New law on how to treat S corp’s retained earnings in divorce
A recent Michigan divorce case involving an S corporation that was separate property raised an issue of first impression in that jurisdiction. Do the company’s retained earnings represent marital income? In resolving the issue, the Michigan Court of Appeals was dead set against adopting a bright-line rule. Instead, it prescribed a multistep analysis that is applicable on a case-by-case basis.
Federal tax law irrelevant: The marriage was short. The husband entered into it with significant premarital assets, including a business that was organized as an S corp. The parties agreed the company was the husband’s separate property. However, the wife argued, successfully, that the increase in value during the marriage was part of the marital estate. She also claimed that the earnings the company had retained during the marriage were part of the marital estate, noting that, under federal tax law, the income of an S corp is taxed to the company’s owner as personal income.
The Michigan Court of Appeals rejected the tax argument. It noted that the policy considerations underlying the making of federal tax law are different from those informing domestic relations cases, which are subject to state law. The court also was opposed to a fixed rule, such as a rule that the earnings “invariably” belong to the entity until distributed or that the earnings must be included in the marital estate when the owner spouse has control over the distribution of earnings.
The court’s approach rests on the presumption that the retained earnings are not part of the marital estate. Overcoming the presumption will be difficult. For one, the court said that, while the party asking for the inclusion (the nonowner spouse) has to show that the owner spouse has control over the distribution of earnings, this showing does not necessarily mean the retained earnings should be part of the marital estate. The trial court also has to consider other factors specific to the business.
In applying its new approach to the instant case, the Court of Appeals found the trial court did not err when it refused to treat the retained earnings as marital income.
A digest of Jensen v. Jensen, 2018 Mich. App. LEXIS 40 (Jan. 9, 2018), as well as the court’s opinion, will be available soon at BVLaw.
“Is he from Mars?” asked 88-year-old Wilber Van Scoik (WGV CPA), who did his first business appraisal back in 1966. He was listening to a presentation on the valuation of decentralized virtual currencies (DVCs) at the recent Southeast Chapter of Business Appraisers (SECBA) conference in Atlanta. The presenter, attorney Andrew Hinkes (Berger Singerman LLP), promised that he would try not to “break our brains” in explaining this new world that was alien to many in the audience.
Market mayhem: Bitcoin is just one of over 6,500 DVCs, or “tokens,” with an outstanding value of around $250 billion currently. IRS guidance (IRS Notice 2014-21) says that DVCs usually are property that must be recognized at fair market value using a method that is “reasonably and consistently applied.” Tokens are traded on exchanges throughout the world, so this would be your source of a value benchmark. The trouble is, the markets are highly volatile and subject to manipulation, Hinkes stressed several times. Retroactive data are also inferior, but the exchanges (almost 70 of them) are the “best we have” at this point, he said.
Hinkes advises that the first step in valuation would be to start with the assumption that there is an arm’s-length transaction. Keep in mind, however, that there may be a strong compulsion to do a trade. Then, you would decide which of the many exchanges would be the relevant market to use to estimate a mean of the highest and lowest price. How can you determine which exchange is relevant? The “reasonably and consistently applied” rule should guide you. For example, what exchanges has the client used for trading? Also, where the client is located may point to a certain exchange in that geographic area.
Another issue to consider is how much of a “miner” is the client. Bitcoin miners use powerful specialized computers that need huge amounts of electricity to operate and generate new units of cryptocurrencies. Hinkes is a miner himself, which makes him better able to practice in this area. A miner who trades DVC as an occupation would have to value it as ordinary income, while someone who does it as a hobby would use FMV.
It was a fascinating presentation that delved into the complicated weeds of DVCs, and it will be interesting to follow the developments in this area.
The April issue of Business Valuation Update will have full coverage of the SECBA conference, which was an excellent event, with topics you don’t hear about every day and a slate of top-notch speakers.
BVR is happy to announce that The Comprehensive Guide to the Valuation of Family Limited Partnerships is the newest addition to its bookstore. This is the 5th edition of this book, and it includes all new updates since the last edition was released in 2011. This new edition has five new case study valuation examples, a new study on market pricing of liquidating noncontrolling real estate interests, using the best empirical data in a valuation, and more. The book’s authors are Bruce A. Johnson,James R. Park, and Spencer Jefferies, and it’s published by Partnership Profiles Inc.
