VALUATION OF ASSETS IN DIVORCE

Transcription

1 The University of Texas School of Law Presented: 8 th Annual Family Law On The Front Lines June 19-20, 2008 Galveston, Texas VALUATION OF ASSETS IN DIVORCE RANDALL B. WILHITE LOOPER REED & MCGRAW, P.C POST OAK BLVD., SUITE 2000 HOUSTON, TEXAS TELEPHONE: DIRECT DIAL: TELEFAX: rwilhite@lrmlaw.com and TRACY B. STEWART, CPA/PFS, CFP TARROW STREET, SUITE 105 COLLEGE STATE, TEXAS TELEPHONE: TELEFAX: STEWART@TEXASDIVORCECPA.COM Note: This paper was converted from a scanned image. The conversion has been reviewed for accuracy; however, minor spelling or text-conversion errors may still be present. Continuing Legal Education

2 TABLE OF CONTENTS I. SCOPE OF ARTICLE II HOW IS VALUE MEASURED? A. Valuation Methodology is Based On The Purpose And Scope of the Valuation B. Texas Pattern Jury Charges On Valuation III. Proving Valuation A. By Sworn Inventory & Appraisement B. By Testimony C. Admissibility of Evidence on Valuation IV. APPELLATE REVIEW OF VALUATION ISSUES V. THE VALUATION OF A BUSINESS A. Valuation Genesis - Revenue Ruling B. Other IRS Revenue Rulings C. What Is Value? D. Basic Financial Data and Applicable Valuation Definitions E. Financial Statements F. Bases of Accounting G. Other Documents H. Important Valuation Definitions I. Normalizing the Company's Financial Statements J. Income Approaches K. Market Approach L. Cost Approach M. Other Concepts VI. SUBJECTIVE CONSIDERATIONS A. Control and Control Premium B. Degrees of Minority Interest C. Premium For Control D. Goodwill E. Discounts for Lack of Control and Marketability VII. DAUBERT CONSIDERATIONS IN VALUATION VI. ADDRESSING COMMON ERRORS A. Errors Involving Competence B. Errors Involving the Valuation Engagement C. Errors Involving Data Accumulation and Analysis D. Errors Involving Valuation Methodology VII. SELECTED AREAS OF CONTROVERSY A. Buy-Sell Agreements Pose Difficulties in Valuation B. Covenants Not to Compete

3 VIII VALUING A PERSONAL INJURY LAW PRACTICE A. Percentage of Completion B. Inception of Title C. Referral Fees D. Structured Settlements E. Advanced Expenses and Costs F. Partners' or Shareholders' Percentage Interests IX. VALUATION OF STOCK OPTIONS A. Intrinsic Value B. Discount to Present Value C. Black-Scholes Option Pricing Model D. Market Value X. FAMILY LIMITED PARTNERSHIPS & LIMITED LIABILITY COMPANIES XI. DISCOVERY A. Permanent Files B. Accountant's Files C. Bank Files D. Invoices E. Interrogatories F. Depositions G. Information Checklist XII. REAL ESTATE VALUATION XIII. XIV. XIV. VALUING PERSONAL PROPERTY AND LIFE INSURANCE TAX ISSUES IN THE VALUATION OF PROPERTY CONCLUSION Appendix 1 - Checklist Document Request Appendix 2 - Premiums Paid Over Market Appendix 3 - Appraisal Standards and Guidelines Appendix 4 - Questions to Ask in an Evaluation of a Company Appendix 5 - Divorce Related Transfers of a Right to Future Income

