Page 49 - Family Law Services

or FMV of the services rendered for the controlling owner can be a point of contention between the par-
ties.

Most closely held business owners’ compensation is based on personal desires and not on the true value
of the services they provide to the company. They are also motivated to maximize compensation to
avoid the double taxation that may be present if the subject company is a C corporation. The FMV of
their services needs to be established and an adjustment made to both the income statement and support
calculations (see the text that follows).

In addition to compensation, there may be perquisites being paid through the business on behalf of the
owner and managers. Examples of perquisites can include the use of autos, boats, planes, second homes,
travel and entertainment, life insurance, and club memberships. In addition to perquisites, there may also
be related party transactions. The most typical example of this is when the owner of the subject equity
personally owns the real estate the business operates in. The appraiser should consider whether rent or
lease payments to the owner are based on arm’s-length market rates. Another typical situation is the
payment of salaries to family members who may be overpaid, underpaid, or not providing any services
to the company. An analysis of the expense categories can be performed to determine if adjustments are
necessary to the income statements.

The analysis of the owner spouse’s total income can affect the determination of marital income for ali-
mony or maintenance and child support, and the adjustment for reasonable compensation can affect the
value of the subject company. If the amount of income that is adjusted creates additional value and is al-
so counted in the awarding of spousal support, then the concept of "double dipping" comes into play.
Some jurisdictions don’t allow double dipping, so the CPA needs to know if this is an issue in the appli-
cable jurisdiction and how it affects the subject company valuation.

Goodwill

In marital dissolution matters, you may have to quantify and allocate goodwill to determine if it is part
of the marital estate. The classic definition of goodwill is the "propensity for customers to return to, or
patronize, a business because of its name or for other reasons." There are two types of goodwill: person-
al (or professional) and enterprise (or practice). Personal goodwill is the intangible value attributable
solely to the personal efforts or reputation of the individual and cannot be transferred. Enterprise good-
will is the intangible value attributable to the subject business that potentially can be transferred.

The determination and allocation of goodwill as a marital asset varies among the states. For the most
part, the states take one of three positions:

1. All goodwill (personal and enterprise) is a marital asset.

2. None of the goodwill is a marital asset.

3. Only enterprise goodwill is a marital asset, personal goodwill is not.

A number of case law decisions have been made on goodwill, but, unfortunately, they are often vague
about how to quantify personal or enterprise goodwill. The CPA should be aware of the prevailing law
in the jurisdiction. This will also assist the CPA with determining what information needs to be obtained
through discovery so a proper allocation and quantification can be made.

© 2020 Association of International Certified Professional Accountants 47