After Balicki: Not all divorce courts must consider tax discounts

BVWireIssue #102-4
March 23, 2011

In the February 2011 Business Valuation Update, we digested Balicki v. Balicki, a case from the Pennsylvania Superior court that requires local family courts to consider the tax consequences of selling a marital asset—even if the sale isn’t imminent or certain. Some BV authorities saw the case as setting a broad “new standard in divorce.” (See the article by M. Holland and M. Thomson in Valuation Examiner, Sept./Oct. 2010). Others believed that—rather than sounding “the death knell” for considering tax discounts in divorce, Balicki was limited to its legal and factual record. (See, “What’s the Hullaballoo about Balicki?” BVSource, Dec. 12, 2010.)

The latter school may be correct, as we now have a new Nebraska case in which a court-appointed expert applied a uniform 40% tax rate for purposes of quantifying the built-in capital gains tax liability under the net asset approach. State precedent typically precludes a court from considering the tax consequences of sale, but the appraiser distinguished the tax discount because it was not one that the owner-spouses (or even the business) would incur upon sale. “Rather, it is a tax liability that the purchaser . . . would acquire,” he emphasized, affecting only “the price a purchaser would pay for the shares of the entity.”

Nevertheless, the Nebraska Court of Appeals held that tax liability is only relevant in two situations: when the sale of the marital business is reasonably certain to occur in the near future, or when liquidation is necessary to satisfy a spouse’s obligations on divorce. At the same time, the court permitted tax adjustments to the cash flows of the business under the income approach. Because these relate to “required payment of annual ordinary income taxes” rather than any built-in depreciation recapture or capital gains tax liability realized on sale, they were proper. For the complete digest of Shuck v. Shuck, 2011 WL 206845 (Neb App.)(Jan. 25, 2011),see the April 2011 Business Valuation Update; the court’s decision will be posted at BVLaw.

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