the decision indicates that little or no weight should be accorded to the buy–sell agreement because there will be no sale, then that indicates a value to the holder standard.

Exhibit 5.4 presents these principles graphically.

EXHIBIT 5.4 Value in Exchange, Value to the Holder Flowchart

Additionally, certain states contain elements that belong to both value in exchange and value to the holder. We consider these to be hybrid states. For example, New York looks to apply fair market value in some cases73 while in other instances also having cases that clearly fall under value to the holder.74 The list that follows classifies states according to our analysis of their treatment of goodwill, shareholder-level discounts, and the weight accorded buy–sell agreements.

There are no states without decisions regarding the standard of value.

As with dissenter's rights and oppression proceedings, we can look to the law associations for guidance on the standard of value. The ALI's Principles of the Law of Family Dissolution132 espouses a value in exchange premise, because it advocates excluding nonsalable goodwill attributable to the individual for assets subject to equitable distribution. The reasoning separates enterprise goodwill and personal goodwill from any value associated with an increased earning capacity. The ALI's Principles of the Law of Family Dissolution state:

(1) Spousal earning capacity, spousal skills, and earnings from postdissolution spousal labor, are not marital property.

(2) Occupational licenses and educational degrees are not marital property.

(3) Business goodwill and professional goodwill earned during marriage are marital property to the extent they have value apart from the value of spousal earning capacity, spousal skills, or postdissolution spousal labor.

In the explanation to this passage, the ALI endorses a market treatment for goodwill, indicating that it exists if and only if the market value of the practice exceeds the asset value.133

Although the Principles of Corporate Governance are cited continually in case law and legal scholarship with regard to fair value in dissenters' rights and shareholder oppression matters, the Principles of the Law of Family Dissolution are not often cited in marital dissolution matters. The states are generally more concerned with the case law precedents of their own or other states with respect to goodwill, discounts, earning capacity, and the like than with the suggestions of law associations.

To demonstrate how we arrived at the classification system, we can start by looking at Arkansas'Wilson v. Wilson134 as an example of why Arkansas is categorized as a fair market value state. In this case, for goodwill to be marital property, it has to be a business asset with value independent of the presence or reputation of a particular individual.

California's Golden v. Golden, however, established that goodwill in a medical practice exists, and the individual practitioner's inability to sell it should not affect its consideration as an asset because the non-titled spouse contributed to its existence. This implies an investment value standard.

New Jersey's Brown v. Brown is a matrimonial case where there are continuing references to the fair value standard as used in dissenting and oppressed shareholder matters. Accordingly, fractional interests in businesses seem to be viewed the same way in matrimonial matters as in dissent and oppression matters in New Jersey.

New York is an example of a hybrid state. While seeming to base the valuation of businesses on the IRS's Revenue Ruling 59-60, including the application of shareholder-level discounts where appropriate (an indicia of fair market value), the state seems to fall closer to investment value with regard to other types of marital property. In fact, New York has gone so far as to assign a value to a license, professional degree, and enhanced earning capacity.

We next address the key issues and cases that help form the basis for our classification system. We begin with the treatment of goodwill, especially enterprise and personal goodwill, by the individual states.

VALUE IN EXCHANGE

As discussed, value in exchange assumes a hypothetical sale and looks to the value of the asset based on what would be realizable upon that sale at the valuation date. Several issues stem from the assumption of a hypothetical sale. We begin by looking at the differences in enterprise and personal goodwill, as a value in exchange would be concerned only with the elements of value that could be transferred to another owner as opposed to those that reside solely with the current owner.

Goodwill

Enterprise Goodwill

Enterprise goodwill is the goodwill of the business. Therefore, it generally is a transferable asset, and it almost always is included in the valuation of the enterprise, even in those states that adhere to the narrowest interpretation of fair market value.135 Upon selling a business, one has the ability to transfer enterprise goodwill to the buyer. Enterprise goodwill is defined by Black's Law Dictionary as “favorable consideration shown by the purchasing public to goods or services known to emanate from a particular source.”136 The existence of enterprise goodwill is based on the fact that customers return to an enterprise, based on its location, staff, telephone number, facilities, and the reputation of the overall entity.137 Enterprise goodwill is found when there is an expectancy of repeat patronage attributable to the entity as distinguished from the individual. An elegant description is found in the nineteenth-century English case Cruttwell v. Lye:138

The good-will, which has been the subject of sale, is nothing more than the probability, that the old customers will resort to the old place.

An early twentieth-century New York commercial case makes a broader statement about goodwill, extending it not only to a particular place, but to a particular advantage that may be sold to another:

Men will pay for any privilege that gives a reasonable expectancy of preference in the race of competition.139

These privileges might include a business's name, its phone number, its logo, or any facet of the business that might give it a continuing competitive advantage. Enterprise goodwill is the goodwill adhering to an entity regardless of the input of any specific individual.

Personal Goodwill

Personal goodwill is goodwill that adheres to an individual. It consists of personal attributes of an individual, including personal relationships, skill, personal reputation, and various other factors. It is usually not transferable and, therefore, states with a value to the holder premise usually do not require it be distinguished from enterprise goodwill. Justice Joseph Story, Associate Justice of the Supreme Court serving from 1812 to 1845, builds on the idea of goodwill adhering not only to a location, but to the reputation or celebrity of the establishment that causes customers to resort to a particular behavior.

Goodwill may be properly enough described to be the advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.140

The basic question surrounding the issue of personal goodwill comes from whether certain abilities, relationships, qualities, and attributes of individuals that generate income (including their reputation) can or should be distributed as marital property. Additionally, are these personal assets transferable within some reasonable time frame to the entity through an individual's cooperation?

A useful working definition of personal goodwill is “[the] part of increased earning capacity that results from the reputation, knowledge and skills of individual people, and is nontransferable and unmarketable.”141 Simply, personal goodwill is that which would make a doctor's patients follow him even if he changed his location, staff, and phone number.

California's In re: Marriage of Lopez142 is an example of an early case where the court suggested a list of factors to be considered in valuing goodwill. Those five factors are:

Upon careful review, it is clear that at least four of the five factors deal with personal attributes. Typically, the age and health of the professional is of little concern to the buyer, unless they have impacted the historical performance of the practice or are used as a negotiating ploy. The reliance on these factors implies that California falls under a value to the holder premise, as there appears to be no explicit attention drawn to the difference between the professional and the practice. In a value in exchange state, most of the five factors would be used to determine how much goodwill is dependent on the individual and should therefore be excluded from value.

Owner's Compensation

There is often an interrelationship between enterprise goodwill, personal goodwill, and the amount paid to the owner employee. One characteristic of a closely held business is that typically its owners are also its key employees. As a result, there is a merging of a return on labor (wages) and return on capital (profits/dividends). The valuation professional is tasked with the responsibility of separating these two returns into wages paid to the employee on an arm's-length basis and the profits generated by the business. This is a difficult task under ordinary circumstances; it becomes even harder when the enterprise is indistinguishable from the individual. The separation of these two returns is necessary under both a value in exchange and a value to the holder premise. Assuming one can estimate compensation for the replacement proxy, it is important to understand whether the resulting profits, if any, are attributable to the enterprise and therefore part of the business or merely the earning capacity of the individual.

The case of Dugan v. Dugan143laid out several factors that should be considered in an assessment of reasonable compensation, including age, experience, education, expertise, effort, and locale. In a value in exchange state, to the extent these excess profits are generated by some unique inchoate attribute, the profits in excess of the reasonable compensation, if any, are considered personal goodwill and not includable as a marital asset. In a value to the holder state, typically, the individual attributes are not explicitly excluded but are considered in the selection of reasonable compensation and in the capitalization rates used in the valuation methodology.144

Goodwill versus Going Concern

The Pennsylvania case Gaydos v. Gaydos145 may further illuminate the character of personal goodwill. The husband, a sole-proprietor dentist, argued that the difference between the fire-sale value and the court's value (found using the average income method) was personal goodwill. The trial court said that this was simply the going-concern value of the business and, therefore, was marital property. On appeal, the Appellate Court decided that the husband, not the practice, was responsible for the net income of the business, and that going-concern value was contingent upon his continued participation, not that of another dentist at the same practice in place of him. (The appellate court was saying that the value was personal to the practitioner.)

Going-concern value, as indicated by the Gaydos court, is not the same as goodwill. Going-concern value refers to the intangible elements that result from factors such as having a trained work force, an operational plant and the necessary licenses, systems and procedures in place. It is also based on the concept that a business enterprise is expected to continue operations into the future.146 Business goodwill is not concerned with physical assets; instead, it can be viewed as the excess earnings the business produces due to (among other things) its reputation and skill.147 Personal goodwill concerns the excess earnings reliant on the practitioner's personal attributes.

Exhibit 5.5 builds on the continuum of value with an additional layer showing the types of intangible value and where they fall over the full continuum. In the next section, we address the intangible values included in marital property under value in exchange, and how those are differentiated from value to the holder intangibles. Later, we will address the most inclusive intangibles under our analysis of value to the holder concepts.

