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.
Having payments structured as alimony can be an effective tax planning tool. Why? Because alimony is deductible by the payor (typically the higher earning spouse) and taxable to the recipient; the former family unit can reduce, often significantly, its overall tax burden. As we have been exploring in this blog series, sometimes payments the parties identified as alimony turn out to be something else…
The CPA preparing Pat’s tax returns just called to say that $96,000 of the payments made under the agreement will be presumed as child support by the IRS. Pat is dumbfounded. The payments were made according to the separation agreement; they were made in cash to the former spouse. All alimony and child support payments have been made on time. The agreement indicated that the payments were to be alimony and the parties expected that they would be deductible by Pat and taxed to Jamie.
How did this happen?
As required by the separation agreement, Pat paid Jamie $6,000 per month for three years until Taylor turned 18, then paid $4,000 per month for one year until Avery turned 18, at which time the payments were reduced to $3,500 per month.
Under these circumstances, the rebuttable presumption is that the payments in excess of $3,500 per month are deemed child support.
Certain spousal support payments (alimony) are deemed to be child support regardless of how they are described in a divorce decree or separation agreement. When a written instrument calls for a reduction in payments as a result of a contingency relating to a child, those payments will be treated as child support for income tax purposes regardless of the description in the written instrument. Examples of contingencies related to a child include the child attaining a specified age, marrying, dying, leaving school, or a similar contingency.
Careful planning may have avoided these consequences.
For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services we provide, click here or call Sal Ambrosino at 301.231.6272.
A Plastic Surgeon was sentenced to four years in jail after concealing assets from his wife – A recent piece in the Washington Post chronicles the efforts of one plastic surgeon to hide assets from his soon-to-be ex-wife. Drawing links to The Panama Papers scandal, the article highlights some of the financial games that spouses play in anticipation of a divorce. Find the full article here.
Estate, trust and marital disputes can be complex, and may require assistance from forensic accountants. The forensic accountants and litigation specialists at Aronson bring together their collective experience to look into, and beyond, the numbers. We deliver the objective analyses and expert witness testimony that can untangle complex financial disputes and accounting investigations. To learn more, visit here.