What’s the Hullabaloo about Balicki?

In Balicki v. Balicki, 2010 Pa.Super.134 (2010), the Superior Court affirmed the trial court’s decision to discount the value of an insurance business, based on the hypothetical income taxes that would be incurred by its owner upon sale of the business. The trial court’s decision was itself a reversal of the master’s report, in which the master found that the tax discount was inappropriate because the owner would not likely sell the business (which had been in the family for more than two generations).

The decision is based on the 2005 amendments to the Pennsylvania Divorce Code (specifically, § 3502(a)(10.1) and (10.2)), which require the divorce court to consider tax consequences and costs of sale associated with marital assets, even if those taxes and costs are not imminent or certain. Balicki is also the result of an “abuse of discretion” standard of appellate review in Pennsylvania divorce cases, which affirms the trial court’s decision unless it is manifestly unreasonable.

In the September/October 2010 edition of The Value Examiner, the magazine of the National Association of Certified Valuation Analysts (NACVA), authors Meg Holland and Maureen Thomas proclaim that Balicki will affect divorce cases across the United States. In their article, the authors draw a parallel that may be difficult for some (even me, an experienced divorce lawyer and accredited valuation analyst) to follow.  Balicki, they say, is the antithesis of Bernier, a 2007 Massachusetts Supreme Court decision that established “fair value” (as opposed to fair market value) as the value standard in Massachusetts divorces.

Balicki is no Bernier, however. First, Balicki is an intermediate appellate court decision, the opinion of three out of the fifteen Superior Court judges, not a Supreme Court decision. Second, Balicki does not change the value standard in Pennsylvania (not that Holland and Thomas are saying that; they aren’t). Sure, Balicki has been interpreted in some outposts as the death knell for the argument that tax discounts may be ignored in cases where the owners never intend to sell. Yet, many of us read Balicki as a decision that stands on its own factual and evidentiary record. The panel in Balicki specifically found insufficient evidence to prove that the owner of the insurance business would never sell. In spite of Balicki, I still maintain that tax and sales cost discounts are not mandatory in every business valuation case.

I would also venture to guess that the wife’s camp did not argue strongly enough that the taxes and expenses were already considered as part of the marketability discount in the business valuation. Had that argument been made cogently at the master’s level, it is possible that the master and trial court would have adopted that position, and the Superior Court under an abuse of discretion would have affirmed.

The Holland and Thomas article leads to some interesting topics for reflection, such as: how do you calculate the hypothetical taxes that a seller would incur when selling an equipment-intensive business whose equipment was fully or greatly depreciated? The depreciation recapture analysis would seem to require a good equipment appraisal.

The Valuation Examiner article also contains an outright mistake: the authors state incorrectly that § 3502(a)(10.1) and (10.2)  were enacted in 1988, prior to the Pennsylvania Supreme Court’s decision in Hovis (1988), which held that tax consequences could not be considered unless imminent and certain. (Actually, those statutes were enacted in 2005. The 1988 recodification of the Divorce Code was silent on the tax issue.)  The authors go on to say that three subsequent divorce decisions, including two out-of-state Supreme Court decisions, were incorrectly decided in reliance on Hovis, which the authors mistakenly regard as bad law.

Of course, Hovis was the law of Pennsylvania until the Pennsylvania Legislature enacted § 3502(a)(10.1) and (10.2) in 2005. During our discussion at the 14th Annual Family Law Update (November 2010), it was the consensus of four leading divorce lawyers that Balicki was an unremarkable decision.  It just means that the next lawyer who wants to argue that tax discounts should not be applied must work that much harder. Still, let’s see what happens in January 2011, when the PBA Family Law Section devotes an entire 90 minute seminar to this case.

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