EXHIBIT 5.5 Continuum of Value: Intangible Assets

Distinguishing Personal and Enterprise Goodwill

Typically, commercial goodwill that has been institutionalized is considered marital property. It is when there is a question as to whether the goodwill adheres to an individual or to a business that identification and valuation of goodwill can be problematic. The requirement to distinguish between personal and enterprise goodwill often can be used as a litmus test to establish how that particular state views value. In those states where a value to the holder premise is employed, the issue is almost never explicitly addressed, as there is no requirement to distinguish between transferable enterprise goodwill and nontransferable personal goodwill. Generally enterprise goodwill, the institutionalized expectancy of repeat patronage, is considered marketable. Personal goodwill, the goodwill associated with the person, generally is not marketable without the continued post-marital participation of that person.148

In a value in exchange state, transferable enterprise goodwill must be separated from nontransferable personal goodwill, but this is not always an easy distinction. The line between an individual's contribution to the success of a business and the success of the business itself is not necessarily clear. However, any state using fair market value or some other variation of a value in exchange premise requires the valuation practitioner to distinguish between the two concepts.

The seminal Florida case of Thompson v. Thompson149 provides insight as to how that state views the distinction between personal and enterprise goodwill, in this case, in a professional practice.

Unfortunately, Thompson refers to fair market value as a method of value and not a standard of value. While approaches and methods can be used to establish fair market value, the term fair market value is a standard under which various approaches and methods are employed.

In some practices, the viability of the practice may be dependent on the continued participation of an individual practitioner, making it difficult to distinguish between enterprise goodwill and the individual practitioner's reputation. Courts that look for a transactional value have in some cases excluded the consideration of goodwill in a professional practice altogether because of either its lack of marketability or its reliance on a particular individual. Other courts have acknowledged that goodwill in a professional practice may have elements of both personal and enterprise goodwill, suggesting that there would be a value to the enterprise in the sale of the business to another individual. At the other end of the continuum, courts in states that favor a value to the holder premise will likely not differentiate between personal and enterprise goodwill as no transaction is contemplated and therefore the transferability issue is not as relevant.

Because of the service aspect of their operations, professional practices and other service businesses are where the personal/enterprise goodwill issue is most evident. A group or partnership type of professional practice might have less reliance on personal goodwill, as it may involve several individuals providing the service and transferability in the form of partners buying in or out of a practice. Other commercial enterprises, including manufacturing, retailing, and wholesaling, may not be as reliant on an individual; therefore, personal goodwill may be less prevalent, depending on the nature of the firm and its management structure. Of course, these are all flexible concepts that will vary based on the circumstances of any given enterprise.

Either the stated or implied standard of value in a given state probably will have the largest effect on the elements of goodwill of a professional practice that are identified as marital property. Indiana's Yoon v. Yoon151is a case where a court attempted to distinguish personal and enterprise goodwill in a professional corporation.

Following Yoon, the case of Bobrow v. Bobrow152 discussed the enterprise goodwill of the accounting firm Ernst & Young. In this business, the facts of the case established that no individual owner had any personal goodwill in the entity and therefore only enterprise goodwill existed.

Because of its conclusion of value as the pro rata share of the enterprise value, Bobrow may be construed as a fair value case under the value in exchange premise. Despite a buy–sell agreement that specified only payment of what was in the capital account, the court valued Mr. Bobrow's ownership at his pro rata share of the enterprise, similar to the way it would be treated under a fair value standard in a dissenting or oppressed shareholders' case. The asset can be sold, enterprise goodwill may be valued, and no personal goodwill is involved. However, were this to be viewed under the fair market value standard, typically discounts would be considered for both lack of control and lack of marketability. We discuss this distinction later on in the chapter.

There has also been substantial debate as to whether the value of goodwill in a sole proprietorship should be treated in the same manner as an interest in a partnership or a closely held corporation. In a sole proprietorship, the value of the business may be inherently more dependent on the proprietor than it would be for a business owned and managed by several operators working together. The Pennsylvania case Beasley v. Beasley153 noted this difference by stating:

A sole proprietor can be distinguished from a partnership, or a professional corporation, to which an ascertainable value can be ascribed for the purpose of buying into or withdrawing from the relationship: but it is the association, or some share of it, that is valued and not the individual partner upon which the value is placed. . . . When a sole proprietor terminates his activity, the lights go out, the value of the sole proprietorship is extinguished and is non-transferable.

A number of states follow Pennsylvania's Beasley in recognizing that goodwill exists in a professional practice, but typically not in a sole proprietorship. These include Alaska,154 Connecticut,155 Maryland,156 Nebraska,157 Oklahoma,158 Minnesota,159 Louisiana,160 Ohio,161Tennessee,162 and Utah.163

Nebraska's Taylor v. Taylor164commented on the dependence of goodwill on the continued efforts of a particular individual. This comment was later cited in Florida's Thompson v. Thompson165 in determining whether personal goodwill should be included in the value of a professional practice. The Taylor court indicated that:

If goodwill depends on the continued presence of a particular individual, such goodwill, by definition, is not a marketable asset distinct from the individual. Any value which attaches to the entity solely as a result of personal goodwill represents nothing more than probable future earning capacity, which, although relevant in determining alimony, is not a proper consideration in dividing marital property in a dissolution proceeding.166

Walk-Away Value

In the Florida case Held v. Held,167 the trial court relied on the opinion of one expert who claimed that a non-solicitation agreement was part of enterprise goodwill. On appeal, the court ruled that the lower court impermissibly valued personal goodwill in the non-solicitation agreement and remanded, directing the trial court to use only the adjusted book value in determining the fair market value of the business. Similarly, as discussed earlier, the court in Hawaii's Antolik v. Harvey168 criticized the lower court for not considering that the chiropractor would compete upon the sale of his business.

Under this fairly narrow view of fair market value, the assumption is that the seller could and would compete with the buyer, thereby taking nearly all of the otherwise transferable goodwill. In these instances, the business's value would most likely be close to the net tangible assets of the business. Under a more conventional interpretation of fair market value, the seller would cooperate, to some extent, with the buyer. For this reason, some refer to states that apply the more narrow view of fair market value in this fashion as walk-away value states.

The following states have cases that use language implying the walk-away standard.

Merging of Personal and Practice Goodwill

There may also be instances when the value of the personal goodwill merges with the enterprise goodwill. This normally results from the professional's choice to grow the practice and surround him- or herself with capable people and institutionalize the personal goodwill. As an example of institutionalization, the Mayo Clinic is a business whose personal goodwill has merged with its practice goodwill. It is fairly obvious that no one goes to the Mayo Clinic to be treated by someone named Mayo, but the reputation of the practice is such that people will travel from around the country to be treated there.176 The enterprise goodwill could (and normally does) exceed the value of the personal goodwill when the personal goodwill has been institutionalized.

Covenant Not to Compete

The lack of transferability of personal goodwill is part of the reason why many courts will exclude it as marital property. However, some elements of personal goodwill may be transferred over time by an individual who will participate in the transition by, at a minimum, signing a covenant not to compete.177

Neither an editor nor lawyer, nor a physician, can transfer to another his style, his learning, or his manners. Either however, can add to the chances of success and profit of another who embarks in the same business in the same field, by withdrawing as a competitor. So that the one sells and the other buys something valuable . . . the one sells his prospective patronage, and the other buys the right to compete with all others for it, and to be protected against competition from his vendor.178

By paying for the restriction of the former owner's ability to practice, the buyer effectively purchases some of the personal goodwill that would otherwise take away clients.179 The transition may also include a consulting contract, whereby the seller is compensated for remaining at the corporation to help transition the company to the buyer, thereby transferring a portion of his or her personal goodwill to the corporation.

The existence of a covenant not to compete may transfer some of an individual's goodwill to the enterprise. Interestingly, the necessity of a covenant indicates two important points. The first is that the buyer perceives that eventually the goodwill can be transferred, and the second is that at the valuation date, some or all of the goodwill still belongs to the seller. Since personal goodwill, by its very nature, is inextricably tied to the individual, most states consider a covenant not to compete as separate property.

In other words, jurisdictions in which the value in exchange premise is used most often consider a covenant not to compete as proof that some goodwill is indeed personal and therefore excludable from the marital estate, and therefore any proceeds from such covenant would be separate property. In a value to the holder state, however, the issue is typically not addressed because a sale is not necessarily contemplated.

The Florida case Williams v. Williams180 considers the effect of a covenant not to compete. In this case, the Court of Appeals elaborated on the decision in Thompson v. Thompson, where the fair market value standard was decided to be the determining factor in valuing goodwill.

The South Carolina case Ellerbie v. Ellerbie181is an example where a court decided that the value of an actual covenant not to compete should not be included as distributable property. In this case, there was an actual transaction with a sale agreement entitled “Merger Asset Acquisition Agreement and Covenant Not to Compete.” This agreement indicated that $422,000 was paid for the assets of the business and $1,200,000 was paid for a covenant not to compete. The court decided that, in this case, the value of the covenant not to compete was separate property and therefore should not be included in the value of the business. It should be mentioned that in these examples it is assumed that the covenants were to prevent sellers who were capable of competing from being able to compete and not just an alternative way of structuring a sale.

The Oregon case of Slater v. Slater182 addressed the issue of whether one should assume that the business owner would execute a covenant not to compete as part of a transaction. The Court of Appeals of Oregon indicated that:

On de novo review, we agree with the husband that the trial court erred in predicating its value of the business—and, particularly, its goodwill—on the assumption that the husband would execute a noncompetition covenant.183

The court reversed and remanded it to the trial court to determine a value for the chiropractic practice without the execution of a covenant by the owner/husband.

