Posts by Joseph W. Cunningham, JD, CPA

Oct 2021 : Bob Treat

Posted by Joseph W. Cunningham, JD, CPA

View / Download October 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Robert Treat

As most Michigan family law attorneys know, Bob Treat recently passed away.

Bob was well known for his QDRO expertise and his generosity in sharing it with others.

And, Bob recently served as Chair of the Family Law Council.

Years ago, Bob and I co-founded the committee of QDRO experts who prepare QDROs for legal aid clients on a pro bono basis under a state-wide program administered by the State Bar of Michigan.

After Bob died, I called Beth Myers of QDRO Express – the firm that Bob founded – to ask whether the firm would continue to prepare the legal aid QDROs. She said she and others at the firm know how much that doing so meant to Bob and that, yes, QDRO Express would continue to participate.

Aside from his exceptional professional achievements, Bob as a really “good guy.” I will miss him, personally, as will all who knew him.

Below is my “Ode to Bob Treat”

  • This is an ode to Bob Treat.
    … One the finest people I’ll ever meet.
  • He gave so much to Michigan Family Law Bar.
    … The most exceptional QDRO guru by far.
  • Bob was so generous sharing his time and talent.
    … So thoughtful, giving & benevolent.
  • In his profession, he was peerless.
    … In fighting disease, Bob was fearless.
  • He endured grueling treatments and a bone-marrow transplant,
    … with a positive attitude and nary a rant.
  • I’ll miss him personally as a good friend.
    … He was so gracious right to the end.
  • Bob leaves a legacy to be held high.
    … He was, in short, one great guy!

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.

Download the PDF file below… “Oct 2021 : Bob Treat”
View / Download October 2021 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Oct 2021 : Bob Treat”

Aug/Sep 2021 : Thoughts on Start-Up Companies in Divorce Settlements

Posted by Joseph W. Cunningham, JD, CPA

View / Download Aug/Sept 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Intro

Start-up companies require considerable thought in divorce settlements. Some reasons:

  1. Some will go great guns and become quite valuable.
  2. Others will fizzle and flop.
  3. And, since we do not have crystal balls, it is often impossible to know how a particular new company will fare.
  4. A considerable investment of time and/or finances may have been made during marriage, by one or both parties.
  5. Experience a party has had during marriage may equip him/her with a set of skills & and/or specialized knowledge that will be advantageously brought to bear on the new enterprise.
  6. Some start-ups have projections – often required to obtain financing – while many do not.

Methods for Handling in a Divorce Settlement

Postema Equitable Award Approach

If a considerable amount of funds has been expended in preparing the launch of the new enterprise, repaying the non-owner spouse half the amount spent may be satisfactory in some instances.

  • This is somewhat akin to the Postema1 reimbursement approach to establishing an equitable award for a spouse who made sacrifices, efforts, and contributions to enable the other to attain an advanced degree and certifications, as the case may be.
  • As with a Postema award, however, it is appropriate to consider non-financial sacrifices, efforts, and contributions made by a spouse to the establishment of the other’s start-up business.

“Structured Settlement”

  • Provide for the owner spouse to receive an agreed on reasonable compensation for his/her efforts.
  • Then pay a portion of what the company earns after paying the compensation – that is, profit – to the non-owner spouse, usually, on a declining scale basis.
  • For example – 50% in the first 2 years, then 40% for a year or two, then 30% for a year.
  • The declining scale takes into account that, as time goes by, less of the profit is attributable to the marriage and more to post-divorce efforts.

Defer the Valuation

On rare occasions, it may be best to provide that the business value will be determined at a set time after the divorce.

  • This approach provides the valuable benefit of hindsight.
  • But, it is not often used because (1) it leaves a part of the settlement unresolved and (2) it will be problematic to determine the portion of the value attributable to postdivorce efforts.
  • Another negative is that it often involves the non-owner spouse “looking over the shoulder” of his/her ex to ensure everything is on the up and up.
  • But, in some instances – particularly where there is sufficient trust and/or the lack of ability to manipulate operating results – it may be a good fit.

Case Specific Approach

As the above indicates, it is clear that – like so many aspects of divorce – dealing with a start-up company in divorce is a case-specific proposition.

All relevant circumstances should be considered in fashioning an appropriate provision in the settlement.

Endnote

1 Postema v Postema, 189 Mich App 89; 471 NW 912 (1991).

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.

