Businesses Flashcards
The court may choose method (Pereira/Van Camp) by selecting whichever formula will _____.
achieve substantial justice between the parties
Beam v. Bank of America (1971) 6 Cal.3d 12
When a business is _______, then the court should compute a fair compensation for the community efforts, skill, and talent rendered during marriage.
capital intensive and capitalized with SP (i.e. when the chief factor of growth of the business is due to capital/equipment and/or labor of others)
Van Camp v. Van Camp (1921) 53 Cal.App. 17
(Reasonable Compensation - Compensation Paid) x Years Married = CP interest.
Van Camp Formula
When party’s efforts are not the primary growth factor (i.e. still works there but has no management role and did not contribute to current majority sales program), ______.
Van Camp is appropriate.
Marriage of Brooks (2019) 244 Cal.Rptr.3d 910
Determines allocation by adding ______. Any value above and beyond is CP. It is generally used when the chief factor of the business is _____.
SP at DOM to SP interest during marriage
due to personal efforts
Pereira v. Pereira (1909) 156 Cal. 1
FMV at DOM + (FMV at DOM * Rate of Return * Years Married) = SP interest.
Pereira Formula
The court may use a blended approach using different methods for different time periods in the life of the entity based upon the capital/personal efforts.
Marriage of Brandes (2015) 239 Cal.App.4th 1461
An apportionment of profits may be required when one spouse _______ BUT not when the spouse expended only minimal effort.
invests separate funds in real estate or securities
Estate of Neilson (1962) 57 Cal.2d 733
The court cannot order Pereira/Van Camp if no evidence of the time devoted to managing ______ is presented.
real estate/securities
Marriage of Ciprari (2019) 32 Cal.App.5th 83
When a spouse applies skills, efforts, and industry to increase CP business after separation, _____ should be applied.
reverse Pereira/Van Camp
Marriage of Imperato (1975) 45 Cal.App.3d 432
FMV at separation = (FMV at separation x Rate of Return x Years of Separation) = CP interest.
Reverse Pereira
Reasonable Compensation during Separation = SP interest.
Reverse Van Camp
The court has the authority to reimburse the community where one spouse has enjoyed _______ after DOS.
exclusive use of the business
Marriage of Watts (1985) 171 Cal.App.3d 366
The court shall value assets and liabilities ______ unless good cause exists for an alternate date of valuation.
as near as practicable to the time of trial
Family Code 2552
Generally small businesses that rely on owner’s skills, services, and reputation are valued _____ per Family Code 771.
at the date of separation
Small law practice should be valued at DOS as ______ but related directly to the rendering of professional services unless a large firm where the party has _____ OR ____ in partnership agreement provides accurate value.
most law firms are not capital assets
insignificant role in value
formula
Marriage of Green (1989) 213 Cal.App.3d 14
When business is primarily dependent on the owner’s skills (goodwill), the business must be valued at _____.
DOS
Marriage of Stevenson (1993) 20 Cal.app.4th 250
The court is not required to find that the entire post-separation increase was due _______ in order to apply an alternate value date.
exclusively to the personal efforts of the operating spouse
Marriage of Duncan (2001) 90 Cal.App.4th 617
When a party’s expert makes ______, it undermines their credibility. In this case, the court used H’s value from 6 months prior and added an increase in income to determine value at trial as opposed to forcing H to pay for a 3rd valuation because W’s expert was not credible and had _____ to valuation or valuation date.
unreasonable arguments (such as pushing for a sale)
delayed/refused to agree
Marriage of Honer (2015) 236 Cal.App.4th 687
Court permitted alternate date of valuation when business owner ______.
failed to cooperate in producing records
Marriage of Stallcup (1979) 97 Cal.App.3d 294
Business owner has burden of proof to establish _____ because business owner has access to all the facts to support the claims.
correctness of returns
Marriage of Hein (2020) 52 Cal.App.5th 519
Neglecting fiduciary duty (by running business into ground) _____.
could be grounds for alternate valuation date.
