Walsh case leaves critical question for experts: how to distinguish future income from goodwill?

BVWireIssue #121-3
October 17, 2012

The latest case to consider the goodwill value of a professional practice highlights some of the complex issues involved without really resolving them, comments Jim Alerding (Alerding Consulting), about last week’s write-up of Walsh v. Walsh. For instance, the Arizona Court of Appeals “does not discuss the standard of value at all,” he says, not even to frame its dismissal of the trial court’s “realizable benefits” approach. Yet by affirming the established Arizona rule—that all personal goodwill, salable or no, is marital property—the court effectively moved “the standard of value from fair market value to investment or intrinsic value."

The Court of Appeals also “punted” on a critical question, Alerding says. That is, after likening personal goodwill to a pension, because the values of both assets are generated and established during the marriage, the court failed to give any guidance on how to allocate future earnings between income that arises as a result of an established asset value (such as a pension) and income that results directly from the practitioner’s continued efforts (which are not divisible). In fact, “this issue of future income” has persuaded several states to exclude personal goodwill from the value of a private practice in divorce, Alerding points out. “In other words, if the income generated from the personal goodwill is not salable,” then it is not akin to pension earnings and would not be part of the marital estate.

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