Goodwill Upon Divorce: Distinguishing Between Intangible ... · — Au thor of Vol . 6 of M c D on a ld Texas Ci vi l P r act ice, on T exa s Ci vi l Ap pel lat e Pract ice, publ

Goodwill Upon Divorce:Distinguishing Between Intangible

Assets, Enterprise Goodwill,and Personal Goodwill

<http://www.orsinger.com/PDFFiles/goodwill-upon-divorce.pdf>

Richard R. [email protected]

McCurley, Orsinger, McCurley, Nelson & Downing, L.L.P.

Dallas Office:5950 Sherry Lane, Suite 800

Dallas, Texas 75225214-273-2400

and

San Antonio Office:1717 Tower Life BuildingSan Antonio, Texas 78205

210-225-5567

AICPA/AAML National Conference on DivorceMay 10-12, 2012

Aria Resort & CasinoLas Vegas, Nevada

© 2012Richard R. OrsingerAll Rights Reserved

CURRICULUM VITAE OF RICHARD R. ORSINGER

Education: Washington & Lee University, Lexington, Virginia (1968-70)

University of Texas (B.A., with Honors, 1972)

University of Texas School of Law (J.D., 1975)

Licensed: Texas Supreme Court (1975); U.S. District Court, Western District of Texas (1977-1992; 2000-present);

U.S. District Court, Southern District of Texas (1979); U.S. Court of Appeals, Fifth Circuit (1979);

U.S. Supreme Court (1981)

Certified: Board Certified by the Texas Board of Legal Specialization Family Law (1980), Civil Appellate Law

(1987)

Organizations and Committees:

Chair, Family Law Section, State Bar of Texas (1999-2000)

Chair, Appellate Practice & Advocacy Section, State Bar of Texas (1996-97)

Chair, Continuing Legal Education Committee, State Bar of Texas (2000-02)

Vice-Chair, Continuing Legal Education Committee, State Bar of Texas (2002-03)

Member, Supreme Court Advisory Committee on Rules of Civil Procedure (1994-present);

Chair, Subcommittee on Rules 16-165a

Member, Pattern Jury Charge Committee (Family Law), State Bar of Texas (1987-2000)

Supreme Court Liaison, Texas Judicial Committee on Information Technology (2001-present)

Tx. Bd. of Legal Specialization, Civil Appellate Law Advisory Commission (Member and Civil Appellate Law

Exam Committee (1990-2006; Chair 1991-1995); Family Law Advisory Commission (1987-1993)

Member, Supreme Court Task Force on Jury Charges (1992-93)

Member, Supreme Court Advisory Committee on Child Support and Visitation Guidelines

(1989, 1991; Co-Chair 1992-93; Chair 1994-98)

Member, Board of Directors, Texas Legal Resource Center on Child Abuse & Neglect, Inc. (1991-93)

President, Texas Academy of Family Law Specialists (1990-91)

President, San Antonio Family Lawyers Association (1989-90)

Associate, American Board of Trial Advocates

Fellow, American Academy of Matrimonial Lawyers

Director, San Antonio Bar Association (1997-1998)

Member, San Antonio, Dallas and Houston Bar Associations

Professional Activities and Honors:

One of Texas’ Top Ten Lawyers in all fields, Texas Monthly Super Lawyers Survey (2010 - 3 Top Point Getter)rd

Listed as one of Texas’ Top Ten Lawyers in all fields, Texas Monthly Super Lawyers Survey (2009)

Recipient of the Franklin Jones, Jr. CLE Article Award for Outstanding Achievement in CLE (2009)

Listed as Texas’ Top Family Lawyer, Texas Lawyer’s Go-To-Guide (2007)

Listed as one of Texas’ Top 100 Lawyers, and Top 50 Lawyers in South Texas, Texas Monthly Super Lawyers

Survey(2003-2010)

Texas Academy of Family Law Specialists’ Sam Emison Award (2003)

State Bar of Texas Presidential Citation “for innovative leadership and relentless pursuit of excellence for continuing

legal education” (June, 2001)

State Bar of Texas Family Law Section’s Dan R. Price Award for outstanding contributions to family law (2001)

State Bar of Texas Gene Cavin Award for Excellence in Continuing Legal Education (1996)

State Bar of Texas Certificate of Merit, June 1995, June 1996, June 1997 & June 2004

Listed in the BEST LAWYERS IN AM ERICA: Family Law (1987-2011); Appellate Law (2007-2011)

Continuing Legal Education and Administration:

Course Director, State Bar of Texas:

• Practice Before the Supreme Court of Texas Course (2002 - 2005, 2007, 2009 & 2011)

• Enron, The Legal Issues (Co-director, March, 2002) [Won national ACLEA Award]

• Advanced Expert Witness Course (2001, 2002, 2003, 2004)

• 1999 Impact of the New Rules of Discovery

• 1998 Advanced Civil Appellate Practice Course

• 1991 Advanced Evidence and Discovery

• Computer Workshop at Advanced Family Law (1990-94) and Advanced Civil Trial (1990-91) courses

• 1987 Advanced Family Law Course. Course Director, Texas Academy of Family Law Specialists First Annual Trial

Institute, Las Vegas, Nevada (1987)

Books and Journal Articles:

—Editor-in-Chief of the State Bar of Texas’ TEXAS SUPREME COURT PRACTICE MANUAL (2005)

—Chief Editor of the State Bar of Texas Family Law Section's EXPERT W ITNESS MANUAL (Vols. II & III) (1999)

— Author of Vol. 6 of McDonald Texas Civil Practice, on Texas Civil Appellate Practice, published by Bancroft-Whitney

Co. (1992) (900 + pages)

—A Guide to Proceedings Under the Texas Parent Notification Statute and Rules, SOUTH TEXAS LAW REVIEW (2000)

(co-authored)

—Obligations of the Trial Lawyer Under Texas Law Toward the Client Relating to an Appeal, 41 SOUTH TEXAS LAW

REVIEW 111 (1999)

—Asserting Claims for Intentionally or Recklessly Causing Severe Emotional Distress, in Connection With a Divorce,

25 ST. MARY 'S L.J. 1253 (1994), republished in the AM ERICAN JOURNAL OF FAM ILY LAW (Fall 1994) and Texas Family

Law Service NewsAlert (Oct. & Dec., 1994 and Feb., 1995)

—Chapter 21 on Business Interests in Bancroft-Whitney's TEXAS FAM ILY LAW SERVICE (Speer's 6th ed.)

—Characterization of Marital Property, 39 BAY . L. REV. 909 (1988) (co-authored)

—Fitting a Round Peg Into A Square Hole: Section 3.63, Texas Family Code, and the Marriage That Crosses States

Lines, 13 ST. MARY 'S L.J. 477 (1982)

SELECTED CLE SPEECHES AND ARTICLES

State Bar of Texas' [SBOT] Advanced Fam ily Law Course: Intra and Inter

Family Transactions (1983); Handling the Appeal: Procedures and Pitfalls

(1984); M ethods and Tools of Discovery (1985); Characterization and

Reimbursement (1986); Trusts and Family Law (1986); The Family Law Case

in the Appellate Court (1987); Post-Divorce Division of Property (1988); M arital

Agreements: Enforcement and Defense (1989); M arital Liabilities (1990);

Rules of Procedure (1991); Valuation Overview (1992); Deposition Use in

Trial: Cassette Tapes, V ideo, Audio, Reading and Editing (1993); The Great

Debate : Dividing Goodwill on D ivorce (1994); Characterization (1995);

Ordinary Reimbursement and Creative Theories of Reimbursement (1996);

Qualifying and Rejecting Expert W itnesses (1997); New Developments in

Civil Procedure and Evidence (1998); The Expert W itness M anual (1999);

Reimbursement in the 21 Century (2000); Personal Goodwill vs. Commercialst

Goodwill: A Case Study (2000); W hat Representing the Judge or Contributing

to Her Campaign Can M ean to Your Client: Proposed New Disqualification

and Recusal Rules (2001); Tax W orkshop: The Fundamentals (2001); Blue

Sky or Book Value? Complex Issues in Business Valuation (2001); Private

Justice: Arbitration as an Alternative to the Courthouse (2002); International

& Cross Border Issues (2002); Premarital and Marital Agreements: Representing

the Non-M onied Spouse (2003); Those Other Texas Codes: Things the Family

Lawyer Needs to Know About Codifications Outside the Family Code (2004);

Pearls of W isdom From Thirty Years of Practicing Family Law (2005); The

Road Ahead: Long-Term Financial Planning in Connection W ith Divorce (2006);

A New Approach to Distinguishing Enterprise Goodwill From Personal Goodwill

(2007); The Law of Interpreting Contracts: How to Draft Contracts to Avoid

or W in Litigation (2008); Effect of Choice of Entities: How Organizational

Law, Accounting, and Tax Law for Entities Affect Marital Property Law (2008);

Practicing Family Law in a Depressed Economy, Parts I & II (2009); Property

Puzzles: 30 Characterization Rules, Explanations & Examples (2009); Troubling

Issues of Characterization, Reimbursement, Valuation, and Division Upon

Divorce (2010); Separate & Community Property: 30 Rules W ith Explanations

& Examples (2010); The Role of Reasoning in Constructing a Persuas ive

Argument (2011)

UT School of Law : Trusts in Texas Law: W hat Are the Community Rights

in Separately Created Trusts? (1985); Partnerships and Family Law (1986);

Proving Up Separate and Community Property Claims Through Tracing (1987);

Appealing Non-Jury Cases in State Court (1991); The New (Proposed) Texas

Rules of Appellate Procedure (1995); The Effective M otion for Rehearing

(1996); Intellectual Property (1997); Preservation of Error Update (1997);

TRAPs Under the New T.R.A.P. (1998); Judicial Perspectives on Appellate

Practice (2000)

SBOT's Advanced Evidence & Discovery Course: Successful M andamus

Approaches in Discovery (1988); M andamus (1989); Preservation of Privileges,

Exemptions and Objections (1990); Business and Public Records (1993); Grab

Bag: Evidence & Discovery (1993); Common Evidence Problems (1994);

M anaging Documents--The Technology (1996); Evidence Grab Bag (1997);

Evidence Grab Bag (1998); M aking and M eeting Objections (1998-99);

Evidentiary Issues Surrounding Expert W itnesses (1999); Predicates and

Objections (2000); Predicates and Objections (2001); Building Blocks of Evidence

(2002); Strategies in M aking a Daubert Attack (2002); Predicates and Objections

(2002); Building Blocks of Evidence (2003); Predicates & Objections (High

Tech Emphasis) (2003)

SBOT's Advanced Civil Appellate Practice Course: Handling the Appeal

from a Bench Trial in a Civil Case (1989); Appeal of Non-Jury Trials (1990);

Successful Challenges to Legal/Factual Sufficiency (1991); In the Sup. Ct.:

Reversing the Court of Appeals (1992); Brief W riting: Creatively Crafting for

the Reader (1993); Interlocutory and Accelerated Appeals (1994); Non-Jury

Appeals (1995); Technology and the Courtroom of the Future (1996); Are Non-

Jury Trials Ever "Appealing"? (1998); Enforcing the Judgment, Including W hile

on Appeal (1998); Judges vs. Juries: A Debate (2000); Appellate Squares (2000);

Texas Supreme C ourt Trends (2002); New Appellate Rules and New Trial

Rules (2003); Supreme C ourt Trends (2004); Recent Developments in the

Daubert Swamp (2005); Hot Topics in Litigation: Restitution/Unjust Enrichment

(2006); The Law of Interpreting Contracts (2007); Judicial Review of Arbitration

Rulings: Problems and Possible Alternatives (2008); The Role of Reasoning

and Persuasion in the Legal Process (2010)

Various CLE Providers: SBOT Advanced Civil Trial Course: Judgment

Enforcement, Turnover and Contempt (1990-1991), Offering and Excluding

Evidence (1995), New Appellate Rules (1997), The Communications Revolution:

Portability, The Internet and the Practice of Law (1998), Daubert W ith Emphasis

on Commercial Litigation, Damages, and the NonScientific Expert (2000),

Rules/Legislation Preview (State Perspective) (2002); College of Advanced

Judicial Studies: Evidentiary Issues (2001); El Paso Family Law Bar Ass’n:

Foreign Law and Foreign Evidence (2001); American Institute of Certified

Public Accounts: Admissibility of Lay and Expert Testimony; General Acceptance

Versus Daubert (2002); Texas and Louisiana Associations of Defense Counsel:

Use of Fact W itnesses, Lay Opinion, and Expert Testimony; W hen and How

to Raise a Daubert Challenge (2002); SBOT In-House Counsel Course: M arital

Property Rights in Corporate Benefits for High-Level Employees (2002); SBOT

19 Annual Litigation Update Institute: D istinguishing Fact Testimony, Layth

Opinion & Expert Testimony; Raising a Daubert Challenge (2003); State Bar

College Spring Training: Current Events in Family Law (2003); SBOT Practice

Before the Supreme Court: Texas Supreme Court Trends (2003); SBOT 26 th

Annual Advanced Civil Trial: D istinguishing Fact Testimony, Lay Opinion &

Expert Testimony; Challenging Qualifications, Reliability, and Underlying Data

(2003); SBOT New Frontiers in M arital Property: Busting Trusts Upon Divorce

(2003); American Academy of Psychiatry and the Law: Daubert, Kumho Tire

and the Forensic Child Expert (2003); AICPA-AAM L National Conference

on Divorce: Cutting Edge Issues–New Alimony Theories; M easuring Personal

Goodwill (2006); New Frontiers` - D istinguishing Enterprise Goodwill from

Personal Goodwill; Judicial Conference (2006); SBOT New Frontiers in M arital

Property Law: Tracing, Reimbursement and Economic Contribution Claims

In Brokerage Accounts (2007); SBOT In-House Counsel Course: W hen an

Officer Divorces: How a Company can be Affected by an Officer’s Divorce

(2009); SBOT Handling Your First Civil Appeal The R ole of Reasoning and

Persuasion in Appeals (2011); New Frontiers in M arital Property Law: A New

Approach to Determining Enterprise and Personal Goodwill Upon Divorce

(2011)

Goodwill Upon Divorce: Distinguishing Between Intangible Assets, Enterprise Goodwill, and Personal Goodwill

i

TABLE OF CONTENTS

I. INTRODUCTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. OVERVIEW... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

III. THE NEW ECONOMY IS BASED ON INTANGIBLES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A. THE IMPORTANCE OF INTANGIBLE ASSETS IN THE “NEW ECONOMY.”. . . . . . . . . . . . . 2B. HUMAN CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3C. THE ACCOUNTANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3D. THE LAWYERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

IV. HUMAN CAPITAL... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

V. LEGAL CONCEPTIONS OF GOODWILL... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6A. THE EARLIEST CONCEPTION OF GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6B. THE FEDERAL CONCEPTION OF GOODWILL... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6C. THE STATES’ CONCEPTION OF GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7D. GOODWILL AS RESIDUAL VALUE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9E. GOODWILL IN TRADEMARK LAW.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

VI. THE ACCOUNTING CONCEPTION OF GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11A. GOODWILL AS EXCESS PURCHASE PRICE... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11B. DEFINITION OF PERSONAL GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11C. PULLING IDENTIFIABLE INTANGIBLES OUT OF RESIDUAL GOODWILL.. . . . . . . . . . . . 12

1. What Constitutes an Intangible Asset (for Accounting Purposes)?. . . . . . . . . . . . . . . . . . . . . . . . 122. Assembled Workforce is Part of Residual Goodwill.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153. Some Say that Assembled Workforce Can be Valued.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194. The Argument That Goodwill is not an Asset... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

VII. WHAT TAX LAW SAYS ABOUT GOODWILL AND SEPARABLE INTANGIBLE ASSETS... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

VIII. THE DIVISIBILITY OF GOODWILL UPON DIVORCE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Arizona.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Arkansas.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23California.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Colorado.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Connecticut.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27District of Columbia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Florida. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Illinois.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Indiana... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Kansas.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Kentucky.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Louisiana.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Maryland.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Massachusetts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Michigan.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35


ii

Missouri.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Nebraska.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Nevada... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38New Jersey.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39New York.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Ohio... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Oklahoma.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46Pennsylvania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47South Carolina... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Tennessee.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Texas.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Utah. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Virginia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Washington.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51West Virginia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Wisconsin.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

IX. TWO SUGGESTIONS ON HOW TO ATTACK THE PROBLEM OF GOODWILL UPON DIVORCE... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

A. THESIS NO. ONE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54B. THESIS NO. TWO... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

X. VALUING GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56A. GOODWILL OF THE GOING BUSINESS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56B. COMMERCIAL OR ENTERPRISE GOODWILL VS. PERSONAL GOODWILL.. . . . . . . . . . . 56

1. Valuing Other Intangible Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562. Determining Personal Goodwill.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

a. Adjusting for Knowledge, Skill and Experience.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57b. Profits Tied to the Seller... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58c. What’s Left is Entity Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

C. HOW DOES PERSONAL GOODWILL COMPARE TO “HUMAN CAPITAL”?. . . . . . . . . . . . 59


1

GOODWILL UPON DIVORCE:DISTINGUISHING BETWEEN INTANGIBLE

ASSETS, ENTERPRISE GOODWILL,AND PERSONAL GOODWILL

by

Richard R. OrsingerBoard Certified in Family Law& Civil Appellate Law by the

Texas Board of Legal Specialization

I. INTRODUCTION. This Article deals with thecourts' treatment of "goodwill" in a divorce propertydivision. After defining the terms, the Articleanalyses current accounting practices regardinggoodwill, and discusses the importance of distin-guishing between (i) intangible assets of thebusiness; (ii) the enterprise goodwill of the business;and (iii) the personal goodwill of the owner. TheArticle presents a 50-state survey of goodwill upondivorce. The Article presents two theses pertainingto personal goodwill.

II. OVERVIEW. The current legal approach togoodwill is archaic. The legal conception of goodwillarose around 200 years ago, when the income ofa business--that was in excess of a return on itstangible assets and its cost of labor--was attributableto its location, the reputation of its proprietor andits products, and the personal relationships betweenthe companies' owner/ employees and the customers.

Nowadays, physical location is important only inselect businesses; the proprietor is largely unknownto the customers; the reputation of the products isa function of the supplier's branding, and in manybusiness models customers don't interact much withwait-people. For many businesses today, the excessof profits beyond what is attributable to identifiableassets constitutes a return on what economists callthe human capital and social capital of the business.

In some businesses, however, especially personalservice businesses, the knowledge, skill, andreputation of the proprietor is an important part ofthe business's ability to earn more than a normal rateof return on its identifiable capital and cost of labor.These qualities of the proprietor, which representthe human capital of the owner, are called "personal

goodwill."

Most states exclude the value of this personalgoodwill from the property division on divorce,which requires business valuators, divorce lawyers,and judges to differentiate between the intangibleassets of the business, the enterprise goodwill ofthe business, and the personal goodwill of thespouse- owner. The lines of demarcation betweenthe intangible assets, and the enterprise goodwillof a business, and the personal goodwill of theowner, are not easy to draw, and in many instancesan accepted conceptual framework to make thesedistinctions does not even exist.

Current accounting practices, and the law that appliesto goodwill, fail to isolate the earnings attributableto unidentified intangible assets of the business,including the business's human capital and socialcapital, from other excess earnings of the business.Accounting and legal standards offer almost no helpin differentiating enterprise goodwill from personalgoodwill. Instead, all unallocated excess earningsare attributed loosely to a residual category called"goodwill," which offers no aid to those who aretasked with dividing that residual category intosubparts. In a divorce, the business valuators, andthe lawyers, and the judge, must somehow differenti-ate between the identifiable intangible assets of abusiness, and the enterprise goodwill of the business,and the personal goodwill of the proprietor, withoutproper guidance from either accounting principlesor the law.

III. THE NEW ECONOMY IS BASED ONINTANGIBLES. Our society, in fact our world,is in the midst of a significant transformation inwhich the focus of our economic and personal lives


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is shifting away from what we call tangible assetsand toward what we call intangible assets. A recentbut telling indication is the fact that on February10, 2012, the market capitalization of AppleCorporation (which makes workplace tools andelectronic toys but earns billions of dollars sellingother people’s intellectual property) exceeded the“market cap” of Exxon Mobil Corporation (whichuses a large number of heavy industrial assets toretrieve, transport, and refine oil from ocean bottoms,deserts, and arctic wastelands around the world) by$63 billion. The accounting profession is makingsome effort to keep up with these changes, but itis a running a decade behind in some respects andin other respects it simply refuses to adapt. The legalprofession has been extremely slow to react to thesechanges, and antiquated legal doctrines are causinginjustices to occur of which the courts are unawarebecause the lawyers themselves are unaware of thechanges.

A. THE IMPORTANCE OF INTANGIBLEASSETS IN THE “NEW ECONOMY.” In themind of the law, the “goodwill” of a business iswhatever it is that makes the business more thanthe sum of its parts. In the past, when all the assetsof a business were physical things, the “extra value”of the business was associated with location, orbuying habits, or personal connections between thebusiness owner and sales staff and the customer.This is a visualization dating back to the generalstore on Main Street. In the present economy ofshopping from mail order catalogues, on cable tv,over the internet, and cell phones; with physicaldelivery by mail, Federal Express, or UPS, anddelivery of software, entertainment and informationover telephone lines, coaxial cable, microfibers, andeven the air waves; in this world of free trade andworld-wide price competition, of huge Walmartsreplacing small stores, of HMOs and PPOs andhospitals controlling the flow of medical care, andof lawyer advertising, the old loyalty-basedconception of goodwill of a business has beenreplaced by brand loyalty, convenience, and price,as the factors that keep customers coming.

In today’s economy, the things that make mostbusinesses valuable are intangible assets. Considerthis: the richest man in America does not sell cars,or hamburgers, or oil. He sells CDs with 0's and

1's on them.

The importance of intangible assets is thedistinguishing feature of the new economy. Byand large, existing financial statementsrecognize those assets only when they areacquired from others. Accounting standardsetters should develop a basis for therecognition and measurement of internallygenerated intangible assets.

Wayne S. Upton, Jr., Special Report: Business andFinancial Reporting, Challenges from the NewEconomy, FINANCIAL ACCOUNTING STANDARDS

BOARD (April 2001), on line at <http://www.fasb.org/articles&reports/sr_new_economy.pdf#76>.

Internally-created intangible assets are becomingincreasingly important in business and harder toignore. An October 2001 report by Leonard I.Nakamura of the Federal Reserve Bank ofPhiladelphia estimated that U.S. companies investin intangibles at a rate of $1 trillion per year, whichmeans that “businesses are investing nearly as muchin intangibles as they are in plant and equipment(business investment in fixed nonresidential plantand equipment in 2000 was $1.1 trillion).” Nakamuraalso suggested that a third of the value of U.S.corporate assets are intangibles. By “intangibles”Nakamura means “private expenditures on assetsthat are intangible and necessary to the creation andsale of new or improved products and processes.These include designs, software, blueprints, ideas,artistic expressions, recipes, and the like. They alsoinclude the testing and marketing of new productsthat are a necessary sunk cost of their first sale tocustomers. It is the private expense to create privaterights to sell new products.” Leonard I. Nakamura,What Is the U.S. Gross Investment in Intangibles?(At Least) One Trillion Dollars a Year!,<http://www.phil .frb.org/files/wps/2001/wp01-15.pdf>.

According to investment researcher Jack Ciesielski:“For 168 companies in the S & P 500 that hadintangibles in 1990 and in 1999, the average ratioof intangibles to total assets was 13% in 1990 andgrew to 18% by 1999. The result is even morestartling when intangibles are compared to commonequity: in 1990, the average ratio was 49%, and it


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swelled to nearly 73% by 1999.” <http://www .accountingobserver.com/commentary/briefs/2001/fasb-goodwill.asp>.

B. HUMAN CAPITAL. Economic theory at onetime adhered to the view that land and labor werethe only two components of economic life.Eventually accumulated capital entered the picture,so that land, labor, and capital became the threecomponents of economic life. Until the 1950s,economic theory mostly assumed that labor powerwas static and could not be enhanced.1 Beginningin the 1950s, economists developed the idea of“human capital,” or education, training, medical care,and other additions to knowledge and health thatimproved the capabilities of the individual worker.2

This view approached education and training as aninvestment rather than a “cultural experience.”3

University of Chicago Professor T. W. Schultzestablished that the American economy has longhad a higher return on "human capital" than onphysical capital.4 In 1964, another University ofChicago Professor Gary Becker published his bookHUMAN CAPITAL, which likened human capital toinvestments in factories and machines. Becker arguedthat one could invest in human capital (via education,training, medical treatment) and that a person’soutput depended partly on the rate of return on hisor her human capital.5

Most states consider a spouse’s human capital tobe personal to the spouse, and to amount to no morethan post-divorce earnings which belong exclusivelyto the spouse who earns it after divorce. That humancapital, which is most often called “personalgoodwill,” is in most states not property and, evenif that capital was developed during marriage, orenhanced during marriage, the other spouse has noclaim to it upon divorce.

Human capital finds its way into the discussion ofenterprise goodwill versus personal goodwill, inSection X.C of this Article.

The business-owning spouse–who is the hypotheticalseller in the hypothetical sale of the business at fairmarket value at the time of divorce–has personalgoodwill, which to some extent includes his or herhuman capital. Most states exclude the value of thispersonal goodwill from the property division on

divorce. But the business itself can also (and almostalways does) have human capital, and in most statesthis human capital of the business is included inenterprise goodwill that has a value that can bedivided in a divorce.

C. THE ACCOUNTANTS. The accountingprofession has been making some effort to keep pacewith the transition from a tangible toward anintangible based economy. In June of 2001 theFinancial Accounting Standards Board (FASB)supplanted its outdated APB Opinion 17, IntangibleAssets, with Financial Accounting Standard No. 142,Goodwill and Other Intangible Assets. Gone wasthe assumption of Opinion 17 that goodwill and otherintangible assets were wasting assets that shouldbe amortized over a 40-year period. Henceforth,goodwill and intangible assets with indefinite usefullives would be tested at least annually forimpairment. Intangible assets with definite usefullives were to be amortized over those useful lives,not an arbitrary 40 years.

Also in June 2001 FASB issued FinancialAccounting Standard No. 141, BusinessCombinations (updated 2007), which gave directionson how accountants should allocate the purchaseprice when one business bought another, includinghow to allocate part of the purchase price tointangible assets and goodwill acquired by purchase.FAS 141 supplanted APB Opinion 16. Opinion 16required that accountants separately recognizeintangible assets when they could be identified andnamed–a crude concept in a world with a multiplicityof intangible assets that were new and strange. FASNo. 141 requires that intangible assets acquiredthrough the purchase of a business be recognizedas assets apart from goodwill if they are“identifiable,” which means that they meet one oftwo criteria—the separability criterion or thecontractual-legal criterion. These concepts arediscussed in Section VI.C below. FAS No. 141 alsogives an illustrative list of intangible assets that meeteither of those criteria.

FAS 141 and 142 thus represent a modernizationof the accounting profession’s approach to intangibleassets, including goodwill. However, the accountingprofession still lags behind the economy in that eventhis updated recognition of goodwill only applies


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when one business acquires another business andpays more than the value of the tangible assets,which requires that the excess price paid must beallocated between intangible assets and residualgoodwill. The accounting profession still does notrecognize enterprise goodwill, created by a businessfor itself, as being separable from the catch-allcategory of residual goodwill. The accountingprofession thus excludes from company balancesheets significant components of a company’swealth.

D. THE LAWYERS. The lawyers, meaning bothpractitioners and judges, have lagged far behind theeconomists and the accountants in adapting to thechange from tangible to intangible assets and therecognition of human capital. This is partly becausethere are 51 versions of family law in America, andpartly because the law changes slowly through casedecisions, or fitfully through infrequent statutoryenactments. There is no governing body of lawyersor judges whose task it is to upgrade and modernizethe legal conceptual framework relating to intangibleassets and goodwill. This places the responsibilityfor change on the lawyers who litigate businessvaluation issues to be alert to these newdevelopments in our economy, and to pursue themin the court system.

IV. HUMAN CAPITAL. The use of the term“human capital” in modern neoclassical economicliterature is said to date back to Jacob Mincer'spioneering article Investment in Human Capital andPersonal Income Distribution in The Journal ofPolitical Economy in 1958. Nobel Prize-winningEconomist Gary Becker, in his book HUMAN

CAPITAL, published in 1964, argues that a personinvests in his or her own human capital (viaeducation, training, medical treatment), and thatperson’s income depends partly on the rate of returnon that human capital. A discussion by Gary Beckerof the concept of human capital is available on theinternet, <http://www.econlib.org/library/Enc/HumanCapital. html>. Some of Becker’s important pointsare:

To most people capital means a bank account,a hundred shares of IBM stock, assembly lines,or steel plants in the Chicago area. These areall forms of capital in the sense that they are

assets that yield income and other usefuloutputs over long periods of time.