Marriage of Koppelman (1984) 159 CAl.App.3d 627
______ is NOT a basis for an alternate valuation date.
Failure to disclose insider information when barred from doing so under securities law
Marriage of Reuling (1994) 23 Cal.App.4th 1428
The court found that a significant increase in value and profit generation post trial could be ______.
tied all the way back to community efforts in specific circumstances (i.e. movies/tv shows/etc.)
Marriage of Zaentz (1990) 218 Cal.App.3d. 154
The court may impose a _____ in awarding one party the business.
covenant not to compete
Marriage of Greaux and Mermin (2014) 223 Cal.App.4th 1242
Even though H had business prior to marriage, because he ______, the business was now CP.
filed for bankruptcy during marriage and thereafter resumed the same business
Marriage of Winn (1979) 98 Cal.App.3d. 363
SP business is only transmuted to CP due to bankruptcy when _____.
the bankruptcy determines that the business is valueless
Marriage of Denney (1981) 115 Cal.App.3d 543
The court may reserve JDX over ____ but only for a limited time period.
WIP
Marriage of Kilbourne (1991) 232 Cal.App.3d 1518
The mere incorporation is not ______ and retains its characterization.
an acquisition
Marriage of Koester (1999) 73 Cal.App.4th 1032:
The following factors should be considered in valuing a closely held corporation: ____
(1) nature of the business and history of the enterprise from inception;
(2) economic outlook in general and condition and outlook in industry;
(3) book value and financial condition;
(4) earning capacity;
(5) dividend-paying capacity;
(6) whether goodwill or other intangible asset;
(7) sales of stock and size of the block of stock to be valued;
(8) market price of stocks of corporations engaged in same or similar line of business having their stocks actively traded in a free and open market, either on an exchange or over the counter.
IRS Revenue Ruling 59-60
The court must consider all eight (8) factors of 59-60 in ___. The court cannot exclusively rely on one thing (in this case the price-earnings ratios of publicly traded stock).
valuing a closely held corporation
Marriage of Hewitson (1983) 142 Cal.App.3d 874
That which the owner/operator would essentially have to pay another person to do the same job. Generally, this is set by surveys in the industry.
Reasonable Compensation
Reasonable compensation where owner/operator was compared to his peers doing ____ was appropriate.
the exact same in the same industry and in the same geographic location
Marriage of Ackerman (2006) 146 Cal.App.4th 191
Reasonable compensation must be determined from ______ including the same geographic location and industry.
similarly situated individuals
Marriage of Rosen (2002) 105 Cal.App.4th 808
Error to use only ______ as sample of compensation.
last year or so
Marriage of Riddle (2005) 125 Cal.App.4th 1075
Risk rate applied to the calculation (generally 1-5) based upon the stability, growth, etc. It is very discretionary and highly debated. (You take the inverse to get the % i.e. a 5 would be ⅕ or 20%.)
Capitalization Rate
The advantage or benefit which is acquired by an establishment beyond the mere value of the capital stock, funds or property employed therein i.e. habitual patronage, reputation, skill or affluence, etc.
Goodwill
Found that goodwill can exist in a _____ i.e. reputation.
personal service business
Mueller v. Mueller (1956) 144 Cal.App.2d 245
Golden v. Golden (1969) 270 Cal.App.2d 401
Factors to consider for goodwill of professional practice are: ____
(1) age;
(2) health;
(3) past earning power;
(4) professional reputation;
(5) skill;
(6) knowledge;
(7) professional success;
(8) nature and duration of business.