Download the PDF file below… “Thoughts on Start-Up Companies in Divorce Settlements”
View / Download Aug/Sept 2021 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Aug/Sep 2021 : Thoughts on Start-Up Companies in Divorce Settlements”

Jun/Jul 2021 : Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished

Posted by Joseph W. Cunningham, JD, CPA

View / Download June/July 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • In their Consent Judgment of Divorce, it was provided that W would receive a coverture fraction share of H’s Civil Service Retirement System (CSRS) pension plan (Plan).
  • The Judgment also provided that W would be “entitled to her prorated share of any and all other ancillary benefits associated with the Plan.”
  • W submitted a proposed Court Order Acceptable for Processing (COAP—essentially a QDRO for CSRS plans—which provided her with a survivor benefit.
  • H objected, claiming that in the divorce negotiations it was noted that his pension did not provide a survivor annuity for W.
  • He further claimed that creating a survivor benefit for W would reduce his pension benefit by 10%.
  • H’s counsel stated that a survivor annuity was not a regular part of the Plan and that such a benefit “would be a separate and distinct benefit.”
  • W’s counsel stated that under MCL 552.101(4), all components of a pension plan are assigned with a retirement plan benefit divided in divorce.
  • The trial court noted that the parties negotiated the specific percentage that W would receive and, further, that they made no provisions applicable on the death of either party.
  • Hence, the court ruled that the parties did not contemplate survivor benefits and that the COAP should not provide for any.
  • W appealed.

Court of Appeals Decision

  • In an unpublished decision, the Court upheld the trial court’s ruling.
  • In doing so, the Court noted that the situation was similar to that in the published case of Hudson v. Hudson, 314 Mich App 28 (2016).
  • In Hudson, the Court ruled that H, an alternate payee of 39.5% of W’s state pension, could not elect a benefit option of a single life annuity based on his life, an option to which W was not entitled to elect on her share of H’s federal pension.
  • H claimed that pursuant to MCL 552.101(4), he was entitled to all components associated with W’s pension.
  • To this the Hudson Court stated the question was whether the right to select a particular payment option was a “component” of the plan subject to the statute. The Court ruled that it was not such a component and held against H’s claim.
  • The Court in Gray held that W’s assertion that the survivor benefit – specifically referred to as a “component” in MCL 552.101(4) – was “foreclosed for the reasons this Court articulated in Hudson.”
  • In a persuasive dissent, Judge Ronayne Krause essentially stated that (1) Hudson did not apply to the Gray circumstances and (2) under the plain meaning of MCL 552.101(4), a survivor benefit is a component of a plan.

Comments on the Case

  • The facts in the Gray case are complicated, including that:
    • The plan involved was federal pension about which less is generally understood than with the more common commercial company plans.
    • It was noted in the trial transcript that it had been agreed at mediation that W’s lawyer was to prepare a letter with questions about the government plan. Apparently this letter, if sent, did not ask about survivor benefits.
    • And, according to H’s counsel, survivor benefits were not part of the plan but rather were “separate
      and distinct.”
  • Takeaway – It is virtually always preferable to specify in the Judgment or Settlement Agreement, as the case may be, what benefits are included with the transfer of a retirement benefit.

Otherwise, issues such as those in Gray and Hudson may arise.

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.

Download the PDF file below… “Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished”
View / Download June/July 2021 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Jun/Jul 2021 : Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished”

May 2021 : Court of Appeals Reverses Trial Court Ruling on the “Marital/Separate” Property Character of a Business Interest Received by Gift before Marriage Wolcott v Wolcott, Mich App No. 351918 (March 11, 2021) Unpublished

Posted by Joseph W. Cunningham, JD, CPA

View / Download May 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • In July 1999, W’s father gave her a 10% interest in a closely-held business (Company) at which she was not employed.
  • The parties married a month later in August 1999.
  • During the entire marriage, the parties maintained separate bank accounts.
  • W deposited any distributions she received from the Company into her separate bank account.
  • The trial court ruled that W’s interest in the Company was her separate property.
  • H appealed.

Court of Appeals Decision

  • In an unpublished decision, the Court reversed the trial court’s ruling.
  • In doing so, the Court noted that the distributions W received from the Company – though deposited into her separate bank account – were commingled with her marital income deposited into the same account.
  • Further, the Court stated that W had testified that she used some of the distributions from the Company to pay marital expenses and household bills.
  • The Court ruled that W’s conduct with regard to distributions from the Company indicates that her interest in the Company was marital property.