But these tangible forms of capital are not theonly ones. Schooling, a computer trainingcourse, expenditures of medical care, andlectures on the virtues of punctuality andhonesty also are capital. That is because theyraise earnings, improve health, or add to aperson's good habits over much of his lifetime.Therefore, economists regard expenditures oneducation, training, medical care, and so onas investments in human capital. They arecalled human capital because people cannotbe separated from their knowledge, skills,health, or values in the way they can beseparated from their financial and physicalassets.

Education and training are the most importantinvestments in human capital. Many studieshave shown that high school and collegeeducation in the United States greatly raise aperson's income, even after netting out directand indirect costs of schooling, and even afteradjusting for the fact that people with moreeducation tend to have higher IQs andbetter-educated and richer parents. Similarevidence is now available for many years fromover a hundred countries with different culturesand economic systems. The earnings of moreeducated people are almost always well aboveaverage, although the gains are generally largerin less developed countries.

* * *The economics of human capital have broughtabout a particularly dramatic change in theincentives for women to invest in collegeeducation in recent decades. Prior to the sixtiesAmerican women were more likely than mento graduate from high school but less likelyto continue on to college. Women who did goto college shunned or were excluded from math,sciences, economics, and law, and gravitatedtoward teaching, home economics, foreignlanguages, and literature. Because relativelyfew married women continued to work for pay,they rationally chose an education that helpedin "household production"—and no doubt alsoin the marriage market—by improving their


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social skills and cultural interests.

All this has changed radically. The enormousincrease in the labor participation of marriedwomen is the most important labor force changeduring the past twenty-five years. Many womennow take little time off from their jobs evento have children. As a result the value to womenof market skills has increased enormously, andthey are bypassing traditional "women's" fieldsto enter accounting, law, medicine, engineering,and other subjects that pay well. Indeed, womennow comprise one-third or so of enrollmentsin law, business, and medical schools, and manyhome economics departments have either shutdown or are emphasizing the "new homeeconomics." Improvements in the economicposition of black women have been especiallyrapid, and they now earn just about as muchas white women.

Of course, formal education is not the only wayto invest in human capital. Workers also learnand are trained outside of schools, especiallyon jobs. Even college graduates are not fullyprepared for the labor market when they leaveschool, and are fitted into their jobs throughformal and informal training programs. Theamount of on-the-job training ranges from anhour or so at simple jobs like dishwashing toseveral years at complicated tasks likeengineering in an auto plant. The limited dataavailable indicates that on-the-job training isan important source of the very large increasein earnings that workers get as they gain greaterexperience at work. Recent bold estimates byColumbia University economist Jacob Mincersuggest that the total investment in on-the-jobtraining may be well over $100 billion a year,or almost 2 percent of GNP.

An article by John F. Tomer, Personal Capital andEmotional Intelligence: an Increasingly ImportantIntangible Source of Economic Growth, 29 EASTERN

ECONOMIC JOURNAL p. 453 (2003), <http://www.findarticles.com/p/articles/mi_qa3620/is_200307/ai_n9247655>, discusses a trend among economiststo look beyond physical capital, natural resources,and labor, as bases for wealth creation, and toconsider human capital as a basis. Tomer says that

“the term capital has increasingly come to refer tointangible factors such as the enhanced humancapacities owing to education and training.” Whilea long list of economists dating back severalcenturies recognized human capital, according toTomer these economists were contemplating personalskills and abilities. For example, “Paul Romer [1990,253] breaks down workers' human capitalendowment into three types of skills that are relevantfor production: (1) physical skills such as eye-handcoordination and strength, (2) educational skillsacquired in primary and secondary school, and (3)scientific talent acquired in post-secondaryeducation.” Tomer focuses on a new type of humancapital, what he calls social and organizationalcapital, that “are the product of activities that createsocial relationships.” This type of capital reposes“not in individuals per se but in the relationshipsor connections between people.”

Tomer discusses other terms used to describe humancapital, including “social capital,” and“psychological capital.” Tomer chooses to use theterm “personal capital,” and says:

Personal capital is a kind of human capitalbecause it relates to a capacity embodied inindividuals. However, personal capital differsfrom standard human capital in that the humancapacity involved is not the type developed byacademic education or by the usual types ofjob-related training. The personal capitalcapacities are fundamentally different fromcognitive intelligence or intellectual knowledge.Personal capital relates to an individual's basicpersonal qualities and reflects the quality ofan individual's psychological, physical, andspiritual functioning [Tomer, 1996, 626-27;Tomer, 2001, 251]. Further, it mirrors one'sinternal biochemical balance, physical healthand conditioning, psychological strengths andweaknesses, and purpose in life. A person'sstock of personal capital is partly a product ofone's genetic inheritance, partly a result of thelife-shaping events that one has encountered,and partly an outcome of one's efforts to matureand to grow in nonintellectual ways. It is inpart produced intentionally. Personal capitalqualities are related to a person's capacity towork or consume in that they underlie the more


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specific capacities (standard human capital andconsumption capital) that a person invests into be qualified for work tasks or to be able toenjoy consumer goods. Moreover, certainpersonal capital qualities are a prerequisite fordeveloping successful organizationalrelationships (social and organizational capital)[Tomer, 1999a, 46-48]. Personal capitalcapacities expand one's achievementpossibilities.

Tomer comments: “Unlike tangible capital, humancapital cannot be removed or alienated from anindividual to be sold.” This type of capital is akinto the personal goodwill that so many states excludefrom the property division upon divorce.

The foregoing economic description of “humancapital” suggests that a property-based approachto dealing with disparate earning capacity upondivorce (such as putting a value on a professionaldegree or professional license) will encountercomplexities that may overwhelm the legal analysisor the valuation process. The simpler way to addressthis issue is through post-divorce alimony.

V. LEGAL CONCEPTIONS OF GOODWILL.In some states enterprise goodwill (sometimes calledcommercial goodwill or professional goodwill) isdivisible on divorce and in some states it is not. Insome states personal goodwill is divisible on divorceand in some states it is not. Part of the differencesin law results from differences in meaning of theterm “goodwill.” The following discussions breakthe term “goodwill” down into components that canbe more accurately discussed. Because someappellate cases use the term “professional goodwill”to mean the enterprise goodwill of a professionalbusiness, and other cases use the term “professionalgoodwill” to mean the personal goodwill of aprofessional, in order to avoid confusion this Articlewill not use the term “professional goodwill.”

A. THE EARLIEST CONCEPTION OFGOODWILL. The earliest English definition of“goodwill” was given by Lord Eldon in Cruttwellv. Lye, 34 Eng. Rep. 129 (Ch. 1810), which said:“The goodwill which has been the subject of saleis nothing more than the probability that the oldcustomers will resort to the old place.” The classic

American legal definition of goodwill was givenby Justice Story in his treatise on partnership law:

the advantage or benefit, which is acquired byan establishment, beyond the mere value of thecapital, stock, funds, or property employedtherein, in consequence of the general publicpatronage and encouragement, which it receivesfrom constant or habitual customers, on accountof its local position, or common celebrity, orreputation for skill or affluence, or punctuality,or from other accidental circumstances ornecessities, or even from ancient partialitiesor prejudices.

Story, COMMENTARIES ON THE LAW OF PARTNERSHIP

§ 99 (6th Ed.1868). This definition was cited bythe U.S. Supreme Court in Metropolitan Nat. Bankv. St. Louis Dispatch Co., 49 U.S. 436, 446, 13 S.Ct.944, 948 (1893).

B. THE FEDERAL CONCEPTION OFGOODWILL. One member of Congress said thisabout goodwill, in connection with the savings andloan crisis: “"Goodwill is not cash. It is a concept,and a shadowy one at that.” 135 Cong. Rec. 11795(1989) (remarks of Rep. Barnard), cited in U.S. v.Winstar Corp., 518 U.S. 839, 854, 116 S.Ct. 2432,2445 (U.S. Sup. Ct. 1996).

The U.S. Supreme Court once described goodwillas “that element of value which inheres in the fixedand favorable consideration of customers, arisingfrom an established and well-known andwell-conducted business,” in Des Moines Gas Co.v. City of Des Moines, 238 U.S. 153, 165, 35 S.Ct.811, 814 (U.S. Sup. Ct. 1915).

The U.S. Supreme Court more recently said thisabout goodwill:

Although the definition of goodwill has takendifferent forms over the years, the shorthanddescription of good-will as "the expectancyof continued patronage," Boe v. Commissioner,307 F.2d 339, 343 (CA9 1962), provides auseful label with which to identify the total ofall the imponderable qualities that attractcustomers to the business. See HoustonChronicle Publishing Co. v. United States, 481


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F.2d, at 1248, n. 5.

Newark Morning Ledger Co. v. U.S., 507 U.S. 546,555-56, 113 S.Ct. 1670, 1675 (U.S. Sup. Ct. 1993).

The U.S. Court of Claims once said this aboutgoodwill:

Goodwill sometimes is used to describe theaggregate of all of the intangibles of abusiness.... Since a normal rate of return usuallyis calculated on tangible assets only, goodwillhas been used as a synonym for the return onall the intangibles of a business. In a morerestricted sense, goodwill is the expectancythat the old customers will resort to the oldplace. It is the sum total of all the imponderablequalities that attract customers and bringpatronage to the business without contractualcompulsion. Another definition equatesgoodwill with a rate of return on investmentwhich is above normal returns in the industryand limits it to the residual intangible asset thatgenerates earnings in excess of a normal returnon all other tangible and intangible assets.

Richard S. Miller & Sons, Inc. v. United States, 537F.2d 446, 450-51 (Ct. Cl. 1976) (citations omitted).

Other federal courts have described goodwill:Houston Chronicle Publishing Co. v. United States,481 F.2d 1240, 1248 (5th Cir. 1973) (the "ongoingexpectation that customers would utilize [acompany's] services in the future"), cert. denied,414 U.S. 1129 (1974); Grace Bros., Inc. v.Commissioner, 173 F.2d 170, 175-76 (9th Cir. 1949)("the sum total of those imponderable qualities whichattract the customer of a business--what bringspatronage to the business"); Dodge Bros., Inc. v.United States, 118 F.2d 95, 101 (4th Cir. 1941)("reasonable expectancy of preference in the raceof competition"); Ithaca Industries, 97 T.C. 253 (slipop. at 17-18), 1991 WL 151392 (1991) (“Whilegoodwill and going-concern value are often referredto conjunctively, technically going-concern valueis the ability of a business to generate incomewithout interruption, even though there has beena change in ownership; and goodwill is a 'preexisting'business relationship, based on a continuous courseof dealing, which may be expected to continue

indefinitely"), aff’d, Ithaca Industries, Inc. v.Commissioner, 17 F.3d 684 (4th Cir. 1992).

In Canterbury v. Commissioner, 99 T.C. 223, 247(1999), the Tax Court said: “The essence of goodwillis a preexisting business relationship founded upona continuous course of dealing that can be expectedto continue indefinitely. Computing & Software,Inc. v. Commissioner, 64 T.C. 223, 233 (1975).Goodwill is characterized as ‘the expectancy ofcontinued patronage, for whatever reason.’ Boe v.Commissioner, 307 F.2d 339, 343 (9th Cir.1962),affg. 35 T.C. 720 (1961); see Philip Morris, Inc. v.Commissioner, 96 T.C. 606, 634 (1991), affd., 970F.2d 897 (2d Cir., June 25, 1992).”

Rev. Rul. 59-60, § 4.02(f), 1959-1 C.B. 237, 241says this about goodwill: “In the final analysis,goodwill is based upon earning capacity. Thepresence of goodwill and its value, therefore, restsupon the excess of net earnings over and above afair return on the net tangible assets. While theelement of goodwill may be based primarily onearnings, such factors as the prestige and renownof the business, the ownership of a trade or brandname, and a record of successful operation over aprolonged period in a particular locality, also mayfurnish support for the inclusion of intangible value.In some instances it may not be possible to makea separate appraisal of the tangible and intangibleassets of the business. The enterprise has a valueas an entity. Whatever intangible value there is,which is supportable by the facts, may be measuredby the amount by which the appraised value of thetangible assets exceeds the net book value of suchassets.”

C. THE STATES’ CONCEPTION OFGOODWILL. Because family law in Americaconsists of fifty-one different bodies of law, thereis great variety in the legal approaches to goodwillupon divorce. There are some principles that areshared between states due to the common heritageof English law (Louisiana excepted) pertaining togoodwill. There are some principles that are sharedbetween states because of common notions of whatconstitutes "property." But there are widedifferences in the law of different states on thequestion of what constitutes goodwill, and whatgoodwill is divisible on divorce.


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The following state court appellate opinions reflectvarying ways to describe goodwill.

<In re Marriage of White, 502 N.E.2d 1084, 1086(Ill. Ct. App. 1986): “A workable definition ofgoodwill is that ‘goodwill is the value of a businessor practice that exceeds the combined value of thephysical assets.’ . . . The market value of goodwillis the amount a willing buyer would pay for aprofessional practice in excess of the value of thephysical assets. . . . A value based upon thecapitalization of excess earnings method is thecapitalization at a fair rate of return of the amountby which the average income of the professionalpractitioner exceeds the hypothetical salary thatwould be earned as an employee with similarqualifications.” [citations omitted]

<Yoon v. Yoon, 711 N.E.2d 1265, 1268-69 (Ind. Sup.Ct. 1999): “Goodwill has been described as the valueof a business or practice that exceeds the combinedvalue of the net assets used in the business. . . .Goodwill in a professional practice may beattributable to the business enterprise itself by virtueof its existing arrangements with suppliers,customers or others, and its anticipated futurecustomer base due to factors attributable to thebusiness. It may also be attributable to the individualowner's personal skill, training or reputation. Thisdistinction is sometimes reflected in the use of theterm ‘enterprise goodwill,’ as opposed to ‘personalgoodwill.’ Enterprise goodwill ‘is based on theintangible, but generally marketable, existence ina business of established relations with employees,customers and suppliers.’ . . . Factors affecting thisgoodwill may include a business's location, its namerecognition, its business reputation, or a variety ofother factors depending on the business. Ultimatelythese factors must, in one way or another, contributeto the anticipated future profitability of the business.Enterprise goodwill is an asset of the business andaccordingly is property that is divisible in adissolution to the extent that it inheres in thebusiness, independent of any single individual'spersonal efforts and will outlast any person'sinvolvement in the business. . . . It is not necessarilymarketable in the sense that there is a ready andeasily priced market for it, but it is in generaltransferrable to others and has a value to others.”

<Dugan v. Dugan, 457 A.2d 1, 4-6 (N.J. Sup. Ct.1983): “Goodwill is generally regarded as thesummation of all the special advantages, nototherwise identifiable, related to a going concern.It includes such items as a good name, capable staffand personnel, high credit standing, reputation forsuperior products and services, and favorablelocation. See also Accounting Principles Board,Op. 17, "Intangible Assets," in FASB FinancialAccounting Standards 266-72 (1981). [FN3] In abroad sense goodwill includes a whole host ofintangibles including the quality of management,the ability of the organization to produce and marketefficiently, and the existence and nature ofcompetition. Some writers have been careful todifferentiate between going concern value andgoodwill. See Paulsen, "Goodwill and GoingConcern Value Reconsidered," Mergers &Acquisitions, Winter 1980, at 10. Goodwill is keyedto reputation; going concern value to the enhancedvalue of the assets due to their presence in anestablished firm. See Danzig & Robison, "GoingConcern Value Reexamined," The Tax Adviser, Jan.1980, at 32. Going concern value has many of thecharacteristics of goodwill and in many situationswill constitute an asset enhancing the value of anenterprise. In that event it will be a component ofthe property subject to equitable distribution. Goingconcern value may be prevalent in some law firms.It is probably not significant in an individual lawpractice. . . .

FN3. APB Opinions are authoritativestatements by the American Institute ofCertified Public Accountants of generallyaccepted accounting principles. See "Forward,"FASB Financial Accounting Standards, supra;2 APB Acc'ting Principles (CCH) § 510.08,at 33 (1973).

“Goodwill can be translated into prospectiveearnings. From an accounting standpoint goodwillhas also been perceived of in terms of the extentto which future estimated earnings exceed the normalreturn on the investment. Walker, "Why PurchasedGoodwill Should be Amortized on a SystematicBasis," 95 J. Acc'tancy 210, 213 (1953); accord,Rev.Rul. 59-60, § 4.02(f), 1959-1 C.B. 237, 241(stating that value of goodwill "rests upon the excessof net earnings over and above a fair return on the


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net tangible assets"). The price paid for goodwillthen is equivalent to the excess of actual earningsover expected earnings based on a normal rate ofreturn on investment. Walker, supra, at 213; seeKerley, "Intangible Assets," in 1 Accountants'Handbook 23-10 (L. Seidler & D. Carmichael 6thed.1981). When goodwill exists, it has value andmay well be the most lucrative asset of someenterprises.

“Variances in the forms of an enterprise do noteliminate goodwill, though they may affect its worth.Goodwill may be present whether that form is apartnership, corporation, joint venture, or individualproprietorship. See Grayer v. Grayer, 147 N.J.Super.513, 520, 371 A.2d 753 (App. Div. 1977); Scherzerv. Scherzer, 136 N.J.Super. 397, 400, 346 A.2d 434(App. Div.1975) (holding no essential differenceso far as equitable distribution principle is concernedbetween an interest in an individual business andone held in corporate name: "The form should notcontrol"), certif. den., 69 N.J. 391, 354 A.2d 319(1976). Moreover, goodwill exists in personal serviceenterprises as well as other businesses. 2 B. Bittker,Federal Taxation of Income, Estates and Gifts ¶51.9.3, at 51-53 (1981).

“In a publicly held corporation one can determinethe total value of a business whose stock is publiclytraded and therefore its goodwill by the market priceof the stock. G. Catlett & N. Olson, Accounting forGoodwill 14 (1968). The excess over the book ormarket value of its assets, however, may also be dueto many and diverse conditions affecting theeconomy as a whole and an industry in particular.The value of stock in a closely held corporation isnot fixed by public trading. Its computation dependsprimarily on the earning power of the business "sincegoodwill by nature encompasses all those intangibleattributes of a business whose quality can bedemonstrated only by a company's ability to makeprofits." Id. [Strike-over added to avoid confusion]

“The calculation of goodwill may depend upon thepurpose for which the measurement is being made.The federal Internal Revenue Service has prescribeda formula approach for income, gift and estate taxpurposes. See Rev.Rul. 68-609, 1968-2 C.B. 327.The market place, as noted above, may often providea different figure. Accountants will usually not

reflect goodwill on a balance sheet until after abusiness has been sold and then state goodwill interms of the excess paid for the net assets over bookvalue. G. Catlett & N. Olson,supra, at 17. Itsevaluation may be complex and difficult. JudgePressler in Lavene v. Lavene, 148 N.J. Super. 267,275, 372 A.2d 629 (App. Div.), certif. den., 75 N.J.28, 379 A.2d 259 (1977), commented:

“There are probably few assets whose valuationimposes as difficult, intricate and sophisticated atask as interests in close corporations. They cannotbe realistically evaluated by a simplistic approachwhich is based solely on book value, which failsto deal with the realities of the good will concept,which does not consider investment value of abusiness in terms of actual profit, and which doesnot deal with the question of discounting the valueof a minority interest.”

<Travis v. Travis, 795 P.2d 96, 97 (Okla. Sup. Ct.1990): “As distinguished from tangible assets,intangibles have no intrinsic value, but do have avalue related to the ownership and possession oftangible assets. Some intangibles, such as atrademark, trade name or patent, are related to anidentifiable tangible asset. Goodwill, which isanother intangible, is not. Often referred to as "themost 'intangible' of the intangibles," D. Kieso & J.Weygandt, Intermediate Accounting 570 (3d ed.1980), goodwill is essentially reputation that willprobably generate future business.”

<Matter of Marriage of Fleege, 588 P.2d 1136, 1138(Wash. Sup. Ct. 1979): “Goodwill is property ofan intangible nature and is commonly defined asthe expectation of continued public patronage. . .. Among the elements which engender goodwill arecontinuity of name, location, reputation for honestand fair dealing, and individual talent and ability.”[Citations omitted]

Retired University of New Mexico ManagementProfessor Allen M. Parkman, who had an economiclegal background, discussed the legal conceptionof goodwill in his chapter A Systematic Approachto Valuing the Goodwill of Professional Practices(1998).6

D. GOODWILL AS RESIDUAL VALUE. The


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wide-ranging discussion over what constitutesdivisible goodwill upon divorce can be narrowedby refining the concept of goodwill. In some olderwritings, the term “goodwill” is used to describeall value of a going business beyond the value ofthe tangible assets of the business, i.e., goodwillconsists of all intangible value of the business. Themeasure of this form of goodwill is the differencebetween the price a buyer would pay to buy the goingbusiness as a whole and the prices buyers wouldpay to buy each individual tangible asset of thebusiness sold separately. But this conception ofgoodwill is overbroad because it lumps into goodwillintangible assets that can be valued on an individualbasis.

Modern property law recognizes many intangibleassets as enforceable and transferrable propertyrights, and these enforceable and transferrableintangible property rights should be discussed andvalued in the context of their specific legalframework (such as trademark law, trade secret law,contract law applied to long term employmentagreements or covenants not to compete, etc.), ratherthan being lumped into the residual catch-all categoryof goodwill. This Article suggests that the term“goodwill” should used to describe the narrowercategory of the ineffable qualities of a particularbusiness that contribute to profitability, beyond notonly tangible assets but also beyond specificallyidentifiable intangible assets that are transferrablewith or without the sale of a business. This Articlealso suggests that the true nature of “residualgoodwill” of most companies in the present mobile,digital and world-wide economy, where goods andservices are increasingly fungible, has shifted fromstable supplier/customer relationship to self-created“human capital” that will stay with the business aftera sale, including not only research and development,but also “enhanced human capacities owing toeducation and training,” social and organizationalcapital of the business, and personal capital ofemployees who will stay with the business (seediscussion of John Tomer, Section IVabove). Theseinvestments, which the business has made in itself,are usually expensed and therefore are not carriedas assets on the balance sheet and are not usuallythought of as assets with separably determinablevalue. As we grow in our ability to identify and valuethe human capital intangible assets of businesses,

then these intangible assets too can move out of“residual goodwill” and be recognized as assets ofthe business, further increasing the accuracy of whatmust be excluded in some states as personal goodwillin a divorce.

This “residual goodwill” must be subdivided in thecontext of divorce into a category called“commercial goodwill” or “enterprise goodwill”and a category called “personal goodwill.” In manystates, upon divorce “commercial goodwill” or“enterprise goodwill” is part of the value to bedivided in the property division, while “personalgoodwill” is not.

E. GOODWILL IN TRADEMARK LAW. Quitea lot has been written about goodwill in trademarklaw. The courts consider a trademark to beemblematic of the goodwill associated with a productor a “brand.” Trademark law recognizes the "ruleagainst assignment in gross." Under the rule againstassignment in gross:

A trademark can be assigned. However, atrademark symbolizes a company's good will.It cannot be transferred apart from the goodwillit symbolizes; that is deemed an unenforceable"assignment in gross" or "naked license."

Mark S. Lee, ENTERTAINMENT AND INTEL-LECTUAL PROPERTY LAW § 2:97 (2011). SeeIrene Calboli, What If, After All, Trademarks Were"Traded in Gross"?, 2008 MICH. ST. L. REV. 345,346 (2008):

Historically, based upon the assumption thattrademarks cannot be protected as commoditiesper se, but only as conveyers of commercialinformation and as symbols of businessgoodwill, [FN3] trademark law has prohibitedtrading in trademarks "in gross." [FN4] Instead,the law has required that trademarks beassigned "with the goodwill" of the businessto which they refer, [FN5] and has allowedtrademark licensing [FN6] only as long aslicensors control the quality of the productsbearing the licensed marks.

See Marshak v. Green, 746 F.2d 927, 929 (2d Cir.1984) ("A trade name or mark is merely a symbol


11

of goodwill; it has no independent significance apartfrom the goodwill it symbolizes. . . . [A] trademarkcannot be sold or assigned apart from [the] goodwillit symbolizes . . ."); Mister Donut of Am. v. Mr.Donut, Inc., 418 F.2d 838, 842 (9th Cir. 1969) ("Thelaw is well settled that there are no rights in atrademark alone and that no rights can be transferredapart from the business with which the mark hasbeen associated").

So, in trademark law the term “goodwill” is giventhe narrow meaning of the public feeling associatedwith a trademark or service mark–a narrower conceptthan we encounter in business valuation. Thegoodwill recognized in trademark law is severableand transferrable in connection with the transfer ofan associated symbol, such as a trade mark or servicemark. This conflicts with the concept of goodwillused for business valuation purposes, whichrepresents a residual category of the intangibles ofa business that cannot be separately identified orseparately transferred. The goodwill associated witha trade mark or service mark is really an intangibleasset that can be separately identified and thus shouldbe distinguished from residual enterprise goodwilland should be valued separately.

VI. THE ACCOUNTING CONCEPTION OFGOODWILL. The accounting profession has beendeveloping and refining its conception of goodwillin recent years. FAS 141 and 142 have been replacedas part of a recodification of accounting standardscalled The Accounting Standards Codification.Goodwill and other intangible assets are discussedgenerally under ASC 350. The standards forallocating purchase price in business acquisitionsis governed by ASC 805. In the area discussed bythis article, the changes were not substantive. Manyarticles on the subject continue to refer to FAS 141and 142. So this Article will continue to refer to FAS141 and 142.

A. GOODWILL AS EXCESS PURCHASEPRICE. Financial Accounting Standards BoardOpinion No. 16, Business Combinations 316 (1970)says: "[T]he excess of the cost of the acquiredcompany over the sum of the amounts assigned toidentifiable assets acquired less liabilities assumedshould be recorded as goodwill." In 2001, theFinancial Accounting Standards Board (FASB)

issued Financial Accounting Statement 142, whichdefines goodwill in its Glossary as “[t]he excess costof an acquired entity over the net of the amountsassigned to assets acquired and liabilities assumed.”FAS 142, ¶ 21 provides that “[t]he implied fair valueof goodwill shall be determined in the same manneras the amount of goodwill recognized in a businesscombination is determined. That is, an entity shallallocate the fair value of a reporting unit to all ofthe assets and liabilities of that unit (including anyunrecognized intangible assets) as if the reportingunit had been acquired in a business combinationand the fair value of the reporting unit was the pricepaid to acquire the reporting unit. The excess of thefair value of a reporting unit over the amountsassigned to its assets and liabilities is the impliedfair value of goodwill.”

B. DEFINITION OF PERSONALGOODWILL. Mark O. Dietrich, in Identifying andMeasuring Personal Goodwill in a ProfessionalPractice, CPA EXPERT (Spring 2005) [reprinted inDietrich, Segregating Personal and EnterpriseGoodwill, THE FIRST EVER AICPA/ASA NATIONAL

BUSINESS VALUATION CONFERENCE p. 30-14 (2005),hereafter called “the Dietrich Segregating article”],described personal goodwill in the following terms:

Personal goodwill, then, is the asset thatgenerates cash profits of the enterprise that areattributed to the business generatingcharacteristics of the individual, and mayinclude any profits that would be lost if theindividual were not present.

Associate Professor of Law Darian M. Ibrahim saidthis about personal goodwill:

Distinguishing personal goodwill from businessgoodwill is often difficult and always fact-specific. Personal goodwill may be mistakenfor business goodwill, and vice versa. Inaddition, goodwill may belong to both abusiness and its owner, making valuationproblematic. There is also a danger, due to theprevalence of business goodwill as a legalconcept and the relative obscurity of personalgoodwill as a legal concept, that buyers andsellers—not to mention the courts and theIRS—will routinely treat all goodwill as


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business goodwill. [Footnotes omitted].

Darian M. Ibrahim, The Unique Benefits of TreatingPersonal Goodwill as Property in CorporateAcquisitions,30 DEL. J. OF CORPORATE LAW 1, 10-11(2005). 7 Professor Ibrahim cited: Bateman v. UnitedStates, 490 F.2d 549 (9th Cir. 1973); Martin IceCream Co. v. Commissioner, 110 T.C. 189 (1998);and Norwalk v. Commissioner, 76 T.C.M. (CCH)208 (1998), as cases that distinguished enterprisegoodwill from personal goodwill.

C. PULLING IDENTIFIABLE INTANGIBLESOUT OF RESIDUAL GOODWILL. The lawyerand business valuator should account for intangibleassets separately from residual goodwill, wherepossible. There may be market data to help valuecertain intangible assets, and if not then intangibleassets may have discernable rates of return that canbe subtracted from the income stream used tocalculate overall value of the business, allowing suchassets to be differentiated from goodwill. Also,identifiable intangible assets of the business aretransferrable with the business, and thus are not partof personal goodwill. The desirability of removingidentifiable intangible assets from residual goodwillhas been recognized by the accounting professionin Financial Accounting Standard 141:8

The FASB’s reasons for rejecting otherrecognition criteria suggested for Statement141

B170. Some respondents suggested that theFASB eliminate the requirement to recognizeintangible assets separately from goodwill.Others suggested that all intangible assets withcharacteristics similar to goodwill should beincluded in the amount recorded as goodwill.The FASB rejected those suggestions becausethey would diminish rather than improve thedecision usefulness of reported financialinformation.

