Valuation in Matrimonial Cases: Trial Manual 2013

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Valuation in Matrimonial Cases: A Courtroom Manual

This long-awaited and completely revised addition to our Courtroom Manual Series is designed to provide rapid reference to all of the key valuation citations/annotations relevant to the crucial valuation issues encountered in equitable distribution litigation.

Just take a look at the Table of Contents below to get an idea of the comprehensive and detailed scope of this fabulous manual! Then read on to see our Special Anniversary Year Offer that will save you 20% on your acquisition of this indispensible practice tool!

Table of Contents

VALUATION – GENERAL PRINCIPLES.......................................................................................... 1
Each Asset Must be Valued............................................................................................................... 1
Average of Appraisals....................................................................................................................... 1
Total Value of Marital Estate............................................................................................................. 1
No Uniform Rule............................................................................................................................... 1
Determination of Fact-Finder............................................................................................................ 2
Court’s Obligation............................................................................................................................. 2
Nature of Entity................................................................................................................................ 3
   S v. C Corporation........................................................................................................................... 3
   Related Companies........................................................................................................................ 3
   Business in Bankruptcy................................................................................................................... 4
   Defunct Business............................................................................................................................ 4
Value to Owner Theory..................................................................................................................... 5
POST-TRIAL CHANGES IN VALUE......................................................................................................... 6
BURDEN TO VALUE............................................................................................................................. 7
Party Seeking Equitable Distribution.................................................................................................. 7
Party Seeking to Establish Separate Property..................................................................................... 7
Meeting Burden by Showing No Alternative Source of Funding.......................................................... 8
Appreciation of Separate Property.................................................................................................... 9
Indirect or Lesser Burden.................................................................................................................. 9
Burden of Proof – Enhanced Earning Capacity.................................................................................. 10
Lack of Necessity to Value............................................................................................................... 11
CONSIDERATION OF POST-VALUATION DATE EVENTS....................................................................... 12
Prohibition...................................................................................................................................... 12
Disclosure Permitted....................................................................................................................... 12
Subsequent Events Considered....................................................................................................... 13
APPRAISERS AND APPRAISAL FEES.................................................................................................... 14
Statutory Provision – DRL Sec. 237(d)............................................................................................... 14
Court Appointment......................................................................................................................... 14
   Court Rule – Appointment of Neutral Expert................................................................................. 14
   Cross Examination........................................................................................................................ 14
   Preliminary Conference................................................................................................................ 15
   Court Rule – Exchange of Expert Reports....................................................................................... 15
   Demand for Expert’s Report – CPLR 3101(d)(1)(i)........................................................................... 15
   Stipulated Reports........................................................................................................................ 15
Cooperation with Expert................................................................................................................. 16
Fees for Appraisers......................................................................................................................... 16
   Requirements in Affidavit............................................................................................................. 16
   Respective Financial Condition of Parties....................................................................................... 16
Appraisal Expert Errors – Examples.................................................................................................. 16
   Unsupportable Assumptions......................................................................................................... 16
   Use of Flawed Earnings................................................................................................................. 17
   No Basis for Adjustments.............................................................................................................. 17
   Improper Capitalization Rates....................................................................................................... 17
   Failure to Capitalize Pre-tax Earnings............................................................................................. 17
   Incomplete References................................................................................................................ 18
   Uninformed Testifier.................................................................................................................... 18
      Insufficient Qualifications & Flawed Methodology........................................................................ 18
Controlling the direct Examination of Your Expert Witness............................................................... 18
DATE OF VALUATION........................................................................................................................ 20
Statutory Provision......................................................................................................................... 20
   Statute......................................................................................................................................... 20
   Duty of Trial Court......................................................................................................................... 20
   Modification by Trial Court............................................................................................................ 20
   Discretion..................................................................................................................................... 21
   Reasons....................................................................................................................................... 21
Pre-Commencement Valuation Date Not Permitted........................................................................ 21
Post Trial Date Not Permitted.......................................................................................................... 21
General Rule – Guidepost............................................................................................................... 22
   General Rule................................................................................................................................ 22
   Reasoning.................................................................................................................................... 23
   Different Assets........................................................................................................................... 24
Burden of Proof.............................................................................................................................. 24
   To Prove “Active” Asset................................................................................................................ 24
   Dichotomy as to Nature of Proof................................................................................................... 24
Effect of Discontinued Action.......................................................................................................... 25
   Prior Discontinued Action.............................................................................................................. 25
   Prior Dismissed Action.................................................................................................................. 25
   Effect on Distribution.................................................................................................................... 25
