In cases where a party owns a business, as justification for a disproportionate split of the business in equitable distribution, we often hear that the titled spouse has to be rewarded for their effort, ingenuity, ideas, etc. related to the business.  While arguably those things could be part of the analysis of the statutory factors, there really is not any law suggesting that this must be so.  In fact, the real justification that I can really get my arms around as to why a business would be disproportionately distributed is the fact that it is often pregnant with capital gains.  While the law is pretty clear that we cannot reduce the value because of hypothetical tax consequences, we can certainly look to same in the percentage distribution.  This makes sense because the failure to do so may actually give the non-titled spouse a greater percentage if taxes are ignored.

That said, I have heard this "sweat equity" argument over the years but have rarely seen a case where it was articulated.  That is until today when the Appellate Division released the unreported (non-precedential) opinion in Falkowski v. Falkowski.

In this case, the husband renovated two homes., purportedly without the assistance of the wife. The first was a premarital home which he renovated during the marriage.  The second, renovated after the parties’ child was born and she left the workforce, was purportedly done on his days off (he worked full time as well.)  For the first house, the husband’s "sweat equity" garnered him an additional 5% of the equity in the asset.  For the second home, the husband received 65% and the wife 35%.  In so ruling, the judge said:

[Husband] worked for five years to build that house into what it is, I gather, today. The testimony was pretty clear. Aside from the fact that [wife] had no say in it, and [husband] did all this with his friends, over five years he gutted everything to the frame. And he replaced everything. And he was fairly passionate when he testified about it too, all the work he did.

. . . . [I]t was a monumental amount of work. I was impressed with the fact that he
basically took the house down to its bare frame and bare rafters and built the entire
thing over. For those reasons I am not splitting this asset equally either. I
believe it’s fairer to recognize that sweat equity and give him 65% of the net value and give [wife] 35% of the net value.


Continue Reading Husband's Sweat Equity Awards Him Greater Share of Marital Real Estate – Is a Slippery Slope Afoot?

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?


Continue Reading In Business Valuation, Are Hypothetical Costs of Sale Considered to Reduce Value? Court in NJ vs. PA Disagree