While there are many similarities between the states when it comes to family law, there are also many differences. That fact was recently highlighted in the context of business valuation, specifically, what things should be considered to arrive at a value for equitable distribution, in a post recently seen on our firm's Pennsylvania Family Law Blog. Specifically,Aaron Weems is an attorney in our Warrington (Bucks County), Pennsylvania office and editor of the Pennsylvania Family Law Blog wrote an interesting post entitled "Superior Court Changes How Businesses are Valued."
In the Balicki case that Aaron discussed, at issue was the valuation of an insurance agency. It was understood that the business would not be sold, therefore, in deciding the value of the business, the Master excluded expenses of sale, transfer, or liquidation which could include broker commissions, finders fees, attorney fees and accountant fees. The appellate court reversed finding that this was improper. Moreover, the appellate court found error in the fact that the Master failed to take into consideration any taxes that may be associated with the sale or liquidation of a business.
Aaron noted that the appellate court held that Pennsylvania statutes 23 PACSA § 3502(a)(10.1) and (10.2) required that for the purposes of equitable distribution of marital property, the Court must consider the Federal, state and local tax ramifications even if they are not “immediate and certain”, and similarly, the sale, transfer, or liquidation of an asset need also not be “immediate and certain,” either.
The practical effect of this reducing these hypothetical expenses is that it reduces the marital estate, and therefore, the other spouses overall equitable distribution award. Would the same result be reached in New Jersey?
The answer is no. In 2002, the New Jersey Appellate Division essentially changed the standard of value in divorce cases in the case of Brown v. Brown. Prior to that time, the standard of value in divorce cases was fair market value. Using the classic definition of fair market value, essentially value was calculated based upon what the business would be sold for in an arms length transaction (not a liquidation as is apparently what Pennsylvania may be doing.) As such, discounts such as those for lack of marketability (i.e. considering the lack of a ready market for a closely held business) and for lack of control (i.e. if a party owned less than 50% of the business) were considered. This would have the effect of reducing value and thus, reducing the marital estate for equitable distribution purposes.
Brown changed things by eliminating such discounts based upon the notion that the business was not being sold. In essence, the court essentially applied the standard of value used in minority oppressed shareholder actions.
Also, unlike Pennsylvania, hypothetical taxes on sale cannot be considered to reduce value based upon the decision in the Orgler case. However, that case also requires a court to consider these hypothetical tax consequences when it comes to the percentage distribution of the asset. Why? Because the court's in New Jersey are court's of equity and fairness is the goal. Put another way, if the non-titled spouse gets cash for his/her share of a business interest, they get that equitable distribution tax free. On the other hand, the business owner will have to pay taxes on the liquidation of the business. Thus, if the non-titled spouse gets 50% of the value of the business in cash or other assets, they may very well be getting more than the titled owner when taxes are considered.
As to whether broker's commissions and other costs of sale are to be considered, in New Jersey, unlike Pennsylvania, the answer is generally no if they are hypothetical as per the Wadlow case. However, if an asset will have to be sold to effectuate equitable distribution, fairness would dictate the consideration of costs of sale and taxes.
As you can see from the above, non-titled spouses on different sides of the Delaware River would experience a different equitable distribution of the same business, just because of the difference in state laws.