4 Valuation of Assets in Divorce I. SCOPE OF ARTICLE. By Randall B. Wilhite Looper Reed & McGraw, P.C. Houston, Texas and Tracy B. Stewart, CPA/PFS, CFP College Station, Texas Valuing assets in a divorce can be one of the most complex and challenging issues facing the family lawyer in today's divorce practice. Not only are there numerous approaches to valuation of assets in a commercial context, there are several different alterations engrafted onto the procedures that are uniquely germane only to the valuation of assets in the context of a divorce. Several characteristics of different types of assets, including the lack of a ready market, make the task of valuation a particular challenge to the family lawyer. In reality, none of the normal valuation methods presents "the" fair market value of an asset Indeed, at best, these methods commonly furnish only a range of values. The weight to be given any single valuation depends on the characteristics of the asset. Furthermore, tax issues relative to different assets can make a big difference on the true realizable value of an asset. II. HOW IS VALUE MEASURED? A. Valuation Methodology is Based On The Purpose And Scope of the Valuation. As necessary, the parties must be assisted by qualified experts to value the property. See In re Rice, 96 S.W.3d 642, 645 (Tex. App.--Dallas 2003, no pet.). What approach the appraiser takes is dependent upon the reason the appraiser has in appraising the asset, and what the appraiser is appraising. 1. Start With A Mission Statement. A preliminary step in the valuation process is the identification and definition of the purpose and scope of the valuation assignment. BUSINESS VALUATION STANDARDS, BVS-I (Am. Soc. Appraisers, 1994). The appraiser is required to identify and define the standard of value, the effective date of the appraisal, and the ownership interest, as well as the purpose and use of the evaluation. General Requirements for Developing a Business Valuation BUSINESS VALUATION STANDARDS, BVS-I IIB 3, 4(Am.Soc. Appraisers, 1994). A major problem affecting the defined mission of the appraiser in determining valuations for divorce settlements and trials often is the intense animosity, distrust and lack of cooperation between the parties. This antagonism frequently results in attempts to prevent the appraiser retained by the spouse without knowledge of the asset to be valued from obtaining adequate information to make a thorough appraisal. Overcoming these obstacles is not easy. It requires diligent perseverance. This issue will be handled in more detail later in this article. -1-

5 a. The Mission Of Valuing Assets In A Divorce. In a divorce context, the mission statement is probably the single most determinative factor in arriving at a final value. This is because, in Texas, the divorce court is required to place hypothetical constraints on the valuation of certain assets, especially goodwill in businesses. b. Valuation Needs Evidence of Value. In Sandone v. Miller-Sandone, 116 S.W.3d 204 (Tex. App.-El Paso 2003, no pet.), the husband, who had failed to file an answer or to appear at the trial appealed with respect to division of the community property. The wife had offered neither pleadings nor evidence with respect to the value of the assets or the amount of the liabilities. The El Paso appellate court held that the trial court must have some basis in the evidence in order to make its division of property. "The statute requires the petitioner to present proof to support the material allegations in the petition despite the respondent's failure to answer." Id. at 207, citing O'Neal v. O'Neal, 69 S.W.3d 347, 349 (Tex. App. -- Eastland 2002, no pet.), dealing with "virtually identical" facts, noted in Joseph W. McKnight, Family Law: Husband & Wife, 56 SMU L. Rev. 1659, 1695 (2002)). In making the division without hearing any evidence the trial court therefore abused its discretion in its disposition of the property and apportioning debts, as well as in its award of attorney's fees unsupported by pleading or evidence. Id. at 208. In In re Scott, 117 S.W.3d 580 (Tex. App. - Amarillo 2003, no pet.), the Amarillo court concluded that the trial court's valuation of the family home based solely on a very low appraisal of the ad valorem taxing authorities as compared to vastly higher valuation based on other evidence caused the valuation to be clearly wrong and probably caused rendition of an improper division of property requiring remand. c. Findings of Fact. Tex. Fam. Code provides that in a suit for dissolution of a marriage in which the court has rendered a judgment dividing the estate of the parties, on request by a party, the court shall state in writing its findings of fact and conclusions of law concerning: (1) the characterization of each party's assets, liabilities, claims, and offsets on which disputed evidence has been presented; and (2) the value or amount of the community estate's assets, liabilities, claims, and offsets on which disputed evidence has been presented. d. The Impact Of Discovery In Litigation Affects The Valuation. A major problem affecting the defined mission of the appraiser in determining valuations of property for divorce settlements and trials often is the intense animosity, distrust and lack of cooperation between the parties. This antagonism frequently results in attempts to prevent the appraiser retained by the spouse not in control or possession of the asset from obtaining adequate information to make a thorough appraisal. Overcoming these obstacles is not easy. It requires diligent perseverance. This issue will be handled in more detail later in this article. 2. The Variation Of Valuation. After a couple's assets have been identified for division, the assets must be valued. Sufficient identification and valuation of all divisible property must be put in evidence on the record. McKnight, Joseph W., Family Law: Husband and Wife, 57 SMU Law Rev See Handley v. -2-