The Minnesota case Sweere v. Gilbert Sweere184 specifically addressed the value of a covenant not to compete. In this case, the court had to decide whether $200,000 from a noncompete agreement should be included in the divorce settlement as marital property. The court found that the portion of the money paid that compensates the spouse for restricting post-marital personal service was separate property. However, any of the payments made to secure transfer of corporate assets was marital property. Ultimately, the court concluded that the purpose of the agreement may have been to prevent Mr. Sweere from interfering with the transfer of goodwill. To this extent, the noncompete was representative of marital goodwill, not post-marital labor and was included in the marital property.185

As we have discussed, value in exchange states assume that there will be a hypothetical sale and seek to value the asset based on what would be realizable in a such a sale between a willing buyer and a willing seller at or near a specifically delineated valuation date. These states choose to exclude personal goodwill.

Exhibit 5.6 shows the value in exchange portion of the continuum of value and case examples of the differing treatments of the covenants not to compete falling under the associated standards, premises, and treatments of intangible value.

EXHIBIT 5.6 Continuum of Value: Intangible Assets under Value in Exchange with Case Examples

At the leftmost end of the continuum of value are the states in which the title holder is viewed as if he or she would not sign a covenant and would compete immediately with anyone who would buy the business. Assuming that the business's goodwill was personal, typically, in this case, there will be very little value to the business above the tangible assets, if the practice has not merged the personal goodwill into enterprise goodwill. The further one moves to the right on the continuum, the longer the transition between the sale and the departure of the seller.

As set forth in the continuum of value chart in Appendix C:

Before moving on to the treatment of intangible assets under value to the holder and the standard of investment value, we need to address shareholder-level discounts and the weight afforded buy–sell agreements as viewed under value in exchange.

Lack of Control and Marketability Discounts under Value in Exchange

Lack of control and marketability discounts are also issues that merit discussion in the context of value in exchange as compared to value to the holder. A state's treatment of these discounts can be another indicia of the premise and standard of value under which courts in that state view valuation in divorce matters. Theoretically, those standards of value that fall under the value in exchange premise typically require the explicit consideration of lack of control and marketability discounts (commonly referred to as shareholder-level discounts) to the value of the owner's shares in recognition of what a willing buyer would pay for the owner's shares upon a hypothetical sale. Alternatively, a standard of value falling under a value to the holder premise does not require explicit consideration of these discounts, as they would be applicable only upon sale, and a sale is not contemplated under this standard. Some states do not fit neatly into either category. Additionally, some states apply a standard more closely akin to fair value as used in dissenting shareholder matters, as buyers or sellers may not be willing, as required by fair market value. These states generally do not apply shareholder-level discounts.

In the U.S. Tax Court, discounts for lack of control and of marketability are generally considered and, when appropriate, applied in the determination of fair market value. The application of these types of shareholder-level discounts in matters of dissenting and oppressed shareholders and the divorce context can be more problematic. As we discussed in Chapter 3, in dissenting and oppressed shareholder matters, absent extraordinary circumstances, the courts and the law associations have been trending toward the elimination of shareholder-level discounts. The reasoning for this trend is that, since neither buyer nor seller are willing participants, the moving party should be compensated for what was taken—either the pro rata share of a going concern or what the owner would have reasonably expected to receive from continuing involvement with the enterprise.

In our view, the treatment of shareholder-level discounts can provide additional insight into separating states into value in exchange, value to the holder, or hybrid states. Typically, value in exchange states that use the fair market value standard require consideration of shareholder-level discounts; value to the holder states using some version of investment value do not. Hybrid states use a combination of standards and may also use fair value as a standard.

Does intention to sell matter in the application of discounts? Typically, under the fair market value standard, the intention to sell may have an impact only on the size of the discounts. Since fair market value assumes a hypothetical sale of the business or business interest, normally shareholder-level discounts such as a discount for lack of control or marketability are considered and, where appropriate, applied. However, in some instances there is a question of whether shareholder-level discounts should be applied at all, given the facts and circumstances of the case. The fair market value standard mandates consideration of shareholder-level discounts, not the automatic application of them.

To some courts, the intention to sell is an important factor in determining what stream of income the individual can expect to receive and whether shareholder-level discounts should be applied. The Oregon case Tofte v. Tofte186 directly addresses this point.

The Colorado Supreme Court was confronted with similar circumstances in In re: Marriage of Thornhill187 as the wife argued that no discounts should be applied and the standard of value for divorce purposes should be fair value.

Thornhill is an important case relative to the standard of value. In this case, the wife attempted to argue that the holding in Pueblo,188 a dissenters' shareholder case, was equally applicable in marital dissolution matters. The Supreme Court of Colorado disagreed and indicated that, because of the statutory language in the dissenters' and oppressed statutes, fair value was appropriate.

Since no such language is contained in the marital dissolution statute, the court refused to extend the holding in Pueblo to marital dissolution matters.

Accordingly, although there are cases in Colorado that would indicate that certain types of assets are closer to value to the holder than others, Thornhill indicates that the application of the marketability discount is at the court's discretion.

Using consideration and, if appropriate, the application of shareholder-level discounts as criteria to determine the applicable standard of value, these states can be categorized as fair market value states: Alaska, Arkansas, Connecticut, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New York, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Vermont, West Virginia, and Wisconsin.

When one uses the treatment of goodwill along with the application of shareholder-level discounts as two criteria for determining the standard of value, one may find that a state's treatment of each issue is not consistent with just one standard of value. For example, a state may not require the distinguishing of personal from enterprise goodwill, which suggests a value to the holder premise, but the state may also require consideration of shareholder-level discounts.

Fair Value

As mentioned previously, fair value is not the same as fair market value. While fair market value considers a willing buyer and a willing seller, generally when fair value is at issue, one of the parties is not willing. Therefore, in order to compensate that party fairly, special considerations are made.

In dissenters' rights and oppressed stockholder cases, in many states, these special considerations consist of disallowing discounts or applying them only in extraordinary circumstances. Upon divorce, the court may also decide that it would be unfair to apply discounts to the value of shares, regardless of how it treats personal goodwill. In those instances, courts have used a spouse's pro rata share of enterprise value, which is language normally associated with fair value.

The outcome of the Virginia case of Howell v. Howell189 represents value in exchange without discounts. This case addresses the applicability of discounts while excluding any personal goodwill present by virtue of an individual's reputation. This case is often referred to as a fair value case.

In this case, the court used the concept of highest and best use, reasoning that the highest value that would be realized was that which would be achieved through the owner's continued presence, not upon sale, and that therefore discounts should not be applied. While Virginia requires one to distinguish personal and enterprise goodwill, thereby implying a titled spouse's departure, the court in this case considered that the highest and best use was the title holder's continued presence. This case appears to have elements of both fair market value and investment value. We have categorized it as fair value because it calculates the value as a pro rata share of the enterprise value.

The New Jersey case Brown v. Brown191addresses the valuation of a wholesale flower distributor in a marital dissolution case in terms resembling those normally found in fair value in oppression and dissenters' rights matters. In this case, no distinction was made as to personal or enterprise goodwill, and the issue at hand between the valuation experts was whether marketability and minority discounts should be applied.

Brown has elements of fair value, with its rejection of discounts, and investment value, in the consideration that the business is not likely to be sold. The case states that the husband will receive the benefits of ownership by continuing to hold the asset. As mentioned previously, Brown was referenced in the Grelier194 case in Alabama.

North Dakota also has two decisions where the court looks to determine fair value. One of these cases195 looked at a situation where the only way the wife could recover her interest would be to file as an oppressed shareholder; therefore, in the divorce proceeding, the court awarded her the fair value of her interest without discounts for lack of marketability and lack of control. In another case,196 the court upheld the judgment of the trial court that a small discount for lack of control status would be equitable. In these cases, it appears that the courts may have been looking for an equitable solution and not strictly applying a particular standard of value.

In the 2003 Sommers197 case and the 2011 Nuveen198 case, the North Dakota courts set the standard as fair market value.

In summary, three states appear to follow something close to a fair value standard under a value in exchange premise: Alabama, Massachusetts, and Virginia. Exhibit 5.7 shows the continuum of value with respect to the treatment of shareholder-level discounts.

EXHIBIT 5.7 Continuum of Value: Discounts under Fair Market Value and Fair Value

Buy–Sell Agreements under Value in Exchange

Many times, when valuing a business, especially a professional practice, there are agreements in place between shareholders or partners that provide for the treatment of a shareholder or partner upon death, retirement, or other manner of withdrawal.

The existence of a partnership or shareholder agreement may have an impact on value because many such agreements serve to delineate the amount participants would receive upon certain circumstances. In a divorce proceeding, many view such agreements as indicia of value but not necessarily as presumptive of value. Still other states view the existence of such an agreement, if timely, arm's-length, and acted upon, as the sole indicator of value.

Logically, states that more closely adhere to a fair market value standard may be inclined to rely more heavily on such an agreement if it meets the above-mentioned criteria. However, if a buy–sell agreement exists but has never actually been used, it would have far less impact than a buy–sell agreement that is regularly updated and enforced.199 Moreover, states that more closely adhere to an investment value standard may assign little, if any, weight to these agreements, because there is no sale. It has been our experience that under any standard of value, the weight accorded a buy–sell agreement is fact sensitive.

