Family Law Services Handbook The Role of the Financial Expert

Preface xvii

Acknowledgments xix

Part One Family Law Litigation and Financial Experts 1

1 Introduction 3

1.1 Introduction 3

1.2 Development of Property Law 3

1.3 U.S. Property Systems 4

1.4 Role of Fault in Divorce 4

1.5 Support 4

1.6 Property Valuation 4

1.7 Property Division 4

1.8 Income Tax 5

1.9 Marital Fraud 5

1.10 Conclusion 5

2 Divorce Assignments and the Financial Expert 6

2.1 Initial Contact 6

2.2 Engagement Terms and Conditions 12

2.3 Case Management 14

2.4 List of Cases 18

2.5 Notes 21

3 Planning and Coordinating Discovery 22

3.1 Introduction 22

3.2 Forms of Discovery 24

3.3 Financial Experts 25

3.4 Expert Discovery 27

3.5 Evaluation of Adverse Expert 28

3.6 Conclusion 29

Part Two Child and Spousal Support 31

4 Child and Spousal Support 33

4.1 Introduction 33

4.2 Child Support Factors 34

4.3 Child Support Guidelines 35

4.4 College and Other Extraneous Expenses 36

4.5 Uniform Interstate Family Support Act 37

4.6 Full Faith and Credit for Child Support Orders Act 38

4.7 Introduction to Spousal Support (Alimony) 38

4.8 Spousal Support Factors 38

4.9 Types of Alimony 41

4.10 Income Available for Support 42

4.11 Imputation of Income: Ability to Earn 45

4.12 Imputation of Income: Assets 47

4.13 Double Dipping 47

4.14 Conclusion 48

4.15 Notes 49

Part Three Character of Property 51

5 Community Property or Equitable Distribution 53

5.1 Introduction 53

5.2 Definition of Property 54

5.3 Characterization of Property 55

5.4 Division of Community or Marital Property 57

5.5 Transmutation Agreements 58

5.6 Premarital Agreements 59

5.7 Tracing and Apportionment 61

5.8 Notes 62

6 Tracing Bank and Investment Accounts 64

6.1 Introduction: Circumstances and Objectives of Tracing 64

6.2 What Constitutes Separate Property and Community Property? 68

6.3 The Community Property Presumption and the Burden on Separate Property 69

6.4 Intent and Fiduciary Duty 70

6.5 Tracing Menu Choices in California 71

6.6 Putting on Tracing Evidence at Trial 75

7 Real Property 77

7.1 Real Property in Divorce 77

7.2 Personal Residence 78

7.3 Real Estate Investments 80

7.4 Apportionment of Separate Property Interests 82

7.5 Allocation of Income and Deductions during Pendente Lite Period 84

7.6 Notes 85

8 Retirement and Pension Plans in Divorce 86

8.1 Definitions 86

8.2 Defined Benefit Plans 88

8.3 Defined Contribution Plans 92

8.4 Hybrid Plans 96

8.5 Other Retirement Accounts: Individual Retirement Accounts 96

8.6 Annuities in Divorce 97

8.7 Keogh (or HR-10) Plans 103

9 QDROs 104

9.1 Retirement Plan Basics 104

9.2 Common QDRO Issues and Problems 108

9.3 Conclusion 112

9.4 Notes 112

10 Equity-Based Compensation: Stock Options 113

10.1 Introduction 113

10.2 Fundamental Issues that Need to Be Addressed 114

10.3 What Are Stock Options? 114

10.4 Option Valuation Overview 115

10.5 A Black-Scholes Valuation Exercise 116

10.6 Options as Marital Property 118

10.7 Taxation of Options 120

10.8 Distribution of Options 121

10.9 Conclusion 122

10.10 Resources 123

10.11 Notes 123

11 Separate Business Interests 125

11.1 Introduction 125

11.2 Investment of Community Funds 126

11.3 Personal Efforts during Marriage 126

11.4 Reasonable Compensation Method in California: VAN CAMP Apportionment of Community and Separate Property Interests 129

