An Alaska divorce case illustrates that the analysis of active and passive appreciation of a business during marriage continues to be a tricky one. This analysis is needed when a business is started before marriage and is not part of the marital estate. But, in some states, the marital estate includes the appreciation in the value of the business during marriage—but only that portion that results from the active efforts of the owner spouse. The job of the analyst is to determine what portion of the value appreciation is active and what portion is passive.

Split-up: In the Alaska case, the business was a contractor that did land clearing, such as excavation, site preparation, tree removal, and the like. The owner started the business in 1998 and got married in 2003, a marriage that ended in 2017. Therefore, the appreciation in value of the business from 2003 to 2017 needs to be split into its active and passive components. The husband’s valuation expert concluded that 60% of the appreciation was passive because of certain factors, such as customer relationships and increases in federal funding (the company had federal contracts). The remaining 40% was active appreciation, which amounted to $337,040, so this was the amount to be included in the marital estate, per the expert’s analysis.

While the court relied on the report of the husband’s expert, the court did not agree with the analysis. The court found that all the appreciation except inflation was active appreciation, which it valued at $842,600.

From the court opinion, there are few details of the expert’s methodology and analysis, so we don’t know whether the problem was the methodology itself or the inputs or assumptions that were used. In any event, this type of analysis continues to be a complex one that needs solid support to pass muster with the court.

The case is Demenno v. Demenno, 2024 Alas. LEXIS 22; 2024 WL 829541 (Feb. 28, 2024), and a case analysis and full court opinion are on the BVLaw platform.