Under the value in exchange premise, buy–sell agreements are usually viewed in two ways. First, the agreement may be considered presumptive because, upon selling his or her shares, the amount stated in the agreement is all a shareholder would likely receive. Conversely, a court looking to apply a fair market value standard might afford the value of the buy–sell agreement little weight, as it does not represent what a hypothetical willing buyer would pay a hypothetical willing seller in an open market.

Many courts have taken the value set forth in buy–sell agreements under consideration, but few have considered such agreements consistently controlling for the purposes of divorce. For example, Pennsylvania's Buckl v. Buckl200 stated that a buy–sell agreement or other such agreement should be considered as a factor in valuing a business. It does not establish, however, that the value established by that agreement must be controlling.

The Connecticut case of Dahill v. Dahill201 discussed this matter as well, adhering more closely to the hypothetical nature of fair market value.

The New Jersey case of Stern v. Stern202 represents a value in exchange concept in which the buy–sell agreement was relied upon as the primary indicator of value.

This case continues to cause a great deal of controversy in New Jersey, with arguments being made that the agreement should control because it is all the stockholder will ever receive. Furthermore, some practitioners argue that the terms of the agreement become more important as the stockholder ages and comes closer to the time when he will receive his buyout. This follows a value in exchange premise. Other practitioners argue that the investment value principles of Dugan and the fair value principles of Brown supersede this case. Based on the facts and circumstances of the case, ultimately the court is the arbiter of which argument will prevail.

The buy–sell agreements enhance our analysis of our chart as shown in Exhibit 5.8.

EXHIBIT 5.8 Continuum of Value: Buy–Sell Agreements under Value in Exchange

A review of the case law in Arkansas seems to indicate little reliance on the provisions of a buy–sell agreement as it does not adhere to a strict interpretation of fair market value. As mentioned in the Dahill case, some Connecticut cases place little emphasis on the provisions of a buy–sell agreement, but others seem to place more weight on such agreements. In Alaska, District of Columbia, Iowa, Oklahoma, and Texas the courts have reached a value based on buy–sell agreements. Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, Ohio, Oregon, Pennsylvania, West Virginia, and Wisconsin have all considered the buy–sell agreement to be case sensitive and that it may be considered in the calculation of value, but not necessarily presumptive of value.

Exhibit 5.9 presents the continuum of value under the value in exchange premise, including the fair market value and fair value standards as discussed up to this point.

EXHIBIT 5.9 Continuum of Value: Value in Exchange

In summary, based on our analysis, 40 states appear to fall under a value in exchange premise:

VALUE TO THE HOLDER

Value to the holder states are generally those that look to identify and value the asset or assets created during the marriage as the result of the joint efforts of both spouses regardless of whether a marketable asset was created. States that favor the value to the holder premise consider the cash flows received by the title-holding spouse regardless of the asset's transferability.

Goodwill

This definition describes goodwill in a manner that largely represents an investment value in that it includes certain personal attributes in the value:

The economic benefits that a going concern may enjoy as compared to a new firm, from (1) established relations with all the markets—both output and input, (2) established relations with government departments and other noncommercial bodies, and (3) personal relationships.203

States that follow an investment value standard seem to apply the notion that although a business may not be immediately salable and may not have value beyond its net tangible assets without the owner/key employee in place, the business has an ongoing value to the owner and therefore to the marital estate. In value to holder states, the view of property is broad and recognizes that the title holder will continue to function as an owner benefiting from the asset already in place.

Dugan v. Dugan,204 one of New Jersey's early cases with respect to the treatment of goodwill, shows the court's reasoning for including elements of personal goodwill as marital property.

Celebrity Goodwill

Currently, New Jersey is the only state that has considered celebrity goodwill as marital property, recognizing that the development of celebrity, like that of personal goodwill in a business, is created by virtue of the noncelebrity spouse's contributions to the marital partnership.205 New York has a similar concept but characterizes it as celebrity status, not celebrity goodwill.

In the case of Piscopo v. Piscopo,206 the value of comedian Joe Piscopo's celebrity status was divided by the court upon the dissolution of his marriage.

California handed down its first reported decision on celebrity goodwill in a case involving movie director John McTiernan. The trial court held that his celebrity had value in and of itself above his assets based on the fact that his earning capacity far exceeded that which a typical director was able to earn. The judge found his profession analogous to that of an attorney, physician, dentist, architect, or any other professional, and that, in that profession, the husband had developed an earning capacity that exceeded that of a typical director. When the appellate court reviewed the decision, however, it decided that goodwill must adhere to a business, even if it is the business of a sole proprietor or professional practice.210 The director's career in this case was not considered a business. The case was appealed; however, the California Supreme Court declined to hear it.211

New York has had several cases involving the goodwill of a celebrity, but these cases dealt with the enhanced earning capacity of a spouse over the course of a marriage and called this celebrity status. In Golub v. Golub,212 for example, the court decided that a celebrity's status and concomitant enhanced earning capacity could be included because the non-celebrity spouse contributed to its formation and appreciation during the marriage. In New York, the court followed the same basic principles in Mann v. Mann,213 where the performer's career had already been established before the marriage, and the court decided that goodwill was not attributable to marital efforts and was therefore not includable in the division of property.

Personal Goodwill versus Earning Capacity

In attempting to distinguish personal goodwill as an inherently separate property, some have made the argument that personal goodwill and earning capacity (not distributable) are indistinguishable. Wisconsin's Holbrook v. Holbrook,214 for example, stated: “The concept of professional goodwill evanesces when one attempts to distinguish it from future earning capacity.” The court conceded that a professional's business reputation has value, but claimed that that value is not a separate property interest, as it merely assured the continuation of earnings in the future. The exclusion of goodwill was based on several factors, including the difficulty in valuation, the extent employment status is determinative of goodwill's existence, the concern that goodwill is really earning capacity, the concern for double counting (which we call double dipping), and the need to exchange a tangible asset (cash or its equivalent) for an intangible (the goodwill of the business) upon divorce. This view has been followed by several decisions, including South Carolina's Donahue v. Donahue215 and Hickum v. Hickum.216

The Wisconsin court later distinguished itself from Holbrook in Peerenboom v. Peerenboom,217 a case that involved the valuation of a dental practice. The court reviewed the concept that a lawyer's interest in a law firm (such as that in Holbrook) is not salable for ethical reasons. However, no such reasons exist in a medical practice, and, therefore, goodwill that is transferable may be included in value. The court did maintain, however, that goodwill must be separate from the reputation of the individual. Peerenboom was later cited for the concept that goodwill as a going concern could be marketable and distributable.218

There have been several criticisms of the view that goodwill in a professional practice is indistinguishable from earning capacity, and, because the two cannot be separated, goodwill should not be included as a marital asset. First, many have argued that it does not comport with the intent of equitable distribution: that the marriage should be viewed as an economic partnership recognizing contributions of each spouse to specific assets. Second, denying the non-titled spouse a share in an asset because of difficulty in valuation is not equitable. Alternatively, some have argued that goodwill not only reflects future earnings, but also should not be recognized as a product of a marital partnership.219

The Colorado court in the case In re: Bookout220 supported the view that goodwill is property or an asset that supplements the earning capacity of another asset, business, or a profession, and, therefore, is not the earning capacity itself. The case cites numerous decisions in Washington, California, and New Jersey, all separating goodwill from earning capacity. As expected, all these states seem to view, to some extent, value under a value to the holder premise.

To further illuminate the difference between goodwill and earning capacity, in the Washington case of In re: Hall,221 two spouses had identical educations as doctors. One owned a practice while the other worked as a salaried teacher. The court found that although both doctors may have equal earning capacities, only the practicing doctor had goodwill, as the goodwill needed an entity to adhere to in addition to the person. The concept has been affirmed in New Jersey as well.

Value of a Professional Degree or License and Enhanced Earning Capacity

As the so-called walk-away doctrine is at one extreme of the continuum, the valuation of professional degrees, licenses, and enhanced earning capacity is at the other end of the continuum. Moreover, these items of marital property are valued without the necessity of an underlying business enterprise. Black's Law Dictionary defines earning capacity as:

A person's ability or power to earn money, given the person's talent, skills, training, and experience. Earning capacity is one element considered when measuring damages recoverable in a personal-injury lawsuit. And in family law, earning capacity is considered when awarding child support and spousal maintenance (or alimony) and in dividing property between spouses upon divorce.222

Enhanced earning capacity is the enhancement of an individual's ability to earn over and above what would be earned following a so-called normal career path and resulting from joint efforts over the life of the marriage. It is often measured by attempting to quantify the difference between the amounts an individual could earn without the enhancement to the amount that individual was earning at the end of the marriage with the enhancement. This can be the result of the acquisition of a degree or license or the result of some type of training, experience, or perfection of a skill that results in the generation of extraordinary earnings over and above a normal career path. To our knowledge, it is only in New York, where professional degrees, licenses, and career enhancement are considered marital property.