Active Assets – Date of Commencement......................................................................................... 26
   Accounts...................................................................................................................................... 26
   Commercial Building..................................................................................................................... 26
   Undeveloped Land....................................................................................................................... 27
   Margin Account Liability................................................................................................................ 27
Passive Assets – Date of Trial........................................................................................................... 27
   ESOP............................................................................................................................................ 27
   Real Estate; Market Forces............................................................................................................ 27
   Limited Partnership Interest......................................................................................................... 28
   IRA Account.................................................................................................................................. 28
   Securities Account........................................................................................................................ 28
   Income Producing Properties........................................................................................................ 28
   Marital Residence; Real Estate...................................................................................................... 28
   Transmuted Assets....................................................................................................................... 29
   Post-Judgment Sale of Residence................................................................................................. 29
   401(k); Insurance Policy................................................................................................................. 29
Midpoint Valuation......................................................................................................................... 29
Effect of Dissipation........................................................................................................................ 30
Effect of Fault................................................................................................................................. 30
Business Interests – When Date of Trial Valuation Used................................................................... 31
Business Interests – Date of Commencement................................................................................. 32
Stock Options................................................................................................................................. 34
Professional Practice....................................................................................................................... 34
Enhanced Earning Capacity.............................................................................................................. 35
Additional Valuations...................................................................................................................... 35
Date of Commencement Valuations – Reporting Period................................................................... 36
Date of Sale.................................................................................................................................... 37
Date of Purchase............................................................................................................................ 37
Separate Property.......................................................................................................................... 37
   Active-Passive Appreciations Distinction........................................................................................ 39
CONSEQUENCE OF FAILURE TO VALUE.............................................................................................. 39
Court’s Curing Defect...................................................................................................................... 39
Remittal.......................................................................................................................................... 39
Waiver of Claim............................................................................................................................... 39
   Pensions...................................................................................................................................... 39
   Personal Property......................................................................................................................... 40
   Enhanced Earning Capacity............................................................................................................ 41
   Business Interest.......................................................................................................................... 41
Tax Consequences of Pension Benefits........................................................................................... 41
Tax Consequences not Necessary if Postponed Distribution in Kind.................................................. 42
Rejection of Valuation Testimony.................................................................................................... 43
Reversal and New Trial.................................................................................................................... 43
Distribution in Kind.......................................................................................................................... 43
VALUATION WITHOUT EXPERT TESTIMONY...................................................................................... 44
Valuation by Admission-Evidentiary Basis........................................................................................ 44
Formal v. Informal Admissions......................................................................................................... 44
Examples of Informal Judicial Admissions......................................................................................... 45
   Statement of Net Worth............................................................................................................... 45
   Loan Application........................................................................................................................... 45
   Verbal Statement by Spouse......................................................................................................... 45
   Statement by Expert..................................................................................................................... 45
   Party’s Estimate............................................................................................................................ 45
   Prior Testimony............................................................................................................................ 46
   Bill of Particulars........................................................................................................................... 46
Other Means of Valuation without Expert Testimony....................................................................... 46
   Valuation by Offer Made.............................................................................................................. 46
   Valuation by Purchase Price.......................................................................................................... 46
   Valuation by Annual Earnings........................................................................................................ 47
   Valuation by Lay Opinion............................................................................................................... 47
   Valuation by Acceptance of Adverse Party’s Expert’s Figure.......................................................... 49
   Percentage Distribution................................................................................................................ 49
VALUATION OF CLOSELY-HELD BUSINESSES...................................................................................... 50
Value Defined................................................................................................................................. 50
   Fair Market Value......................................................................................................................... 50
Valuation of Securities – Not Exact Science...................................................................................... 50
C Corporations v. S Corporations..................................................................................................... 51
   Nature of C Corp.......................................................................................................................... 51
   Nature of S Corp.......................................................................................................................... 51
   Advantages of S Corp. status........................................................................................................ 51
   Disadvantage of S Corp. status..................................................................................................... 52
Revenue Ruling 59-60 – Generally................................................................................................... 53
Revenue Ruling 59-60 – Factors....................................................................................................... 53
Income Approaches to Valuation..................................................................................................... 58
