On a quarterly basis, Aronson’s Financial Advisory Services Group experts will provide synopses’ on recent court decisions on tax, financial, and valuation issues. This case studies series aims to showcase current trends for family relations attorneys in the Washington D.C. Metro Area.
U.S. Supreme Court
May 15, 2017 – Federal law preempts state as to veteran’s waiver of retirement pay. In Howell v. Howell, SCOTUS held that federal law prevents a state court from ordering a veteran to “indemnify” a divorced spouse for the loss of a portion of the veteran’s retirement pay caused by the veteran’s waiver of retirement pay to receive service-related disability benefits.
U.S. Tax Court
June 1, 2017 – Alimony: Requirement that payments be “under a divorce or separation agreement.” Evidenced in Paul S. Mudrich, TC Memo 2017-101, Paul earned a bonus in 2006 while he was still married to Lauri. In 2007, Paul divorced Lauri and married Kyera. Paul and Lauri had executed an agreement stating that the bonus was community property. Paul would pay Lauri half of the bonus net of taxes and report the bonus on his return. Paul filed a 2007 return claiming an alimony deduction equal to half of the gross amount of the bonus. The IRS disagreed on the basis that the payment was not paid pursuant to a written divorce or separation agreement. The Tax Court sided with the IRS.
May 15, 2017 – Divorce agreements are not binding on the IRS. In T.C. Memo. 2017-80, the Tax Court reminded couples that the IRS is not a party to their divorce. The terms agreed to in a settlement agreement are not binding on the IRS. In this particular agreement, the separating couple agreed to a 50/50 split of any tax liabilities arising from joint returns filed during their marriage. The IRS disagreed, stating that the taxpayers were jointly and severally liable. The Tax Court ruled in favor of the IRS. For more details on this particular case, please read our blog The IRS is Not a Party to Your Divorce, Your Agreement Does Not Bind Them.
District of Columbia
April 20, 2017 – Equitable, not equal distribution of marital property; preexisting retirement funds are separate property unless transformed to marital. In Fleet v. Fleet, the D.C. Court of Appeals found that the trial court’s record of factual findings was inadequate to support its distribution of the marital home and the retirement account between the parties. In this particular situation, two questions went before the Court. First, Mr. Fleet contended that in dividing the marital home, the trial court applied an improper presumption of equal rather than equitable distribution. Second, Mr. Fleet claimed the trial court made a mistake in awarding a portion of his pre-marital retirement account to Mrs. Fleet. The Court of Appeals reversed and remanded the case for further consideration.
May 30, 2017 – Presumptive income must first be based on current year income; gross income from self-employment is subject to reasonable business expenses. The Court of Appeals of Virginia ruled in Tidwell v. Late that the trial court erred when it used the average gross income over four years for a self-employed father whose annual income fluctuated in order to calculate his income for child support purposes. Further, the Court pointed out that the gross income should be subject to reasonable business expenses. The Court clarified that the trial court must first calculate a presumptive support amount based on current year income, and then they could explicitly analyze whether higher income in prior years manifested a greater capacity that rendered the presumptive award inappropriate or unjust. If the trial court then determined that it should deviate from the child support guidelines, it could be within its discretion to average a party’s income over a reasonable period of time.
April 18, 2017 – Court could not grant to wife GI Bill benefits which husband was unable to transfer; non-modifiable support prohibited by statute; distribution of more than 50% of marital share of military pension prohibited. In an unpublished Memorandum Opinion, the Court of Appeals of Virginia found in Garrett v. Garrett that the trial court incorrectly granted 18 months of GI Bill educational benefits after Mr. Garrett was discharged from service and unable to transfer his benefits under the bill; provided for non-modifiable spousal support because the court’s award of non-modifiable support was prohibited by statute; and, it awarded the wife 100% of the marital share of her husband’s military pension, when Virginia law prohibits the distribution of more than 50% of the marital share of the cash benefits actually received. The Court ruled that the trial court was not in error when it imputed income to the husband for the purposes of calculating spousal support.
February 28, 2017 – Coverture fraction applied to company stock sold pre-separation. In an unpublished Memorandum Opinion, the Court of Appeals of Virginia found no error and affirmed the trial court’s ruling in Allen v. Allen on the distribution of marital property and spousal support. Notably, the Court agreed with the trial court’s use of a coverture fraction applied to the stock of a company created by the husband during the marriage and sold pre-separation where the husband was required to provide post-separation services in order to receive payment.
For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services, contact Sal Ambrosino at 301.231.6272 and email@example.com.
It is not uncommon for the valuation of a privately-held business to be one of the central issues in a litigation matter, such as a shareholder dispute or a family law matter. When this is the case, the attorneys representing the parties to the dispute will need to be on the lookout for litigation landmines.
Recently, an attorney we were assisting on a family law matter in Virginia was provided a valuation report of a business in which his client’s spouse had a non-controlling ownership interest. Opposing counsel wanted the parties to stipulate to the value set forth in this valuation report. The attorney forwarded the report and asked us to give him our thoughts. After reading the first few pages of the report, we quickly realized that using the value stated in this report might cause the marital estate to be significantly undervalued.
Our immediate concerns had to do with the purpose of the valuation and the standard of value. The purpose of a valuation will often dictate the standard of value. For example, estate and gift tax returns are required to be based on a Fair Market Value standard, while valuations done for GAAP purposes are generally required to be on a Fair Value standard. The report provided by opposing counsel was prepared under the Fair Market Value standard in connection with a gift tax return.
In this case the litigation was based in Virginia, so the applicable standard of value was Intrinsic Value. The valuation report from opposing counsel included a discount for lack of marketability of 30% (not uncommon with a fair market valuation of a non-controlling ownership interest). This type of discount is typically not applicable under the Intrinsic Value standard. After we communicated our aforementioned concerns to the attorney, the stipulation was not agreed to. Fast-forwarding a bit … a new valuation was prepared on an Intrinsic Value basis, which the parties used to reach a settlement agreement that reflected a substantially higher value with respect to the interest in the company. Landmine avoided!
Navigating and deciphering a valuation report can be tricky business. Identifying the proper standard of value is only one of many issues to be addressed. To learn more about how Aronson’s Financial Advisory Services team helps attorneys untangle complex financial disputes and conduct accounting investigations, contact Will Kunz at 301.222.8216 or firstname.lastname@example.org.