New Jersey has rejected the inclusion of earning capacity as an asset subject to equitable distribution. While one trial court included earning capacity as a separate “amorphous”223 asset, the New Jersey Supreme Court rejected the notion, stating:

Potential earning capacity is doubtless a factor to be considered by a 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.224

Normally, earning capacity is a consideration for the determination of spousal support or a factor affecting the division of assets rather than in the determination of marital property. Most states recognize that individuals enter a marriage with a certain amount of intellectual or human capital. They possess skills, talents, education, and experience that have resulted in a specific earning capacity. During the marriage, by the attainment of additional education or experience, there may have been an enhancement of this human capital resulting in an extraordinary increase in the degree or license holder's earning capacity to which there was a contribution made, either directly or indirectly, by the other spouse. The rationale for considering these types of assets as marital property seems to be that, by his or her contributions, the dependent spouse should share in the future benefits he or she helped to create. This inclusion is basically the recognition of joint spousal investments in the degree or license holder's career.225

The view that enhanced earnings capacity can appreciate during the marriage due in part to the efforts and/or sacrifices of the dependent spouse and that this creates marital property appears to result from a conscious decision to treat increased earning capacity developed during the marriage as an asset rather than as income to determine maintenance or support. Initially, the point behind distributing enhanced earning capacity seemed to be that without distribution of his or her share of this asset, the dependent spouse who contributed to the enhancement may be left without any assets at all.226 This reasoning can be seen in the New York case O'Brien v. O'Brien,227 which established the treatment of a professional license acquired during the marriage as marital property in New York.

The O'Brien doctrine has been criticized, however, by those who point out that the statutory language on which the doctrine is based focuses on division of property rather than the definition thereof. The statute instructs the court to consider “direct or indirect contributions made . . . to the career or career potential of the other party” when distributing marital assets, not while identifying them. The section advises that a spouse's contributions should be accounted for in the distribution of property.228 Essentially, the contributing spouse should be given a bigger slice of the same pie as opposed to the pie itself being made bigger.

As personal goodwill may eventually merge with practice goodwill, some have suggested that, eventually, the value of a practitioner's license becomes subsumed in his or her practice. The New York case McSparron v. McSparron229 addresses this issue and asks whether eventually the value of a license is used up by the income that it has produced. The court in this case considered factors such as a change in circumstances and location of a practicing professional and decided that, no matter how far along, the license has a value outside of one's career, concluding that it did not merge.

In the most extreme application of the value to the holder premise that we have found, the New York case of Hougie v. Hougie230 involved the inclusion of the enhanced earning capacity of an investment banker in the property distribution. The facts of the case ultimately revealed that the husband needed and had a license that allowed him to perform his job, but the court stated that the husband's enhanced earning capacity was a distributable asset regardless of whether a license is required.

McSparron left open the possibility that, in New York, both a license acquired during the marriage and a business or business interest acquired during the marriage can be valued and distributed in a divorce. Such was the issue in Grunfeld v.Grunfeld.231 Mr. Grunfeld was a customs lawyer who acquired both his law license and practice during the marriage. At the trial court level, both were valued. However, the trial judge awarded alimony to the wife, which used the same projected professional earnings to determine the value of the license. Cognizant of not double counting, the trial court judge did not distribute the value of the license as it was included in the alimony award. The wife appealed and the First Appellate Division modified the trial court's decision and ordered that one half the value of the husband's professional license be distributed to the wife.

The husband appealed to New York's highest court, the Court of Appeals. The Court of Appeals found that:

The value of a professional license as an asset of the marital partnership is a form of human capital dependent upon the future labor of the licensee. The asset is totally indistinguishable and has no existence separate from the projected professional earnings used to value the license also form the basis of an award of maintenance, the licensed spouse is being twice charged with distribution of the same asset value, or sharing the same income with the non-licensed spouse.232

The Court of Appeals agreed with the trial court that distributing the license and awarding maintenance (alimony) is double counting.

While the treatment of these assets in New York is somewhat unique it is not without its critics. A New York's Matrimonial Commission report suggested changes to the statute, recommending the elimination of New York's consideration of enhanced earning capacity, professional degrees or licenses, and celebrity status as marital property.233 However, professional degrees, licenses, and celebrity status are considered marital property in New York. Some departments also consider enhanced earnings as marital property as well. However, over the past few years, the amounts generally credited to the non-titled spouse have diminished.

Double Dipping

The value of a business is the present value of expected future benefits that can be received from that business whether determined by the asset-based, market, or income approaches. When the value of a business is distributed in a divorce, the non-business-owner spouse receives some type of asset in exchange for his or her equitable or community share of the business. The share of the business credited to the non-owner spouse is based on the expected future benefits to the owner. Double dipping can arise from the use of the same income stream for both valuation and alimony. This is an increasingly relevant issue when dealing with the interrelationship between the distribution of marital property and the award of alimony.

For example, in using an income or excess earnings method to value a company, the officer's compensation in excess of reasonable compensation is added back to the income stream of the company and capitalized. Essentially, the valuation takes a portion of the owner's compensation and capitalizes it to value the business while at the same time considering it all available for alimony and thereby using it twice.234

Double dipping was first addressed in the treatment of pensions as marital property. As applied to business valuation, double dipping was first addressed in the 1963 Wisconsin case Kronforst v. Kronforst,235 where the court stated that “such an asset cannot be included as a principal asset in making division of the estate and then also an income item to be considered in awarding alimony.” However, New Jersey's decision in Steneken v. Steneken236has allowed the use of the same income stream for both alimony and equitable distribution.

Classification of Value to the Holder Typically States by Their Treatment of Goodwill

A state using investment value will typically consider all goodwill in a professional practice or business and will not attempt to differentiate between personal and enterprise goodwill. California's Golden v. Golden237 is an example of an investment value case where the rationale the court used was based on the nonprofessional spouse's contribution in assisting in the creation of this value.

Interestingly, there are significant differences between the treatment of goodwill as marital property in Golden v. Golden and a case like Pennsylvania's Gaydos v. Gaydos.238 The courts in both cases recognized that the practice would continue after the end of the marriage and that there is a value to that continuance. California saw goodwill as a product of the ongoing value of the company that was developed during the marriage and should be shared between the parties, while Pennsylvania excluded that value as being tied too closely to the practitioner and his or her future efforts.

Washington State views personal goodwill in a slightly different manner from California as illustrated by In re: Lukens.239 The Washington court acknowledged that personal goodwill may not be marketable but stated that it is an asset nonetheless. The court viewed goodwill in light of the concept of a recent graduate or an existing practitioner relocating to another state and having to start over. Although the practitioner would have the skills acquired through training and practice, he or she would not have any reputation in a new place, and therefore that reputation has to be affiliated with the practice.

As discussed earlier, New York is the only state to explicitly include professional degrees, licenses, celebrity status, or enhanced earnings capacity that was acquired during the marriage as marital assets or the incremental increase in them. Alternatively, New Jersey does not consider a professional degree or license as marital property but does consider the value of celebrity goodwill. Other states have suggested that including the value of a license or degree may be warranted in certain compelling circumstances.

Exhibit 5.10 presents the continuum of value under the value to the holder premise.

EXHIBIT 5.10 Continuum of Value: Intangible Assets under Value to the Holder with Case Examples

Next we move to a discussion of the treatment of shareholder-level discounts and the weight accorded buy–sell agreements in states that fall under the value to the holder premise.

Shareholder-Level Discounts under the Value to the Holder Premise

Under the value to the holder premise of value, the business is valued under the assumption that the entity will continue under current ownership. As we have discussed, personal goodwill is includable as a marital asset under this premise, even though it cannot be sold. Therefore, the shareholder-level lack of control and lack of marketability discounts associated with the value in exchange premise would typically not apply.

Montana is a hybrid value state that has applied discounts in certain divorce valuations, such as that in the case of In Re: Decosse,240 where a 20% lack of control discount was applied. In our view, New York is a hybrid state, which adheres to a fair market value standard in the valuation of businesses while applying the most liberal definition of marital property in the valuation of a professional degree or license and enhanced earning capacity.

The following value to the holder states, absent extraordinary circumstances, do not apply discounts: Arizona, California, Nevada, New Jersey, New Mexico, and Washington.

Fair Value

Some cases appear to use assumptions more often attributed to an investment value standard while using the language of fair value, which can be either value in exchange or value to the holder. When a case mentions a pro rata share of enterprise value, rejects shareholder-level discounts, or mentions the unwillingness of a buyer or seller, the standard of value is usually fair value. Although the New Jersey case of Brown v. Brown241and Louisiana case of Ellington v. Ellington242 reference investment value concepts like continuing benefits of ownership and employment, the predominant language of these cases involves fair value.

As mentioned previously, the Louisiana case Ellington v. Ellington may be considered a fair value case. While the wife's expert used an excess earnings method and came to a value of $668,000, the husband's expert determined that the fair market value of liabilities outweighed assets by approximately $55,000 and therefore the company had no value. The court rejected the testimony of both experts as each used a fair market value standard, which was not appropriate because neither party was a willing seller. Taking this into account, the court came to a value of $293,000. The appellate court affirmed this decision, as the husband would retain ownership and current management would remain in place and the husband would continue to benefit from the asset in place. Subsequently, the Louisiana statute was amended to require adherence to a fair market value standard and specifically excludes personal goodwill.

Exhibit 5.11 shows the continuum of value based on the treatment of discounts in divorce proceedings under the investment value and fair value and under the value to the holder premises.

EXHIBIT 5.11 Continuum of Value: Discounts under Fair Value and Investment Value

Buy–Sell Agreements under Value to the Holder

As we have seen in the Graff case, Colorado generally favors a value to the holder premise of value. This extends to the treatment of the buy–sell agreement, which can be seen in the case In re: Huff.243

The actual use of a shareholder agreement may determine whether it is relied on by the family court. In the New Jersey case Stern v. Stern,245 the court found that the agreement was updated quarterly, it established an intangible value to the business above the value of a partner's capital account, and was generally used for departing partners. In this case, the court decided that that value should not be disturbed.