Methodology – Capitalization of Earnings........................................................................................ 59
   Explanation of Method................................................................................................................. 59
   Case Law...................................................................................................................................... 59
   Capitalization Rate........................................................................................................................ 60
   Pre-Tax Earnings Capitalized.......................................................................................................... 62
Methodology – Discounted Cash Flow Analysis................................................................................ 63
Methodology – Capitalization of Excess Earnings.............................................................................. 64
   Explanation of Method................................................................................................................. 64
   Revenue Ruling 68-609.................................................................................................................. 64
   Steps in Utilizing Formula Approach............................................................................................... 66
   New York Decisions Endorsing Excess Earnings Approach............................................................... 67
Adjustment to Earnings................................................................................................................... 67
   Aberrational and Non-Recurring Events......................................................................................... 68
Reasonable Compensation.............................................................................................................. 69
   Data Sources for Reasonable Compensation.................................................................................. 70
   Reasonable Compensation for Deductibility Purposes................................................................... 71
Methodology – Market Approach................................................................................................... 72
   Explanation of Method................................................................................................................. 72
   Methods...................................................................................................................................... 72
   Finding Guideline Companies........................................................................................................ 72
   Transaction Method..................................................................................................................... 73
Methodology – Transaction in Stock................................................................................................ 74
Methodology –Cost Approach – Fledgling Business.......................................................................... 75
Methodology – Asset-Based Approach............................................................................................ 75
   Asset-Based Methods.................................................................................................................. 76
   Inventory Evaluations.................................................................................................................. 77
DISCOUNTS...................................................................................................................................... 79
Discount for Lack of Marketability.................................................................................................... 79
   Second Department – former position.......................................................................................... 79
   Modified Position......................................................................................................................... 79
   Taken against entire value of entity............................................................................................... 79
   Size of the Discount...................................................................................................................... 79
   Factored in Capitalization Rate...................................................................................................... 80
Minority Discount........................................................................................................................... 81
   Compared to Lack of Marketability............................................................................................... 81
   Transfer of Shares between family members............................................................................... 81
Premium for Control....................................................................................................................... 82
   Control confers Value.................................................................................................................. 82
   Ways to Enhance Value................................................................................................................ 82
   Avoid Double Counting................................................................................................................ 83
 Key Person Discount....................................................................................................................... 83
 Volatility Discount........................................................................................................................... 84
Combining Discounts...................................................................................................................... 84
RESTRICTIVE AGREEMENTS............................................................................................................... 85
One Factor in Valuation Analysis...................................................................................................... 85
Restrictive Agreement must be Considered..................................................................................... 85
   Total Basis of Value...................................................................................................................... 86
Capital Account............................................................................................................................... 86
Binding in Absence of Other Evidence............................................................................................. 87
Non-Matrimonial Action.................................................................................................................. 88
Updated Valuations per Agreement................................................................................................ 88
Non-Compete Covenants............................................................................................................... 88
VALUATION OF PROFESSIONAL PRACTICES....................................................................................... 90
General Considerations................................................................................................................... 90
   Professional Goodwill.................................................................................................................. 90
   Practice Goodwill......................................................................................................................... 90
   Basis of Value.............................................................................................................................. 90
   Form of Practice........................................................................................................................... 90
   Difficulty of Valuation................................................................................................................... 90
   Combination of Factors................................................................................................................ 90
   Disclosure.................................................................................................................................... 91
   Other Disclosure Considerations................................................................................................... 92
Factors – Stern v. Stern................................................................................................................... 92
Professional Practice – Death Benefit Provision............................................................................... 94
Methodology – Death Benefit v. Capitalization of Earnings............................................................... 95
Double Counting Dilemna................................................................................................................ 95
   Burden of Proof........................................................................................................................... 97
Methodology – Retained Jurisdiction Approach............................................................................... 97
   Law Practice................................................................................................................................. 97
   Medical License........................................................................................................................... 98
PROFESSIONAL PRACTICE –OTHER VALUATION METHODS................................................................ 99
Capitalization of Excess Earnings...................................................................................................... 99
Methodology – Arms’ Length Transaction...................................................................................... 101
VALUATION OF ENHANCED EARNING CAPACITY............................................................................. 104
Definition...................................................................................................................................... 104