Impressive FV auditors panel at ASA Los Angeles event May 10
The agenda has been posted for the ASA/USC Fair Value Conference, and it looks like this year’s version will be another top-notch event, which will be in Los Angeles on May 10 at KPMG. This is the 13th edition of this conference, and one of the highlights will be a fair value auditors panel that includes senior valuation personnel from the six largest accounting firms. They are: Tony Alfonso (BDO), Leigh Miller (EY), Austin Lee (Deloitte), James Marshall (PwC), Kevin Voigt (KPMG), and John Ferro (Grant Thornton LLP). Tony Aaron, formerly with EY and now an adjunct professor of accounting at the USC Leventhal School of Accounting, will join them. For more details and to register, click here. There’s an early-bird discount if you sign up before March 1, and there’s also a discount for alumni of the University of Southern California. This event is not only of interest to appraisers, but to auditors and financial executives as well.
Do you know someone in the business valuation, financial litigation, or related profession who is 40 years of age or under and has what it takes to be part of the “next generation of industry mavericks?” If so, consider submitting his or her name to NACVA for its 2017 40 Under Forty honors. Nominees do not need to be affiliated with NACVA. To submit a name for consideration, click here. The deadline is March 31, 2018.
BVR partner Transaction Advisors will present an event where you’ll hear perspective and practical insights on the latest strategies for evaluating and structuring corporate transactions. The Chicago M&A Conference will be on March 2 at the University of Chicago Gleacher Center and will feature experts from EY, Duff & Phelps, Prairie Capital, Mason Wells, Concentric Equity Partners, Willis Towers Watson, Federal Reserve Bank of Chicago, and more.
Discount offer: When you register, use special code BVR_20 at checkout for 20% off the registration price. Join Transaction Advisors for a day of learning—and for great networking! For more details and to register, click here.
Goodwill impairments decreased in 2016 for companies in the STOXX Europe 600 Index, according to the 2017 European Goodwill Impairment Study from Duff & Phelps. Goodwill impairments decreased by a quarter, from €37 billion in 2015 to €28 billion in 2016. The top three industries in 2016 with the highest decline in goodwill impairment amounts are (€ billions): financials and real estate (€14.3 to €7.9), utilities (€9.0 to €4.7), and industrials (€4.0 to €1.4). From a geographic perspective, the United Kingdom was the country with the highest aggregate amount of goodwill impairments in 2016, at €13.7 billion—almost double the 2015 level.
People: Zachary Schweda, former managing director/partner at Gabriel Partners Valuation and Corporate Services Practice along with Michael Bigrigg, former senior manager there, have joined Bober Markey Fedorovich’s Valuation Advisory Services Practice; both are in the firm’s Cleveland office … Roger Grabowski (Duff & Phelps LLC) is scheduled to present the opening session at the 13th Annual ASA/USC Fair Value Conference in Los Angeles on May 10, 2018; among the topics he will discuss is how the 2017 Tax Cut and Jobs Act impacts the cost of equity and the WACC … Sandesh Hegde (SHCA), based in Mumbai, has been appointed to the marketing education committees of the International Institute of Business Valuers (iiBV); he’s formerly with BDO Consulting India and BizEquity … Ankura has appointed Robert J. Frezza as senior managing director; he’s based in the firm’s New York City office … David Burdette has been promoted to director at Prairie Capital Advisors Inc. (Oakbrook Terrace, Ill.), a corporate advisory and investment banker … Gary Voth has been appointed chairman of the board of Houston-based Pannell Kerr Forster of Texas; he has been with the firm since 2005 and a member of the management committee since 2012.
Firms:Syracuse, N.Y.-based Dannible & McKee acquired Sbarra & Co. CPAs of Endicott, N.Y., adding five employees, including one partner, Thomas Sbarra … Expanding its footprint in New Jersey, New York-based Prager Metis CPAs LLC, has relocated one of its New Jersey offices from Morganville (formerly the Bernknopf Group) to larger space in Cranbury, N.J.…Idaho firm Cooper Norman CPAs & Business Advisors has joined CPAmerica International, an accounting association of independent CPA firms … Prairie Capital Advisors Inc. (Oakbrook Terrace, Ill.) a corporate advisory and investment banker, has acquired KC&G Business Appraisal Associates Inc., a Kansas firm … Boston area firm Rucci Bardaro & Falzone has changed its name to RBF, redesigned its logo, and launched a new website with the theme “Success, Measured” … Anders CPAs + Advisors has been named one of the St. Louis Business Journal’s 2018 Best Places to Work list of over 200 nominations; last year, the firm was ranked No. 1 in the Large Employer category … Ohio firm Clark Schaefer Hackett is celebrating its 80th anniversary this year by raising funds for firefighters.
Recent actions in the health insurance market, continued increasing regulatory initiatives, and consolidation/integration in the healthcare delivery system are keeping imaging center transactions in play.
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