Tax Trends and Developments Column – Michigan Family Law Journal
The Michigan Court of Appeals has ruled in a number of cases that, if is a business providing personal services is worth more to the owner than the price at which it could be sold, the value for divorce purposes is value to the owner – sometimes called “holder’s interest value” – on a going concern premise unless there is reason to believe the enterprise will be sold or discontinued.
But what about the reverse situation – the sale value – that is, fair market value (FMV) – is higher than the value to the owner?
Premise of Value to Owner
If there is no intent to sell or discontinue a business or professional practice, it should be valued for divorce based on its intrinsic value to the owner on a going concern basis. The financial benefits from that value are what have been conferred on the family while intact and will be conferred solely on the owner post-divorce.
Support – Kowalesky, 148 Mich App 151 (1986) and several other Court of Appeals (COA) cases.
Logic – If there is no intent to sell, under what rationale should any value other than the value based on current financial benefits provided by the business be used in a divorce settlement?
No other value is relevant to this family or, hence, to this divorce.
However, Value to Owner Cuts Both Ways
Value to Owner Higher than FMV – The value of a neurosurgeon’s practice – dependent solely on established referral sources to this particular doctor – is worth much more assuming the doctor will continue the practice than to sell it. According to the COA, the higher value applies in divorce if there is no reason to believe the practice will be sold or discontinued.
FMV Higher than Value to Owner – Several years ago consolidators were “rolling up” funeral homes to add value via economies of scale – synergistic value. But, if a family-owned funeral home intended to remain as such and had no intention of “going corporate”, would it make any sense to use the higher potential sale value which is, essentially, irrelevant to this family, this divorce?
Logic – What possibly supports applying value to owner if higher, but not if lower? Either way, should not the value to this particular family be used?
If potential sale value is significantly higher than value to owner, the non-owner can be protected by use of a clawback provision which provides that, in the event of sale within a certain time frame, the non-owner will receive some percentage of net sale proceeds in excess of the value used in the divorce.
Depending on the circumstances, a declining percentage may be appropriate – e.g. 50% of the excess if the sale occurs within a year of divorce, 40% within two years, and so on.
Such a provision should be considered particularly if there is reason to believe a sale may occur in the near term.
It is not a failsafe method for safeguarding the non-owner, but does afford some measure of protection.
About the Author
Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.
Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)