Arizona, Colorado, Montana, New York, and Washington are states that use an investment value to value certain businesses upon divorce, and all of them have applied the notion that a buy–sell agreement may be considered but should not be binding on value. Thus, we would view buy–sell agreements in the manner shown in Exhibit 5.12 under both the value in exchange and value to the holder premises.

EXHIBIT 5.12 Continuum of Value: Buy–Sell Agreements under Value in Exchange and Value to the Holder

In summary, based on our analysis, five states fall under some version of a value to the holder premise:246 Arizona, New Mexico, California, Washington, and Nevada.

In addition, there are six states that have both value in exchange and value to the holder characteristics: Colorado, New Jersey, Michigan, New York, Montana, and North Carolina.

SUMMARY

We have presented the stated or implied premises and standards of value under which each state values closely held businesses or business interest in divorce. The reality is, however, that courts are generally less concerned with the theoretical underpinnings of business valuation than they are with what they perceive to be a fair outcome for the parties involved. One commentator in New Jersey said this regarding the 2003 New Jersey case Brown v. Brown:247

Brown emphasized not only the importance of the concept of fairness in a divorce case, but when a conflict existed between policy concerns and appraisal methodology, policy would prevail.248

Valuations performed for estate, gift, or income tax purposes are often perceived as different from cases involving people who are dividing an ongoing asset (as in divorce, dissent, or oppression), sometimes unwillingly. In these cases, the courts appear more willing to seek an equitable remedy in order to fairly compensate the individuals involved.

For example, the North Carolina case Hamby v. Hamby249 is one in which a different standard is stated from that which is applied. In the valuation of an insurance agency, the court directed the experts to find the fair market value less any encumbrances. The expert whose opinion the court ultimately chose stated that his purpose was to find the fair market value, which he determined was the going concern value to the individual. The expert further stated that even though the business could not be sold, there was a value to the owner above what he received as salary. While setting out to determine net value—that is, fair market value less encumbrances—based on the testimony of the wife's expert, the court arrived at a value to the holder.

In this case, there appears to be an obvious intention to fairly compensate the parties without adhering strictly to the assumptions conventionally underlying a particular standard of value. Although the Hamby v. Hamby case may go back and forth between premises and standards of value, other cases have looked not to a standard of value but rather, it seems to us, to a fair solution. New York did this in O'Brien v. O'Brien,250 and New Jersey applied equitable principles in Brown v. Brown.251

To summarize, standards of value in divorce are determined on a state-by-state basis. We have looked at each state as a means of discerning the premises and standards of value they follow. We began with two distinct premises—value in exchange and value to the holder—and three basic standards of value—fair market value, fair value, and investment value. We then looked at the treatment of goodwill, shareholder-level discounts, and the weight accorded buy–sell agreements as indicia of the premise and standard of value applied in each state. Our conclusion is that one could look at a continuum of value as a way to conceptualize the intersection of valuation theory and case law and use this continuum toward a standard of value classification system in divorce. Exhibit 5.13 represents the continuum of value including premises, standards, their indicia, and representative cases. Although this construct may be helpful to valuation professionals and appraisal users, we offer a word of caution. While we think that our suggested classification system may be a useful way of interpreting how the standards of value have been used by courts, it is likely that the courts will continue to identify, value, and distribute marital property in ways they deem equitable and not feel constrained by valuation theory.

EXHIBIT 5.13 Continuum of Value

1 Gary N. Skoloff and Laurence J. Cutler, New Jersey Family Practice, 10th ed. (New Brunswick, NJ: New Jersey Institute for Continuing Legal Education, 2001), at 1.11.

2 Shannon P. Pratt and Alina Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 5th ed. (New York: McGraw-Hill, 2008), at 41.

3 The National Conference of Commissioners on Uniform state laws was formed in 1892 for the purpose of providing states with nonpartisan, well-conceived, and well-drafted legislation that brings clarity and stability to critical areas of the law (www.uniformlaws.org/Narrative.aspx?title=About%20the%20ULC).

4 James J. White, “Symposium: One Hundred Years of Uniform State Laws: Ex Proprio Vigore,” 89 Michigan Law Review, (August 1991), at 2106.

5Id .

6 Mary Ann Glendon, “Symposium: Family Law: Family Law Reform in the 1980s,” 44 Louisiana Law Review, 1553 (July 1984).

7 California requires an equal division. Idaho and Nevada both require equal division unless compelling reasons exist to divide property differently. Alaska, Arizona, and Washington require equitable division. New Mexico, Texas, and Wisconsin leave the details of division to the court's discretion. Louisiana does not include direction on division in their statutes.

8 Arkansas Statute § 9-12-315(4).

9 Louisiana Statute § 9:2801.

10 Arizona Statute 25-211.

11 Pennsylvania Divorce Code § 3501.

12Hatcher v. Hatcher (1983), 129 Mich. App. 753; 343 N.W.2d 498; 1983 Mich. App. LEXIS 3397.

13 John McDougal and George Durant, “Business Valuation in Family Court,” 13 South Carolina Lawyer, No. 14 (September/October 2001), at 2.

14 The excess earnings method for valuing intangible assets consists of estimating the value of the tangible assets, estimating a reasonable rate of return on the tangible assets, and, to the extent that total returns of the business or practice exceed the reasonable return of the tangible assets, is the basis for finding the dollar value of the intangible assets. That is accomplished by dividing the excess returns by a rate called a capitalization rate.

15 Mary K. Kistjardt, “Professional Goodwill in Marital Dissolution: The State of the Law,” in Valuing Professional Practices and Licenses, Ronald L. Brown, ed. (2004 supplement).

16 692 P.2d 175 (Wash. Supr. Ct. 1984).

17 Mary Kay Kistjardt, “Professional Goodwill in Marital Dissolution,” December 31, 2008 at 2.04 p. 41. University of Missouri at Kansas City—School of Law.

18Id., at 1.04, p. 1–33.

19 New Hampshire appears to be the only state that includes all property in the consideration for distribution, defining property in this way: § 458:16-a.I: “Property shall include all tangible and intangible property and assets, real or personal, belonging to either or both parties, whether title to the property is held in the name of either or both parties. Intangible property includes, but is not limited to, employment benefits, vested and non-vested pension or other retirement benefits, or savings plans. To the extent permitted by federal law, property shall include military retirement and veterans' disability benefits.” However, the statute goes on to direct that the value of premarital or gifted property should be considered in the distribution of the marital estate. Other states may not recognize separate property, but they do not provide that direction by statute.

20 Illinois also does not include appreciation, but includes a reimbursement provision for the non-owner spouse for his or her efforts contributing to an increase in value. The appreciation is not made marital property but is recognized by reimbursement.

21 13 Del. C. § 1513.

22 Colorado Statute 14-10-113.

23 Cheryl Lynn Daniels, “North Carolina's Equitable Distribution Statute,” 64 North Carolina Law Review, Rev. 1395 (August 1986), at 1399.

24 Arkansas Statute 2004 § 452.330, at 4.

25 Code of Alabama 2005 § 30-2-51(a).

26Julsen v. Julsen, 741 P.2d 642 (Alaska 1987).

27 As previously discussed, determining what caused the appreciation in value is an important element of the distribution of the increase in value. The valuation expert should consult with the retaining attorney to determine what, if any, role he or she has to opine on the economic reason for this increase.

28 Estate Tax Regulation § 20.2031-1.

29 74 A.2d 71, 72 (Del. 1950).

30Id.

31 270 Cal. App.2d 401; 75 Cal. Rptr. 735; 1969 Cal. App. LEXIS 1538.

32Id., at 738.

33 See Dugan v. Dugan, 92 N.J. 423; 457 A.2d 1; 1983 N.J. LEXIS 2351, at 21. DR 2-108(A) of the Disciplinary Rules of the Code of Professional Responsibility: “A lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as may be provided in a bona fide retirement plan and then only to the extent reasonably necessary to protect the plan.”

34 Today, the goodwill or client base of a law firm may be sold in New Jersey. This was not always the case.

35 Dugan v. Dugan , 92 N.J. 423; 457 A.2d 1; 1983 N.J. LEXIS 2351.

36 Wash. App. 602, 849 P.2d 695 (Wash. App. Div. 3, 1993).

37 In re: Marriage of Graff , 902 P.2d 402 (Colo. App., 1994).

38 Id., at [**5].

39 308 N.J. Super. 474; 706 A.2d 249; 1998 N.J. Super. LEXIS 80.

40 While the above applies to businesses and business interests, it appears that other marital assets, including real property, are valued at their fair market value.

41 O'Brien v. O'Brien , 66 N.Y.2d 576; 489 N.E.2d 712; 498 N.Y.S.2d 743 (1985).

42 761 P.2d 305 (Haw. Interm. App. 1988).

43 348 N.J. Super. 466; 792 A.2d 463; 2002 N.J. Super. LEXIS 105.

44 63 So.3d 668 (Alab. Civ. App. 2010).

45Id.,

46 75 Cal. Rptr. 735 (Cal. App. 1969).

47 50 So.3d 1102 (Alab. Civ. App. 2010).

48 131 P.3d 451(Ala. Supr. Ct. 2006).

49 Arkansas Statute §9-12-315(4).

50 1998 Conn. Super. LEXIS 846.