Comments on the Case

  • The Court’s decision seems unfair to W.
  • The parties evidently, from the outset of their marriage, intended to keep their respective property interests separate, including the distributions W received from the Company.
  • That the distributions were incidentally “commingled” with marital funds does not necessarily indicate an intent to convert them – and certainly not the Company – to marital property, nor does use of some of the funds to pay marital expenses – particularly if other funds were temporarily insufficient.
  • The Court used these two factors to convert a pre-marital gift into marital property.
  • Treating the commingled distributions as marital seems reasonable. But, to treat the entire value of W’s interest in the Company as marital seems excessive.
  • The obvious upshot of the case is, if a party wants to keep separate property separate, then such party:
    1. Should deposit any income from such property in a separate account into which no marital funds are deposited; and,
    2. Should not use such funds to pay marital expenses. If such is necessary because marital funds are insufficient, make a documented loan of the separate funds to pay the expenses, and be sure that the loan is repaid.

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.

Download the PDF file below… “Court of Appeals Reverses Trial Court Ruling on the “Marital/Separate” Property Character of a Business Interest Received by Gift before Marriage Wolcott v Wolcott, Mich App No. 351918 (March 11, 2021) Unpublished”
View / Download May 2021 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “May 2021 : Court of Appeals Reverses Trial Court Ruling on the “Marital/Separate” Property Character of a Business Interest Received by Gift before Marriage Wolcott v Wolcott, Mich App No. 351918 (March 11, 2021) Unpublished”

Apr 2021 : Court of Appeals Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)

Posted by Joseph W. Cunningham, JD, CPA

View / Download April 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H, an orthopedic surgeon, had operated his practice out of a building he leased for most of the marriage. He had many employees.
    • But, in 2016, he sold his equipment to a hospital at which he began working on a contractual basis. He retained one employee, his secretary.
  • At the trial, H said the change was prompted by billing and insurance company issues.
  • H said his practice had no value because he was essentially an employee of the hospital, and, further, that he owned no equipment and had no accounts receivable.
  • He also said that he was easily replaceable and could not assign or sell his contractual position.
  • W’s valuation expert valued H’s practice at $600,000. However, he admitted that he did not have complete information based on which to calculate a value and testified that the $600,000 was in considerable part his “extrapolation.”
  • Further, the expert acknowledged that H was, as he claimed, essentially an employee of the hospital.
  • The trial court ruled that H was an independent contractor with the hospital and no longer operated a practice.
    Hence, there was nothing to value.
  • W appealed.

Court of Appeals Decision

  • The Court upheld the trial court’s ruling.
  • In doing so, the Court noted the concessions that W’s expert made noted above and stated “the evidence supported the trial court’s decision.”

Comments on the Case

  • As was noted in the case, there is a trend in the medical practice arena for doctors to form contractual relationships with a hospital instead of operating an independent practice.
  • Many groups of doctors have done this. It is often mutually beneficial in that:
    1. The hospital has the certainty of access to the doctors’ medical services and has control over the cost thereof.
    2. The doctors, in addition to significant relief from administrative matters now performed by the hospital, have a steady source of need for their services.
  • However, it can be a blurry line between a “practice” as such and being essentially “an employee of hospital.”
  • For example:
    • Assume a medical practice group consists of four doctors who make, on average, $400,000 each annually.
    • Depending on the nature of the practice, there may be a holder’s interest value to each doctor’s practice within the group.
    • For the most part, albeit, not exclusively, the group of doctors performs services for patients of one hospital.
    • The group and the hospital agree to enter a contractual arrangement which, essentially, formalizes the mode in which they had been operating.
    • The agreement provides that the doctors will each make $350,000 annually while being relieved of various administrative responsibilities.
    • So, from a de facto standpoint, are the doctors essentially in a very similar economic position as before entering the agreement with the hospital? Or, perhaps, a better position? If there was a holder’s interest value to their practice, has it disappeared?
  • Some relevant questions to consider in similar situations, under subject agreement, are:
    • Are the doctors in fact employees of the hospital or have they retained independent contractor status?
    • Are the doctors restricted from performing services for non-hospital patients?
    • To what degree are the doctors at the “beck and call” of the hospital?
    • Are the doctors on fixed salaries or is their compensation tied to the amount of services they provide?
    • To what degree does the hospital control the doctors’ schedules?
  • As with so many issues in divorce, the “practice” issue in circumstances where there is a contractual relationship with a medical institution is fact specific.

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.

Download the PDF file below… “Court of Appeals Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)”
View / Download April 2021 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Apr 2021 : Court of Appeals Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)”