Back in 2007, the Bernier decision by the Supreme Judicial Court of Massachusetts was among the first to analyze the “bedeviling” issue of tax-affecting the income stream of a closely held corporation in divorce. (See BVWire #60-2) Recently—the same panel delivered an expedited opinion concerning the present value a husband’s interest in a highly lucrative hedge fund partnership. Three aspects promise to spark as much interest and debate as Bernier:
- First, the trial court correctly included the present value of the partnership interest in the marital estate, when the asset produced a consistent income stream with annual cash distributions (in some years, return on capital and equity topped $20 million).
- At the same time, the trial court erred by using the direct capitalization of income method to value the partnership (from which the husband would eventually retire), when a discounted cash flow (DCF) analysis “more accurately reduces a finite period of future cash-flow to present valuation,” the court held, citing Valuing a Business, 5th ed., by Shannon Pratt and Alina Niculita (available at BVResources).
- The trial court also erred by tax-affecting the partnership at a combined capital gains tax rate without providing its specific reasons, the court held. (Note: At trial, the husband’s expert applied a 40% combined income tax rate to post-retirement income only; the wife’s expert tax-affected pre-retirement income at 31.5% and post-retirement at 38.5%.)