FAS 1414 ¶ B170, p. 135.

B171. Some respondents doubted their abilityto reliably measure the fair values of manyintangible assets. They suggested that the onlyintangible assets that should be recognized

separately from goodwill are those that havedirect cash flows and those that are bought andsold in observable exchange transactions. TheFASB rejected that suggestion. Although thefair value measures of some identifiableintangible assets might lack the precision ofthe measures for other assets, the FASBconcluded that the information that will beprovided by recognizing intangible assets attheir estimated fair values is a more faithfulrepresentation than that which would beprovided if those intangible assets weresubsumed into goodwill. Moreover, includingfinite-lived intangible assets in goodwill thatis not being amortized would further diminishthe representational faithfulness of financialstatements.

FAS 141 ¶ B171, p. 136.

The accounting profession is going to have to leadthe legal profession in the effort to pull recognizedintangible rights out of residual goodwill, becausesome appellate courts are still perpetuating JusticeStory’s 1868mercantile definition of goodwill, andlisting components of goodwill that prevailed beforethe advent of telecommunications, the automobile,the airplane, personal computers, and the internet.This is not to say that the accounting profession hasfully adjusted to the “new economy,” whereintangibles are an important source of wealth. FASBnow says to report intangible rights that are separablefrom goodwill when such rights are purchased, butnot when such rights result from self-investment.Until self-created intangible assets are recognizedas assets and included on the balance sheet, thebalance sheet will continue to be of little use invaluing a business, and the entity value, derived bybusiness valuators by applying a cap rate or discountrate to normalized cash flows, will continue to reflectvalue far in excess of a rate of return on recognizedassets. People will continue to call this “excess”earnings “goodwill,” and courts will continue tostruggle with how to allocate this “excess” earningsbetween enterprise goodwill and personal goodwillin divorce property divisions.

1. What Constitutes an Intangible Asset (forAccounting Purposes)? Accounting principles inthe USA treat self-investment in intangibles as an


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expense rather than an investment, so the value ofthis self-investment does not show up on the balancesheet, and the income statement fails to capture thisinvestment in future income. Thus a business’sincome appears to be attributable in a mysteriousway to “goodwill” in instances when it is reallyattributable to self-investment in intangible assetsthat are not captured on either the balance sheet orthe income statement. The accounting professionhas partly rectified this problem, but only forintangible assets that are purchased, not self-created.And the accounting profession specifically excludeswork force in place as an intangible, which is therepository for much of the human capital and socialcapital within the organization.

FASB Concepts Statement No. 6, Elements ofFinancial Statements, issued in December 1985,defined “assets” in the following way:

26. An asset has three essential characteristics:(a) it embodies a probable future benefit thatinvolves a capacity, singly or in combinationwith other assets, to contribute directly orindirectly to future net cash inflows, (b) aparticular entity can obtain the benefit andcontrol others' access to it, and (c) thetransaction or other event giving rise to theentity's right to or control of the benefit hasalready occurred. Assets commonly have otherfeatures that help identify them—for example,assets may be acquired at a cost and they maybe tangible, exchangeable, or legallyenforceable. However, those features are notessential characteristics of assets. Theirabsence, by itself, is not sufficient to precludean item's qualifying as an asset. That is, assetsmay be acquired without cost, they may beintangible, and although not exchangeable theymay be usable by the entity in producing ordistributing other goods or services. Similarly,although the ability of an entity to obtainbenefit from an asset and to control others'access to it generally rests on a foundation oflegal rights, legal enforceability of a claim tothe benefit is not a prerequisite for a benefitto qualify as an asset if the entity has the abilityto obtain and control the benefit in other ways.

It is clear that many intangible assets meet this old

FASB criteria for “asset,” and thus should beconsidered as belonging to the business, separateand apart from goodwill.

In June, 2001, the Financial Accounting StandardsBoard issued Financial Accounting Statements 141,Business Combinations,9 and 142, Goodwill andOther Intangible Assets.10 FAS 141 was updatedin 2007.11 The stated reason for issuing FAS 141and 142 was that “[a]nalysts and other users offinancial statements, as well as companymanagements, noted that intangible assets are anincreasingly important economic resource for manyentities and are an increasing proportion of the assetsacquired in many transactions.” FAS 141 defines an “intangible asset” in this way:

An intangible asset is an asset (not includinga financial asset) that lacks physical substance.As used in this Statement, the term intangibleasset excludes goodwill.12

FAS 141 ¶ 3(l), p. 3. Intangible assets are disting-uished from goodwill:

A19. The acquirer shall recognize separatelyfrom goodwill the identifiable intangible assetsacquired in a business combination. Anintangible asset is identifiable if it meets eitherthe separability criterion or the contractual-legalcriterion described in paragraph 3(k).13

FAS ¶ A19, p. 38.

FAS 141 discusses when an asset is “identifiable.”This is important in determining when an intangibleasset should be recognized separately from goodwill.As noted in FAS 141:

A28. The identifiability criteria determinewhether an intangible asset is recognizedseparately from goodwill.

FAS ¶ A28, p. 41. The identifiability criterion isbased on either the separability criterion or thecontractual-legal criterion:

k. An asset is identifiable if it either:


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(1) Is separable, that is, capable of beingseparated or divided from the entity and sold,transferred, licensed, rented, or exchanged,either individually or together with a relatedcontract, identifiable asset, or liability,regardless of whether the entity intends to doso; or

(2) Arises from contractual or other legal rights,regardless of whether those rights aretransferable or separable from the entity or fromother rights and obligations.

FAS 141 ¶ 3(k), p. 3. FAS 141 reiterates that thecontractual-legal criterion is independent from theseparability criterion:

A20. An intangible asset that meets thecontractual-legal criterion is identifiable evenif the asset is not transferable or separable fromthe acquiree or from other rights andobligations.

FAS 141 ¶ A20, p. 38.

FAS 141 discusses the separability criterion:

A21. The separability criterion means that anacquired intangible asset is capable of beingseparated or divided from the acquiree and sold,transferred, licensed, rented, or exchanged,either individually or together with a relatedcontract, identifiable asset, or liability. Anintangible asset that the acquirer would be ableto sell, license, or otherwise exchange forsomething else of value meets the separabilitycriterion even if the acquirer does not intendto sell, license, or otherwise exchange it. Anacquired intangible asset meets the separabilitycriterion if there is evidence of exchangetransactions for that type of asset or an assetof a similar type, even if those transactions areinfrequent and regardless of whether theacquirer is involved in them.

A22. An intangible asset that is not individuallyseparable from the acquiree or combined entitymeets the separability criterion if it is separablein combination with a related contract,identifiable asset, or liability.

FAS 141 ¶¶ A21 & A22, p. 39.

FAS 142 requires that intangible assets of acquiredcompanies must be amortized over their useful lives,or if the useful life is indefinite, that the intangiblebe tested annually for impairment. This alters theprevious rule requiring intangible assets to beamortized over an arbitrary 40 year period. This alsoresults in business valuators having to evaluate eachintangible asset based on the attributes of thatintangible asset. And it requires that residualgoodwill be tested annually for impairment.

FAS 142 lists in Appendix A the following examplesof intangible assets: customer lists, patents,copyright, broadcast licenses, airline route authority,and trademarks. FAS 142 only applies to acquiredintangibles, and GAAP does not require thatintangibles developed internally by a business mustbe disclosed on the balance sheet.

As mentioned above, a researcher for FASB authoreda report that dealt in detail with intangible assets:Wayne S. Upton, Jr., Special Report: Business andFinancial Reporting, Challenges from the NewEconomy, FINANCIAL ACCOUNTING STANDARDS

B O A R D ( Ap r i l 2001) , on l i n e a t<http://www.fasb.org/articles&reports/sr_new_economy.pdf#76>. He describes intangibleassets as follows:

The Intangibles Research Center at New YorkUniversity offers two possibledefinitions:

Broad Definition—Intangibles are nonphysicalsources of probable future economic benefitsto an entity or alternatively all the elementsof a business enterprise that exist in additionto monetary and tangible assets. [Footnotereference omitted.]

Narrow Definition—Intangibles arenonphysical sources of probable futureeconomic benefits to an entity that have beenacquired in an exchange or developed internallyfrom identifiable costs, have a finite life, havemarket value apart from the entity, and areowned or controlled by the entity.


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The FASB Exposure Draft, BusinessCombinations and Intangible Assets, offered:Intangible assets are noncurrent assets (notincluding financial instruments) that lackphysical substance.

Id. at 68. [Footnote omitted] Upton describes thelong list of intangible assets contained on ExhibitA to FASB Exposure Draft, Business Combinationsand Intangible Assets, later shortened by FASB.Id. at 68-69. Upton observes: “The items on the listof potential intangible assets share a commoncharacteristic. Each is separable from the entity orexists by virtue of contractual or legal rights.Separability and contractual/legal rights are notessential characteristics of an asset, but they areevidence of one characteristic that isessential—control.” Id. 70-71. Upton’s papercontains a thorough discussion of what constitutesan intangible asset of a business. This discussionis an excellent reference for intangible assets thatmight be differentiated from residual goodwill.

FAS 141 says “Goodwill is an asset representingthe future economic benefits arising from other assetsacquired in a business combination that are notindividually identified and separately recognized.”

2. Assembled Workforce is Part of ResidualGoodwill. FAS 141 rejects assembled workforceas an identifiable intangible asset:

A25. The acquirer subsumes into goodwill thevalue of an acquired intangible asset that is notidentifiable as of the acquisition date. Forexample, an acquirer may attribute value tothe existence of an assembled workforce, whichis an existing collection of employees thatpermits the acquirer to continue to operate anacquired business from the acquisition date.An assembled workforce does not representthe intellectual capital of the skilledworkforce—the (often specialized) knowledgeand experience that employees of an acquireebring to their jobs. Because the assembledworkforce is not an identifiable asset to berecognized separately from goodwill, any valueattributed to it is subsumed into goodwill.

FAS 141 continues:

Assembled workforce

B176. In developing Statement 141, the FASBdid not consider whether an assembledworkforce met either the contractual-legal orthe separability criterion for recognition as anidentifiable intangible asset. Instead, Statement141 precluded separate recognition of anassembled workforce because of the FASB’sconclusion that techniques to measure the valueof an assembled workforce with sufficientreliability were not currently available. IFRS3 and IAS 38, on the other hand, did notexplicitly preclude separate recognition of anassembled workforce. However, paragraph 15of IAS 38 noted that an entity usually wouldnot have sufficient control over the expectedfuture economic benefits arising from anassembled workforce for it to meet thedefinition of a separate intangible asset.

B177. In developing the 2005 Exposure Draft,the Boards concluded that an acquirer shouldnot recognize an assembled workforce as aseparate intangible asset because it meetsneither the contractual-legal nor the separabilitycriterion. The views of respondents whocommented on recognition of an assembledworkforce were mixed.

Some agreed with its proposed recognitionprohibition. Others suggested that the Boardsreconsider that prohibition; they generally saidthat an assembled workforce is already valuedin many situations for purposes of calculatinga “contributory asset charge” in determiningthe fair value of some intangible assets. (Inusing an “excess earnings” income valuationtechnique, a contributory asset charge isrequired to isolate the cash flows generatedby the intangible asset being valued from thecontribution to those cash flows made by otherassets, including other intangible assets.Contributory asset charges are hypothetical“rental” charges for the use of those othercontributing assets.) Those respondentsopposed a prohibition on recognizing anassembled workforce as a separate intangibleasset; they favored permitting acquirers toassess whether an assembled workforce is


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separable in each situation and to recognizethose that are separable.

B178. In reconsidering the proposal in the 2005Exposure Draft, the Boards concluded that theprohibition of recognizing an assembledworkforce should be retained. Because anassembled workforce is a collection ofemployees rather than an individual employee,it does not arise from contractual or legal rights.Although individual employees might haveemployment contracts with the employer, thecollection of employees, as a whole, does nothave such a contract. In addition, an assembledworkforce is not separable, either as individualemployees or together with a related contract,identifiable asset, or liability. An assembledworkforce cannot be sold, transferred, licensed,rented, or otherwise exchanged without causingdisruption to the acquirer’s business. Incontrast, an entity could continue to operateafter transferring an identifiable asset.Therefore, an assembled workforce is not anidentifiable intangible asset to be recognizedseparately from goodwill.

B179. The Boards observed that neitherStatement 141 nor IAS 38 defined an assembledworkforce and that inconsistencies haveresulted in practice. In addition, some whoobjected to the recognition prohibition in the2005 Exposure Draft apparently consider anassembled workforce to represent theintellectual capital of the skilledworkforce—the (often specialized) knowledgeand experience that employees of an acquireebring to their jobs. However, the Boards viewan assembled workforce as an existingcollection of employees that permits an acquirerto continue to operate an acquired businessfrom the acquisition date, and they decided toinclude that definition in this Statement(paragraph A25).

B180. The Boards observed that the value ofintellectual capital, in effect, is recognizedbecause it is part of the fair value of the entity’sother intangible assets, such as proprietarytechnologies and processes and customercontracts and relationships. In that situation,

a process or methodology can be documentedand followed to the extent that the businesswould not be materially affected if a particularemployee left the entity. In most jurisdictions,the employer usually “owns” the intellectualcapital of an employee. Most employmentcontracts stipulate that the employer retainsthe rights to and ownership of any intellectualproperty created by the employee. For example,a software program created by a particularemployee (or group of employees) would bedocumented and generally would be theproperty of the entity. The particularprogrammer who created the program couldbe replaced by another software programmerwith equivalent expertise without significantlyaffecting the ability of the entity to continueto operate. But the intellectual property createdin the form of a software program is part ofthe fair value of that program and is anidentifiable intangible asset if it is separablefrom the entity. In other words, the prohibitionof recognizing an assembled workforce as anintangible asset does not apply to intellectualproperty; it only applies to the value of havinga workforce in place on the acquisition dateso that the acquirer can continue the acquiree’soperations without having to hire and train aworkforce.14

The rationales for this refusal to segregate assembledworkforce from residual goodwill were expressedin the Revised Minutes of the October 18, 2006FASB meeting.15 The following lengthy excerpt isilluminating:

TOPIC 1: Assembled Workforce

1. Ms. Eastman stated that the Boards havereaffirmed that an identifiable (that is,contractual or separable) intangible asset canbe measured with sufficient reliability andshould be recognized separately from goodwill.However, the Exposure Draft specificallyprecludes the recognition of an acquiredassembled workforce separately from goodwill,which is consistent with FASB Statement No.141, Business Combinations. The staff believesthat in a principles-based standard, allintangible assets should be subject to the same


17

recognition criteria. Therefore, it would beinconsistent to preclude the recognition of anyidentifiable intangible asset, including anassembled workforce.

2. Regardless of what the Board decides onrecognition, the staff believes the Board shouldclarify the meaning of an assembled workforce.Otherwise, there could be an inconsistency inthe measurement of an assembled workforcewhen calculating contributory asset capitalcharges. Also, there is the potential for doublecounting in the valuation of intellectualproperty intangible assets when the fair valueof the assembled workforce includes theintellectual capital related to the developmentof these other intangible assets. There are twogeneral views for the meaning of an assembledworkforce:

a. View 1: An assembled workforce is theintellectual capital of the skilledworkforce of which the acquirer hasobtained the benefit as a result of theacquisition. This view implies that theassembled workforce is the (specialized)knowledge and experience that theemployees bring to their jobs.

b. View 2: An assembled workforce is acollection of employees that allows theacquirer to continue to operate on DayOne. That is, the acquirer does not needto go through the process of finding,hiring, and training the employees becausethey are already in place and operatingon a continuous “business as usual” basis.This view would eliminate the potentialfor double counting.

3. Some constituents have raised concerns aboutthe decision usefulness, materiality, and costsof recognizing an assembled workforceseparately from goodwill. However, the staffbelieves that in terms of decision usefulnessand materiality, for some industries, particularlythose that are service- or people-intensive, theseparate recognition of an acquired assembledworkforce would provide decision-usefulinformation. The staff also noted that the fair

value of an assembled workforce might beimmaterial in some industries, particularly ifView 2 is chosen, but to preclude recognitionaltogether is inconsistent with a principles-based standard. In fact, the difference inmateriality by entity or industry is one of thereasons that an assembled workforce shouldbe recognized as it gives users an indicationof the main value drivers of a business. In termsof the cost of preparation, the staff believesthat because assembled workforces currentlyare valued for the purpose of calculating thecontributory asset capital charges for thevaluation of other intangible assets, there willbe no additional costs involved if the exceptionfor assembled workforce is removed. As forsubsequent accounting, the useful life couldbe estimated from historical employee turnoverdata. An impairment of the assembledworkforce would be evident, for example, whensubstantially higher turnover occurs than whatwas assumed in the initial determination of theuseful life.

4. Ms. Eastman noted that at the October 19,2006 IASB Board meeting, the IASB Boardsupported View 2 (all IASB Board membersagreed) and agreed that a separable assembledworkforce should be separately recognized(seven IASB Board members agreed; five didnot).

5. The Board generally supported View 2 inclarifying the meaning of an assembledworkforce (all Board members agreed).However, the Board concluded that anassembled workforce should not be recognizedas an intangible asset separately from goodwillbecause it is generally not separable (all Boardmembers agreed).

6. Mr. Trott stated that for an intangible assetto be identifiable, that intangible asset wouldhave to either arise from a contractual-legalright or be separable. He believes that anassembled workforce neither meets thecontractual-legal right criterion nor theseparable criterion because an assembledworkforce is not contractually based and cannotbe sold separately from the business. Ms.


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Eastman stated that some constituents believethat an assembled workforce is separable incombination with other assets (for example,a division within an organization). An exampleof a separable assembled workforce would bea consulting firm that “leases” out its employeesto other corporations for an extended periodof time. She also clarified that the staff is notstating that an acquirer should alwaysseparately recognize an assembled workforce;if that assembled workforce is not separable,then the acquirer should not recognize itseparately from goodwill. Mr. Trott respondedby stating that if the Board was to agree thatan assembled workforce is separable incombination with its other related assets, thatwould defeat the purpose of the separablecriterion because the measurement of thatassembled workforce would include themeasurements of all the other related assets.In the case of the consulting firm “leasing” outits employees, Mr. Trott believes that theconsulting firm’s product is the servicesprovided by its employees and, therefore, itis not possible to differentiate between thevalue of the employees and the value of theservices provided by those employees. Mr.Crooch agreed with Mr. Trott. Ms. Seidmanadded that if the Board was to support theseparate recognition for the consulting firm’sassembled workforce, the Board would besupporting View 1, which is not the Board’sview of the meaning of an assembledworkforce.

7. Mr. Batavick stated that although he agreesthat an assembled workforce is a collection ofemployees that allows the acquirer to continueto operate on Day One (View 2), he also couldenvision some circumstances in which theintellectual capital (that is, the specialized skillset of the employees) could be valuable to theacquirer (View 1). As for whether an assembledworkforce could be recognized separately fromgoodwill, he believes that an assembledworkforce does not meet the separabilitycriterion and should not be recognizedseparately from goodwill. Furthermore, hequestions the value of the information providedby separately recognizing an assembled

workforce from goodwill. Even if one couldsubstantiate that there is value in thatinformation, requiring the separate recognitionof an assembled workforce would addcomplexity to the final Statement on businesscombinations because not only would the Boardhave to provide recognition and measurementguidance, it also would have to provideimpairment and amortization guidance, whichwould prolong the business combinationsproject. He concluded by stating that hebelieves that an assembled workforce does notmeet the separability criterion as stated inexisting guidance for intangible assets.

8. Ms. Seidman supported View 2. ParagraphB169 in Statement 141 states that “. . .replacement cost is not a representationallyfaithful measurement of the fair value of theintellectual capital acquired in a businesscombination.” In response to the staff’squestion about whether that statement is valid,she noted that she believes that statement isoutdated now that FASB Statement No. 157,Fair Value Measurements, has been issued.Consequently, she believes that statementshould be deleted. As for whether the Boardshould remove the exception for separaterecognition of assembled workforce, Ms.Seidman stated that,on-balance she would voteto keep the prohibition. She stated that if onebelieves that the nature of an assembledworkforce is the cost of accumulating theemployees, then there are two reasons fordisallowing its separate recognition fromgoodwill. First, to the extent that an assembledworkforce needs to be combined with otherrelated assets to meet the definition ofseparable, not only would that be too broadof an interpretation of the term separable, thevaluation of that assembled workforce wouldinclude a broad number of elements, whichwould not provide particularly usefulinformation. Second, the nature of an assembledworkforce seems to mirror a transaction cost(that is, the acquirer is basically reimbursingthe acquiree for paying the acquirer’s costs toassemble these employees). Ms. Seidmanemphasized that one of the themes of theStatement on business combinations is that the


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cost of assembling an asset is not part of thefair value of the asset itself. By supportingView 2, the Board would essentially beclarifying that an assembled workforce is ofa different nature than the other types ofintangible assets that are separable andrecognized separately from goodwill. Mr.Young agreed with Ms. Seidman.

9. Mr. Linsmeier stated that while he believesan assembled workforce has aspects of bothViews 1 and 2, he supports View 2. Limitingthe definition of an assembled workforce toView 2 would help acquirers account for anassembled workforce because the intellectualcapital portion might be recognized in otherassets at the acquisition date in a businesscombination. He stated that while he agreedwith the other Board members that anassembled workforce is generally not separable,he questioned whether the Board should makethat decision for preparers. If uniquecircumstances exist in the acquisition wherebythe acquirer could separately value theworkforce, that acquirer should be allowed torecognize that assembled workforce apart fromgoodwill. Although he understood thetransaction cost notion as stated by Ms.Seidman, he believes that at the acquisitiondate, an acquirer is not recognizing atransaction cost. He believes that at theacquisition date, the acquirer is receiving anasset because the acquirer could continueoperations without expending resources toconstruct a workforce. Mr. Linsmeier does notsupport prohibiting separate recognition.However, if the Board does prohibitrecognition, the basis for conclusions shouldexplain that the Board believes it would be achallenge for an assembled workforce to meetthe separability criterion and that it would notbe a common occurrence for an acquirer to beable to separately recognize an assembledworkforce.

10. Mr. Herz agreed with Mr. Linsmeier. Hestated that an acquirer is acquiring all thetangible and intangible assets of a business,including a workforce that is trained and readyto operate on the date of acquisition, and all

those assets contribute to the value of theacquiree. He believes that whether anassembled workforce is separable would dependon the business model of the acquiree. Similarto Mr. Linsmeier, Mr. Herz stated that the staffshould state the reason that the Board supportsthe prohibition is because it believes that anassembled workforce generally is not separableand should not be separately recognized, whichis consistent with the principle that onlyidentifiable intangible assets should berecognized separately from goodwill. Heclarified that he supports View 2, even thoughhe believes that View 1 is correct from aneconomic point of view. However, themeasurement issues associated with View 1leads him to support View 2.

3. Some Say that Assembled Workforce Canbe Valued. Willamette Management Associates,a nationwide business valuation firm founded in1969, takes the view that assembled workforce canbe valued. In Pamela J. Garland and David M.Chiang, Valuation of the Assembled WorkforceIntangible Asset for Property Taxation Purposesp. 52 (Spring 2006),16 the authors wrote this:

Most industrial and commercial organizationsrecognize their employees—and other formsof human capital—as a valuable intangibleasset. Recognizing the value of a company'sassembled workforce is not a new concept.Companies often analyze the value of theirhuman capital intellectual property (e.g., anassembled workforce) for a variety oftransactional, financing, accounting, taxation,and litigation purposes.

Id. p. 52. The authors go on to say:

Many corporate CEOs have publicly stated thatthe assembled workforce is one of theircompany’s most valuable assets. However, fewcompanies incur the effort or expense toperiodically quantify the value of theirassembled workforce intellectual property.Numerous court cases have concluded that anentity’s assembled workforce is a discreteintangible asset that has a measurable value.


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Id. at 54. The authors cite: Ithaca Industries, Inc.v. C.I.R., 17 F.3d 684 (4th Cir. 1994); and BurlingtonNorthern R.R. Co. v. Bair,815 F.Supp. 1223 (S.D.Iowa, 1993), aff'd, 60 F.3d 410 (8th Cir. 1995). Theauthors go on to discuss how to value workforcein place. If assembled workforce is valued, and itis established that it will stay with the company ifthe business is sold, then the value of assembledworkforce can be withdrawn from the category ofresidual goodwill, and avoid being treated the waythat undifferentiated goodwill is treated in litigation,including divorce.

4. The Argument That Goodwill is not an Asset.Walter P. Schuetze was the Chief Accountant,Division of Enforcement, at the U.S. Securities andExchange Commission up until February, 2000,while FASB was considering the updated treatmentof intangible assets. Mr. Schuetze was one ofFASB’s original seven members. Mr. Schutze foryears spoke out against the reporting of imaginaryassets on balance sheets, things he said “that onlyaccountants call assets.”17 On August 17, 1998, Mr.Schuetze (a UT graduate who worked as anaccountant in San Antonio) gave a speech in whichhe discussed the FASB’s consideration of thequestion of whether the cost of goodwill should berecognizable as an asset. Walter P. Schuetze,Enforcement Issues, and Is the Cost of PurchasedGoodwill an Asset?18 Schuetze argued that goodwilldid not fit the definition of an asset and could nothave a specific cost assigned to it. Schuetze said:

In paragraph 172 of Concepts Statement 6, theBoard said, "Future economic benefit is theessence of an asset. An asset has the capacityto serve the entity by being exchanged forsomething of value to the entity, by being usedto produce something of value to the entity,or by being used to settle its liabilities." Thecost of purchased goodwill is simply theamount paid by one entity for the net assetsof another entity, or for a controlling equityinterest in another entity, in excess of the fairvalue of the individual, identifiable net assets(assets minus liabilities) of that other entity;the amount said to represent the cost ofpurchased goodwill is just the excess amountleft over–in a word, the lump. But, the lumpcannot be exchanged for anything. The lump

cannot be used to produce anything of value.The lump cannot be used to settle a liability.I conclude, therefore, using the Board's ownwords, that the future economic benefitcriterion is not met.

VII. WHAT TAX LAW SAYS ABOUTGOODWILL AND SEPARABLE INTANGIBLEASSETS. Before the adoption of Internal RevenueCode § 197, there was much litigation over whetheran intangible asset was or was not depreciable underIRC § 167. A deduction was allowed if the taxpayerproved that the intangible asset (1) had anascertainable value separate and distinct fromgoodwill, and (2) had a limited useful life, theduration of which could be ascertained withreasonable accuracy. Newark Morning Ledger Co.v. U.S., 507 U.S. 546, 558, 113 S.Ct. 1670, 1676(1993). This struggle was supplanted by IRC § 197,which specifies intangibles that can be amortized.Although not intended for this purpose, the list ofintangible assets in Section 197(d) could beconsidered as a list of intangible assets of a businessthat are separable from goodwill in a divorce.

Internal Revenue Code § 197(d): Section 197intangible.--For purposes of this section--

(1) In general.--Except as otherwise providedin this section, the term "section 197 intangible"means--

(A) goodwill,(B) going concern value,(C) any of the following intangible items:

(i) workforce in place including itscomposition and terms andconditions (contractual or otherwise)of its employment,(ii) business books and records,operating systems, or any otherinformation base (including lists orother information with respect tocurrent or prospective customers),(iii) any patent, copyright, formula,process, design, pattern, knowhow,format, or other similar item,(iv) any customer-based intangible,(v) any supplier-based intangible,and


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(vi) any other similar item,(D) any license, permit, or other rightgranted by a governmental unit or anagency or instrumentality thereof,(E) any covenant not to compete (or otherarrangement to the extent sucharrangement has substantially the sameeffect as a covenant not to compete)entered into in connection with anacquisition (directly or indirectly) of aninterest in a trade or business orsubstantial portion thereof, and(F) any franchise, trademark, or tradename.

The term "customer-based intangible" is definedin § 197(d)(2) to mean “(i) composition of market,(ii) market share, and (iii) any other value resultingfrom future provision of goods or services pursuantto relationships (contractual or otherwise) in theordinary course of business with customers.” Theterm "supplier-based intangible" is defined in§ 197(d)(3) to mean “any value resulting from futureacquisitions of goods or services pursuant torelationships (contractual or otherwise) in theordinary course of business with suppliers of goodsor services to be used or sold by the taxpayer.” Notethat workforce in place is listed as an amortizableintangible. In contrast, FAS 141 specifically excludesassembled workforce as a separable intangible asset,because replacement cost (the cost to hire and traina comparable assembled workforce) is “not arepresentationally faithful measurement of the fairvalue of the intellectual capital acquired in a businesscombination” and FASB believes that “techniquesto measure the value of an assembled workforce andthe related intellectual capital with sufficientreliability are not currently available.”

Business valuators must deal with an issue that taxaccountants can ignore, and that is the effect thatthe business owner’s departing or competing willhave on the workforce in place, customer-basedintangibles, and supplier-based intangibles.

