EQUITABLE DISTRIBUTION VALUATION
LAW & VALUATION
WAKE FOREST UNIVERSITY
LAW SCHOOL
April 14, 2004
A. Doyle Early, Jr.
What is the Standard of Value
for Equitable Distribution
in North Carolina?
A.
B.
C.
D.
E.
F.
G.
H.
Fair Market Value - Poore v. Poore (1985)
Investment Value
Intrinsic Value - Fountain v. Fountain (2002)
Fair Value - Hamby v. Hamby (2001)
Royals v. Piedmont Electric
Going Concerns Value
Liquidation Value
Book Value/Adjusted Book Value
Net Value - Beightol v. Beightol (1988)
Fair Market Value
Rev. Ruling 59-60
The price at which property would change
hands between a willing buyer and a willing
seller, when the former is not under any
compulsions to buy and the latter is not
under any compulsions to sell, both parties
having reasonable knowledge of relevant
facts.
Carlson v. Carlson (1997)
Classification And
Date of Valuation
1.
2.
3.
Marital
Separate
Divisible
N.C.G.S. §50-20(b) 1, 2 and 4
Real Estate Valuations
A.
B.
C.
Direct Sales Comparison Approach
Income Approach
Cost Approach
Valuing Personal Property
1.
2.
3.
4.
By the Parties/Affidavits
By an Appraiser
Publications
Court Valuations
Valuing Stock Options
1.
2.
Intrinsic Value - Fountain v. Fountain (2002)
Black Scholes Method
Valuation of Life Insurance
1.
2.
Cash Surrender Value
Fair Market Value - Surles v. Surles (2002)
Valuation of Pension,
Retirement and Deferred
Compensation Benefits
Types of Plans
A. Defined Contribution
B. Defined Benefit
C. Vested
D. Non-Vested
Vested and Non-Vested Pensions
Vested pensions may be payable:
1. As a lump sum by agreement;
2. Over a period of time in fixed amounts by agreement;
3. By appropriate Domestic Relations Order as a prorated
portion of the benefits made to the designated recipient at
the time the party against whom the award is made actually
begins to receive the benefits; or
4. By awarding a larger portion of other assets to the party
not receiving the benefits and a smaller share of other
assets to the party entitled to receive the benefits.
Non-vested pensions may be payable:
Same as 1, 2 and 3, but not 4.
Determining Present Value
Bishop v. Bishop (1994)
1.Determine the amount of monthly benefit
that would be received at retirement age if
party had retired on date of separation
2.Determine the life expectancy
3.Determine the appropriate discount rate
4.Calculate present value
5.Use of PBGC Tables
Example of Valuation of
Defined Benefit Plan
$5,820
7.5%
Annual benefit at age 65
PBGC interest rate on the date of separation
Table IV-A for 7.5% - PBGC actuarial value of $1.00
per year deferred to age 65…and payable for life
thereafter -- healthy lives
3.486
PBGC interpolated actuarial factor
$19,564.51
Annual benefit x PBGC factor
79%
Coverture fraction (15/19)
$15,455.96
Present value of defined benefit after applying
coverture fracture
39.5%
Prorated benefit at date of retirement
Valuing Closely Held
Corporations and
Professional Practices
“Further, in reviewing the trial court’s valuation of an
ongoing business or an interest therein for purposes of
equitable distribution, the task of the appellate court is to
determine whether the approach used by the trial court
reasonably approximates the net value of the business
interest…. If it does, the valuation will not be disturbed.”
If no credible evidence is presented as to value of business,
the court does not have to value it. Grasty v. Grasty (1997)
Factors to be Considered under
Revenue Ruling 59-60
1. The nature of the business and the history of the enterprise from its
inception.
2. The economic outlook in general and the condition and outlook of the
specific industry in particular.
3. The book value of the stock and the financial condition of the business.
4. The earning capacity of the company.
5. The dividend paying capacity.
6. Whether or not the enterprise has goodwill or other intangible value.
7. Sales of the stock and the size of the block of the stock to be valued.
8. The market price of stocks of corporations engaged in the same or
similar line of business having their stocks actively traded in the free
and open market, either on an exchange or over the counter.
Approaches to Valuation
1. Income Approach
A.
Capitalization of Earnings
B.
Capitalization of Discounted Cash Flow
C.
Capitalization of Discounted Net Income
2. Asset Based Approach
A.