51 732 So.2d 47 (Fla. App. 1999).

52 761 P.2d 305 (Haw. Interm. App. 1988).

53 836 N.E.2d 481; 2005 Ind. App. LEXIS 2039.

54 LEXIS 694 (Iowa. App. 2004).

55 657 P.2d1106; (Kan. Supr. Ct. 1983).

56 43 So. 3d 218 (La. App. 2010).

57 474 N.W.2d 843 (Minn. Ct. App. 1991).

58 LEXIS 283 (Miss. Supr. Ct. 2003).

59 361 S.W.3d 36 (Mo. App. 2011).

60 1806 N.W.2d 580 (Neb. App. 2011).

61 LEXIS 275 (N.H. Supr. Ct. 2006).

62 126 A.D.2d 591(N.Y. Supr. Ct. App. 1987). New York also follows an investment value standard of value as evidenced by O'Brien v O'Brien, 489 N.E.2d 712 (N.Y. Ct. App. 1985).Moll v. Moll, 187 Misc. 2d 770 (N.Y. Supr. Ct. 2001).

63 561 S.E.2d 571, 577 (N.C. App. 2002).

64 660 N.W.2d 586 (N.D. Supr. Ct. 2003).

65 891 P.2d 1277 (Okla. Supr. Ct. 1995).

66 672 P.2d 1205 (Ore. App. 1983).

67 463 S.E.2d 321 (S.C. Ct. App. 1995).

68 697 N.W.2d 748 (S.D. Supr. Ct. 2005) citing First Western Bank Wall v. Olsen, 2001 S.D. 16, P.17, 621 N.W.2d 611 617.

69 972 A.2d 176 (Vt. Supr. Ct. 2009).

70 589 S.E.2d 536 (W. Va. Supr. Ct. 2003).

71 724 N.W.2d 702 (Wisc. App.2006).

72 842 P.2d 575 (Wyo. Supr. Ct. 1992).

73Beckerman v. Beckerman , 126 A.D.2d 591 (N.Y. Supr. Ct. App. 1987).

74O'Brien v. O'Brien , 489 N.E.2d 712 (N.Y. Ct. App. 1985).

75 131 P.3d 451 (Alas. Supr. Ct. 2006).

76 902 S.W.2d 247 (Ark. App. 1995).

77 1998 Conn. Super. LEXIS 846 (Conn. Super. Ct. 1998).

78 LEXIS 213 (Del. Fam. Ct. 2003).

79 649 A.2d 810 (D.C. App. 1994).

80 667 So.2d 915 (Fla. Dist. Ct. App. 1996).

81 288 Ga. 274 (Ga. Supr. Ct. 2010).

82 761 P.2d 305 (Haw, Interm. App. 1988).

83 152 P.3d 544 (Ida. Supr. Ct. 2007).

84 895 N.E.2d 1025 (Ill. App.2008).

85 927 N.E.2d 926 (Ind. App. 2010).

86 LEXIS 694 (Iowa App. 2004).

87 648 P.2d 218 (Kan. Supr. Ct. 1982).

88 282 S.W.3d 306 (Ky. Supr. Ct. 2009).

89 938 A.2d 35 (2008)(Me. Supr. Ct. 2008).

90 582 A.2d 784 (Md. Ct. App. 1990).

91 LEXIS 94 (Minn. App. 2007).

92 54 So.3d 216 (Miss. Supr. Ct. 2011).

93 738 S.W.2d 429 (Mo. Supr. Ct. 1987).

94 806 N.W.2d 580 (Neb. App. 2011).

95 821 A.2d 1107 (N.H. Supr. Ct. 2003).

96 660 N.W. 2d 586 (N.D. Supr. Ct. 2003).

97 2007 Ohio 561; LEXIS 523 (Ohio App. 2007).

98 217 P.3d 162 (Okla. Civ. App. 2009).

99 245 P.3d 676 (2010 Ore. Ct. App. 2010).

100 663 A.2d 148 (Pa.Supr. Ct. 1995).

101 766 A.2d 925 (R.I. Supr. Ct. 2001).

102 463 S.E.2d 321 (S.C. Ct. App. 1995).

103 556 N.W.2d 78 (S.D. Supr. Ct. 1996).

104 260 S.W.3d 631 (Tex. App. 2008).

105 176 P.3d 476 (Utah App. 2008).

106 613 A.2d 203 (Vt. Supr. Ct. 1992).

107 589 S.E.2d 536 (W. Va. Supr. Ct. 2003).

108 800 N.W.2d 399 (Wisc. Supr. Ct. 2011).

109 65 P.3d 41 (Wyo. Supr. Ct. 2003).

110 63 So.3d 668 (Alab. Civ. App. 2010).

111 873 N.E.2d 216 (Mass. Supr. Ct. 2007).

112 523 S.E.2d 514 (Va. App. 2000). Howell uses the term intrinsic value, which is a value to the holder/investment value definition, but does not allow personal goodwill as a marital asset. Therefore, we classify Virginia as a fair value state.

113 732 P.2d 208 (Ariz. Supr. Ct. 1987).

114 75 Cal. Rptr. 735 (Cal. Ct. App. 1969). Some argue that in California community assets considered marketable should be valued using the fair market value standard of value. They cite In re: Marriage of Cream (1993) 13 CA 4th, 81, 16 CR.2d 575 as the basis for the view that marketable assets should be valued at their fair market value and not under the investment value standard. What constitutes a marketable asset is undefined and in our view the issue is unsettled. The practitioner should discuss with counsel which standard to use or using both standards of value so that the issue will be delineated to the court.

115 782 P.2d 1304 (Nev. Supr. Ct. 1989).

116 719 P.2d 432 (N.M. Ct. App. 1986).

117 692 P.2d 175 (Wash. Supr. Ct. 1984).

118 232 P.3d 782 (Colo. Supr. Ct. 2010).

119 834 P.2d 244 (Colo. Supr. Ct. 1992).

120 809 N.W.2d(Mich. App.2010).

121 384 N.W.2d 112(Mich. App. 1986).

122 936 P.2d 821 (Mont. Supr. Ct. 1997).

123 950 P.2d 1373(Mont. Supr. Ct. 1997).

124 792 A.2d 463 (N.J. Super. Ct. App. Div. 2002).

125 457 A.2d 1 (N.J. Supr. Ct. 1983).

126 126 A.D.2d 591(N.Y. Supr. Ct. App. 1987).

127 187 Misc. 2d 770(N.Y. Supr. Ct. 2001).

128 556 S.E.2d 639(N.C. App. 2001).

129 547 S.E.2d 110 (N.C. App. 2001).

130 LEXIS 524(Tenn. App. 2010).

131 LEXIS 690(Tenn. App. 2007).

132ALI, “Principles of the Law of Family Dissolution: Analysis and Recommendations” (Philadelphia: Matthew Bender, 2002), at §4.07.

133 American Law Institute, “Principles of the Law of Family Dissolution” (2002).

134Wilson v. Wilson, 741 S.W.2d 640 (Ark. 1987).

135 Enterprise goodwill in a professional practice may be treated differently because of the reliance on a particular owner.

136 Bryan A. Garner, Black's Law Dictionary, 8th ed. (St. Paul, MN: Thompson West, 2004), at 694.

137 Jay Fishman, “Personal Goodwill v. Enterprise Goodwill,” 2004 AICPA National Business Valuation Conference, Session 5, Orlando, FL, November 7, 2004.

138 34 Eng. Rep. 129, 134 (1810).

139 In re: Brown , 150 N.E. 581, 583 (N.Y. 1926).

140 Joseph Story, “Commentaries on the Law of Partnerships,” § 99, at 170 (6th ed., 1868).

141 Helga White, “Professional Goodwill: Is It a Settled Question or Is There ‘Value' in Discussing It?” 15 Journal of the American Academy of Matrimonial Lawyers, (1998), Vol. No. 2 at 499.

142 113 Cal. Rptr. 58, 38 Cal. App.3d 1044 (1974).

143 92 N.J. 423; 457 A.2d 1; 1983 N.J. LEXIS 2351.

144 There is much debate on the methodologies to be used to determine reasonable compensation; however, that is beyond the scope of this book. For such a study, see Dugan v. Dugan, 92 N.J. 423; 457 A.2d 1; 1983 N.J. LEXIS 2351, or Jay E. Fishman, Shannon P. Pratt, and J. Clifford Griffith, “PPC's Guide to Business Valuation” (Thompson PPC, 2004), at 11–12.

145 693 A.2d (Pa. Super. Ct. 1993).

146 “Valuations in the Business Setting: International Glossary of Business Valuation Terms” (2000). William & Mary Annual Tax Conference. Paper 184. <http://scholarship.law.wm.edu/tax/184>.

147 Kathryn J. Murphy, “Business Valuations in Divorce,” Dallas Chapter Texas Society of Certified Public Accountants, 1998 Divorce Conference, September 22, 1998, at 19.

148 Alica Brokers Kelly, “Sharing a Piece of the Future Post-Divorce: Toward a More Equitable Distribution of Professional Goodwill,” 51 Rutgers Law Review, (Spring 1999), at 588.

149 576 So.2d 267 (Fl. Supr. Ct. 1991).

150 738 S.W.2d 429, 434 (Mo. Supr. Ct. 1987).

151 711 N.E.2d 1265; 1999.

152 State of Indiana, Hamilton Superior Court No. 29D01-0003-DR-166.

153 518 A.2d 545 (Pa. Super. Ct., 1986).