Treas. Reg. § 1.197-2(b)(2) defines “going concernvalue” as “the additional value that attaches toproperty by reason of its existence as an integralpart of an ongoing business activity." Court casesrecognize “going concern value” as distinguishable

from goodwill. In Citizens and Southern Corp. v.C.I.R., 91 T.C. 463, 481 n. 9, 1988 WL 90987(1988), aff'd, 900 F.2d 266 (11th Cir. 1990), the courtsaid:

Going concern value as distinguished fromgoodwill is the additional element of valuewhich attaches to property by reason of itsexistence as an integral part of a going concern.VGS Corp. v. Commissioner, 68 T.C. 563, 591(1977). Going concern value is 'bottomed onthe ability of the acquired business to generatesales without any interruption because of thetake-over.' Winn-Dixie Montgomery Inc. v.United States, 444 F.2d 677, 685 n. 12 (5th Cir.1971).

The Tax Court, in UFE, Inc. v. Commissioner, 92T.C. 1314, 1323 (1989), said this:

Going concern value is an intangible,nonamortizable capital asset that is oftenconsidered to be part of goodwill. Goodwillhas been defined as the 'expectancy of BOTHcontinuous excess earning capacity and alsoof competitive advantage or continuedpatronage.' Wilmot Fleming Engineering Co.v. Commissioner, 65 T.C. 847, 861 (1976).(Emphasis added.) On the other hand, goingconcern value has also been described as relatedless to the business reputation and the strengthof customer loyalty, than to the operatingrelationship of assets and personnel inherentin an ongoing business. Going concern valuehas been defined as 'the additional element ofvalue which attaches to property by reason ofits existence as an integral part of a goingconcern.' VGS Corp. v. Commissioner, 68 T.C.563, 591 (1977); Conestoga Transportation Co.v. Commissioner, 17 T.C. 506, 514 (1951).Going concern value is manifested in thebusiness' ability to resume business activitywithout interruption and to continue generatingsales after an acquisition. Computing &Software Inc. v. Commissioner, 64 T.C. 223,235 (1975). While courts have blurred thesedistinctions between goodwill and goingconcern value, they are different conceptually.See United States v. Cornish, 348 F.2d 175,184 (9th Cir. 1965); Computing & Software


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Inc. v. Commissioner, supra at 234-235;Winn-Dixie Montgomery, Inc. v. United States,444 F.2d 677, 685 (5th Cir. 1971).

VIII. THE DIVISIBILITY OF GOODWILLUPON DIVORCE. A law review article evaluatedthe law of goodwill and divorce, and had this to say:

There is a split among states regarding thetreatment of goodwill in a divorce proceeding.Eight states, including Ohio, have not decidedthe issue, [FN22] while the remaining statesfollow one of the following three approaches.The majority position, and the positionadvocated in this article, holds that enterprisegoodwill is marital property, but personalgoodwill is separate property. [FN23] Theminority position holds that all goodwill ismarital property. [FN24] Lastly, four states holdthat goodwill is never marital property. [FN25]

[FN22]. Alabama, Georgia, Idaho, Iowa, Maine,Ohio, South Dakota, Vermont. [Strikeoutsreflect subsequent developments in certainstates.]

[FN23]. Alaska, Arkansas, Connecticut,Delaware, Florida, Hawaii, Illinois, Indiana,Maryland, Massachusetts, Minnesota,Mississippi, Missouri, Nebraska, NewHampshire, Oklahoma, Oregon, Pennsylvania,Rhode Island, Texas, Utah, Virginia, WestVirginia, Wisconsin, Wyoming. See Richmond,779 P.2d 1211 (Alaska); Wilson, 741 S.W.2d640 (Arkansas); Eslami, 591 A.2d 411(Connecticut); E.E.C., 457 A.2d 688(Delaware); McDiarmid, 649 A.2d 810 (D.C.);Thompson, 576 So. 2d 267 (Florida); Antolik,761 P.2d 305 (Hawaii); Talty, 652 N.E.2d 330(Illinois); Yoon, 711 N.E.2d 1265 (Indiana);Prahinski, 540 A.2d 833 (Maryland); Goldman,554 N.E.2d 860 (Massachusetts); Sweere, 534N.W.2d 294 (Minnesota); Singley, 846 So. 2d1004 (Mississippi); Hanson, 738 S.W.2d 429(Missouri); Taylor, 386 N.W.2d 851(Nebraska); Watterworth, 821 A.2d 1107 (NewHampshire); Travis, 795 P.2d 96 (Oklahoma);Lankford, 720 P.2d 407 (Oregon); Solomon,611 A.2d 686 (Pennsylvania); Moretti, 766A.2d 925 (Rhode Island); Nail, 486 S.W.2d

761 (Texas); Sorensen, 839 P.2d 774 (Utah);Howell, 523 S.E.2d 514 (Virginia); Holbrook,309 N.W.2d 343 (Wisconsin); May, 589 S.E.2d536 (West Virginia); Root, 65 P.3d 41(Wyoming).

[FN24]. Arizona, California, Colorado,Kentucky, Michigan, Montana, Nevada, NewJersey, New Mexico, New York, NorthCarolina, North Dakota, Washington. SeeWisner v. Wisner, 631 P.2d 115 (Ariz. App.Div. 1 1981); Lopez, 1974 Cal. App. LEXIS1040 (California); Huff v. Huff, 834 P.2d 244(Colo. 1992); Heller v. Heller, 672 S.W.2d 945(Ky. App. 1984); Kowalesky v. Kowalesky,384 N.W.2d 112 (Mich. App. 1986); Stufft v.Stufft, 950 P.2d 1373 (Mont. 1997); Ford v.Ford, 782 P.2d 1304 (Nev. 1989); Dugan, 457A.2d 1 (New Jersey); Hurley v. Hurley, 615P.2d 256 (N.M. 1980), overruled on othergrounds; Moll v. Moll, 722 N.Y.S.2d 732 (N.Y.2001); Poore v. Poore, 331 S.E.2d 266 (N.C.1985); Sommers v. Sommers, 660 N.W.2d 586(N.D. 2003); Hall v. Hall, 692 P.2d 175 (Wash.1984).

[FN25]. Kansas, Louisiana, South Carolina,Tennessee. See Powell v. Powell, 648 P.2d 218(Kan. 1982); Pearce v. Pearce, 482 So. 2d 108(La. App. 4th Cir. 1986); Donahue v. Donahue,384 S.E.2d 741 (S.C. 1989); Smith v. Smith,709 S.W.2d 588 (Tenn. App. 1985 ). . . .

Kelly Schroeder, Fair and Equitable Distributionof Goodwill in an Ohio Divorce Proceeding, 31 U.DAYTON L. REV. 83, 87-88 (2005).

The following list reflects the way various stateappellate courts have dealt with goodwill forpurposes of property division upon divorce. Thecases reflect not only a conception of whatconstitutes goodwill, but also whether such goodwillis divisible. Where they occurred, descriptions ofhow goodwill should be valued are included.

Alaska.

<Moffitt v. Moffitt, 813 P.2d 674, 676 (Alaska 1991):“Alaska law provides that the goodwill of a closecorporation is property which may be included in


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the marital estate in a divorce proceeding.”

<Richmond v. Richmond, 779 P.2d 1211, 1213-14(Alaska 1989): “In Moffitt, we articulated a two-parttest for assessing the divisibility of professionalgoodwill. Moffitt, 749 P.2d at 347. The trial courtmust first determine if goodwill exists. Id. If the trialcourt determines that goodwill exists, ‘it then mustdetermine whether the good will could actually besold to a prospective buyer.’ Id. ‘If the trial courtdetermines either that no good will exists or thatthe good will is unmarketable, then no value for goodwill should be considered in dividing marital assets.’. . . We express no opinion regarding themarketability of a multi-lawyer law firm'sprofessional goodwill.FN3 It may be that marketableprofessional goodwill exists in a multi-lawyer firm,for example, upon evidence of sales or purchasesof partnership interests.”

<Moffitt v. Moffitt, 749 P.2d 343, 347 (Alaska 1988):“Preliminarily, the trial court must decide whethergood will exists. If the trial court finds good willexists, it then must determine whether the good willcould actually be sold to a prospective buyer. If thetrial court determines either that no good will existsor that the good will is unmarketable, then no valuefor good will should be considered in dividing themarital assets. Conversely, the good will should beconsidered if the evidence suggests that it has valueand is marketable. In that case, the trial court shoulduse one or more principled methods of valuation.”

< Wright v. Wright, 904 P.2d 403, 406 (Alaska 1995):“Capitalization of excess earnings is one of therecognized methods for appraising business goodwill and has been approved by this court on severaloccasions.”

Arizona.

<Mitchell v. Mitchell, 732 P.2d 208, 211-12 (Ariz.1987): “We note that some jurisdictions hold thatthe goodwill of a professional partnership orproprietorship is not a divisible marital asset. . . .However, because the professional practice of thesole practitioner or partner will continue afterdissolution of the marriage, with the same goodwillas it had during the marriage, we find that a refusalto consider goodwill as a community asset does not

comport with Arizona's statutory equitabledistribution scheme. We prefer to accept theeconomic reality that the goodwill of a professionalpractice has value, and it should be treated asproperty upon dissolution of the community,regardless of the form of business.” [citationsomitted].

Arkansas.

<Wilson v. Wilson, 741 S.W.2d 640, 646-47 (Ark.Sup. Ct. 1987): “The prevailing view appears to bethat goodwill of a professional practice or businessis a business asset with a determinable value andis marital property, subject to division in a divorceproceeding. . . . Some jurisdictions, however, haveheld that professional goodwill does not constituteproperty and should not be considered as maritalproperty divisible in such proceedings. . . . We .. . conclude that, for goodwill to be marital property,it must be a business asset with value independentof the presence or reputation of a particularindividual--an asset which may be sold, transferred,conveyed or pledged. Thus, whether goodwill ismarital property is a fact question and a party, toestablish goodwill as marital property and divisibleas such, must produce evidence establishing thesalability or marketability of that goodwill as abusiness asset of a professional practice.”

<Williams v. Williams, 108 S.W.3d 629, 642-43 (Ark.App. 2003): “[F]or goodwill to be marital property,it must be a business asset with value independentof the presence or reputation of a particularindividual. . . . To establish goodwill as maritalproperty and thus be divisible, the party mustproduce evidence establishing the salability ormarketability of that goodwill as a business assetof a professional practice. The Tortorich and Wilsoncases confirm that the burden is on the party whoseeks to establish goodwill as a marital asset toproduce convincing proof delineating betweenprofessional goodwill on the one hand and personalgoodwill on the other. . . . Mr. Schwartz admittedin his testimony that he did not attribute any valueto Dr. Alonzo Williams' personal reputation. Hestated that he ‘... didn't distinguish between thegoodwill that developed between any personal andany professional. . . . Dr. Williams attributes hisdraw of patients to various factors. Specifically, he


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testified that he has a group of twenty to thirtyphysicians with whom he maintains regular contactand from whom he receives referrals. Dr. Williamscontends that he receives much of his business basedupon referrals. He testified that these referrals keepcoming because the referring doctors are his personalfriends and know that he will treat the patient wellregardless of financial circumstances. Dr. AlonzoWilliams testified that the racial makeup of hispatient base is over 80% African American. Dr.Williams is one of the only two African Americanboard certified gastroenterologists in Arkansas. Theburden of proof is with the Plaintiff, not theDefendant, to delineate the facets of goodwill. Thecourt finds that the Plaintiff has failed to do so.’”

<Tortorich v. Tortorich, 902 S.W.2d 247, 250-51(Ark. App. 1995): "Dr. Tortorich is a solepractitioner whose personal skills developed hisreputation with other dentists. Dr. Tortorich'spractice, as the evidence clearly showed, was almostwholly dependent on referrals from other dentistswho referred patients to him based on his reputationalone. Without the presence or reputation of thisparticular individual the oral surgery practice hadno value independent of its tangible assets. Thechancellor adopted Mr. Schwartz's opinion of thegoodwill value of Anthony L. Tortorich, D.D.S.,P.A., and held that this goodwill had a value ofapproximately $180,000 and was a marital asset.It appears that Mr. Schwartz arrived at his opinionby capitalizing the above average net income Dr.Tortorich has been able to generate in his practice.This does not, however, purport to distinguish thesuperior personal earnings capacity of Dr. Tortorichfrom any goodwill of the professional associationindependent of his continued presence andreputation. Upon our de novo review we concludethat the value of Dr. Tortorich's P.A. is $61,086 andthat it has no goodwill value independent of Dr.Tortorich's presence and reputation. We do not hold,as suggested in the dissenting opinion, that a soloprofessional practice can never have businessgoodwill independent of the personal goodwill ofthe practitioner. We simply hold that pursuant toWilson, Mrs. Tortorich had the burden of provingthat Dr. Tortorich's professional association hadbusiness goodwill independent of Dr. Tortorich'spersonal goodwill if it was to be considered a maritalasset. This she failed to do.”

California.

<Cal. Bus. & Prof. Code § 14100 ('The “good will”of a business is the expectation of continued publicpatronage’).

<In re Marriage of Fortier, 109 Cal.Rptr. 915, 918(Cal. App. 1973): ” the goodwill of respondent'smedical practice was, in fact, community property.. . . [S]ince community goodwill may be evaluatedby no method that is dependent upon the post-maritalefforts of either spouse, then, as a consequence, thevalue of community goodwill is simply the marketvalue at which the goodwill could be sold upondissolution of the marriage, taking into considerationthe expectancy of the continuity of the practice.”

<In re Marriage of Foster, 117 Cal.Rptr. 49, 53-54(Cal. App. 1974): “The value of community goodwillis not necessarily the specified amount of moneythat a willing buyer would pay for such goodwill.In view of exigencies that are ordinarily attendanta marriage dissolution the amount obtainable in themarketplace might well be less than the true valueof the goodwill. Community goodwill is a portionof the community value of the professional practiceas a going concern on the date of the dissolutionof the marriage. As observed in Golden, '. . . in amatrimonial matter, the practice of the solepractitioner husband will continue, with the sameintangible value as it had during the marriage. Underthe principles of community property law, the wife,by virtue of her position of wife, made to that valuethe same contribution as does a wife to any of thehusband's earnings and accumulations duringmarriage. She is as much entitled to be recompensedfor that contribution as if it were represented by theincreased value of stock in a family business.”

<In re Marriage of McTiernan and Dubrow, 35Cal.Rptr.3d 287, 295 (Cal. App. 2005): “Personalproperty may be incorporeal . . ., i.e., withouttangible substance, and it may be intangible in thesense that it is a right rather than a physical object.. . . But, even if incorporeal or intangible, propertymust be capable of being transferred. ‘[I]t is afundamental principle of law that one of the chiefincidents of ownership in property is the right totransfer it.’. . . ‘A common characteristic of aproperty right, is that it may be disposed of,


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transferred to another. . . .’ Husband's ‘earningcapacity and reputation in his profession as a motionpicture director which greatly exceeds that of mostpersons involved in that profession’ or, in the trialcourt's shorthand, his ‘elite professional standing,’cannot be sold or transferred. His high standingamong other motion picture directors is entirelypersonal to him. He cannot confer on another directorhis standing as No. 13 in cumulative box officerevenues during 1985- 1996. He cannot sell thisstanding to another, because a buyer would not beJohn McTiernan, no matter how much the buyerwas willing to pay. For the same reason, and unlikea law or medical practice, husband cannot transferhis ‘elite professional standing.’ That standing ishis, and his alone, and he cannot bestow it onsomeone else. Thus, an essential aspect of a propertyinterest is absent. The fact that husband's ‘eliteprofessional standing’ is not transferable effectivelyrefutes the trial court's conclusion that husband's‘practice’ as a motion picture director is like the‘practice’ of an attorney or physician. The practiceof an attorney, physician, dentist, or accountant istransferable, but husband's ‘elite professionalstanding’ is his alone, and not susceptible to beingtransferred or sold.”

<In re Marriage of Ackerman, 146 Cal.App.4th 191,199-200, 52 Cal. Rptr.3d 744, 750-51 (2006) :

No rigid rule applies for determining the valueof goodwill. ( In re Marriage of Foster (1974)42 Cal.App.3d 577, 583, 117 Cal.Rptr. 49.)Rather, it “may be measured by ‘any legitimatemethod of evaluation that measures presentvalue by taking into account some past result,’so long as the evidence ‘legitimately establishesvalue.’ [Citation.]” ( In re Marriage of Rosen(2002) 105 Cal.App.4th 808, 819, 130Cal.Rptr.2d 1 ( Rosen ).) “[E]ach case mustbe determined on its own facts andcircumstances and the evidence must be suchas legitimately establishes value. [Citations.]”( In re Marriage of Foster, supra, 42 Cal.App.3dat p. 583, 117 Cal.Rptr. 49.) Because goodwillvalue of a business is a question of fact for thetrial court, its determination will be upheld ifsupported by substantial evidence. ( In reMarriage of Nichols, supra, 27 Cal.App.4th661, 670, 33 Cal.Rptr.2d 13.)

The “capitalization of excess earnings” methodis one recognized valuation technique. ( Rosen,supra, 105 Cal.App.4th at pp. 818–819, 130Cal.Rptr.2d 1.) This “method focuses on the‘ “earning power” ’ of the business to determinewhat ‘ “rate of return” ’ the predicted earningswill yield in light of the risks involved to attainthem. [Citation.]'' ( Id. at p. 818, 130Cal.Rptr.2d 1.) “Broadly put, the excessearnings approach is predicated on acomparison of the earnings of the professionalin question with that of a peer whoseperformance is ‘average.’

Colorado.

<Huff v. Huff, 834 P.2d 244, 256-58 (Colo. 1992):

The district court selected a value based on theexcess earnings method, which is a generallyaccepted method for determining the presentvalue of someone's interest in a business. SeeIn re Marriage of Bookout, 833 P.2d 800,804-805 (Colo. App. 1991) (affirming trialcourt's use of excess earnings approach); Duganv. Dugan, 92 N.J. 423, 457 A.2d 1, 9 (1983)(adopting excess earnings approach in valuationof law practice for purposes of divorceproceeding); In re Marriage of Hall, 103Wash.2d 236, 692 P.2d 175, 179-80 (1984)(trial court may consider various methods forvaluing goodwill of spouse participating inpartnership, including excess earnings methodor formula in partnership agreement); Alan S.Zipp, Divorce Valuation of Business Interests:A Capitalization of Earnings Approach, 23Fam.L.Q. 89, 102 (1989) (capitalization ofexcess earnings approach is one of the methodsrecommended by the American Institute ofCertified Public Accountants and is a methodrelied on by the Internal Revenue Service tovalue a business for tax purposes). The excessearnings approach capitalizes the amount bywhich the attorney's historical earnings exceedthat which an attorney with similar education,experience and capabilities earned during thatperiod. See Bookout, at 803, 805; Dugan, 457A.2d at 9. This method results in a valuationthat represents the value of both the tangibleassets and goodwill of the husband's partnership


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interest on the dissolution date. [FN14] Zipp,supra, at 91, 102. The excess earnings valuationmethod is an appropriate valuation in adissolution proceeding because it provides thepresent value of the partnership interest to theparticipating spouse and ‘avoids the problemof valuing a business on the basis of post-divorce earnings and profits.’ Id. at 89, 102.. . .

The husband also argues that the district court'suse of the excess earnings method results ina "double dipping" by the wife into thehusband's income. The husband contends thatthe excess earnings approach converts his futureincome into property which is then dividedbetween the spouses. He contends that "doubledipping" occurs because that same futureincome is the source from which the wife'smaintenance is paid. The husband contendsthat the wife receives double benefits from thesame source: the husband's future income. Wedisagree.

As stated above, the excess earnings approachis a valuation method which capitalizes theexcess earnings based on a comparison of thehusband's past earnings to the past earningsof an attorney in the same area with the sameeducation, experience, and capabilities. Basedon these historical earnings, this methodprovides a valuation which represents thepresent value of the husband's partnershipinterest. The excess earnings approach doesnot convert the husband's future income intoproperty; on the contrary, it avoids valuing abusiness or partnership on the basis ofpostdivorce earnings and profits. See Bookout,at 804-805; Zipp, supra, at 102.

< In re Marriage of Bookout, 833 P.2d 800, 804-05(Colo. Ct. App. 1992, cert. denied):

Next, husband notes that, in capitalizing excessincome, his future income stream is valued anddivided as property. Therefore, he argues thatbasing an order of maintenance and childsupport upon the same income inequitablyawards wife a double recovery. We disagree.

The few courts that consider personal goodwillas nothing more than probable future earningcapacity have concluded that goodwill is nota divisible marital asset. See Kimbrough v.Kimbrough, 228 Neb. 358, 422 N.W.2d 556(1988); Holbrook v. Holbrook, 103 Wis.2d 327,309 N.W.2d 343 (1981); see generally A.H.Rutkin, Family Law & Practice § 37.05(1)(1991). However, this minority view is contraryto the law which we have adopted in thisjurisdiction. See In re Marriage of Nichols, 43Colo.App. 383, 606 P.2d 1314 (1979) (the valueof goodwill incident to a practice is an assetacquired during the marriage).

Furthermore, the value of goodwill which isto be determined at the time of dissolution isnot synonymous with a spouse's expectationof future earnings. In re Marriage of Lukens,16 Wash.App. 481, 558 P.2d 279 (1976); Inre Marriage of Fortier, 34 Cal.App.3d 384, 109Cal.Rptr. 915 (1973). See also Dugan v. Dugan,supra (future earning capacity per se is notgoodwill). Such earnings are simply a factorwhich are considered to decide if goodwillexists, In re Marriage of Lopez, 38 Cal.App.3d93, 113 Cal.Rptr. 58 (1974), and it is this latterasset that is valued and allocated between theparties to a dissolution. Stern v. Stern, 66 N.J.340, 331 A.2d 257 (1975). Goodwill reflectsnot simply a possibility of future earnings, buta probability based on existing circumstances.Dugan v. Dugan, supra.

In a dissolution of marriage proceeding, thevalue of goodwill should be measured byarriving at a present value based upon pastresults and not by accounting for the post-marital efforts of the professional spouse.However, the method of valuation that, as here,capitalizes the historical past earnings of thebusiness at an appropriate capitalization rateto identify a value of the goodwill possessedby the business at the date of dissolution avoidsthe problem of valuing a business on the basisof post-dissolution earnings and profits. SeeIn re Marriage of Foster, 42 Cal.App.3d 577,117 Cal.Rptr. 49 (1974).

Thus, a valuation on the basis of past earnings


27

represents the advantage currently possessedby the business as shown by its historical abilityto earn income in excess of that which wouldbe earned if the owner had invested in tangibleproperty and leased it to other businesses. Zipp,Divorce Valuation of Business Interests: ACapitalization of Earnings Approach, 23Fam.L.Q. 89 at 109 & 111 (1989); see generallyUdinsky, Putting a Value on Goodwill, 9Fam.Adv. 37 (1986).

Goodwill is a property or asset whichsupplements the earning capacity of anotherasset, a business, or a profession, and, therefore,it is not the earning capacity itself. In reMarriage of Hall, 103 Wash.2d 236, 692 P.2d175 (1984). Hence, while both a practicingprofessional and a salaried professional bringan earning capacity comprised of skill andeducation to their positions, the goodwilldirectly supplements the earning capacity onlyof the practicing professional. In re Marriageof Keyser, 820 P.2d 1194 (Colo. App. 1991).

Thus, we conclude that the identification,valuation, and division of husband's goodwillas a portion of his physical therapy practicedid not divide husband's future income.Therefore, wife did not receive a doublerecovery.

Connecticut.

< Eslami v. Eslami, 591 A.2d 411, 418-19 (Conn.Sup. Ct. 1991): “It can hardly be doubted that theincrement of value, loosely termed goodwill, thatarises from the established reputation of a businessfor the quality of its goods or services may oftenbe found to enhance the value of professional aswell as other enterprises by increasing their abilityto attract patrons. Relatively few courts have whollyrejected consideration of the goodwill of aprofessional practice in determining the value ofthe property held by the parties in a dissolutionaction. . . . Several courts have recognized that thegoodwill of an established practice may have value,but disapprove of the capitalization of excessearnings method of valuation, insisting uponevidence of value based on comparable sales orpartnership withdrawal agreements. . . . We agree

with the cases that recognize that goodwill mayconstitute an element of value distinct from thetangible assets of a medical practice. Its value,however, must be determined on the basis of theprice that a willing buyer would pay in excess ofthe tangible assets to acquire the practice. Obviously,the most persuasive evidence of such value wouldbe prices obtained in comparable sales of similarmedical practices, if sufficient information of thatkind can be found. We reject the notion thatprofessional goodwill may be evaluated withoutconsideration of the saleability of the practice andthe existence of a market for its purchase. . . . Tothe extent that the goodwill of the practice cannotbe detached from the personal reputation and abilityof the practitioner through a sale, it cannot be saidto have any significant market value, even thoughit may enhance the earning power of the practitionerso long as he continues to work in the samecommunity. ‘[I]f goodwill depends on the continuedpresence of a particular individual, such goodwill,by definition, is not a marketable asset distinct fromthe individual.’ Taylor v. Taylor, supra, 222 Neb.at 731, 386 N.W.2d 851. A valuation method thatdoes not differentiate between the goodwill of thepractice as a saleable entity and the practitioner'sown earning power as enhanced by such goodwillmay well result in counting the same basis for afinancial award in dissolution cases twice, once asan asset of his estate subject to allocation and again,as a component of his earning capacity forming thebasis for alimony. In theory, at least, thecapitalization of excess earnings method ofevaluating goodwill seeks to determine the pricea prospective purchaser would pay to acquire thestream of income in excess of the amount he wouldexpect to earn by engaging in the profession throughother avenues. In economic terms, if radiologistswere so scarce that the demand for such servicesoverwhelmed the supply, there would be littleadvantage in buying an established practice at asubstantial price for the goodwill component ratherthan establishing a new practice. The supply-demandrelationship is theoretically reflected in bothcomponents of the capitalization formula, thedetermination of excess earnings and thecapitalization factor. Thus the formula is relatedto market value, but provides an alternative to thecomparable sales method for determining that value.The difficulty lies not in the theory but in its


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application, particularly with respect to the basisfor calculating the amount of excess income andselecting the capitalization rate. Although evidenceof comparable sales would ordinarily be morepersuasive, we hold that capitalization of excessincome is a permissible method for determining thevalue of the goodwill of a professional practice,despite difficulties in its application. We havepreviously approved the capitalization of projectednet income as a permissible accounting techniquefor determining the value of a closely heldcorporation characterized as a ‘one-man’ business.”[Citations omitted]

Delaware. E.E.C. v. E.J.C., 457 A.2d 688, 692-94(Del. 1983): "Husband's CPA conceded he had noexperience in valuing a law practice for purposesof purchase or sale; his experience was limited tovaluing small businesses in general. However, hestated that he would apply the same approach tovaluing a law practice as in valuing a small businessoperated as a sole proprietorship. With respect towife's valuation approach, he stated he had neverheard of a ‘fair value’ approach. In his view, acapitalization of earnings approach was notappropriate because husband's earnings were notsubstantially greater than those of other attorneysof his age and experience. Further, husband's CPAcontended that his client's 1977 earnings should beexcluded in any averaging process because theyincluded an extraordinary contingent fee not likelyto reoccur. . . .

“As noted above in Stern, professional goodwill mayconstitute an element for valuation of a professionalendeavor. But here the parties appear to concedethat goodwill should be disregarded. Were goodwilla factor to be valued, one recognized, albeitcriticized, accounting technique for determiningvalue of goodwill does involve capitalization ofearnings but only of excess earnings. See, Kennedy& Thomas, Putting a Value on Education andProfessional Goodwill, 2 Family Advocate 3, at page5 (Summer 1979). The article states:

The theory underlying the capitalization [ofexcess earnings] formula [for determininggoodwill] is that a future flow of income hasa present value and its value can be computedto an equivalent lump sum payment. An

economist or an accountant, using thecapitalization formula, can determine presentvalue of the asset-goodwill-which producesthe excess earnings.

“However, the article criticizes even thecapitalization of excess income as a method fordetermining goodwill on the ground that itimproperly takes into consideration “income to beearned after the marriage is dissolved and ... [thus]represents, in effect, the division of postdivorceincome ....” Kennedy & Thomas, Id. at page 5.

“We see little substantive difference between thetechnique of discounting a future flow of incometo determine present value and capitalizing anannualized average income. Both valuationtechniques seek to arrive at present value byreference to future income. We agree with Stern thatearning capacity is irrelevant in determining thepresent value of marital assets for purpose of divisionof marital property under 13 Del.C. § 1513. Itfollows that wife's technique of valuing husband'ssole proprietorship professional practice based ona capitalization of husband's earnings must berejected. We conclude that husband's soleproprietorship practice should be valued for § 1513purposes using the approach generally followed byhusband's CPA."

District of Columbia.