Marriage of Lopez (1974) 38 Cal.App.3d 93
Although the court has wide discretion to determine the value of goodwill at trial, they cannot ____. The trial court must provide their reasoning and legal basis for coming to the value assigned.
do so on a whim
Marriage of Hargrave (1985) 163 Cal.App.3d 346
The court found that an attorney who had only been licensed for 7 years, at the firm 5 years, and a shareholder for only 2 years. Due to his _____, the court reasonably concluded that he had not contributed in any substantial way to whatever ____ the firm might possess.
youth and inexperience
goodwill
Marriage of Aufmuth (1979) 89 Cal.App.3d 446
The stock purchase agreement is _______ , and the trial court erred when it did not consider H’s _______.
not controlling
professional reputation and years of experience
Marriage of Fenton (1982) 134 Cal.App.3d 451
_______ is akin to goodwill as it is developed from relationships with clients, etc. But wife’s transitional bonus came with several conditions and the court should appropriately divide between CP/SP.
Book of Business
Marriage of Finby (2013) 222 Cal.App.4th 977
The court erred by not considering H’s _______ of the business.
- age
- expressed desire to retire, and
- projection higher than actual output
Marriage of Rives (1982) 130 Cal.App.3d 138
When joining an existing partnership, if the partner does not buy into WIP/AR, the partner has ______ and the court can only determine that partner’s own goodwill.
no ownership of them
Marriage of Iredale & Cates (2004) 121 Cal.App.4th 321
Court found that “career” or “practice” as a ____ is not a business to be divided but income only.
motion picture director
Marriage of McTiernan & Dubrow (2005) 133 Cal.App.4th 1090
Minority and Marketability most common ones however the _____ are discretionary.
Discounts
Where the owner has a small interest and really no say in decisions of business, the value can be discounted.
Minority Discount
The court will typically adjust where the spouse owns a ____.
minority interest
Marriage of Behrens (1982) 137 Cal.App.3d 562
Where there is no ____ (or limited by buy-sell agreement), the value can be discounted.
market
Marketability Discount
Where there are restrictive stock ownership agreements, valuation ______.
may be discounted
Marriage of Rosan (1972) 24 Cal.App.3d 885
The court should not charge the _____ in valuing the interest in a business because it is merely a potential debt at some point in the future.
potential tax liability to the community
Marriage of Fonstein (1976) 17 Cal.3d 738
Reducing value based upon a _____ (if sells business in future) is too speculative.
future covenant not to compete
Marriage of Czapar (1991) 232 Cal.App.3d 1308
When the community benefits (in this case $7.5M) in a sale that occurred with ______, the community must bear the whole detriment of the ________.
covenant not to compete condition
owner spouse’s inability to work during the covenant period
Marriage of Quay (1993) 18 Cal.App.4th 961
Values the present worth of future benefits of ownership
Income Approach
(Average earnings X Cap. Rate (1-5)) + Non-operating assets
Capitalization of Income Formula
Court found that valuing medical practice at 25% of gross billings and adjusting for _____ was proper.
profitability
Marriage of Barnert (1978) 85 Cal.app.3d 413
It was error for the court to accept ______, as opposed to an average, in determining value, especially considering the ______.
one year of net income
volatility of income over the years
Marriage of Rosen (2002) 105 Cal.App.4th 808
(Adjusted book value) + [(Average net earnings - Reasonable Compensation) - (Rate of Return on Book Value)] X Cap. Rate (1-5)
Capitalization of Excess Earnings Formula
Any WIP or AR at the DOS needs to be ______ as an adjustment. The court must give weight to the discount for _______.
added back to the balance sheet
uncollectibility
Marriage of Nichols (1994) 27 CAl.app.4th 661
AR from during marriage is ___ so must be equally taxed if collected.
CP
Johnson v. U.S. (9 Cir. 1943) 135 F.2d 125
Although AR brought into marriage (and collected and spent during marriage) was roughly the same as the AR at separation, _____.
it cannot be “offset.” The AR at separation is CP while the AR at marriage is long gone.
Marriage of House (1975) 50 Cal.App.3d 578
Determining what the business could sell for on the market by comparing to like companies.
Market Approach
The court may value a business based upon the _____.
right to withdraw from a partnership (detailed in the partnership agreement).
Marriage of Fonstein (1976) 17 Cal.3d 738