11.5 Postseparation Change in Value 130

11.6 Selection of Method: PEREIRA or VAN CAMP 130

11.7 Equitable Apportionment 131

11.8 Notes 132

Part Four Business Valuations 133

12 Professional Standards 135

12.1 Introduction 136

12.2 The Early Years 137

12.3 Other Valuation Standards 137

12.4 Application of Standards to Valuations for Family Law 137

12.5 Details of the Consulting Standard 138

12.6 AICPA General Professional Standards 139

12.7 Statement of Standards for Valuation Services No. 1 140

12.8 Developmental Standards 145

12.9 Reporting Standards 146

12.10 Reporting Exemption for Certain Controversy Proceedings 148

12.11 Appendices and Interpretation 1-01 to SSVS 1 148

12.12 Accreditation of Valuation Experts 149

12.13 The Future 149

12.14 Notes 150

13 Premise and Standards of Value 151

13.1 Premise of Value 151

13.2 Standard of Value 152

13.3 Notes 156

14 Determining Enterprise Value 158

14.1 Determining the Subject Company Equity Value 158

14.2 Valuation Approaches and Methods 158

14.3 Qualitative and Quantitative Analysis 164

14.4 Normalizing the Benefit Stream 166

14.5 Developing the Discount Rate Using the Buildup Method 167

14.6 Developing the Discount Rate Using the Modified Capital Asset Pricing Model 173

14.7 Difference between the Capitalization and Discount Rate 173

14.8 Long-Term, Sustainable (Perpetual) Growth Rate 173

14.9 Reconciling the Results 174

14.10 Nonoperating Assets and Liabilities 175

14.11 Notes 176

15 Enterprise, Personal, Business, and Celebrity Goodwill 178

15.1 Definitions of Enterprise and Personal Goodwill 178

15.2 Difference between Goodwill and Other Types of Intangible Assets 179

15.3 Why the Need to Differentiate 179

15.4 Differing Standards of Value and Their Effect on the Goodwill Issue 180

15.5 Qualitative Differences between Personal and Enterprise Goodwill 185

15.6 Quantitative Analysis: Allocating between Personal and Enterprise Goodwill 188

15.7 Celebrity Goodwill 191

15.8 Conclusion 192

15.9 Notes 192

16 Owner Agreements’ Impact on Business Value 196

16.1 Overview 196

16.2 Legal Entities 197

16.3 Customary Terms to Agreements 198

16.4 Premises and Standards of Value 199

16.5 Controlling and Noncontrolling Equity Interests 200

16.6 Impact of Agreement Terms on Value and Examples 200

16.7 Summary 209

16.8 Notes 210

17 Premiums and Discounts 211

17.1 Introduction 211

17.2 Entity-Level and Shareholder-Level Valuation Adjustments 212

17.3 Control and Discount for Lack of Control or Minority Interest Discount 214

17.4 Elements of Control 215

17.5 Market Evidence for Control and Acquisition Premiums 215

17.6 Marketability and Liquidity 217

17.7 Discount for Lack of Marketability 220

17.8 Conclusions 225

17.9 Notes 225

Part Five Trial or Settlement 229

18 Dividing the Marital Estate 231

18.1 Introduction 231

18.2 Important Dates 235

18.3 Marital Balance Sheet and Proposed Property Division Schedules 236

18.4 Property Disposition Options: Settlement versus at Trial 240

18.5 Other Specific Issues and Considerations 244

18.6 Conclusion 246

18.7 Notes 247

19 Preparing for Trial 248

19.1 Introduction 248

19.2 Expert Depositions 248

19.3 Pretrial Motions 250

19.4 Voir Dire and Methodology 252

19.5 Preparing for Expert Witness Testimony 253

19.6 Conclusion 261

19.7 Notes 261

Part Six Alternative Dispute Resolution 263

20 Court or Neutral Expert 265

20.1 Introduction: Role of the Neutral, Joint, or Court Expert 265

20.2 Considerations before the Expert Accepts the Engagement 268

20.3 Considerations while Serving as the Court’s Expert 268

20.4 Considerations When Delivering Findings 269

20.5 Practical Tips 270

20.6 Language and Content of Court Orders 271

20.7 Conclusion 272

20.8 List of Cases 272

20.9 Sample 730 Order 273

20.10 Notes 277

21 Mediation and Dispute Resolution 278

21.1 Introduction 278

21.2 Forms of Dispute: Resolution and Mediation 279

21.3 Fundamental Mediation Blocks 280

21.4 Programs and Providers 283

21.5 Preparation and Participation 284

21.6 Conclusion 287

21.7 Notes 287

22 Collaborative Law 288

22.1 Introduction 288

22.2 The Collaborative Process: Isn’t This Just like Mediation? 289

22.3 Collaborative Professionals: Building a Professional Team 290

22.4 Financial Professional 292

22.5 Collaborative Contract 292

22.6 Disclosure in the Collaborative Process 293

23 Private Judging 294

23.1 Introduction 294