<McDiarmid v. McDiarmid, 649 A.2d 810, 814-15(D.C. Ct. App. 1994): “As the District of Columbiahas not heretofore addressed the question of whetherprofessional goodwill is subject to distribution upondissolution of marriage, we have examined the casesof our sister jurisdictions and considered how theyhave addressed and resolved this issue. We foundthat ‘[t]here is no specific consensus as to adefinition of professional goodwill, whether a solepractitioner of any profession can have goodwill,or what method or methods should be used to valueprofessional goodwill.’ Thompson v. Thompson,576 So.2d 267, 269 (Fla.1991). The jurisdictionsare divided as to whether professional goodwill ina law practice may be marital property subject todistribution upon dissolution of marriage. A numberof courts have concluded that professional goodwillin a law practice is not property subject to equitable


29

distribution. These courts have concluded that theconcept of goodwill is indistinguishable from futureearning capacity and thus too remote and speculativeto be valued. . . . A majority of the jurisdictions hasconcluded, however, that professional goodwill ismarital property subject to equitable distribution.These courts classify goodwill as marital propertybecause ‘[t]o hold otherwise would result in awindfall to the professional spouse.’ . . . We adoptthe majority view that goodwill of a professionalpractice acquired during a marriage is maritalproperty subject to valuation and distribution. . .. We also recognize, however, that ‘under the factsof a given case, a professional practice may haveno goodwill value . . . , and that a case-by-caseinquiry into valuation is preferable in these cases.’”

Florida.

<Thompson v. Thompson, 576 So.2d 267, 270 (Fla.Sup. Ct. 1991): “If a law practice has monetary valueover and above its tangible assets and cases inprogress which is separate and distinct from thepresence and reputation of the individual attorney,then a court should consider the goodwillaccumulated during the marriage as a marital asset.The determination of the existence and value ofgoodwill is a question of fact and should be madeon a case-by-case basis with the assistance of experttestimony.” [Footnote omitted]

Georgia. Miller v Miller, 705 S.E.2d 839, 843 (Ga.2010): "Husband further asserts that the trial courterred when it divided professional goodwill, becausethat asset is not marital property. . . . If by that termhe includes enterprise goodwill and means that noneof the goodwill of a professional practice can bedivided, we resolve this enumeration by followingthe vast majority of jurisdictions and includingenterprise goodwill in the valuation of a professionalpractice as part of marital property. . . . If, as is morelikely, Husband is contending that the trial courtdivided individual goodwill, we resolve thiscontention by assuming for purposes of this appealonly that individual goodwill does not constitutemarital property in Georgia and by observing asexplained below that the trial court, in acceptingthe testimony of Wife's expert, in fact excludedindividual goodwill from its valuation of thepractice."

Hawaii. Antolik v. Harvey, 761 P.2d 305, 318-18(Haw. App. 1988):

According to Prahinski, there are three judicialviews on the question whether the goodwillof the business of a professional that isaccumulated during the marriage is maritalproperty. First, the majority view is that suchgoodwill is a business asset with a determinablevalue and is marital property. Second, somecourts have held that such goodwill is notproperty and thus cannot be marital property.The third view distinguishes between truegoodwill which is a marketable business assetand the goodwill which is dependent on thecontinued presence of the professionalinvolved. The former constitutes maritalproperty, while the latter does not.

We generally agree with the Maryland courtthat it is essential to recognize “the differencebetween true goodwill and an individual'sreputation, which may be characterized as theability to obtain future earnings masqueradingas goodwill.” Prahinski, 75 Md.App. at 134,540 A.2d at 843. Therefore, we adopt the thirdview espoused by the courts of Arkansas(Wilson v. Wilson, 294 Ark. 194, 741 S.W.2d640 (1987)); Maryland (Prahinski, supra); andNebraska (Taylor, supra) with two reservations:1) we question whether the word “reputation”adequately describes what must be excludedto arrive at the true goodwill of the businessand 2) we question whether the third viewadequately provides for situations where thebusiness has the enforceable legal right to theindividual's continued services or to preventthe individual from quitting and competing withit. Whether the intangible assets of the businessof a professional constitute true goodwill ornot should be determined by the trier of facton a case-by-case basis.

Idaho.

<Olsen v. Olsen, 125 Idaho 603, 606, 873 P.2d 857,860 (1994): “This Court has held that ‘good will’is an appropriate factor in determining the value ofa business. ‘The good will of a business is the customwhich it attracts, and the benefits or advantage it


30

receives from constant or habitual customers, andthe probability that old customers will continue tocome to the place.’ . . . The capitalized excessearnings approach is an appropriate means ofarriving at a determination of good will to be utilizedin valuing enterprises such as GMO, OLC andNutri-Plus.” [Citations omitted.]

< Stewart v. Stewart, 152 P.3d 544, 548-89 (Idaho2007):

The question presented by this case is whethergoodwill is an appropriate factor to considerin determining the community property valueof a professional services corporation, an issueof first impression. Any division of propertyin a divorce proceeding begins with thepresumption that all property acquired aftermarriage is community property. . . . The trialcourt reasoned that James acquired all of hisinterest in DCI during marriage and that thevalue of his interest in DCI, including goodwill,was community property.

There seems to be no principled reason to treatthe goodwill of a business differently whenit is a professional services corporation. Theproperty rights of individuals with professionaleducations and licenses do not differ from therights of people engaged in other types ofbusiness. Determining the value of goodwillin small professional services corporations mayindeed be difficult, since Idaho law treatspersonal skill and reputation as separate assetsrather than community property. See Wolfordv. Wolford, 117 Idaho 61, 67, 785 P.2d 625,631 (1990) (holding that personal attributes,including knowledge, skill, and reputation, werenot property, either separate or community);Olsen, 125 Idaho at 606, 873 P.2d at 860(stating that knowledge, background, and talentare personal assets rather than communityproperty). Where a professional business is anindependent entity, however, goodwill iscalculable and divisible in divorce just asgoodwill in any other business. DCI was suchan independent entity, and it was possible forthe magistrate judge to distinguish betweenJames' identity and the separate identity of DCI.A practitioner's knowledge, skill, and

background are personal attributes. To theextent a professional services corporation hasgoodwill value beyond these personal assets,however, that goodwill is community property."[Some citations omitted.]

Illinois. In re Marriage of Talty, 652 N.E.2d 330,334 (1995): “To the extent that goodwill inheresin the business, existing independently of William'spersonal efforts, and will outlast his involvementwith the enterprise, it should be considered an assetof the business, and hence of the marriage. Incontrast, to the extent that goodwill of the businessis personal to William, depends on his efforts, andwill cease when his involvement with the dealershipends, it should not be considered property. ”

Indiana.

<Yoon v. Yoon, 711 N.E.2d 1265, 1268-69 (Ind. Sup.Ct. 1999): “Goodwill has been described as the valueof a business or practice that exceeds the combinedvalue of the net assets used in the business. . . .Goodwill in a professional practice may beattributable to the business enterprise itself by virtueof its existing arrangements with suppliers,customers or others, and its anticipated futurecustomer base due to factors attributable to thebusiness. It may also be attributable to the individualowner's personal skill, training or reputation. Thisdistinction is sometimes reflected in the use of theterm ‘enterprise goodwill,’ as opposed to ‘personalgoodwill.’ Enterprise goodwill ‘is based on theintangible, but generally marketable, existence ina business of established relations with employees,customers and suppliers.’ Allen Parkman, TheTreatment of Professional Goodwill in DivorceProceedings, 18 FAM. L.Q. 213, 215 (1984). Factorsaffecting this goodwill may include a business'slocation, its name recognition, its businessreputation, or a variety of other factors dependingon the business. Ultimately these factors must, inone way or another, contribute to the anticipatedfuture profitability of the business. Enterprisegoodwill is an asset of the business and accordinglyis property that is divisible in a dissolution to theextent that it inheres in the business, independentof any single individual's personal efforts and willoutlast any person's involvement in the business.. . . It is not necessarily marketable in the sense that


31

there is a ready and easily priced market for it, butit is in general transferrable to others and has a valueto others.”

<Bobrow v. Bobrow, 2002 WL 32001420, *20 (Ind.Super. 2002): “Indiana law provides that enterprisegoodwill need not actually be transferred to beincluded in the marital estate-only that it betransferable.”

<Balicki v. Balicki, 837 N.E.2d 532, 538-39 (Ind.App. 2005): "Here, neither Darcy nor Mark presentedany evidence regarding the value of any personalgoodwill in T & M. Mark's appraiser didacknowledge the distinction between personal andenterprise goodwill and believed that if there wasany personal goodwill attached to T & M it wouldhave belonged solely to Mark. Nowhere, however,did the appraiser place a value on that purportedpersonal goodwill; in fact, he never said that therenecessarily was such goodwill. Moreover, Mark didnot question the other two appraisers regardingwhether any part of their valuation included or reliedupon goodwill; neither their written reports nor theirtestimony mentioned goodwill at all, either enterpriseor personal.

“The trial court could not assign a value to Mark'spurported personal goodwill associated with T &M with no evidence in the record to guide such avaluation."

Iowa. In re Marriage of Hogeland, 448 N.W.2d 678,681-82 (Iowa App. 1989): "A professionalcorporation presents difficult problems in valuingbecause its income comes almost exclusively fromthe efforts of the professionals and its value isdependent on continual professional performanceand the cooperation among the shareholders. Thevalue set by the stockholders has been consistentlyset and represents a value at which the shares mustbe sold. Furthermore, stock in a professionalcorporation can only be sold to another professionalof the same discipline. It is doubtful anotherprofessional would purchase the stock unless he orshe felt they could establish a working relationshipwith the other professionals. We determine thecurrent value of the professional stock is at or nearthe stock redemption price. We find the stock valueto be less than $30,000 and find the trial court

overvalued it by $15,000."

Kansas.

<Powell v. Powell, 648 P.2d 218, 223-24 (Kan. Sup.Ct. 1982): “ The question of whether this courtshould adopt the theory that good will of aprofessional practice is a marital asset to be dividedat divorce is, in the final analysis, a public policyissue. . . . We are not persuaded a professionalpractice such as Dr. Powell's has a good will value.The practice is personal to the practitioner. Whenhe or she dies or retires nothing remains. Theprofessional's files and lists of clients are of no useto others. The very nature of a professional practiceis that it is totally dependent upon the professional.We refuse to adopt the theory that good will in aprofessional practice is an asset subject to divisionin a divorce action.”

Kentucky.

<Gomez v. Gomez, 168 S.W.3d 51, 56 (Ky. App.2005): “In this case the trial court found the practiceof Bluegrass Radiology with respect to thosephysicians entering or exiting the practice to besignificant. Eduardo testified and submittedaffidavits from other physicians who had left thepractice that when a physician joined or left thegroup an evaluation of the current accountsreceivable was done. Based on that value a physicianentering or leaving the practice had to pay or waspaid a percentage of the accounts receivable value.No calculation for goodwill was included. The trialcourt found this evidence to be persuasive alongwith evidence that when the group had discontinuedits practice at another hospital it did not receive anypayment for goodwill. The description of how thepractice had historically valued itself is, in essence,a buy-sell agreement. And while buy-sell agreementsor corporate by-laws have been rejected as the basisfor valuing a professional practice where this wouldnot accurately reflect the value of the business,Clark, supra 782 S.W.2d at 60, they may be usedas a factor in reaching a determination regardingthe value of a professional business. . . . And whilewe would have reached a different conclusion onthe evidence presented in this case, the trial court'sdetermination that no goodwill existed because ofthe historical way in which the practice valued itself


32

is supported by substantial evidence.”

<Clark v. Clark, 782 S.W.2d 56,59-60 (Ky. App.1990):

“This Court, in Heller, supra, specifically ruled thatthe goodwill contained in a business or professionalorganization is a factor to be considered in arrivingat the value of the practice. This Court explainedgoodwill in Heller. Specifically, professionalpractices that can be sold for more than the valueof their fixtures and accounts receivable havegoodwill. Heller, supra, at 948. Goodwill in essenceis the expectation that patrons or patients will returnbecause of the reputation of the business or firm.This goodwill has specific pecuniary value. Goodwillhas also been defined as the excess of return in agiven business over the average or norm that couldbe expected for that business. Hanson v. Hanson,738 S.W.2d 429 (Mo.1987). The age, health andprofessional reputation of the practitioner, the natureof the practice, the length of time the practice hasbeen in existence, past profits, comparativeprofessional success, and the value of its other assets,are all factors of goodwill. Poore, supra. It is thegrowing trend of courts in this country to considergoodwill in valuing a corporation. . . . Thus, the trialcourt was correct in considering goodwill.

“The trial court in the case at bar adopted acapitalization of excess earnings method forevaluating the goodwill of this professionalcorporation. Under this method, the goodwill valueis based in part on the amount that the earnings ofthe professional spouse exceed those which wouldhave been earned by a professional with similareducation, experience, and skill as an employee inthe same general area. Poore, supra, 331 S.E.2d at271. Specifically, four steps are involved in thecapitalization of excess earnings method. First, thecourt must ascertain what a professional ofcomparable experience, expertise, education andage would be earning as an employee in the samegeneral locale, determine and average theprofessional's net income before federal and statesincome taxes for a period of approximately fiveyears, compare the actual average with the employeenorm, and multiply the excess by a capitalizationfactor. Taylor v. Taylor, 222 Neb. 721, 386 N.W.2d851 (1986). Dr. Mackin, the appellee's expert who

calculated the value of the goodwill, used these samesteps outlined above. He specifically concentratedon a three-year period of Dr. Clark's earnings. Heused a survey of doctors in appellant's OB-GYNspecialty who had been surveyed by the AmericanMedical Association. Dr. Mackin used a weightedmultiplication factor to gain results that closelycorrelated with the methods used in the survey.Contrary to appellant's assertion, the method involvescalculating the professional's past earnings, not futureearnings. There is no indication from the evidencein the case at bar that the trial court incorrectlyapplied the capitalization of excess earnings method.The findings correctly show the true value of thecorporation's goodwill.

“The capitalization of excess earnings method isa widely accepted method and the most often used.Taylor, supra, 386 N.W.2d at 857; Poore, supra, 331S.E.2d at 271; Levy, supra, 397 A.2d at 380. Thereare a number of acceptable methods which courtsmay adopt. There is no definitive rule or best methodfor valuing goodwill. Poore, supra; Hurley v. Hurley,94 N.M. 641, 615 P.2d 256, 259 (1980). Thedetermination of goodwill is a question of fact ratherthan law, and each case must be determined on itsown facts and circumstances. Poore, supra, Hurley,supra. Thus, the trial court was correct in adoptingand applying the capitalization of excess earningsmethod.”

<Gaskill v. Robbins, 282 S.W.3d 306, 314-15 (Ky.2009):

In this first look at the subject, this Court findsthe reasoning of Yoon and May to becompelling. The distinction between enterpriseand personal goodwill has a rational basis thataccepts the reality of specific businesssituations. In a case such as this one, there canbe little argument that the skill, personality,work ethic, reputation, and relationshipsdeveloped by Gaskill are hers alone and cannotbe sold to a subsequent practitioner. In thismanner, these attributes constitute nonmaritalproperty that will continue with her regardlessof the presence of any spouse. To consider thishighly personal value as marital wouldeffectively attach her future earnings, to whichRobbins has no claim. Further, if he or someone


33

similarly situated were then awardedmaintenance, this would amount to “doubledipping,” and cause a dual inequity to Gaskill.On the other hand, if she were willing to leaveher name on the practice, such as “Gaskill'sOral and Maxillofacial Surgery,” even thoughshe herself did not continue to practice, therearguably could be some reputational reliancethat she would stand behind the quality of thepractice which could have some pecuniaryvalue. Such scenarios do occur, but this is notthe case here.

Additionally, this type of distinction is assusceptible to expert valuation as goodwill onthe whole is. If the value of goodwill can bereasonably determined at all, the amount ofenterprise goodwill, which is all that can beconsidered as marital property, can bedetermined.

Therefore the trial court erred in failing toconsider personal and enterprise goodwill. "

Louisiana.

<La. Rev. Stat.§ 9: 2801.2. Community property;valuation of goodwill

In a proceeding to partition the community,the court may include, in the valuation of anycommunity-owned corporate, commercial, orprofessional business, the goodwill of thebusiness. However, that portion of the goodwillattributable to any personal quality of thespouse awarded the business shall not beincluded in the valuation of a business.

<Pearce v. Pearce, 482 So.2d 108, 111 (La. App.1986), writ denied, 484 So.2d 140 (La. 1986):“Goodwill does not form a part of the corporateassets of a sole medical practitioner. Depner v.Depner, 478 So.2d 532 (La. App. 1st Cir.1985). TheDepner court specified, and we agree:

Professional medical competence is personal to thephysician and cannot be attributed to the corporationbecause it is a personal relationship betweenphysician and patient, not between corporation andpatient. Since goodwill must adhere to some

principal property or right it is therefore dependentupon the property or right of either the corporationor the individual or both. In examining the goodwillin this case we find that it exists independent of thecorporation. Absent the corporation it exists, absentthe physician it does not exist. Therefore it is notan asset of the corporation. The corporation mayprofit from this relationship but it cannot share init. The corporation cannot share in a personalrelationship between physician and patient.

There is no basis on these facts to support Mrs.Pearce's concept and claim for corporate professionalgoodwill. Dr. Pearce's future earnings have nopresent value susceptible of partition as a communityasset. Mrs. Pearce is not entitled to equity in herex-husband's potential earnings by claiming one-halfas goodwill.”

<Rao v. Rao, 2005 WL 2898066,*15 (La. App.2005): “The evidence clearly supports the conclusionthat the hypothetical value postulated by Mrs. Rao'sexpert accountant was largely based upon goodwillattributable to the personal qualities and patientrelationships of Dr. Rao and his fellow stockholderphysicians using the corporate facilities as part oftheir professional practice. Although LouisianaEndoscopy Center, Inc. is not a professional medicalcorporation per se, we conclude it was intended bythe parties to be an extension of a professionalmedical practice group in accordance with the federal"safe harbor" regulations. It is inappropriate to usesuch goodwill attributable to Dr. Rao in the valuationof community corporate stock. . . . Although the issuehas not been specifically addressed by the legislatureand seems to be res nova, we conclude it is likewiseinappropriate to incorporate goodwill attributableto the personal, professional qualities of the otherphysician stockholders in such valuation.” [Footnoteomitted]

Maine. Ahern v. Ahern, 938 A.2d 35, 40 (Me. 2008):"In the present case, the court correctly treated thegoodwill value of Donald's dental practice aspersonal goodwill not subject to distribution asproperty. Both Donald's and Elizabeth's appraisersunequivocally testified that the goodwill value ofthe dental practice was attributable to Donald's skilland reputation. As such, it was not readilytransferable or realizable because it was contingent


34

on future events such as Donald's willingness andability to participate in a sale of the practice. Neitherappraiser treated it as a component of the value ofthe practice arising from the practice's generallymarketable established relationships, name, andbusiness reputation, which are the earmarks ofenterprise goodwill. Although we do not presumeto address all possible permutations of theenterprise/personal goodwill distinction-and wecaution that these categories could prove overlysimplistic when applied to the circumstances of othercases-we have no difficulty in concluding on thefacts before us that the personal goodwill value ofDonald's dental practice is not a species of propertysubject to equitable distribution."

Maryland.

<Prahinski v. Prahinski, 582 A.2d 784, 787-88 (Md.Sup. Ct. 1990): “Because the question of whetherprofessional goodwill is marital property is one offirst impression in Maryland, we found it beneficialto review the decisions of the courts of other stateswhich have addressed the issue. This review revealedthree positions. The view most often followed treatsgoodwill as marital property in all cases.] The nextlargest group considers goodwill to be personal tothe practitioner, and therefore not marital property.Finally, a small group of states requires a case-by--case examination to determine how goodwill shouldbe treated. It is interesting to note that theclassification of a jurisdiction as a communityproperty state or an equitable distribution state isnot determinative of its treatment of goodwill. . .. After reviewing these three alternatives and therationale of their respective supporting cases, weare of the opinion that the goodwill of a solo lawpractice is personal to the individual practitioner.Goodwill in such circumstances is not severable fromthe reputation of the sole practitioner regardless ofthe contributions made to the practice by the spouseor employees. In order for goodwill to be maritalproperty, it must be an asset having a separate valuefrom the reputation of the practitioner. We are notconvinced that the goodwill of a solo law practicecan be separated from the reputation of the attorney.It is the attorney whose name, whether on the dooror stationery, is the embodiment of the practice. Weare cognizant that in this computer age many lawpractices, and in Leo's practice in particular, much

of the research and "form" work is done bynonlawyers. In the final analysis, however, it is theattorney alone who is responsible for the work thatcomes out of the office. Rule of ProfessionalConduct 5.3(c). In the instant case, the responsibilityis solely Leo's, and no amount of work done byMargaret will shift the responsibility to her. Theattorney's signature or affidavit places his seal ofapproval on the work being done and makes theattorney liable for its accuracy and authenticity. Thisprofessional assurance is what might have convincedsome clients to use Leo F.X. Prahinski, Attorney-at-Law, instead of going to a title company to havetheir settlements completed. The assurance wouldend should Leo somehow remove himself from thepractice. Therefore, the goodwill generated by theattorney is personal to him and is not the kind ofasset which can be divided as marital property.

Massachusetts.

<Goldman v. Goldman, 554 N.E.2d 860 (Mass. Ct.App. 1990): "We reject the wife's most significantclaim of error in valuation, the failure of the judgeto allocate any amount to the goodwill of thehusband's professional corporation. The judge waswarranted in accepting the husband's accountant'sopinion that there was no goodwill in this one-manprofessional corporation. For a discussion of theclassification of professional goodwill, see generallyGregory, The Law of Equitable Distribution § 6.03(1989)."

<Champion v. Champion, 764 N.E.2d 898 (2002):"Whether a business takes the form of a corporation,partnership, or sole proprietorship, does not affectthe valuation method that a court may use eventhough some methods may better lend themselvesto particular types of business associations. See 2McCahey, Valuation and Distribution of MaritalProperty § 22.08, at 22-102 & 22-103 (2001). Thewilling buyer/willing seller test is used to determinethe fair market value of a sole proprietorship forFederal estate and gift tax purposes, see id. at §24.07[2], and the guidelines established for suchpurposes are relevant in divorce litigation. [FN5]See 2 Budd & Zupcofska, Massachusetts DivorceLaw Practice Manual § 14.4, at 14-23 (MCLE 2000).In the absence of a determinable market value,experts commonly value a closely held business by


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the assignment of value to the assets of the business,as was done here (inventory and receivables lessliabilities), and by the capitalization of earnings.See Kindregan & Inker, Family Law & Practice §45.8, at 275 (2d ed.1996)."

<Sampson v. Sampson, 369, 816 N.E.2d 999, 1007-08 (Mass. Ct. App. 2004): “In the instant case, unlikeChampion v. Champion, supra, a capitalized incomemethod was utilized by both parties' experts invaluing the wife's business. Such a method requiressubtraction from business income of a reasonablesalary expense for the operator of the business. .. . Without subtraction of a sum representing areasonable salary, there is significant concern thatthe business may be overvalued. Moreover, wheresuch a salary is subtracted, it facilitates theidentification of those portions of a given assetproviding separate bases of property assignment andalimony as articulated by Dalessio v. Dalessio, supra.

“Here, however, the expert whose testimony wascredited by the judge did not adjust directly for theowner-operator's salary. Rather, while recognizingthat an owner-operator's salary should be subtracted,the expert did not do so. Instead, the expert deductedthe salary of the business's sole employee other thanthe wife, a customer services representative whosemuch lower annual salary had ranged from $17,532to $23,264 over a five year period. Withoutexplanation in his report, the expert concluded thatthe customer services representative's salary wasan appropriate salary for a "part-time owner." Theexpert also summarily concluded that the part-timeowner could do the work of the customer servicesrepresentative as well as her own.

“Read closely, other parts of the report raisesignificant questions about the appropriateness ofthe smaller salary deduction. For example, the expertrecognizes only that it "may be possible" to replacethe owner, but not with someone with the owner'sfamiliarity with the agency's operations. The expert'sreport is also inconsistent. On the one hand, itemphasizes the value of the two-person operation,particularly in terms of its ability simultaneouslyto maintain its high quality service, market to newcustomers, and position the agency for future growth;on the other hand, it finds that one part-time ownercan perform all these functions for the small salary

of the current customer services representative. Thejudge does not address these critical and questionableaspects of the expert's valuation. See Redding v.Redding, 398 Mass. 102, 108, 495 N.E.2d 297 (1986)("Any failure in the decision-making process toconsider and explain the effect of an important factmay require reversal of the judgment in order topermit consideration and explanation of the omittedsubject"). The judge simply accepted the $175,000valuation and assigned the husband $175,000 fromthe proceeds of the house to offset the value of thewife's business.

“Furthermore, when considering the wife's incomefor the purposes of determining her need for support,the judge made no adjustments, concluding that shewould earn $41,912 a year. The $41,912 was basedon what she was earning from the business withoutrecognizing that some of that income had beenattributed to the value of the business itself. For thatadditional income, the husband had already beencompensated by providing him with an otherwisedisproportionate share of the proceeds from the saleof the house. See Murphy v. Murphy, 6 A.D.3d 678,775 N.Y.S.2d 370 (2004). Cf. Rattee v. Rattee, 146N.H. at 47-48, 767 A.2d 415. Concerns are therebyraised that either the value of the business wasinflated by artificially deflating the salary of theowner-operator or, conversely, that the wife's incomewas inflated when determining her need for support."

Michigan.

<Kowalesky v. Kowalesky, 384 N.W.2d 112 (Mich.App. 1986): Kowalesky cite: "We believe thatneither Revenue Ruling 59-60 nor any other singlemethod should uniformly be applied in valuing aprofessional practice. Rather, this Court will reviewthe method applied by the trial court, and itsapplication of that method, to determine if the trialcourt's valuation was clearly erroneous. [FN1] . ..FN1. Our discussion should not be read asprohibiting trial courts from using Revenue Ruling59-60 in their decisions if they find it helpful or asprohibiting parties from using it in presenting theircases. Since the trial court in the case at bar did notapply the ruling, we need not decide if doing so iserroneous. We only conclude that use thereof is notrequired."


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<Conger v. Conger, 2000 WL 33388397, *1-2 (Mich.Ct. App. 2000) (unpublished opinion): "The holder'sinterest method is utilized in divorce proceedingsto quantify the present value of a business to itsproprietor. One commentator described this valuationmethod as follows: Applying the holder's interestmeasure of value to a personal service business suchas a professional practice is simply an extension ofthe principles of case specific valuation commonlyused by trial courts in dividing marital assets underequitable distribution principles. Stripped to its core,the holder's interest value means that: (1) If aninterest in a personal service business is worthconsiderably more to the owner (a) under theassumption that he or she will continue to operatethe business--and accordingly, continue to reap thefinancial benefits it provides, than (b) assuming theowner will sell the business to a third party ... (2)then the appropriate value for divorce settlementpurposes, that is, for determining the offsettingamount of cash or value of other property for thenonowner spouse, is the value to the owner, not thelower [fair market value].... [A]doption of theholder's interest measure of value simply brings intoconformity the valuation of personal servicebusinesses with the way most other marital assetshave been valued for years. [Cunningham, EquitableDistribution and Professional Practices: CaseSpecific Approach to Valuation, 73 Mich. B J 666,667 (July 1994).] In the present case, the circuit courtrecognized its own discretion in choosing thevaluation method to apply. The court exercised thatdiscretion by choosing the holder's interest method,reasoning that the closely held corporation was worthmore to defendant than the fair market value of thebusiness, based on the assumption that defendantwould continue to operate the business after theparties' divorce. . . . Defendant next argues thatproper application of the holder's interest methodrequires the circuit court to distinguish betweenpersonal and business goodwill. Although defendantacknowledges that no Michigan court has everdistinguished between business and personalgoodwill, he urges this Court to accept the holdingsof various foreign jurisdictions and to recognize adistinction between personal and business goodwillfor the purpose of business asset valuations. Becausedefendant failed to raise this issue before the trialcourt, it is unpreserved for appeal. Further, we areunpersuaded of the need to adopt a distinction

between personal and business goodwill, forpurposes of valuing business assets in the contextof a divorce action."

Minnesota. Roth v. Roth, 406 N.W.2d 77, 80 (Min.App. 1987): "The trial court found no goodwill valuefor Roth Chiropractic, Ltd. Goodwill value is atransferable property right which is generally definedas the amount a willing buyer would pay for a goingconcern above the book value of the assets. SeeHaugen v. Sundseth, 106 Minn. 129, 132-33, 118N.W. 666, 667 (1908).

“ Each party provided expert testimony on the issue.If expert witnesses give conflicting opinions on thevaluation of assets which have a reasonable basisin fact, it is for the trier of fact to decide, and thedecision will not be overturned on appeal unlessclearly erroneous. . . .Francine Roth's expert admittedthe corporation would have a goodwill value onlyif Lars Roth assisted in a transition after a sale. Hefurther admitted that there was no highly accurateway of determining the dollar value of thecorporation's goodwill because it varies dependingon the personality of the buyer and his or her abilityto work with established patients of the practice.