Adjusted Book Value
B.
Liquidation Value
C.
Capitalization of Excess Earnings (Rev. Ruling 68-609)
3. Market Comparable Approach
A.
Sales of Comparable Companies
B.
Arms-Length Transactions
C.
Prior Sales of Company Stock
D.
Consideration of Restrictive Agreement (Buy-Sell) - Fox v. Fox (1991)
E.
Use of Industry Standard Approaches (Rules of Thumb) - Smith v. Smith (1993)
4. Trial Court is permitted to average the approaches utilized by the experts - Sharp v. Sharp
(1994)
5. To Challenge methodology, the party must object to the admissability of the evidence Walter v. Walter (2002)
Capitalization of Excess Earnings
(Revenue Ruling 68-609)
1.
2.
3.
4.
Average Earnings Normalized
$ 50,000.00
Average Tangible Assets
200,000.00
Fair Percentage Return (10%)
20,000.00
Average Earnings Attributable to
Goodwill or Excess Earnings
(1. - 3.) 30,000.00
5. Capitalized Averaged Earnings
Attributable to Goodwill at 20%
(Multiply by 5 to get the value of
Goodwill)
150,000.00
6. Add 2. And 5. For Total Business Value $350,000.00
Capitalization Rates
1. The rate used to convert income into an asset.
2. Determine the discount rate, which represents the total
annually compounded rate of return the investor requires
over the life of the investment.
3. Capitalization rate is discount rate minus long term growth.
C=D-g
4. A capitalization rate reflects risk.
5. A capitalization rate may be expressed in a percentage or a
multiple (I.e., a 25% capitalization rate results in a multiple
of 4).
6. Capitalization rate equates to P.E. (Price Earnings Ratio)
7. Court can choose it’s own capitalization rate - Smith v.
Smith (1994)
Build-Up Method
1. Risk-free, long-term (20 yr.) government
bond rate
2. Equity (common stock) risk premium
3. Small company risk premium
4. Specific company risk premium
(Determined by appraiser)
5. Discount rate
Less long-term growth of
Equals Capitalization rate of
7.30%
7.40%
5.10%
8.00%
27.80%
- 5.00%
22.80%
Example of Weighted Value
Year
Net Income
1985
$ 95,000
1986
$102,000
1987
$115,000
1988
$140,000
1989
$154,000
Total$606,000
$1,974,000 ÷ 15 = $131,600
Weight Weighted Net Income
15
1
$
2
$
3
$
4
$
5
$
$1,974,000
95,000
204,000
345,000
560,000
770,000
Restrictive Agreement
Weaver v. Weaver (1985)
1.
2.
3.
Presumptive Value
Reasonable or Rational Reflection of
Value
Experience and History
Discounts or Premiums
A.
B.
C.
D.
E.
F.
G.
Minority Interest Discount v. Control Premium
Lack of Marketability Discount (Liquidity)
Discount for Loss of Key Man
Discount for Trapped-In Capital Gains - Davis v. Commissioner
(Discount allowed for trapped-in capital gains although there was
no sale or contemplated sale of the asset on the date of
separation.)
But…Dolan v. Dolan (2002) - the value of commercial real estate
should not be adjusted for capital gains distribution did not
contemplate an immediate sale
Clark v. Clark (1980) - Alimony
Shannon Pratt
The Trial Judge as Gatekeeper for Expert Testimony
1.
2.
3.
4.
5.
6.
7.
Daubert v. Merrell Dow Pharmaceuticals, Inc. (1993)
Scientific testimony
Kumho Tire Co. v. Patrick Carmichael (1999)
Expanded to technical or other specialized testimony
Howerton v. Arai (2003)
Danbert applied in N.C.
Walter v. Walter (2002)
Applies to valuation methodology if there is objections
Rule 702 - “If scientific, technical or other specialized knowledge will assist the trier of fact… a
witness qualified as an expert… may testify hereto in the form of an opinion.”
Questions for the trial judge:
A.
Whether testimony is based on scientifically valid reasoning or methodology
B.
Whether the reasoning or methodology can properly be applied to the facts at issue
Factors to consider in determining admissibility:
A.
Whether theory or technique can be and has been tested
B.
Whether it has been subjected to peer review and publication
C.
The known or potential rate of error
D.
Whether the theory or technique has achieved general acceptance in the relevant field