Enhanced Earning Capacity-Methodology...................................................................................... 104
   General..................................................................................................................................... 104
   Newly-Earned License v. History of Earnings............................................................................... 105
   Economic Reality........................................................................................................................ 105
Coverture..................................................................................................................................... 106
Discount Rate................................................................................................................................ 107
Baseline Earnings.......................................................................................................................... 109
Topline Earnings............................................................................................................................ 109
Work Life Expectancy.................................................................................................................... 110
Maintenance v. Other Assets – Double Counting........................................................................... 111
   Qualification where not Intangible Asset..................................................................................... 111
   Actual Earnings........................................................................................................................... 112
Enhanced Earning Capacity – Nexus............................................................................................... 116
LIABILITIES...................................................................................................................................... 117
Concept of Marital Liabilities.......................................................................................................... 117
Valuing the Debt........................................................................................................................... 118
Income Tax Liabilities..................................................................................................................... 118
   Marital Obligations..................................................................................................................... 118
   Escrow for Tax Liabilities............................................................................................................. 118
   One Party Responsible............................................................................................................... 118
VALUATION OF REAL PROPERTY...................................................................................................... 120
Methods of Valuation................................................................................................................... 120
   Market Data Approach............................................................................................................... 120
   Income Capitalization Methods.................................................................................................. 120
   Cost Approach........................................................................................................................... 122
   Hypothetical Selling Costs........................................................................................................... 122
Miscellaneous............................................................................................................................... 122
VALUATION OF VARIOUS ASSETS.................................................................................................... 124
Artwork........................................................................................................................................ 124
Open-End Mutual Fund................................................................................................................. 124
General Insurance Agency............................................................................................................. 124
Stock Options................................................................................................................................ 124
   Terminology............................................................................................................................... 124
   Valuation Methods.................................................................................................................... 125
Restricted Securities...................................................................................................................... 127
TAX IMPACTING............................................................................................................................. 128
Embedded or Built-in Capital Gains (“BIG”).................................................................................... 128
   General..................................................................................................................................... 128
   Statutory Reference................................................................................................................... 128
   Trend in Tax Court Cases............................................................................................................ 128
   New York – Impact of Built-in Gains............................................................................................ 128
   Present Value of Capital Gains.................................................................................................... 129
   Tax Impacting of Non-holding Company...................................................................................... 129
   Bonus – Tax Impacted................................................................................................................ 130
   Pension Assets – Tax Impacted................................................................................................... 130
   Distribution in Kind..................................................................................................................... 131
Refusal to Tax Impact.................................................................................................................... 131
Business Sold................................................................................................................................ 132
Effect of Taxes on Manner of Payment of Distributive Award......................................................... 132
Burden of Proof............................................................................................................................ 133
   Considered in Distribution.......................................................................................................... 134
   Insufficient Evidence.................................................................................................................. 134
Tax Impacting Recognition............................................................................................................. 135
PENSIONS...................................................................................................................................... 137
Actuarial Testimony....................................................................................................................... 137
Terminology.................................................................................................................................. 137
Pensions as Marital Property......................................................................................................... 138
   Majauskas Decision.................................................................................................................... 138
   Significance of Classification Fraction........................................................................................... 140
   Post-Commencement Interest................................................................................................... 140
   Methods of Distribution............................................................................................................. 141
   Judicial Approaches and Preferences.......................................................................................... 141
   Securing the Deferred Pension Award........................................................................................ 141
Valuation of Pension Interest........................................................................................................ 142
   Valuation Date........................................................................................................................... 142
   Post DOC Passive Appreciation – Marital Property....................................................................... 143
   Post-DOC Change in Pension Formula......................................................................................... 143
   Retirement Date Selection......................................................................................................... 143
   Termination Packages................................................................................................................ 143
   Tuition Credit as Benefit of Employment..................................................................................... 143
   Federal Aspects of Pension Distribution...................................................................................... 143
APPENDIX “A” – Glossary of Terms.................................................................................................. 145
TABLE OF AUTHORITIES................................................................................................................... 155

 

 

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