“The trial court concluded it would be “entirelyspeculative” to assign a goodwill value to thebusiness. We cannot say the trial court's finding wasclearly erroneous." [Citation omitted.]

Mississippi.

<Singley v. Singley, 846 So.2d 1004, 1010 (Miss.2002): “We join the jurisdictions that adhere to theprinciple that goodwill should not be used indetermining the fair market value of a business,subject to equitable division in divorce cases.”

<Watson v. Watson, 882 So.2d 95, 105 (Miss. 2004):"We now hold that, although there is a distinctionbetween ‘personal goodwill’ and ‘business enterprisegoodwill,’ neither should be included in the valuationof a solo professional practice for purposes of adivision of marital assets. In such cases, the two aresimply too interwoven and not divisible."

<Lewis v. Lewis, 54 So.3d 216, 218 (Miss. 2011):“Thus, Mississippi case law prohibits the inclusion


37

of goodwill in valuing a business interest fordistribution as marital property. ‘“[G]oodwill,”whether ‘personal goodwill’ or ‘business enterprisegoodwill’ shall not be included in the valuation of[a car dealership].’ Yelverton, 961 So.2d at 29.‘[G]oodwill is simply not property; thus it cannotbe deemed a divisible marital asset in a divorceaction.’ Singley, 846 So.2d at 1011. Upon remand,the chancellor should value Legacy withoutFN1

considering goodwill.”

<Cox v. Cox, 61 So.3d 927, 937 (Miss. App. 2011):the court held that the wife had not preservedappellate complaint about an expert’s failure toinclude, in the value of a company, the value ofpatents owned by the company, purportedly becausethey were part of goodwill that had to be excludedunder Mississippi law.

Missouri.

<Hanson v. Hanson, 738 S.W.2d 429, 434-35 (Mo.Sup. Ct. 1987): “[G]oodwill is recognized asproperty in this state; that recognition is notdependent on a traditional mercantile setting.Goodwill may exist in both commercial andprofessional entities. Irrespective of the setting inwhich it is found, the meaning of goodwill does notchange. It is property which attaches to and isdependent upon an existing business entity; thereputation and skill of an individual entrepreneur--behe a professional or a traditional businessman--isnot a component of the intangible asset we identifygenerally as goodwill. With the caveats whichfollow, we hold that goodwill in a professionalpractice acquired during a marriage is maritalproperty subject to division in a dissolution ofmarriage proceeding. We define goodwill withina professional setting to mean the value of thepractice which exceeds its tangible assets and whichis the result of the tendency of clients/patients toreturn to and recommend the practice irrespectiveof the reputation of the individual practitioner. Ourunderstanding of goodwill is thus consistent withand no broader than the economic, accounting andlegal definition which existed prior to the adventof Dugan, Fleege and cases reaching similar results.Goodwill is not dependent, however, on the mannerin which the professional practice is organized northe size of the practice itself. We recognize, as is

implied in Geesbreght, 570 S.W.2d at 427, thatgoodwill will more likely exist in larger professionalpractices than in the offices of sole practitioners.This is so because reliance by patients/clients onthe reputation and skill of the individual practitioneris, in most cases, inversely related to the numberof practitioners in the practice. However, to theextent that, for instance, competent evidence existsthat clients/patients will return to the place of thepractice--or recommend it to acquaintances who havenot yet patronized it--irrespective of the presenceof the individual professional, goodwill exists inthe solo practice. Professional goodwill may notbe confused with future earning capacity. We havenot declared future earning capacity to be maritalproperty. We do not now do so. Instead, we leaveto the trial court broad discretion in striking anappropriate balance between husband and wife inthe division of property and any award ofmaintenance.”

Montana. In re Marrige of Stufft, 950 P.2d 1373,1378-79 (Mont. 1997): "Similarly, in this case,Mayla presented the expert testimony of a CPAregarding the valuation of the goodwill associatedwith David's law firm. David maintains that theCPA's appraisal of the Stufft Law Firm's goodwillis inadequate and based on a faulty analysis. TheDistrict Court recognized that David'scross-examination of the CPA revealed someinadequacies in the CPA's appraisal; however, thecourt found that the CPA's appraisal was the mostcredible evidence presented to the court. Davidpresented no expert testimony to contradict that ofMayla's CPA, and maintained that the law firm wasmerely worth the value of its office equipment. Incomparison, the CPA testified that his expertise forthe past ten years has been in the valuation of varioustypes of professional practices. His method ofvaluing the goodwill of professional practices is toconvert the law firm's earnings to a multiple of thegross income, based upon the profitability of thebusiness, and its going concern value based on anongoing customer group. The CPA relied principallyupon the law firm's tax returns to find the fee incomeof the law firm, then applied a goodwill factor of25 percent to the value of the business. The 25percent figure is based upon statistics for similartypes of professional practices where the rate ofretention of clients is comparable. The amount he


38

arrived at from this equation was exclusive of theunderlying assets in the business. The CPA arrivedat a goodwill value for the Stufft Law Firm of$43,605.

“Although David's cross-examination of the CPAraised some relevant questions regarding the methodof valuation, David offered no expert testimonywhich might offer a reasonable alternative to theCPA's valuation of the Stufft Law Firm's goodwill.The District Court, therefore, found that the CPA'sappraisal was the most credible evidence presentedto the court and concluded that the goodwill ofDavid's law firm is valued at $43,605.

“Based on the testimony presented in this case, andthe fact that it was uncontroverted by any comparableexpert testimony from David, we conclude that theDistrict Court's valuation of the goodwill attachedto David's law practice was supported by substantialevidence and was not clearly erroneous."

Nebraska.

<Taylor v. Taylor, 386 N.W.2d 851, 857-58 (1986):“Virtually any income-producing entity, regardlessof the nature of the business organization, may havean asset of recognized value beyond the tangibleassets of such entity, an intangible asset generallycharacterized as goodwill. To the extent that suchintangible asset's value results from recurrentcustomer patronage, there is no question thatgoodwill is property which may be considered asa part of the marital estate for the purpose of adissolution proceeding. . . . However, difficulty mayarise in valuing a professional practice, becausegoodwill is likely to depend on the professionalreputation and continuing presence of a particularindividual in that practice. . . . The particularizedquestion becomes: Is professional goodwill, solelydependent on the presence of a specific individual,marital property within § 42-365 and subject toequitable division in a dissolution proceeding?Courts answering that question in the affirmativehave generally adopted a method of evaluationinvolving capitalization of excess earnings todetermine the extent of goodwill as an asset in aprofessional practice. . . . The concept of professionalgoodwill evanesces when one attempts to distinguishit from future earning capacity. Although a

professional business's good reputation, which isessentially what its goodwill consists of, is certainlya thing of value, we do not believe that it bestowson those who have an ownership interest in thebusiness, an actual, separate property interest. Thereputation of a law firm or some other professionalbusiness is valuable to its individual owners to theextent that it assures continued substantial earningsin the future. It cannot be separately sold or pledgedby the individual owners. The goodwill or reputationof such a business accrues to the benefit of theowners only through increased salary. . . . [W]heregoodwill is a marketable business asset distinct fromthe personal reputation of a particular individual,as is usually the case with many commercialenterprises, that goodwill has an immediatelydiscernible value as an asset of the business and maybe identified as an amount reflected in a sale ortransfer of such business. On the other hand, ifgoodwill depends on the continued presence of aparticular individual, such goodwill, by definition,is not a marketable asset distinct from the individual.Any value which attaches to the entity solely as aresult of personal goodwill represents nothing morethan probable future earning capacity, which,although relevant in determining alimony, is not aproper consideration in dividing marital propertyin a dissolution proceeding.”

Nevada.

<Ford v. Ford, 782 P.2d 1304, 1309 (Nev. 1989):“Goodwill exists in a going professional practice,whether or not a sale is in the offing. . . . . In theinstant case, the district court heard evidence of Dr.Ford's ongoing medical practice. Although Dr. Fordtestified that his practice was not salable, potentialproblems in selling the practice will not eliminatethe goodwill which attaches to it, nor its value asan asset to be considered in equitable distribution.Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1, 6 (1983).Accordingly, the district court properly declinedto follow the restrictive reasoning of Hanson [v.Hanson, 738 S.W.2d 429, 435 (Mo. Sup. Ct. 1987)]and correctly found that goodwill existed in Dr.Ford's surgical practice.”

New Hampshire. In re Watterworth, 821 A.2d 1107,114-15 (N.H. 2003): "Wife next argues that the trialcourt's valuation was erroneous as a matter of law


39

because, by crediting Husband's expert's report, thetrial court failed to calculate a value for goodwill.She observes that “the vast majority of courts whichhave ruled on the question” have held that thegoodwill of a practice is property of value whichshould be included in the amount of assetsdistributed upon the dissolution of marriage. . . .

“We decline to rule as a matter of law that whenassessing the value of a professional practice, thetrial court must always calculate a value forgoodwill. The valuation of a professional practiceis a question of fact, not a question of law. . . . Thedetermination of the existence and value of goodwillis also a question of fact, not law. . . . As Wife'sexpert conceded, “[T]here is no single best approachto valuing a professional association or practice.”. . . . Valuation of each individual practice dependson its particular facts and circumstances. Id. We willnot disturb the trial court's findings in this regardunless they are unsustainable on the record. . . .

“We conclude that the trial court's exercise ofdiscretion in crediting the Husband's expert'svaluation over the Wife's expert's valuation wassustainable. . . . The trial court could havereasonably determined that it was inappropriate toplace a value on the goodwill of the practice wherethe Agreement does not require Husband to executea covenant not to compete upon sale of stock. “Apartfrom a negotiated non-competition agreement, ...Husband would be free to compete by opening anoffice down the street.” . . . Under thesecircumstances, the trial court reasonably could haveconcluded that it was “ doubtful any purchaser wouldpay for any intangible factors in order to purchaseHusband's interest.” [Citations omitted]

New Jersey.

<Dugan v. Dugan, 457 A.2d 1, 6 (N.J. Sup. Ct.1983): “Our limited concern involves the existenceof goodwill as property and its evaluation forpurposes of equitable distribution under N.J.S.A.2A:34-23 with respect to attorneys and in particularindividual practitioners. Though other elements maycontribute to goodwill in the context of aprofessional service, such as locality andspecialization, reputation is at the core. Paulsen,supra, at 10. It does not exist at the time professional

qualifications and a license to practice are obtained.A good reputation is earned after accomplishmentand performance. Field testing is an essentialingredient before goodwill comes into being. Futureearning capacity per se is not goodwill. However,when that future earning capacity has been enhancedbecause reputation leads to probable future patronagefrom existing and potential clients, goodwill mayexist and have value. When that occurs the resultinggoodwill is property subject to equitable distribution.

“We held in Lynn v. Lynn, 91 N.J. 510, 453 A.2d539 (1982), that a license to practice medicine anda medical degree were not property. They reflectedonly a possibility of future earnings. This holdingwas consonant with the proposition in Stern v. Stern,66 N.J. 340, 345, 331 A.2d 257 (1975), that potentialearning capacity is not property within the meaningof the statute, though relevant on the issues ofalimony and of determining equitable proportionsfor the distribution of property.

“When, however, the opportunity provided by thelicense is exercised, then goodwill may come intoexistence. Goodwill is to be differentiated fromearning capacity. It reflects not simply a possibilityof future earnings, but a probability based on existingcircumstances. Enhanced earnings reflected ingoodwill are to be distinguished from a license topractice a profession and an educational degree. Inthat situation the enhanced future earnings are soremote and speculative that the license and degreehave not been deemed to be property. The possibilityof additional earnings is to be distinguished fromthe existence of goodwill in a law practice and theprobability of its continuation. Moreover, unlikethe license and the degree, goodwill is transferableand marketable. Though there is an apparentlimitation on the part of an individual practitionerto sell a law practice, the same is not true in a lawfirm.

“After divorce, the law practice will continue tobenefit from that goodwill as it had during themarriage. Much of the economic value producedduring an attorney's marriage will inhere in thegoodwill of the law practice. It would be inequitableto ignore the contribution of the non-attorney spouseto the development of that economic resource. Anindividual practitioner's inability to sell a law


40

practice does not eliminate existence of goodwilland its value as an asset to be considered in equitabledistribution.”

<Seiler v. Seiler, 706 A.2d 249, 251-252 (N.J. Super.Ct. App. Div. 1998): “Whether the goodwillgenerated by a manager of a "captive insuranceagency" is an asset of the manager or of the insurancecompany which the manager represents has not beenaddressed in New Jersey. Two other jurisdictionshave addressed similar questions, with oppositeresults.

“In In re Marriage of Zeigler, 69 Wash. App. 602,849 P.2d 695, 696 (1993), the husband was a"captive agent" of State Farm Insurance Company.The husband's agreement with State Farm providedthat all sales were limited to State Farm approvedproducts, all policyholder names and informationpertaining to the policies were trade secrets of StateFarm, the agency's leased computer system, software,and records were the sole property of State Farm,the agency's book of policyholders belonged to StateFarm, and the agency could not assign or sell thebook of policyholders to anyone. Ibid. The husbandcontrolled the organization of and paid the expenseof the agency. Ibid. The agreement also containeda no-compete clause. Ibid.

“The court concluded that "the Agency's captivestatus means that any reasonable expectation ofcontinued patronage is indistinguishably intertwinedwith the reputation and goodwill of State Farm."Id. at 698. Because State Farm retained the vitalrights to the policyholders and the stream of renewalsfrom them, any goodwill attached primarily to StateFarm, not its captive agent. Ibid. Thus, there wasno goodwill in the Agency to equitably distribute.Ibid.

“The Colorado Court of Appeals faced a similarsituation in In re the Marriage of Graff, 902 P.2d402, 405 (Colo.Ct.App. 1994), and explicitlydisagreed with Zeigler. Graff also involved a StateFarm agency run by the husband. Id. at 404. Thehusband set his own hours, decided the location ofhis office, hired and fired his own employees andset their salary, selected and purchased his ownsupplies, was characterized in his State Farm contractas an independent contractor, and reported his

income as that of a business on Schedule C of histax return. Ibid. The husband was unable to sell hisrights to the State Farm contract. Ibid. The courtfound that the restrictions on the transfer of theagency did not preclude the existence of goodwill.Id. at 405. Despite the restrictions on the husband'sagency, the facts that he controlled his businessexpenses, that he had stated his interest as a businessownership with the Internal Revenue Service, thatthe net income of the business had increasedsubstantially under the husband's ownership, andthat the husband had no plans to discontinue hisrelationship, supported the trial court's finding thatthe agency had goodwill. Ibid.

“Despite Graff's criticism of Zeigler, we are satisfiedthat the Zeigler ruling is persuasive given the morecomparable facts of Zeigler to this case. Allstatehas established a sales structure to encourageindividual initiative and the opportunity to earnsignificant income. Defendant's ability to earn asubstantial income must not blind us to the fact thathe is an employee of a major insurance companyselling its insurance products in accordance withthe terms and conditions established by his employer.The compensation scheme does not transform aperson in defendant's position into an independententrepreneur. He remains a salesman whose job isto aggressively solicit new clients and retain oldclients.

“Certainly, defendant has much more discretion andcontrol over the conditions of his employment thanmany employees; nevertheless, he remains anemployee with significant limitations imposed onhim by his employer. Unlike an independentinsurance agent, he cannot hire and fire employeeswithout the permission of Allstate. He can sell noproduct other than Allstate. He has no transferrablebook of accounts. Like any employee, he can beterminated.

“Defendant's reputation in the community may havegenerated new business; however, that can be saidfor any salesman. We cannot ignore that the captiveagent, like defendant March 26, 201, is selling aproduct of a major national insurance companywhich has fashioned its own reputation for price,quality and service over many years with theassistance of a formidable national, regional and


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local advertising campaign.”

New Mexico.<Hurley v. Hurley, 615 P.2d 256, 259 (1980),overruled on other grounds, 637 P.2d 564 (1981).:“We believe a sound rule to apply is that althoughthe individual right to practice [accounting] is aproperty right which cannot be classed as communityproperty, the value of the practice as a business atthe time of dissolution of the community iscommunity property. . . . The mere difficulty ofvaluation is not sufficient reason to ignore theexistence of good will. . . . Once its existence andvalue are established, it should be included in anddivided along with other community property. . .. There appears to be no definitive rule for thedetermination of the value of good will. . . . Eachcase must be determined on its own facts andcircumstances. . . . Here there was conflictingtestimony on the value of Dr. Hurley's good will.Dr. Lybecap, an economist, testified on Dr. Hurley'sbehalf and argued that the practice had no good willdue to its nonsaleability. However, the value ofcommunity good will is not necessarily the amountof money that a willing buyer would pay for suchgood will. . . . Mr. Zimmer testified on behalf ofMrs. Hurley. He used a capitalization of excessearnings method in determining a value for the goodwill of Dr. Hurley's practice. Using this method hearrived at a value. We feel that this is a legitimate,although not an exclusive, method of evaluation ofcommunity good will which should have beenconsidered by the trial court.”

< Mitchell v. Mitchell, 719 P.2d 432 (N.M. App.1986): "In Hurley, the supreme court stated thatgoodwill can and does exist in a professional practiceeven though founded on the personal skill andreputation of an individual, and that once theexistence and value of goodwill have beenestablished, it should be included and divided alongwith other community property. In New Mexico,“professional goodwill” has been defined as thedifference between the total value of the professionalassociation or corporation and the aggregate valueof its separable resources and property rights, lessliabilities. Hertz v. Hertz, 99 N.M. 320, 657 P.2d1169 (1983). When goodwill exists, the court hasapproved the capitalization of excess earningsmethod to determine its value. However, it is not

considered an exclusive method. Id. Factors to beconsidered when determining professional goodwillinclude the length of time the professional has beenpracticing, his comparative success, his age andhealth, physical and fixed resources of the practice,and past profits of the practice. Id. Even though thegoodwill may not be a salable asset, it can have valueand should not be ignored. "

New York.

<Moll v. Moll, 722 N.Y.S.2d 732, 735 (N.Y. Sup.Ct. 2001): “The O'Brien analysis is not limited toprofessional licenses and has been used to find amedical board certification (Savasta v. Savasta, 146Misc.2d 101, 549 N.Y.S.2d 544 [S.Ct., NassauCounty]), a law degree (Cronin v. Cronin, 131Misc.2d 879, 502 N.Y.S.2d 368 [S.Ct., NassauCounty]), an accounting degree (Vanasco v. Vanasco,132 Misc.2d 227, 503 N.Y.S.2d 480 [S.Ct., NassauCounty]), a podiatry practice (Morton v. Morton,130 A.D.2d 558, 515 N.Y.S.2d 499), the licensingand certification of a physician's assistant(Morimando v. Morimando, 145 A.D.2d 609, 536N.Y.S.2d 701), a Masters degree in teaching(McGowan v. McGowan, 142 A.D.2d 355, 535N.Y.S.2d 990), a Master's degree and a permanentcertificate in school administration (DiCaprio v.DiCaprio, 162 A.D.2d 944, 556 N.Y.S.2d 1011 [4thDept.1990]), a fellowship in the Society of Actuaries(McAlpine v. McAlpine, 143 Misc.2d 30, 539N.Y.S.2d 680 [S.Ct., Suffolk County] ), the celebritycareer of an opera singer (Elkus v. Elkus, 169 A.D.2d134, 572 N.Y.S.2d 901), the increase in value ofthe wife's career as a model and actress (Golub v.Golub, 139 Misc.2d 440, 527 N.Y.S.2d 946 [S.Ct.,N.Y. County]), the enhanced earning capacityattributed to a former Congressional career (Martinv. Martin, 200 A.D.2d 304, 614 N.Y.S.2d 775) andthe enhanced earning capacity of an investmentbanker (Hougie v. Hougie, 261 A.D.2d 161, 689N.Y.S.2d 490 [1st Dept.1999]) all to constitutemarital property. All of these decisions, like O'Brien,base their finding of marital property on the"enhanced earning capacity" which the "thing ofvalue" provided to its holder. See, e.g., McGowanv. McGowan, 142 A.D.2d 355, 535 N.Y.S.2d 990(2d Dept. 1988).”

<Golub v. Golub, 527 N.Y.S.2d 946,950 (Sup. Ct.


42

New York County 1988): “There seems to be norational basis upon which to distinguish betweena degree, a license, or any other special skill thatgenerates substantial income. In determining thevalue of marital property, all such income generatingassets should be considered if they accumulatedwhile the marriage endured. If one spouse hassacrificed and assisted the other in an effort toincrease that other spouse's earning capacity, itshould make no difference what shape or form thatasset takes so long as it in fact results in an increasedearning capacity. The rationale in both O'Brien andMcGowan for awarding the spouse an economicinterest in the intangible asset seems to have beenbased on a view of the asset as "investments in theeconomic partnership of the marriage and the productof the parties' joint efforts." (McGowan, supra ).

“The noncelebrity spouse should be entitled to ashare of the celebrity spouse's fame, limited, ofcourse, by the degree to which that fame isattributable to the non-celebrity spouse (25 UCLALaw Review, 1095). The source of the fame muststill be traced to the marital efforts.

“Thus, as in O'Brien, if a spouse devotes himselfor herself to the family throughout the marriage,giving up career opportunities, and no liquid assetsexist, the court should compensate this spouse forhis or her contribution enabling him or her to pursuehis or her career and not just a terminablemaintenance award. For example, if instead ofmedical school the spouse went to music school andbecame a celebrated pianist, in equity bothaccomplishments must be treated equally.

“The question, therefore, presented is should O'Brienbe extended so as not to prejudice a spouse who ismarried to a non-professional?

“This court answers the question in the affirmativeand holds that the skills of an artisan, actor,professional athlete or any person whose expertisein his or her career has enabled him or her to becomean exceptional wage earner should be valued asmarital property subject to equitable distribution.Thus, although plaintiff's celebrity status is neither"professional" nor a "license" (Morimando, supra)its increase in value is marital property; despite thedifficulties presented in valuing such property.”

<Kohl v. Kohl, 800 N,.Y.S.2d 348 (Sup. Ct. N.Y.County, 2004), aff’d, 806 N.Y.S.2d 35 (2005): “Thehusband contends that the theoretical value of thesales and consultancy business is $315,622; the wifecontends its value is $1,600,000. These disparateconclusions result from two major valuationdifferences. First, the parties disagree on the amountof reasonable compensation that should be deductedbefore determining the value of the businesscomponent of the husband's earnings. Only earningsover and above reasonable compensation can formthe basis for the valuation of the ownership interestunder the capitalization of earnings methodology.The wife argues that a reasonable compensationfigure is $400,000 while the husband contends itis $750,000. . . . The court finds $400,000 to be thereasonable compensation figure. Both expertwitnesses conceded that no direct, statistical sourceexists for persons holding comparable positions tothat held by the husband. However, the court findsthat the wife's expert presented cogent argumentsto support his assessment of reasonablecompensation. Mr. Johnson considered thecompensation received by the IDI officers, related,statistical sources for corroborative comparison, andthe husband's historical earnings. . . . In contrast,Mr. Friedman gave little justification for how hearrived at his $750,000 figure other than from hisown experience in auditing and valuing businesses.Moreover, he gave few specifics to justify hisconclusion . . . . In sum, the court found Mr.Johnson's assessment of the husband's reasonablecompensation more credible.

“The second significant dispute in the valuationconcerned what capitalization rate should be appliedbased on an assessment of the risk factors of thebusiness. In the capitalization of earnings valuationmethod, after deduction of reasonable compensation,a capitalization rate must be applied to the remainingearnings to determine the value of the business. Bothparties agree that the capitalization rate here shouldbe determined using the "build-up method". Thisapproach adds to a risk free investment rate allrelevant risk factors, including for the overall market,the particular industry, and the specific businessbeing valued, to ultimately determine the risk ahypothetical buyer of the business would have toassume. From this number, the valuator can calculatethe rate of return a buyer would want to receive to


43

assume that risk, thereby arriving at the fair marketvalue of the business. The wife's expert concludedthat a 25% capitalization rate (capitalization multipleof 4) was appropriate; the husband's expert proffereda capitalization rate of 44.3% (capitalization multipleof 2.25). . . .

“In performing the build up of the risk factors, theexperts were in general agreement through assessingthe historical risk premium (the risk factors froma risk free investment through a small capitalizedcorporation). The major discrepancies arose indetermining the risk factors for the specific businessbeing valued. Both experts conceded that thedetermination of those risk factors is largelysubjective . . . . The court concludes that theassessment by Mr. Johnson is more credible andsupported by the evidence.

FN9. Through that calculation, the wife 'sexpert found a 19% rate whereas the husband'sexpert found a 17.3% rate. . . .

“The main difference arises from Mr. Friedman'sassignment of a 32% risk factor for dependence upona key person, that being the husband. The court findsthat the assignment of such a high risk factor is notreflected in the reality of the business during theperiod subject to valuation. For instance, Mr.Friedman assigned as a high risk factor the stabilityof the business's earnings. He contended that theearnings of the business are entirely dependent onthe husband and the real estate industry. . . . Whilethis is true, during the period subject to valuation,the husband's earnings increased each year lendingweight to the conclusion that the business has stableearnings. Similarly, Mr. Friedman included as a highrisk factor the fact that there is no continuity ofcustomer base. In point of fact, the husband oftenhad repeat customers . . . and, both historically andthrough the valuation period, was able to obtain newjobs without any evidence of difficulty. In addition,although Mr. Friedman noted that the growthpotential of the company might be a risk factor, heconceded that the husband's earnings had increasedduring the period under valuation. Thus, not onlywas this not a risk factor (Mr. Friedman subtracted5% from his risk assessment because of thebusiness's growth), but lent support to the conclusionthat Mr. Friedman overstated the other risk factors.

. . .

“Mr. Johnson acknowledged that certain risk factorsexist (e.g. key-person, size premium, customerconcentration, etc.) as well as lack of marketability.However, the court finds Mr. Johnson's assessmentthat a hypothetical buyer would seek to recapturethe purchase price in 4 years reasonable not onlywith respect to the accounting methodology heemployed, but also as supported by the evidenceof the success of the business. . . . [Record referencesand footnotes omitted]”

<White v. White, 611 N.Y.S.2d 951, 953 (N.Y.Supreme Court, Appellate Division 1994): “The firstpoint of contention centers on Supreme Court'sevaluation of defendant's interest in his law firmand the distribution of 15% of this asset to plaintiff.Supreme Court accepted the opinion of plaintiff'sexpert that, pursuant to the capitalization of earningsapproach, defendant's interest as of April 2, 1990had a value of $431,000. In contrast, defendant'sexpert, utilizing the net asset approach, fixed thevalue at $19,409. Parenthetically, we note thatbecause defendant's professional practice is wellestablished, the valuation of his license is not anissue as it is deemed to have merged and beensubsumed by the practice (see, McSparron v.McSparron, 190 A.D.2d 74, 80-81, 597 N.Y.S.2d743).

“The capitalization of earnings method is appropriateto use when evaluating a law practice and is apt tomore accurately reflect its value than the net assetmethod (see, Nehorayoff v. Nehorayoff, 108 Misc.2d311, 437 N.Y.S.2d 584; Annotation, Valuation ofGoodwill in Law Practice for Purposes of DivorceCourt's Property Distribution, 77 ALR4th 683). Thus,Supreme Court did not abuse its discretion inrejecting defendant's evaluation.”

<Nehorayoff v. Nehorayoff, 437 N.Y.S.2d 584, 588,591 (Sup. Ct. Nassau Cty. 1981): “The mostvigorously contested issue in this case was the valueof Dr. Nehorayoff's half interest in Plaza Women'sMedical Realty, Inc., a closely held corporationprimarily engaged in the termination of pregnanciesand related laboratory work. Each side called anexpert witness as to value. Mrs. Nehorayoff's experttestified that in his expert opinion the value of the


44

half interest was in the range of $675,000 to$1,350,000. The Doctor's expert testified that in hisexpert opinion the corporation had no value. Thevaluation of closely held and professionalcorporations is a difficult problem confronting thecourts with increasing frequency. To date noconsistent approach to valuation has been arrivedat. . . . Taking into consideration the actual andimputed earnings of the enterprise, the value of Dr.Nehorayoff's interest in Plaza Women's MedicalRealty, Inc. in terms of the capitalization of netearnings is $200,000.”

North Carolina.

<Poore v. Poore, 331 S.E.2d 266, 27071 (N.C. App.1985): "The valuation of each individual practicewill depend on its particular facts and circumstances.. . . In valuing a professional practice, a court shouldconsider the following components of the practice:(a) its fixed assets including cash, furniture,equipment, and other supplies; (b) its other assetsincluding accounts receivable and the value of workin progress; (c) its goodwill, if any; and (d) itsliabilities. . . . The component of a professionalpractice which is the most controversial and difficultto value, and yet often the most valuable, is itsgoodwill. . . . Goodwill is commonly defined as theexpectation of continued public patronage. . . . Itis an intangible asset which defies precise definitionand valuation. . . .It is clear, however, that goodwillexists, that it has value, and that it has limitedmarketability. See Jewel Box Stores v. Morrow, 272N.C. 659, 158 S.E.2d 840 (1968) (the execution ofa covenant not to compete, in connection with thesale of a business, is essentially a sale of the goodwillof the business).