23.2 What Is a Private Judge? 294

23.3 What Factors Should Be Considered in the Decision to Go Private? 295

23.4 What Does a Private Judge Offer? 296

23.5 How the Private Process Is Different from the Public Courts 297

23.6 Ethical Considerations 297

23.7 Statutory Authority 298

23.8 Preparation and Participation 298

23.9 Conclusion 307

23.10 Notes 307

Part Seven Income Tax 309

24 Income Tax: General Rules 311

24.1 Introduction 311

24.2 Child Support 311

24.3 Filing Status 312

24.4 Dependency Exemption 313

24.5 Miscellaneous Issues 315

24.6 Notes 319

25 Tax Consequences of Property Division: IRC Section 1041 320

25.1 Introduction 320

25.2 Section 1041 of the Internal Revenue Code 321

25.3 Transfers of Property between Spouses or Former Spouses Incident to a Divorce 321

25.4 Tax Basis of Assets Transferred under Section 1041 323

25.5 Conflicts with Section 1041 324

25.6 Transfers of Stock Options and Deferred Compensation in Divorce 325

25.7 Stock Redemptions in Divorce 327

25.8 Interest Paid and Received on Deferred Equitable or Community Distribution Payments 329

25.9 Preventing Unintended Outcomes 331

25.10 Notes 331

26 Tax Issues of Child and Spousal Support 332

26.1 Support: General Discussion 332

26.2 Definition of Alimony 334

26.3 Definition of Child Support 335

26.4 Key State and U.S. Tax Court Cases Addressing Unallocated Alimony and Child Support 336

26.5 Alimony Recapture 337

26.6 Nunc Pro Tunc 339

26.7 Payments to Third Parties 340

26.8 Temporary Support Issues 340

26.9 Conflict between Family and Tax Law 341

26.10 Support Arrearages 341

26.11 What Agreements Must Say to Qualify as Alimony 341

26.12 Nontaxable and Nonincludable Alimony and Strategies 342

26.13 Payments after Death 342

26.14 Alimony and Expense Issues of a Jointly Owned Home 342

26.15 Child Contingency Issues and Traps 343

26.16 Substitute Payments 347

26.17 Reviewing Divorce Agreements 347

26.18 Internal Revenue Ruling Publications 347

26.19 Notes 350

Part Eight Marital Investigations and Fraud 351

27 Marital Fraud 353

27.1 What’s Love Got to Do with It? 353

27.2 Value in Fraud 354

27.3 Data Gathering 355

27.4 Business Entity And Marital Fraud 358

27.5 Common Frauds and How to Identify Them 362

27.6 Divorce Planning Strategies to Affect Business Values and Income 366

27.7 Conclusion 366

27.8 Bibliography 367

27.9 List of Cases 367

27.10 Sample Document Request 367

27.11 Notes 369

28 Searching Public Information 370

28.1 Privacy Laws and Asset Searches: Introduction 370

28.2 Asset Searches 371

28.3 Hidden Assets 371

28.4 Databases 373

28.5 Search Engines, Meta-Search Engines, and Directories 374

28.6 Alternatives in Searching 375

28.7 Privacy Laws 377

28.8 Conclusion 381

28.9 Notes 382

29 Bankruptcy and Insolvency in Divorce 383

29.1 Introduction 383

29.2 Overview of Chapter 7 Bankruptcy 384

29.3 Overview of Chapter 13 Bankruptcy 386

29.4 Protecting Domestic Support Obligations in Divorce 388

29.5 Protecting Property Settlements in Divorce 389

29.6 Automatic Stay and Divorce Exceptions 390

29.7 Priority of Obligations 391

29.8 Effect of Bankruptcy Filing on Divorce Decree 391

29.9 Certain Obligations 392

29.10 Dismissal 393

29.11 Revocation of Discharge 394

29.12 List of Cases 394

29.13 Notes 394

Glossary 399

About the Editors 409

About the Contributors 413

Index 423

Thomas Burrage, CPA, is Principal in Charge of Litigation and Valuation, Burrage & Johnson, CPAs, PLC. He performs expert witness in cases fraud malpractice, minority shareholder, economic damages and family law. He is co-author of Wiley's Divorce and Domestic Relations Litigation, and AICPA's CPA's Guide to Family Law Services, and a contributing editor to PPC divorce taxation publications.

Donald J. DeGrazia, CPA, ABV, is senior shareholder in the firm, Gold Meltzer Plasky & Wise, specializing in federal and state taxation, multi-state taxation, and matrimonial taxation. He is also Chairman of Integra International, Inc. He provides various court and arbitration testimony, including matrimonial expert witness.

William B. Stewart, CPA/ABV, CVA, CFE, is principal of William B. Stewart CPA firm, specializing in forensic accounting. His expertise includes business valuations, family law, mediation consulting, and business advisory services. He has been appointed by the courts as an auditor, expert and receiver in large commercial litigation, and family law cases. He i