154 Moffitt v. Moffitt, 813 P.2d 674 (Al. Supr. Ct. 1991).

155 Cardillo v. Cardillo , 1992 WL 139248 (Conn. Super. Ct 1992).

156 Prahinski v. Prahinski , 540 A.2d 833 (Md. Spec. App. 1988).

157 Taylor v. Taylor , 386 N.W.2d 851 (Neb. 1986).

158 Travis v. Travis, 795 P.2d 96 (Okla. 1990).

159 Roth v. Roth , 406 N.W.2d 77 (Minn. App. 1987).

160 Depner v. Depner, 478 So.2d 532 (La. App. 1985).

161 Burma v. Burma , No. 65062 (Ohio App. 8 Dist. Sept. 29, 1994).

162 Smith v. Smith , 709 S.W.2d 588 (Tenn. App. 1985).

163 Sorenson v. Sorenson (769 P.2d 820 (Utah App. 1989), aff'd 839 P.2d 774 (Utah 1992).

164 Taylor v. Taylor , 386 N.W.2d 851 (Neb. 1986).

165 576 So.2d 267; 1991 Fla. LEXIS.

166 Id.

167 912 So.2d 637 (Fla. App. 2005).

168 761 P.2d 305(Haw. Interm. App. 1988).

169 LEXIS 213 (Del. Fam. Ct. Aug. 22, 2003).

170 667 So.2d 915 (Fla. Dist. Ct. App. 1996).

171 761 P.2d 305(Haw. Interm. App. 1988).

172 648 P.2d 218 (Kan. Supr. Ct. 1982).

173 LEXIS 283 (Miss. Supr. Ct. 2003).

174 736 S.W.2d 388 (Mo. Supr. Ct. 1987).

175 463 S.E.2d 321 (S.C. Ct. App. 1995).

176 Fishman, “Personal Goodwill v. Enterprise Goodwill.”

177 Jay E. Fishman, Shannon P. Pratt, and Clifford Griffith, “PPC's Guide to Business Valuation,” at 1205.19. Reference to Minnesota case, Sweere v. Gilbert-Sweere, 534 N.W.2d 294 (Minn. Ct. App. 1995).

178 Mcfadden v. Jenkins , 40 N.D.422, 442, 169 N.W. 151, 155-56 (1918) (quoting Cowan v. Fairbrother, 118 N.C. 406, 411-12, 24 S.E. 212, 213 (1896)).

179 John Dwight Ingram, “Covenants Not to Compete,” 36 Akron Law Review, No. 49 (2002), at 51.

180 667 So.2d 915.

181 323 S.C. 283; 473 S.E.2d 881; 1996 S.C. App. LEXIS 113.

182 245 P.3d 676 (Ore. Ct. App. 2010).

183 Id .

184 534 N.W.2d 294; 1995 Minn. App. LEXIS 912.

185 Fishman, Pratt, and Griffith, “PPC's Guide to Business Valuation.”

186 134 Ore. App. 449; 895 P.2d 1387; 1995 Ore. App. LEXIS 772.

187 2010 WL-216-9086, June 1, 2010.

188 Pueblo Bancorporation v. Lindoe, Inc. ,63 P.3d 353 (Colorado 2003).

189 46 Va. Cir. 339; 1998 Va. Cir. LEXIS 256.

190 Bosserman v. Bosserman, 9 Va. App. 1, 5, 384 S.E.2d 104 (1989).

191 348 N.J. Super. 466; 792 A.2d 463.

192 160 N.J. 352, 368, 734 A.2d 721 (1999) (Balsamides).

193 160 N.J. 383, 397, 734 A.2d 738 (1999) (Lawson).

194 Grelier III. 2009 WL 5149267 (Ala Civ. App.) (Dec. 30, 2009).

195 Fisher v. Fisher, 1997 N.D. 176; 568 N.W.2d 728; 1997 N.D. LEXIS 195.

196 Kaiser v. Kaiser , 555 N.W.2d 585; 1996 N.D. LEXIS 253.

197 Sommers v. Sommers , 660 N.W.2d 586 (N.D. Supr. Ct. 2003).

198 Nuveen v. Nuveen , 795 N.W.2d 308 (N.D. Supr. Ct. 2011).

199 Frank Louis, “Economic Realism: A Proposed Standard,” New Jersey Institute of Continuing Legal Education 2005 Family Law Symposium.

200 373 Pa. Super. 521; 542 A.2d 65; 1988 Pa. Super. LEXIS 1048.

201 1998 Conn. Super. LEXIS 846 (Conn. Super. Ct. 1998).

202 66 N.J. 340; 331 A.2d 257; 1975.

203 Allen Parkman, “The Treatment of Professional Goodwill in Divorce Proceedings,” 18 Family Law Quarterly, No. 213 (1984).

204 92 N.J. 423; 457 A.2d 1; 1983 N.J.

205 Robin P. Rosen, “A Critical Analysis of Celebrity Careers as Property upon Dissolution of Marriage,” 61 George Washington Law Review, No. 522 (January 1993).

206 232 N.J. Super. 559; 557 A.2d 1040; 1989.

207 Piscopo v. Piscopo , 231 N.J. Super. 576, 580–581 (Ch. Div. 1988).

208 Dugan v. Dugan , 92 N.J. 423 (1983).

209 Piscopo v. Piscopo , 231 N.J. Super., at 579 (slip opinion at 4).

210 McTiernan v. Dobrow , 133 Cal. App. 4th 1090; 35 Cal. Rptr. 3d 287; 2005 Cal. App. LEXIS 1692.

211 2006 Cal. LEXIS 1743.

212 139 Misc. 2d 440, 527 N.Y.S.2d 946 (Sup. Ct. 1988).

213 N.Y.L.J ., Jan. 10, 1995, at 26 (Sup. Ct. N.Y. County).

214 103 Wis.2d 327, 309 N.W.2d 343, 1981 Wisc. App. LEXIS 3322 (Wis. Ct. App. 1981).

215 S.C. (1989) 299 S.C. 353, 384 S.E.2d 741.

216 463 S.E.2d 321 (S.C. Ct. App. 1995).

217 433 N.W.2d 282 (Wis. Ct. App. 1998).

218 Sommerfeld v. Sommerfield , 454 N.W.2d 55 (Wis. Ct. App. 1990).

219 Kistjardt, “Professional Goodwill in Marital Dissolution,” 2.04.

220 833 P.2d 800 (Colo. App. 1991), cert. denied, 846 P.2d 189 (Colo. 1993).

221 103 Wn.2d 236, 692 P.2d 175 (1984).

222 Garner, Black's Law Dictionary, at 547.

223123 N.J. Super., at 568.

224 Stern v. Stern, 66 N.J. 340, at 260.

225 Kelly, “Sharing a Piece of the Future Post-Divorce,” at 73.

226 David M. Wildstein and Charles F. Vuotto, “Enhanced Earning Capacity: Is It an Asset Subject to Equitable Distribution under New Jersey Law?” (www.vuotto.com/earningcapacity.htm).

227 66 N.Y.2d 576; 489 N.E.2d 712; 498 N.Y.S.2d 743; 1985.

228 Kenneth R. Davis, “The Doctrine of O'Brien v. O'Brien: Critical Analysis,” 13 Pace Law Review (1994), at 869.

229 87 N.Y.2d 275; 662 N.E.2d 745; 639 N.Y.S.2d 265; 1995 N.Y. LEXIS 4451.

230 261 A.D.2d 161; 689 N.Y.S.2d 490; 1999 N.Y. App. Div. LEXIS 4588.

231 Grunfeld v. Grunfeld , 94 N.Y. N.Y.S.2d 486 (Ct. App. 2000).

232 Id .

233 Hon. Sondra Miller, “Report to the Chief Judge of the State of New York,” New York Matrimonial Commission, February 2006.

234 Donald J. Degrazia, “Controversial Valuation Issues in Divorce,” presented at the 2003 AICPA National Business Valuation Conference.

235 21 Wis.2d 54, 123 N.W.2d 528 (1963).

236 2005 N.J. LEXIS 57.

237 270 Cal. App. 2d 401; 75 Cal. Rptr. 735 (1969 Cal. App.).

238 693 A.2d (Pa. Super. Ct. 1993).

239 16 Wn. App. 481, 558 P.2d 279 (1976), review denied, 88 Wn.2d 1011 (1977).

240 282 Mont. 212; 936 P.2d 821; 1997 Mont. LEXIS 66; 54 Mont. St. Rep. 318.

241 348 N.J. Super. 466; 792 A.2d 463.

242 842 So.2d 1160; 2003 La. App. LEXIS 675.

243 834 P.2d 244 (Colo. 1992).

244 Id., LEXIS 607; 16 BTR 1304.

245 66 N.J. 340; 331 A.2d 257; 1975.

246 New Jersey also has cases with elements of value to the holder, while having others that appear more closely akin to value in exchange. This is why we consider New Jersey a hybrid state.

247 348 N.J. Super. 466; 792 A.2d 463.

248 Louis, “Economic Realism.”

249Hamby v. Hamby, 143 N.C. App. 635, 547 S.E.2d 110 (2001).

250 66 N.Y.2d 576; 489 N.E.2d 712; 498 N.Y.S.2d 743; 1985.

251 348 N.J. Super. 466; 792 A.2d 463.