“Although some courts have refused to considergoodwill in valuing a professional practice, . . thevast majority of courts which have ruled on thequestion have held that the goodwill of a professionalpractice is property of value which should beincluded among the assets distributed upon thedissolution of marriage. . . .. We agree that goodwillis an asset that must be valued and considered indetermining the value of a professional practice forpurposes of equitable distribution. . . . We must nowdetermine whether the court below erred in valuingthe professional association, including its goodwill.

“There is no set rule for determining the value ofthe goodwill of a professional practice; rather, eachcase must be determined in light of its own particularfacts. . . . The determination of the existence andvalue of goodwill is a question of fact and not oflaw, . . . and should be made with the aid of experttestimony. . . . Courts are cautioned to valuegoodwill ‘with great care, for the individualpractitioner will be forced to pay the ex-spouse“tangible” dollars for an intangible asset at a valueconcededly arrived at on the basis of some uncertainelements.’ . . . Among the factors which may affectthe value of goodwill and which therefore arerelevant in valuing it are the age, health, andprofessional reputation of the practitioner, the natureof the practice, the length of time the practice hasbeen in existence, its past profits, its comparativeprofessional success, and the value of its other assets.. . ."

<Swaney v. Swaney, 2011 WL 6574878 (N.C. App.2011) (unpublished opinion not constitutingcontrolling authority): “As we have alreadyindicated, the net value of a business includesgoodwill, which ‘ must be valued and consideredin determining the value of a [business] for purposesof equitable distribution.’ Poore, 75 N.C.App. at420–21, 331 S.E.2d at 271 (emphasis added). ‘Anylegitimate method of valuation that measures thepresent value of goodwill by taking into accountpast results, and not the postmarital efforts of theprofessional spouse, is a proper method of valuinggoodwill.’ Id. at 421, 331 S.E.2d at 271. A widelyaccepted method for determining the value of abusiness' goodwill is ‘the price that a willing buyerwould pay to a willing seller for’ that business. Id.”

North Dakota.

<Sommers v. Sommers, 660 N.W.2d 586 (N.D.2003): "We have indicated that the goodwill of adivorcing party's business interests may beconsidered in valuing the parties' marital property."

<Nuveen v. Nuveen, 795 N.W.2d 308, 313 (N.D.2011): “The fair market value of a business isordinarily the proper method for valuing propertyin a divorce. . . . ‘Fair market value is the price abuyer is willing to pay and the seller is willing to


45

accept under circumstances that do not amount tocoercion.’ . . . When making a valuation of aprofessional corporation, the goodwill of a businessmay be considered, and ‘the trial court must includeat a minimum the interest in the office equipment,furniture, fixtures, and the accounts receivable.’”

Ohio.

<Hardy v. Hardy, 2005 WL 2660627, *5 (Ohio Ct.App. 2005): “The parties both offered expert opinionevidence concerning the value of the consultingbusiness. Nancy's expert opined that the businessis worth $140,000, using past revenues and amultiplier factor to arrive at projected futurerevenues on which her opinion was based.Lawrence's expert valued the business on the basisof its capital assets, as well as goodwill and futurepotential, and opined that the value of the businessis only nominal. . . . The magistrate found that thevaluation provided in the opinion of Lawrence'sexpert was more reliable. Nancy objected. The trialcourt overruled the objection, stating: ‘The courtfinds that defendant's business, L.R. Hardy &Associates, has little or no market value. Thebusiness is effectively a consulting businessproviding personal service to various defensecontractors. The business' only product is thepersonal service provided by Mr. Hardy. There areno capital assets in the business; he has no clientbase; and he has no individual contracts with anyfirm that could be sold. There are no appreciablebusiness assets to be divided.’ . . . .Lawrence'sconsulting business is marital property, to the extentthat it represents an ‘interest’ Lawrence has that heacquired during the marriage. . . . Like a professionalpractice, its value when the marriage terminates maybe determined in relation to anticipated futurerevenues. See Barone v. Barone, (Sept. 1, 2001),Lucas App. NO. L-98-1328. However, that dependson the particular facts, including the nature of theactivity as well as the owner/spouse's expectedcapacity to generate revenues. Those are questionsof fact for the trial court to determine. Lawrencewas sixty-nine years of age at the time of the divorce.The future revenues of his consulting business arelimited by his age and the nature of the business.The trial court could, in its discretion, find thatevidence on which Nancy's expert relied is tootenuous to support a finding of any particular value,

and instead adopt the valuation offered byLawrence's expert. [Paragraph numbers omitted]

<Goswami v. Goswami, 787 N.E.2d 26, 33 (Ohio 2003):

If a business is included as part of the assetsin a divorce proceeding, the goodwill of thebusiness may usually be treated as part of themarital assets. Kahn v. Kahn (1987), 42 OhioApp.3d 61, 64, 536 N.E.2d 678. There are someproblems, though, with valuing the goodwillof a one-person medical practice because anygoodwill would be personal to the individualdoctor such that it would be unalienable anduntransferable. See, e.g., Fexa v. Fexa (1990),396 Pa.Super. 481, 578 A.2d 1314.

{¶ 41} Assuming that appellant's medicalpractice had goodwill associated with it, thevalue of that goodwill was incorporated intothe overall valuation of his medical practice.The “capitalization of income” valuationmethod is used to value an entire business anddoes not attempt to value the individual assetsof the business. 1 Fishman, Pratt, Griffith,Wilson, Guide to Business Valuations (2dEd.1992) 2–19, Section 220.20; Goldberg,Valuation of Divorce Assets (1984) 142 f.,Section 6.6; Turner, Equitable Distribution ofProperty (2d Ed.1994) 542, Section 7.08.Because appellant's entire business was givena value, there is no reason to separately valuethe goodwill, if indeed there is any goodwillvalue.”

<Clymer v. Clymer, 2000 WL 1357911, *2-3 (OhioCt. App. 2000):

Goodwill is an integral part of the valuationof a professional business in a divorceproceeding. Kahn v. Kahn (1987), 42 OhioApp.3d 61, 64. "The comprehensive definitionof 'goodwill' is 'the advantage or benefit, whichis acquired by an establishment, beyond themere value of the capital, stock, funds, orproperty employed therein, in consequence ofthe general public patronage andencouragement, which it receives from constantor habitual customers, on account of its local


46

position, or common celebrity, or reputationfor skill or affluence, or punctuality, or fromother accidental circumstances or necessities,or even from ancient partialities or prejudices.'" Spayd v. Turner, Granzow & Hollenkamp(1985), 19 Ohio St.3d 55, 59.

The experts' differing values of plaintiff's lawpractice arise from their assessment of thegoodwill of the practice. Several methods forvaluing professional goodwill are recognized,including: (1) capitalization of net profits (orstraight capitalization), (2) capitalization ofexcess earnings, (3) the IRS meth od (knownas the "formula" approach), which subtractsa reasonable rate of return on tangible assetsand salary from average earnings, (4) marketvalue, and (5) buy-sell agreements. Kell v. Kell(Dec. 14, 1993), Ross App. No. 92CA-1931,unreported. Nesser employed the "excessearnings" method to calculate the goodwill ofplaintiff's law practice. In arriving at theconclusion that the practice had no goodwill,Nesser used plaintiff's actual earnings for eachyear between 1981 and 1984, initiallysubtracted the estimated return on assets, andthen subtracted the estimated earnings forplaintiff's peer group of similarly situatedattorneys. The estimated earnings of plaintiff'speer group was calculated with the help of theAltman & Weil and OSBA reports because thetrial court's earlier calculation was criticizedin Clymer III for not using factors to make thevalue representative of plaintiff's peer group.With those reports, the trial court's calculation,premised on Nesser's testimony, considers thefactors Clymer III indicated would make thereasonable compensation calculation moreaccurate, such as the attorney's area of practice,firm size, experience and population where thepractice is located.

Nesser then weighed the difference betweenactual and reasonable earnings, less the returnon assets, to arrive at an excess earningsnumber, that then was capitalized to arrive atthe amount of goodwill possessed bydefendant's law practice. In Nesser'scalculations, plaintiff made less than the peergroup Nesser compared him to in each year

and therefore had no excess earnings and,accordingly, no goodwill. . . . The trial courtdid not abuse its discretion in adopting Nesser'sanalysis over the analysis of defendant'sexpert.”

<Kahn v. Kahn, 536 N.E.2d 678, 682 (Ohio Ct. App.1987): “Another contention of the appellant is thatby placing a value on the goodwill of a professionalpractice that we are placing a value on thedefendant's medical degree. The Ohio Supreme Courthas told us that "a professional degree cannot becategorized as 'property.' " . . . Looking back at thedefinitions of "goodwill" previously presented showsthat much more than the degree is valued in agoodwill calculation. Goodwill is an intangible valueof an ongoing medical practice. An ongoing soleprofessional medical practice, by definition, requiresa professional physician with a degree, since it wouldbe both unethical and illegal to have an uneducatedor unlicensed doctor practicing medicine as solepractitioner. Furthermore, the value of goodwill canbe calculated independently of the value of thedegree. "A professional may not have any goodwill;for example, he may just be starting his practice orhe may be a salaried employee. Yet, his professionaldegree and his license to practice are of substantialeconomic benefit to him." Kennedy & Thomas,Putting a Value on: Education and ProfessionalGoodwill (1979), 2 Family Advocate 3, 5. Sincegoodwill can be calculated independently of thevalue of the degree it is erroneous to assume thatby placing a value on the goodwill of a medicalpractice that we are treating the medical degree asmarital property. . . . We, like the trial court,recognize that goodwill is an integral part of thevaluation of a professional business in a divorceproceeding.

Oklahoma.

<Jennifer D. Ary-Hogue, Peace on Earth, Goodwillin Divorce: Revisiting Travis in Light of Oklahoma'sRevised Ethical Rule Allowing the Sale of LawPractice Goodwill, 61 OKLA. L. REV. 585 (2008).

<Traczyk v. Traczyk, 891 P.2d 1277, 1280 (Okla.Sup. Ct. 1995): "We find that the trial court did noterr in considering the goodwill of the Bethany FootClinic as a factor in determining the value of the


47

clinic as marital property. The goodwill of theBethany Foot Clinic is distinct from the personalreputation of Dr. Traczyk. Although many of Dr.Traczyk's patients would not continue to patronizethe Bethany Foot Clinic were Dr. Traczyk to sellto another podiatrist, competent evidence indicatesthat many would stay. Indeed, Dr. Traczyk may usethe goodwill as a selling point to potentialpurchasers."

<Travis v. Travis, 795 P.2d 96, 100 (Okla. Sup. Ct.1990): “This Court has previously found that a lawpractice can be considered jointly acquired propertysubject to division as part of a marital estate. . . .In contrast to the physical assets of a law office, thereputation of the lawyer cannot be purchased byanother seeking to acquire an established lawpractice. If Mr. Travis were to cease his practiceof law, he would not be free to sell his files to asucceeding lawyer because such a sale would violateRule 1.8(j) of the Rules of Professional Conductwhich prohibits a lawyer acquiring a proprietaryinterest in a lawsuit. This general rule has its basisin common law champerty and maintenance. See,Comment, Rule 1.8. Mr. Travis would only be ableto divide a fee with a succeeding lawyer dependingupon the client's agreement to retain the succeedinglawyer, the client's agreement in writing to a feedivision, both lawyers' assuming joint responsibilityfor the representation, and the total fee beingreasonable. Rule 1.5, Rules of Professional Conduct,5 O.S. Supp. 1989, ch. 1, app. 3-A. Establishingearning capacity is much less speculative than tryingto establish a good will value of a law practice.Projected earnings can be considered in establishingsupport alimony which, unlike property divisionof good will, may be adjusted upward or downwardat a later date. . . . Because Oklahoma law allowssuch an adjustment, and because law practices cannotbe bought and sold as can other professionalpractices, we conclude that a consideration of theearning capacity of a lawyer and subsequent settingof support alimony based upon that earning capacityis more equitable than the speculative division ofgood will in the law practice of a sole practitioner.”[Citations omitted]

Oregon. Slater and Slater, 245 P.3d 676, 682-83(2010), rev. den., 256 P.3d 121 (Or. App. 2011):“Taken together, our cases demonstrate that, for

purposes of valuation in this context, cognizable‘goodwill’ refers to the value of a business ‘overand above the value of its assets’ irrespective of theowner's or professional's continued ‘personalservices,’ . . . or ‘personality or reputation,’ . . . .Accordingly, where a business has no value aboveand beyond its assets absent ‘the owner personallypromis[ing] his [or her] services to accompany thesale of the business,’ . . . there is no goodwill. . .. At the same time, a closely held business may havegoodwill value where the ‘success or failure,’ . . .of that business does not rest entirely on the businessowner's personal services, personality, or reputation.. . .” [Citations omitted.]

Pennsylvania.

<Solomon v. Solomon, 611 A.2d 686, 691-92 (Pa.Sup. Ct. 1992): “This is the first time this Court hasbeen presented with the propriety of including thevalue of the good will of a business as a marital asset,where good will was not subject to the partnershipagreement itself. Generally, we agree with theSuperior Court that if a business qualifies as maritalproperty pursuant to 23 P.S. § 401(e), then to theextent that such business has established good will,such value should be considered for purposes ofequitable distribution.” [Footnote omitted]

<Butler v. Butler, 663 A.2d 148, 155 (Pa. 1995):“As we held in Solomon, in determining whethergoodwill should be valued for purposes of equitabledistribution the courts must look to the precise natureof that goodwill. That goodwill value which isintrinsically tied to the attributes and/or skills ofcertain individuals is not subject to equitabledistribution because the value thereof does notsurvive the disassociation of those individuals fromthe business. . . .In other words, where such goodwillis attributable solely to an individual's attributes itcannot be viewed as a value of the business as awhole. On the other hand, as this Court also notedin Solomon, goodwill which is wholly attributableto the business itself is subject to distribution.”

<Baker v. Baker, 861 A.2d 298, 303(Pa. Super.2004): “Wife's expert testified the goodwill heattributed to the value of the practice was not basedon personal characteristics of Husband. Rather thegoodwill value the expert attributed to the practice


48

was based on criteria such as location and customerlists. This aspect of the practice's goodwill wasproperly subject to equitable distribution. . . .However, the determination of whether a businesshas established good will is controlled by the natureof the business itself. Since good will is essentiallypositive reputation, the factors that have given riseto the positive reputation will necessarily controlthe determination of whether good will exists forpurposes of equitable distribution. If the positivereputation is due only to the reputation of a singleindividual as opposed to the business entity ingeneral, then the business has no good will forpurposes of equitable distribution. The value is thatof the single individual and not the entity in general,and this value is not capable of surviving thedisassociation of the individual from the businessentity. However, as the single individual'scontributions become less substantial, the goodreputation enjoyed by a business entity becomesless related to the single individual and more aproduct of the business entity in general, and thus,more capable of surviving the disassociation of thesingle individual. In the case sub judice, the recordfacts indicate that William was engaged as a solepractitioner of veterinary medicine specializing inthe breeding of horses. The Superior Courtdetermined that given the substantial record evidencethat the success of William's business was dependentsolely on his own expertise, the trial court did notabuse its discretion in finding that William's businesshad no good will value.

“Kathleen claims that the reputation of the businesswas based not only upon William's professionalcontributions, but also upon the contributions ofother members of the staff, which includedveterinarians, together with the general facilitiesand commodities of the business unrelated toveterinary practice or the breeding of horses. Wedisagree.

“It is evident that the trial court paid great attentionto the conflicting evidence concerning good willvalue. The trial court found particularly persuasivethe testimony of numerous clients concerning theimportance of William's professional expertise insustaining the various aspects of the business. Incontrast, the trial court was not persuaded byKathleen's claim that the other commodities of the

business and the existence of other staff veterinarianssupported a finding of good will separate and apartfrom William's professional reputation. The trialcourt specifically found that the contributions ofother veterinarians were minor in that only tworecently graduated veterinarians were employed fora brief period of time and they brought no newbusiness to the practice. Accordingly, the trial courtfound that William's business possessed no goodwill value. As there was more than sufficientevidence to support a finding that William's businesspossessed no good will value outside his professionalreputation, we hold that the Superior Court did notabuse its discretion in affirming the decision of thetrial court on this issue.”

Rhode Island.

<Becker v. Perkins-Becker, 669 A.2d 524, 528(R.I.1996): “The capitalization of earnings of aprofessional practice on the basis of the servicesof a single individual in order to arrive at a good-willfactor in ascertaining the value of such practice isimproper as a matter of law.”

<Moretti v. Moretti, 766 A.2d 925, 927-28 (R.I. Sup.Ct. 2001): "In evaluating goodwill as a companyasset, it is important to distinguish between personaland enterprise goodwill. ‘Enterprise goodwill is anasset of the business and accordingly is propertythat is divisible in a dissolution to the extent thatit inheres in the business, independent of any singleindividual's personal efforts and will outlast anyperson's involvement in the business.’ Yoon v. Yoon,711 N.E.2d 1265, 1268-69 (Ind.1999).

“In the case at bar, it does not appear that eitherexpert attempted to evaluate enterprise goodwill,as opposed to personal goodwill, which dependedupon defendant's continued involvement in thebusiness. We are of the opinion that this case shouldbe remanded to the Family Court so that enterprisegoodwill, as opposed to personal goodwill, may beevaluated and applied to the overall value ofTangleridge, taking into account the risk factor thatwould be applicable if defendant left the business."

South Carolina.

<Donahue v. Donahue, 384 S.E.2d 741 (S.C. Sup.


49

Ct. 1989): “The decision as to the inclusion ofgoodwill of a professional practice in a marital estateis, "in the final analysis, a public policy issue." . .. The following is a well-recognized definition ofgoodwill:

Goodwill may be properly enough describedto be the advantage or benefit which is acquiredby an establishment beyond the mere value ofthe capital, stock, funds, or property employedtherein, in consequence of the general publicpatronage and encouragement which it receivesfrom constant or habitual customers, on accountof its local position or common celebrity, orreputation for skill or affluence, or punctuality,or from other accidental circumstances ornecessities, or even from ancient partialitiesor prejudices.

“More specifically, professional goodwill has beenheld to have the following attributes:

It attaches to the person of the professional manor woman as a result of confidence in his orher skill and ability. [cite omitted] It does notpossess value or constitute an asset separateand apart from the professional's person, orfrom his individual ability to practice hisprofession. It would be extinguished in theevent of the professional's death, retirementor disablement.

. . . ‘The very nature of a professional practiceis that it is totally dependent upon theprofessional.’ [citation omitted] The definitionsset forth above indicate the intangible natureof the goodwill asset. It is this intangibilitywhich inevitably results in a speculativevaluation. The basis of this Court's concern inCasey was the speculative element involvedin valuation of goodwill. In light of thedefinitions above, we see similar problems inthe valuation of goodwill of a professionalpractice. Accordingly, we hold that the familycourt erred in placing a value upon, andconsequently dividing the goodwill of thehusband's dental practice.”); Casey v. Casey,362 S.E.2d 6, 6-7 (S.C. 1987) (“Courts fromother jurisdictions are divided as to whethergoodwill is marital property divisible upon

divorce. . . . The issue is one of first impressionin this state. . . . When the goodwill in abusiness is dependent upon the owner's futureearnings, it is too speculative for inclusion inthe marital estate. . . . Moreover, these futureearnings are accounted for in an award ofalimony. . . . We hold that goodwill inHusband's fireworks business does notconstitute marital property subject to equitabledistribution.”). [citations omitted]

South Dakota. Endres v. Endres, 532N.W.2d 65,69 (S. D. Sup. Ct. 1995) (approving capitalizationof excess earnings to value goodwill): "We need notconsider whether professional goodwill is maritalproperty for purposes of division in a divorce actionto decide the issues presented here. We note the trialcourt found that the concrete business was acommercial venture and that sufficient evidenceexisted to assign a value for goodwill. The trial courtheard evidence from both parties' expert witnessesregarding Watertown Concrete's sales volume overa period of several years and how these figurescompared to market share in the local trade area.The business' financial records and operating historywere also put into evidence. Finally, the court heardevidence regarding Watertown Concrete's reputationin the community. We do not find error in the court'sdecision to include goodwill in the valuation of theparties' concrete business." [Emphasis in original.]

Tennessee.

<Harmon v. Harmon, 2000 WL 286718, *7 (Ten.App. March 2, 2000): "Subsequent cases have noted,however, that both Smith and Hazard involved aprofessional practice in which the “value as a goingconcern and its business reputation were inseparablefrom the professional reputation of the [divorcingspouse] practitioners.” York at *3. In a largerprofessional association which does not depend onthe reputation of a single practitioner, Tennesseecourts have not limited the valuation to the valueof the physical assets and the accounts receivable."

<Kerce v. Kerce, 2003 WL 22037526, *4 (Tenn.App. 2003): “In valuing a professional practice ithas long been held that good will of the business,dependent as it is on the person and personality of


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the spouse practicing the profession, is not a partof the marital estate.”

<Smith v. Smith, 709 S.W.2d 588, 591 (Tenn. App.1985): “The next question is what elements of aprofession are taken into account in arriving at thevalue of that profession for purposes of making anequitable division. The physical assets, of course,such as the furniture, buildings, library, etc., arethings that have an ascertainable value and shouldbe taken into account. The accounts receivable,properly weighted, should have a definite value. Themost troublesome question involves the good willof the firm. Is that an asset that can be consideredpart of the marital property? Other states are spliton the question, although a clear majority hold thatthe good will of the firm should be considered andevaluated in making a division of the maritalproperty. See Annot. 52 A.L.R.3d 1344. We arenot persuaded, however, that this state should adoptthe rule that professional good will is a part of themarital estate. We find the position taken by theWisconsin Court of Appeals in Holbrook v.Holbrook, 103 Wis.2d 327, 309 N.W.2d 343(App.1981) to be persuasive.”

Texas.

<Nail v. Nail, 486 S.W.2d 761 (Tex. 1972): “[I]tcannot be said that the accrued good will in themedical practice of Dr. Nail was an earned or vestedproperty right at the time of the divorce or that itqualifies as property subject to division by decreeof the court. It did not possess value or constitutean asset separate and apart from his person, or fromhis individual ability to practice his profession. Itwould be extinguished in event of his death, orretirement, or disablement, as well as in event ofthe sale of his practice or the loss of his patients,whatever the cause.”

<Geesbreght v. Geesbreght, 570 S.W.2d 427, 435-36(Tex. Civ. App.--Fort Worth 1978, writ dism'd):“‘Good will’ is sometimes difficult to define. In apersonal service enterprise such as that of aprofessional person or firm, there is a differencein what it means as applied to ‘John Doe’ and asapplied to ‘The Doe Corporation’ or ‘The DoeCompany’. If ‘John Doe’ builds up a reputation forservice it is personal to him. If ‘The Doe Company’

builds up a reputation for service there may be achange in personnel performing the service upona sale of its business but the sale of such businessnaturally involves the right to continue in businessas "The Doe Company". The "good will" built upby the company would continue for a time and wouldlast while the new management, performing the samepersonal services, would at least have the opportunityto justify confidence in such management while itattempted to retain the ‘good will’ of customerclients of the former operators. At least theopportunity to have time to try to preserve the ‘goodwill’ already existent and to use it as an entranceinto the identical field of operations in a personalservice type of business would be present wherethe name of the business is a company name asdistinguished from the name of an individual.Therein does it have value, plus the value of theopportunity to justify confidence in the newmanagement by the customer/clients of thepredecessor owner(s). It is as applied to the foregoingthat we consider Emergency Medicine to possesswhat we treat as ‘good will’ as part of its worth andvalue under the circumstances of this case, andtherefore an asset which would have value to someextent apart from John's person as a professionalpractitioner.”

<Austin v. Austin, 619 S.W.2d 290, 291-92 (Tex.Civ. App.--Austin 1981, no writ): “The good willof an ongoing, noncorporate, professional practiceis not the type of property that is divisible ascommunity property in a divorce proceeding. [citingNail.] . . . When good will is not attached to theperson of the professional man or woman, it isproperty that may be divided as community property.[citing Geesbreght.] . . . Once a professional practiceis sold, the good will is no longer attached to theperson of the professional man or woman. Theseller's actions will no longer have significant effecton the good will. The value of the good will is fixedand it is now property that may be divided ascommunity property.”

Utah.

<Sorensen v. Sorensen, 839 P.2d 774, 775 (UtahSup. Ct. 1992): “It would not be equitable to requiredhim to pay his wife part of the value ascribed to thegoodwill, because the goodwill of a sole practitioner


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is nothing more than his or her reputation forcompetency. . . . We believe . . . that unless theprofessional retires and his practice is sold, hisreputation should not be treated differently froma professional degree or an advanced degree: bothsimply enhance the earning ability of the holder.”

<Karlsson v. Karlsson, 2005 WL 1119651 (UtahApp. 2005): “Karlsson argues that this case fallswithin the scope of Sorensen. Karlsson, however,has not demonstrated that the goodwill of thecatering business is solely attributable to hispersonal, professional reputation. See id. at 775.Rather, the catering business was cofounded by theparties and both worked in the business. Thus, wesee no problem in the award of a limited amountfor the goodwill of the catering business.”

<Stevens v. Stevens, 754 P.2d 952, 956 (Utah App.1988): “The presence of good will may be evidencedby proof of an on-going competitive enterprisehaving continuity of place and commercial nameand enjoying a favorable reputation founded uponprior sales of goods or services. . . . The presenceor absence of good will depends upon the facts andcircumstances of the particular case. . . . Whereappropriate, the good will value of a businessenterprise is subject to equitable distribution. . .. There can be no good will in a business that isdependent for its existence upon the individual whoconducts the enterprise and would vanish were theindividual to die, retire or quit work.”

Vermont. Mills v. Mills, 702 A.2d 79, 81 (1997):"Using a capitalization-of-earnings method,defendant's expert valued plaintiff's future legalservices at $240,143, but acknowledged thatplaintiff's services had no independent value beyondplaintiff's ability to perform them. In light of thistestimony, there was no abuse of discretion in findingthat plaintiff's future legal services had no marketvalue subject to distribution."

Virginia.

<Hoebelheinrich v. Hoebelheinrich, 600 S.E.2d 152,155-56 (Va. App. 2004): "Although we have saidthat, as a matter of law, goodwill attributable topersonal characteristics is considered separateproperty and goodwill attributable to the business

entity is considered marital property, . . . we willnot disturb a “ ‘trial court's valuation of goodwill... if it appears that the court made a reasonableapproximation of the goodwill value, if any, of theprofessional practice based on competent evidenceand the use of a sound method supported by thatevidence.’ ” . . . .“If conflicting, competent evidenceis presented, that [evidence] found more crediblewill determine whether goodwill exists and its valueif it does exist. The existence [of goodwill] is notfixed as a matter of law, nor is the method of [its]valuation; both are functions of the fact-findingprocess.” " [Ciations omitted.]

<Howell v. Howell, 523 S.E.2d 514, 520 (Va. Ct.App. 2000): “Discounting future earnings is not aninherently flawed method of valuation because itis based on projected future earnings. The value ofgoodwill can have two components. Professionalgoodwill (also designated as individual, personal,or separate goodwill) is attributable to the individualand is categorized as separate property in a divorceaction. Practice goodwill (also designated as businessor commercial goodwill) is attributable to thebusiness entity, the professional firm, and may bemarital property. The commissioner and the trialcourt carefully distinguished between these twocomponents and selected a value that was solelyattributable to the husband being a partner in Hunton& Williams. It represented the premium due to thehusband's association with Hunton & Williams, theeconomic advantage he enjoyed because he was apartner in that firm. It included no value attributableto him personally, and it did not rely upon anyearnings due to the husband's own expertise,reputation, experience, skill, knowledge, orpersonality. As applied, the discounted futureearnings method was not a flawed method ofvaluation. In valuing the goodwill of the partnershipinterest, courts must take special care not to confusethe owner spouse's personal future earning capacitywith practice goodwill attributable to the law firmin order to avoid double counting. "Further,particular care must be given that future earningscapacity and reputation not be confused withprofessional goodwill."”

Washington.

<Hall v. Hall, 692 P.2d 175 (Wash. Sup. Ct. 1984):


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“The husband here contends that the Fleege doctrineshould be reconsidered because (1) it presentsconfusing and unfair criteria for identifying andevaluating the economic benefit to one spouse orthe other, from a professional degree and career;and, (2) it is unfair where, as here, it requires thedetermination that only one of two spouses, withidentical professional educations and earningcapacities, has professional goodwill. Thesecontentions are based on the failure to distinguishbetween professional goodwill and personal earningcapacity of the professional. Goodwill is a propertyor asset which usually supplements the earningcapacity of another asset, a business or a profession.Goodwill is not the earning capacity itself. It is adistinct asset of a professional practice, not just afactor contributing to the value or earning capacityof the practice. . . . Discontinuance of the businessor profession may greatly diminish the value of thegoodwill but it does not destroy its existence. Whena professional retires or dies, his earning capacityalso either retires or dies. Nevertheless, the goodwillthat once attached to his practice may continue inexistence in the form of established patients orclients, referrals, trade name, location andassociations which now attach to former partnersor buyers of the practice.”

<In re Marriage of Lukens, 558 P.2d 279, 282(Wash. App. 1976, rev. denied): “The value ofgoodwill, which is to be determined at the time ofdissolution, is not synonymous with the spouse'sexpectation of future earnings. . . . Goodwill shouldbe measured by arriving at a present value basedupon past results and not by accounting for thepostmarital efforts of the professional spouse. . .. Factors to be considered include the length of timethe professional has been practicing, his comparativesuccess, his age and health, and particularly the pastprofits of the practice, which would reflect anyincome previously generated by his goodwill.Additionally, because goodwill does not existseparately but is incidental to the other assets of thebusiness, attention should be given to the physicaland fixed resources of the practice.” [Citationsomitted]

<Matter of Marriage of Fleege, 588 P.2d 1136, 1138(Wash. Sup. Ct. 1979): “[W]hile the goodwill ofa professional practice may not be readily marketable

and the determination of its exact value may bedifficult, that element may nevertheless be foundto exist in a given professional practice. Thedetermination of its value can be reached with theaid of expert testimony and by consideration of suchfactors as the practitioner's age, health, past earningpower, reputation in the community for judgment,skill, and knowledge, and his comparativeprofessional success. A dentist who has practicedmany years and established a good reputation canexpect his patients to return to him and to speak ofhim in a manner that enhances that reputation andencourages others to seek his services. Also, he canexpect a large number, if not most, of these patientsto accept as their dentist a person to whom he sellshis practice. These prospects are a part of goodwill,and they have a real pecuniary value.”

West Virginia

<May v. May, 214 W.Va. 394, 589 S.E.2d 536, 547(2003): “[W]e hold that in determining whethergoodwill should be valued for purposes of equitabledistribution, courts must look to the precise natureof that goodwill. Personal goodwill, which isintrinsically tied to the attributes and/or skills ofan individual, is not subject to equitable distribution.It is not a divisible asset. It is more properlyconsidered as the individual's earning capacity thatmay affect property division and alimony. On theother hand, enterprise goodwill, which is whollyattributable to the business itself, is subject toequitable distribution.”

<Wilson v. Wilson, 227 W.Va. 157, 706 S.E.2d 354,361-67 (W. Va. 2010) (extensive discussion of factssupporting ruling that business had no enterprisegoodwill, only husband’s personal goodwill).

Wisconsin.

<Holbrook v. Holbrook, 309 N.W.2d 343, 345, 353-54 (Wis. Sup. Ct. 1981): “Originally, goodwill wassaid to exist only in commercial business, and notin a professional business which depends upon theskill and reputation of a particular person. . . .Because goodwill has no existence apart from thebusiness to which it attaches, courts have determinedthat there can be no income tax deduction for lossof goodwill; the loss of goodwill cannot be


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compensated for in eminent domain proceedings;goodwill cannot be used to satisfy debts; nor is itsubject to depreciation. . . . Even greater problemsarise when, after it has been determined thatprofessional goodwill is a marital asset divisibleupon divorce, attempts are made to place a dollarvalue on the goodwill that is part of the maritalestate. This would be especially problematic, where,as here, the business involved has several members,all of whom have presumably contributed to thegoodwill of the business. Valuation of oneindividual's goodwill interest in the business wouldbe almost pure speculation. . . . We are notpersuaded that the concept of professional goodwillas a divisible marital asset should be adopted inWisconsin. We are not obliged nor inclined to followthe twisted and illogical path that other jurisdictionshave made in dealing with this concept in the contextof divorce. . . . The concept of professional goodwillevanesces when one attempts to distinguish it fromfuture earning capacity. Although a professionalbusiness's good reputation, which is essentially whatits goodwill consists of, is certainly a thing of value,we do not believe that it bestows on those who havean ownership interest in the business, an actual,separate property interest. The reputation of a lawfirm or some other professional business is valuableto its individual owners to the extent that it assurescontinued substantial earnings in the future. It cannotbe separately sold or pledged by the individualowners. The goodwill or reputation of such abusiness accrues to the benefit of the owners onlythrough increased salary.” [Footnotes omitted]

<Peerenboom v. Peerenboom, 433 N.W.2d 282,283-84 (1988), “Case law is inconsistent with thetreatment of goodwill. Id. In Holbrook, our supremecourt stated: “We are not persuaded that the conceptof professional goodwill as a divisible marital assetshould be adopted in Wisconsin.” Id. at 350, 309N.W.2d at 354. Holbrook, however, involved thedivision of an individual lawyer's interest in a largelaw firm. The court explained that due to ethicaland contractual considerations, his interest in thelaw firm's goodwill could not be exchanged or soldon the open market. The court concluded thereforethat it would be inequitable to compel “a professionalpractitioner to pay a spouse a share of intangibleassets at a judicially determined value that couldnot be realized by a sale or another method of

liquidating value.” Id. at 351, 309 N.W.2d at 355.The court observed that the firm's goodwill wasreflected in the husband's salary.

“In contrast, in this case the record shows no ethicalor contractual barrier to Jay's disposing of his interestin his dental practice. Accordingly, to the extent thatthe evidence shows that the goodwill exists, ismarketable, and that its value is something over andabove the value of the practice's assets and theprofessional's skills and services, it may be includedas an asset in the marital estate and be subject todivision.

“However, double counting an asset is not permitted.See Chen v. Chen, 142 Wis.2d 7, 16–17, 416 N.W.2d661, 665 (Ct. App.1987). Therefore, care must betaken to ensure that the goodwill is indeed a separateasset, rather than the established employment orearning capacity of the professional. If it is notestablished as a separate asset, but merely a measureof earning capacity, its value would then improperlybe taken into consideration more than once. It wouldbe a factor in setting support and maintenance, aswell as an asset to be divided in the propertydivision.”

<McReath v. McReath, 800 N.W.2d 399, 411 (Wisc.Sup. Ct. 2011): "In accordance with previousWisconsin case law, we conclude today that whenvaluing a business interest that is part of the maritalestate for purposes of divorce, a circuit court shallinclude the value of the salable professional goodwillattendant to the business interest."

Wyoming. Neuman v. Neuman, 842 P.2d 575, 581-82(Wyo. 1992): “A method of valuation thatcapitalizes the historical past earnings of a businessat an appropriate capitalization rate, in order toidentify the value of any goodwill possessed by thebusiness at the date of divorce or separation, isappropriate in the context of divorce proceedingsbecause it avoids the problem of valuing a businesson the basis of post-divorce earnings and profits.Zipp, supra. This method essentially is the approachthat the wife's expert took in reaching his opinionas to value of the Neuman Transit stock, and hisapproach ultimately was adopted by the trial court.The court considered and evaluated the opinionsof both experts. The deliberate nature of this


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consideration by the trial court is manifest by thenearly five pages of explanation contained in thefindings of fact in the decree of divorce.

A trial court is free to assess expert opinionand determine fair market value in light oftestimony regarding: the nature of the business,the corporation's fixed and liquid assets at theactual or book value, the corporation's networth, the marketability of the shares, pastearnings or losses and future earning potential.

Bryan v. Bryan, 222 Neb. 180, 382 N.W.2d 603,606 (1986) (citing Dean v. Dean, 87 Wis.2d 854,275 N.W.2d 902, 912 (1979)).

“We accept and agree with the reasoning of theNebraska and Wisconsin Supreme Courts. The trialcourt is not required to accept any one accountingmethod of stock valuation as more accurate thananother.”

IX. TWO SUGGESTIONS ON HOW TOATTACK THE PROBLEM OF GOODWILLUPON DIVORCE. The Author offers up two thesesfor discussion purposes, as a way to a clearerunderstanding of enterprise vs. personal goodwillin a Texas divorce.

A. THESIS NO. ONE. This Article proposes athesis, that the value of a business as a going concernconsists of (i) the value of tangible assets, plus (ii)the value of intangible assets that are recognizedas identifiable components of the business, plus (iii)the commercial goodwill or enterprise goodwill ofthe business, plus (iv) the personal goodwill thatis so identified with the selling owner that it is lostto the business when the seller leaves.

Restated in business valuation terms, valuing abusiness using the income method yields a valuefor the business based on the use of all tangible andintangible assets combined, including goodwill.The value of tangible assets can be determined byappraisals, and a reasonable rate of return on thatinvested capital can be determined. The value ofintangible rights that are recognized under contractlaw or intellectual property law or are otherwiseseparable from goodwill can, admittedly with moredifficulty, be valued and a reasonable rate of return

on that invested capital can be determined. Out ofthe “residual goodwill,” the value of the personalgoodwill can be estimated based on projecting thedrop in future profits of the business that will occurwhen the seller leaves the business or even competeswith it. The loss in value associated with the dropin profits is the measure of the seller’s personalgoodwill, and the remaining unallocated intangiblevalue of the business is commercial or enterprisegoodwill. Restated more succinctly, category (iii)enterprise goodwill is what is left of profits aftersubtracting the profits attributable to categories (i),(ii), and (iv).

B. THESIS NO. TWO. This Article proposesa second thesis, that the reduction in future profitsattributable to the business’s loss of the seller’spersonal goodwill contains three components: (i)the loss associated with losing the seller’sknowledge, skill and experience; (ii) the lossassociated with losing suppliers, customers orreferral sources as a result of the seller leaving thebusiness; and (iii) the loss associated with losingsuppliers, customers or referral sources as a resultof the seller competing with the business. (Furtherdiscussion is warranted about whether the possibleloss of valuable employees not under long termcontracts, and who would leave with the owner,should be factored into personal goodwill.)

The first of these three components of personalgoodwill should be assessed separately from thesecond and third components, because the seller’sknowledge, skill and experience can be replacedby hiring a new employee with equivalentknowledge, skill and experience, while the loss ofprofits to the business resulting from the seller’sleaving, or leaving and competing, cannot be madewhole by hiring a new employee.

Note that the reasonable compensation assigned tothe seller in normalizing the historical profits of thebusiness is identical to the cost of hiring areplacement employee with similar knowledge, skilland experience, so there is no net loss to the businesspurely from the loss of the seller’s knowledge, skilland experience. The knowledge, skill and experiencecomponent of the seller’s personal goodwill can befully accounted for by assessing reasonablecompensation for the seller’s services. See Section


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VII.B.2.a below. In other words, the familiar processof normalizing business profits, by adjusting theseller’s compensation to a reasonable compensationlevel, effectively eliminates knowledge, skill andexperience from the appraiser’s calculation of theseller’s personal goodwill. The net effect on thebusiness is the same, whether the seller stays on asan employee or is replaced by a new employee, sincethe needed knowledge, skill and experience canbe acquired by paying an employee compensationcommensurate with the seller’s level of knowledge,skill and experience.

The loss to the business of losing the seller’s tiesto suppliers, customers and sources of futurebusiness cannot be replaced by hiring a newemployee with equivalent knowledge, skill andexperience, since the new employee will have noneof the seller’s relationships with suppliers,customers, and sources of future business. SeeSection VII.B.2.a below. These are the types ofrelationships discussed above in connection withJohn Tomer’s concept of “social capital,” asdistinguished from the more traditional concept of“standard human capital,” such as knowledge, skilland experience. The only way to avoid thisrelationship-related loss is to keep the seller as anemployee or consultant of the business, or throughsome public relations arrangement to maintain theappearance of the seller’s continued connection withthe business (i.e, keeping his/her name on the door,face in advertisements, etc.). See Martin Ice CreamCo. v. Commissioner, 110 T.C. 189, 207 (1998)(“This court has long recognized that personalrelationships of a shareholder--employee are notcorporate assets when the employee has noemployment contract with the corporation. Thosepersonal assets are entirely distinct from theintangible corporate asset of corporate goodwill.).

Note that the relationship-based connections tosuppliers, customers, and sources of future businessare not necessarily based on personal relationships.They could be based on a perception arising fromadvertising, or word-of-mouth, or prominence inthe community, or membership in a certain church,or race, gender or ethnicity, or any other attribute,so long as the attribute is perceived to be connectedto the seller of the business, as opposed to thebusiness or to an employee of the business, or to

a trademark or brand name, etc.

The distinction between the effect of leaving versusthe effect of competing is supported by the fact thata seller can leave a business without competing withit, such as by death, retirement, or relocation toanother market. A buyer will pay more for thebusiness when the seller has died, retires, or movesto a different market, than the buyer will pay if theseller is expected to compete with the business afterthe sale. Also, securing a covenant not to competedoes not protect the business from losses resultingfrom the seller simply leaving the business. Anyties to the business that are based on the seller’spersonal relationships are at risk of loss just becausethe seller leaves, even if he or she does not compete.

If the seller competes with the business after thesale, then suppliers and customers and sources offuture business may not just drift away to otherbusinesses–they may actually follow the seller tohis/her new business. This loss due to competitioncan be avoided by paying the seller for a covenantnot to compete–in states where such covenants areenforceable. The value of the covenant not tocompete can be measured by the projected loss inprofits attributable to the seller’s competing withthe business.

Looked at from the opposite perspective, valuingthe covenant not to compete does not measure theentire personal goodwill of the seller, because thecovenant not to compete does not retain for thebusiness the value of the seller’s knowledge, skill,experience, and it does not allow the business toavoid the loss in suppliers, customers and sourcesof future business that “dry up” because the ownerhas left the business.

In sum, the loss of the seller’s knowledge, skill orexperience, traditionally viewed by courts as acomponent of the seller’s personal goodwill, willhave no effect on business profits provided that theseller’s historical compensation is normalized toa level that matches the seller’s level of knowledge,skill and experience, so that a suitable replacementemployee can be hired at the same compensationlevel. However, the loss to the business whichresults from termination of personal relationshipsbetween the seller and suppliers, customers, and


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sources of future business, cannot be erased by hiringa new employee with equivalent knowledge, skilland experience, because the new employee will havenone of these personal relationships. This loss ofrelationships must be gauged separately, byprojecting the increased cost and lost revenue thatthe business will suffer because those historical tieshave been severed. And the business may suffera loss arising from the seller’s mere departure, evenif the seller does not compete. One the other hand,if the seller does compete, the losses occasionedby the seller’s departure may be subsumed in thelosses occasioned by the seller’s competing.

X. VALUING GOODWILL. The methods ofvaluing the goodwill of a business are well-known.In a sale, goodwill is the difference between thepurchase price and the value of tangible assets plusidentifiable intangible assets (leases, intellectualproperty rights, employment agreements, covenantsnot to compete, etc.). If there is a covenant not tocompete the goodwill includes personal goodwill.If there is no covenant to compete, then personalgoodwill is not included in the purchase price. Ina divorce, there is no sale, so the valuator can onlyestimate the fair market value of the business. Ina personal service business, the valuator must notinclude in the date-of-divorce value any post-divorcelabors, and, in most states the valuator mustsegregate commercial or enterprise goodwill fromthe personal goodwill of the owner. Goodwill ina professional practice is usually determined usingthe excess earnings method or a capitalization ofearnings stream.

A. GOODWILL OF THE GOING BUSINESS.The Tax Court recognizes three ways to measurethe value of goodwill of a business: (i) the bargainof the parties (where agreement was reached as aresult of arm's-length bargaining between partieswith adverse legal interests); (ii) the "residual" or"gap" method (subtract the value of the tangibleassets, i.e. cash, cash equivalents and other tangibleassets from the purchase price, and the remainderconstitutes aggregate intangible asset value); (iii)the capitalization method (calculate the annualearnings of the business and subtract a fair returnon tangible assets). Concord Control, Inc. v.Commissioner, 78 T.C. 742, 745-46 (1982). See R.M.Smith, Inc. v. Commissioner, 591 F.2d 248, 252-253

(3d Cir. 1979) (the residual method is inaccuratewhenever the buyer paid too little or too much forthe interest in the business); Philip Morris, Inc. andConsol. Subs. v. Commissioner, 96 T.C. 606 (1991),affd. without published opinion, 970 F.2d 897 (2dCir. 1992) (residual method rejected because acontrol premium was included in price paid). Underthe excess earnings approach to valuing goodwillreflected in Rev. Rul. 68-609, 1968-2 C.B. 327, theincome attributable to tangible assets is deductedfrom net income of the business, and the remainingincome is attributed to goodwill, which is thencapitalized. Philip Morris Inc. and Consol.Subsidiaries v. Commissioner, 96 T.C. 606, 633(1991).

B. COMMERCIAL OR ENTERPRISEGOODWILL VS. PERSONAL GOODWILL.Valuing the commercial or enterprise goodwill ofa going business requires the valuator to differentiatethe commercial or enterprise goodwill (or goodwillthat can be transferred in a sale of the business) fromthe personal goodwill of the business owner(goodwill that cannot be transferred in the sale ofthe business if the owner leaves the business). Thisdifferentiation is complicated by the fact that someof the personal goodwill may actually transfer withthe sale of the business if (i) the previous ownercontinues to work for the business, (ii) lends the useof his name or image to the business, or (iii) theprevious owner has died, retires, relocates to anothermarket or agrees not to compete with the business.

To determine commercial or enterprise goodwillthe valuator must determine the fair market valueof the business, then subtract the value of tangibleassets and the value of intangible assets that areenforceable under contract or other law or areseparable, leaving a residual goodwill. See SectionIII.A.2 above. The valuator next determines thereduction in profits resulting from the seller leavingthe business, or competing with it, as the case maybe. Capitalizing the remaining profit yields thebusiness’s commercial or enterprise goodwill.

1. Valuing Other Intangible Assets. Animportant step in the process of determiningcommercial or enterprise goodwill is assigningvalues to the intangible assets of the business otherthan goodwill. This reduces the portion of intangible


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value that must be allocated to residual goodwill.A checklist of non-goodwill intangible assets of agoing business could be drawn from InternalRevenue Code § 197(d), including: going concernvalue; workforce in place; business books andrecords, operating systems, or any other informationbase; any patent, copyright, formula, process, design,pattern, knowhow, format, or other similar item;any customer-based intangible (i.e., compositionof market, market share, and any other valueresulting from future provision of goods or servicespursuant to relationships, contractual or otherwise,in the ordinary course of business with customers);any supplier-based intangibles (i.e., value resultingfrom future acquisitions of goods or servicespursuant to relationships, contractual or otherwise,in the ordinary course of business with suppliersof goods or services to be used or sold); anygovernment-granted license, permit, or other right;any covenant not to compete entered into inconnection with the acquisition of part or all of thebusiness. In a divorce calculation, customer-basedand supplier-based intangibles (and workforce inplace) must be reduced to reflect the effect of theowner leaving the business and even competing withit.

The valuation of intangible assets that are recognizedas legally enforceable or separable is more concretein the sense that these non-goodwill intangible assetsare more susceptible to a replacement cost analysisor a market data analysis, and a reasonably accuratecapitalization of earnings attributable to the assetcan be achieved. For example, several cases havefound that all goodwill of a franchise businessresided in the franchise agreement. See Canterburyv. Commissioner, 99 T.C. 223, 249 (1992), and casedcited therein.

One might ask, if commercial or enterprise goodwillis considered to be what’s left after subtracting thereduction in value resulting from the loss of theseller’s personal goodwill, then why bother withthe preliminary step of assigning values to otherintangible assets? It is worthwhile to allocateintangible value between goodwill and otherintangible assets in order to reduce the scope of thefight over what is commercial or enterprise goodwilland what is personal goodwill. Valuing non-goodwill intangible assets forces the valuator to be

concrete on as many components of value as ispossible, and it reduces the size of the “residualgoodwill” that must be calculated by process ofelimination. However, in many cases this may bea luxury that the client cannot afford.

The effort to individually value separable intangibleassets can be time-consuming and therefore costly.Limited funding in a divorce may force the valuatorto aggregate intangible assets for purposes ofvaluation.

2. Determining Personal Goodwill. This Articleproposed that the first step in determining personalgoodwill is to remove the factor of knowledge, skilland experience from the goodwill determinationby including that factor in the adjustment made tonormalize the owner’s historical compensation. Theremainder of the goodwill can then be divided intorelationship-based personal goodwill and commercialor enterprise goodwill.

a. Adjusting for Knowledge, Skill andExperience. It is a thesis of this Article that, inusing an excess earnings approach to valuing abusiness, the best way to account for the knowledge,skill, and experience component of personal goodwillis to adjust the level of reasonable compensationattributed to the owner. Dietrich, Identifying andMeasuring Personal Goodwill in a ProfessionalPractice, CPA EXPERT Spring 2005) [reprinted inthe Dietrich Segregating article, p. 30-16] (“. . . someportion of the personal goodwill issue can often beminimized by properly addressing reasonablecompensation”). A highly skilled, experiencedprofessional perhaps is entitled to a higher level ofcompensation in national compensation surveys.For example, in a survey of all physicians, includingall years of practice, an experienced physician wouldtend toward a higher percentile than youngerphysicians, and a specialist would tend toward ahigher percentile than nonspecialists. If thephysician in question is board certified, and thesurvey data reflects compensation of similarspecialists, then a high level of skill may be assumedfor all, and perhaps no special consideration ofpushing the physician to the higher median levelsis warranted, in that the level of skill is alreadyexpressed in the survey data. At any rate, innormalizing the seller’s historical compensation,


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a compensation level will be reached that shouldpermit the business to hire a replacement employeewith knowledge, skill and experience comparableto the Seller’s with no adverse effect on profitability.

b. Profits Tied to the Seller. It is another thesisof this Article that the relationship-based componentof personal goodwill can best be measured byprojecting the reduction in profits to the businessthat will occur after the seller leaves the business,or competes with it. If profits decline after the sale,and all other factors remain the same, then theamount of reduced profit is a measure of therelationship-based portion of the personal goodwillof the seller. This assumption is weakened ininstances where the buyer brings personal goodwillto the business to replace the lost personal goodwillof the seller.

Mark Dietrich says that the lost-profits approachto determining personal goodwill is equivalent tothe method of determining the value of a covenantnot to compete. The Dietrich Segregating articlep. 30-5 (“Measuring profits attributable to the selleris analogous to determining personal goodwill versusthe enterprise (business) ‘goodwill’ or intangiblevalue”). According to Dietrich, in determining thevalue of a covenant not to compete, the valuator mustprepare an “alternate valuation” of the business,assuming that the seller leaves the business andcompetes with it. The Dietrich Segregating article,p. 30-5. The difference between the normal businessvaluation (assuming a continuation of historicalprofitability) and the alternate valuation is the valueof the covenant not to compete. Where the sellerleaves the business but does not intend to compete(death, retirement, relocation to another market),the “alternate valuation” would be made on theassumption that the seller leaves without competing.

The creation of an alternate-valuation could requiresome serious financial modeling that could cost morethan the client wants or can afford to pay.

Determining how the seller’s leaving the business,or competing with it, will affect that business willvary from business to business. When the valuationis undertaken in connection with divorce, thevaluator cannot uncritically accept non-bindingstatements by the owner’s “buddies” that favorable

supply relationships, or customers, or sources offuture business, or valued employees, will severconnections to the business if the owner sells. Therisk of such severances should be objectivelyanalyzed. While loyalty does exist, most peoplemake business decisions based on self-interest, whenthe cost of loyalty is high.

A possible factor to consider in assessing the effectof future competition by the seller is any statutoryor common law prohibitions against the seller’sdamaging the value of what he is selling, such asa common law protection of customer lists,prohibitions against soliciting employees orcustomers, a tort remedy for interference withbusiness relations, a claim based on promissoryestoppel, etc.

In states that do not tightly enforce covenants notto compete, the value of such a covenant,theoretically at least, should be diminished, and anymarket data regarding the sales of comparablebusinesses in that state would have increasedimportance in determining a value for divorcepurposes, where the seller must factor in a loss ofprofits even with a covenant not to compete. Anexample is given in Dietrich, Identifying andMeasuring Personal Goodwill in a ProfessionalPractice, CPA EXPERT (Spring 2005) [reprinted inthe Dietrich Segregating article, p. 30-15]. Dietrichdiscusses Texas Business & Commerce Code §15.50,which provides that covenants not to competeinvolving a physician cannot deny to the physicianaccess to a list of his patients whom he has seen ortreated within one year of the termination ofemployment. However, the language of the statuteevidently relates to covenants not to competeincident to employment, and may or may not applyto covenants not to compete relating to the sale ofa medical practice. Sales information from stateswith weak enforcement of covenants not to competeshould be studied to see whether the combined salesprice and cost of a covenant not to compete is lessthan in states that enforce such covenants. The factorof competition may prove to be less we imagine.

c. What’s Left is Entity Goodwill. In an incomeapproach, if the seller’s historical compensation isadjusted to reflect his/her knowledge, skill andexperience, and if the valuator adjusts the projection


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of future profits downward to reflect the loss of theseller’s special relationships, then the personalgoodwill portion of the overall goodwill of thebusiness is measured by the reduction in futureprofits tied to the seller’s leaving and competing.Any goodwill left after making these adjustmentsis, by process of elimination, commercial orenterprise goodwill.

C. HOW DOES PERSONAL GOODWILLCOMPARE TO “HUMAN CAPITAL”? It isevident that the “human capital” of the seller hasmany of the earmarks of personal goodwill, whichso many states say is not part of the marital estateto be divided upon divorce. It is legally easier touse alimony, and not property division, to addressthe income disparity arising from the spouses’investment during marriage in increasing thebreadwinning spouse’s human capital. But inproperty divisions, the community interest in abusiness should not be undervalued due to aninaccurate view of what constitutes the tangible andintangible assets of the business, and what constitutesenterprise versus personal goodwill.

Even if the case law in a particular state has notrecognized “human capital” as an asset to divideor as a factor to consider in awarding alimony upondivorce, a lawyer may want to prove up the valueof the human capital or increased personal goodwillin support of an unequal property division, or somealternative theory of recovery, perhaps in equity,perhaps in some other area of law. Proving only thevalue of the business, including only enterprisegoodwill, leaves the judge with no numbers toconsider regarding the value of the personal goodwillof the breadwinning spouse.

In states that have long-term alimony, the forensicaccountant may be asked to give opinion testimonyabout the actual cost of the spouses’ investment inhuman capital during marriage, the enhancementof the working spouse’s earning capacity, the lossin income-earning capacity of the spouse who didnot develop a career during marriage, and theprojected difference in post-divorce earnings.

Lastly, while the human capital of the businessowner may not be divisible in a divorce in certainstates, the human capital of employees of this

business is part of enterprise goodwill, which isdivisible in most states.


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1. <http://home.uchicago.edu/~gbecker/Nobel/nobellecture.pdf> [3/30/2012]. …



4. http://www.nobelprize.org/nobel_prizes/economics/laureates/1979/presentation-speech.html> [3/30/2012]. …

5. <http://en.wikipedia.org/wiki/Human_capital> [3/30/2012]. …

6. Taken from Ronald L. Brown, VALUING PROFESSIONAL PRACTICES & LICENSES (3rd ed.Englewood Cliffs, NJ: Prentice-Hall, 1998) <http://www.unm.edu/~parkman/Goodwill.PDF> [3/30/2012]. …

7. <http://www.law.arizona.edu/faculty/FacultyPubs/Documents/Ibrahim/30DelJCorp%20L1. pdf> [3/30/2012]. …

8. <http://www.fasb.org/pdf/fas141r.pdf> [3/30/2012]. …

9. <http://www.fasb.org/pdf/fas141.pdf> [3/30/2012]. …

10. <http://www.fasb.org/pdf/fas142.pdf> [3/30/2012]. …

11. <www.fasb.org/pdf/aop_FAS141.pdf> [3/30/2012]. …

12. FASB ASC Topic 350-30-Glossary and ASC Topic 805-20-Glossary, define “intangible assets” as “Assets (not includingfinancial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other thangoodwill.)” …

13. FASB ACS Topic 805, Business Combinations, defines “goodwill” as “An asset representing the future economic benefitsarising from other assets acquired in a business combination . . . that are not individually identified and separately recognized.”…

14.<http://www.fasb.org/pdf/fas141r.pdf> pp. 137-39 [3/30/2012]. …

15. <http://www.fasb.org/jsp/FASB/Page/10-18-06_bcam.pdf> [3/30/2012]. …

16. <http://www.willametteinsights.com/06/spring_2006_3.pdf> [3/30/2012]. …

17.<https://docs.google.com/viewer?a=v&q=cache:ZCIuM-4he70J:5317.vanbreda.org/readings/schuetze.pdf+what+are+assets+and+liabilities?+where+is+true+north?&hl=en&gl=us&pid=bl&srcid=ADGEESjO7Ywn1bSNETABdoGL_dGlIPbrRK9svC8rkiKYCva-4_FRzUX5g4C1gRtuvLSTwgV9qbTWE8I7aQEFlKU6pcfT9M9AfXyuy3khYFrluSG6RJefhPEI_nucD4wk3YdDGZrozbSh&sig=AHIEtbRlgvK4HXzOViejuzv-ALXbS5tsWQ> ¶ 18, p. 8 [3/30/2012]. …

18. <http://www.sec.gov/news/speech/speecharchive/1998/spch219.htm> [3/30/2012]. …

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