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DISTINGUISHING PERSONAL GOODWILL FROM ENTERPRISE GOODWILL

Richard R. [email protected]

http://www.orsinger.com

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

Dallas Office:5950 Sherry Lane, Suite 800

Dallas, Texas 75225214-273-2400

and

San Antonio Office:1616 Tower Life BuildingSan Antonio, Texas 78205

210-225-5567

New Frontiers in Marital Property LawOctober 12-13, 2006

Renaissance Stanford Court Hotel, San Francisco, California

© 2006Richard 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 16-165aMember, 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 1994-1997, 1999-2001, 2003-2006) and Civil Appellate Law Exam Committee (1990-present; Chair 1991-

1995)Tx. Bd. of Legal Specialization, 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 AdvocatesFellow, American Academy of Matrimonial LawyersDirector, San Antonio Bar Association (1997-1998)Member, San Antonio, Dallas and Houston Bar Associations

Professional Activities and Honors:

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 2004Listed in the BEST LAWYERS IN AMERICA (1987-to date)2004 Listed in Texas’ Top 100 Lawyers by Texas Monthly Superlawyers Survey

Continuing Legal Education and Administration:

Course Director, State Bar of Texas Practice Before the Supreme Court of Texas Course (2002, 2003, 2004, 2005)Co-Course Director, State Bar of Texas Enron, The Legal Issues (March, 2002) [Won national ACLEA Award]Course Director, State Bar of Texas Advanced Expert Witness Course (2001, 2002, 2003, 2004)Course Director, State Bar of Texas 1999 Impact of the New Rules of DiscoveryCourse Director, State Bar of Texas 1998 Advanced Civil Appellate Practice CourseCourse Director, State Bar of Texas 1991 Advanced Evidence and Discovery Course

Director, Computer Workshop at Advanced Family Law Course (1990-94)and Advanced Civil Trial Course (1990-91)

Course Director, State Bar of Texas 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:

—Chief Editor 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 WITNESS 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 LAWREVIEW 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 AMERICAN JOURNAL OF FAMILY LAW (Fall 1994) and Texas FamilyLaw Service NewsAlert (Oct. & Dec., 1994 and Feb., 1995)---Chapter 21 on Business Interests in Bancroft-Whitney's TEXAS FAMILY 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 StatesLines, 13 ST. MARY'S L.J. 477 (1982)

SELECTED CLE SPEECHES AND ARTICLES

State Bar of Texas' [SBOT] Advanced Family Law Course: Intra and InterFamily Transactions (1983); Handling the Appeal: Procedures and Pitfalls(1984); Methods and Tools of Discovery (1985); Characterization andReimbursement (1986); Trusts and Family Law (1986); The Family LawCase in the Appellate Court (1987); Post-Divorce Division of Property(1988); Marital Agreements: Enforcement and Defense (1989); MaritalLiabilities (1990); Rules of Procedure (1991); Valuation Overview (1992);Deposition Use in Trial: Cassette Tapes, Video, Audio, Reading andEditing (1993); The Great Debate: Dividing Goodwill on Divorce (1994);Characterization (1995); Ordinary Reimbursement and Creative Theories ofReimbursement (1996); Qualifying and Rejecting Expert Witnesses (1997);New Developments in Civil Procedure and Evidence (1998); The ExpertWitness Manual (1999); Reimbursement in the 21st Century (2000);Personal Goodwill vs. Commercial Goodwill: A Case Study (2000); WhatRepresenting the Judge or Contributing to Her Campaign Can Mean to YourClient: Proposed New Disqualification and Recusal Rules (2001); TaxWorkshop: The Fundamentals (2001); Blue Sky or Book Value? ComplexIssues in Business Valuation (2001); Private Justice: Arbitration as anAlternative to the Courthouse (2002); International & Cross Border Issues(2002); Premarital and Marital Agreements: Representing the Non-MoniedSpouse (2003); Those Other Texas Codes: Things the Family Lawyer Needsto Know About Codifications Outside the Family Code (2004); Pearls ofWisdom From Thirty Years of Practicing Family Law (2005); The RoadAhead: Long-Term Financial Planning in Connection With Divorce (2006)

SBOT's Marriage Dissolution Course: Property Problems Created byCrossing State Lines (1982); Child Snatching and Interfering withPossess'n: Remedies (1986); Family Law and the Family Business:Proprietorships, Partnerships and Corporations (1987); Appellate Practice(Family Law) (1990); Discovery in Custody and Property Cases (1991);Discovery (1993); Identifying and Dealing With Illegal, Unethical andHarassing Practices (1994); Gender Issues in the Everyday Practice ofFamily Law (1995); Dialogue on Common Evidence Problems (1995);Handling the Divorce Involving Trusts or Family Limited Partnerships(1998); The Expert Witness Manual (1999); Focus on Experts: Close-upInterviews on Procedure, Mental Health and Financial Experts (2000);Activities in the Trial Court During Appeal and After Remand (2002)

UT School of Law: Trusts in Texas Law: What Are the Community Rightsin 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 EffectiveMotion for Rehearing (1996); Intellectual Property (1997); Preservation ofError Update (1997); TRAPs Under the New T.R.A.P. (1998); JudicialPerspectives on Appellate Practice (2000)

SBOT's Advanced Evidence & Discovery Course: Successful MandamusApproaches in Discovery (1988); Mandamus (1989); Preservation ofPrivileges, Exemptions and Objections (1990); Business and Public Records(1993); Grab Bag: Evidence & Discovery (1993); Common EvidenceProblems (1994); Managing Documents--The Technology (1996); EvidenceGrab Bag (1997); Evidence Grab Bag (1998); Making and MeetingObjections (1998-99); Evidentiary Issues Surrounding Expert Witnesses(1999); Predicates and Objections (2000); Predicates and Objections (2001);Building Blocks of Evidence (2002); Strategies in Making 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 Appealfrom 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 Writing: Creatively Craftingfor 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 While on Appeal (1998); Judges vs. Juries: A Debate (2000);Appellate Squares (2000); Texas Supreme Court Trends (2002); NewAppellate Rules and New Trial Rules (2003); Supreme Court Trends (2004);Recent Developments in the Daubert Swamp (2005); Hot Topics inLitigation: Restitution/Unjust Enrichment (2006)

SBOT’s Annual Meeting: Objections (1991); Evidentiary Predicates andObjections (1992-93); Predicates for Documentary & DemonstrativeEvidence (1994); “Don’t Drink That! That’s My Computer!” (1997); TheLawyer as Master of Technology: Communication With Automation (1997);Technology Positioning (1999); Objections Checklist (2000); Evidence fromSoup to Nuts (2000)

Various CLE Providers: SBOT Advanced Civil Trial Course: JudgmentEnforcement, Turnover and Contempt (1990-1991), Offering and ExcludingEvidence (1995), New Appellate Rules (1997), The CommunicationsRevolution: Portability, The Internet and the Practice of Law (1998),Daubert With Emphasis on Commercial Litigation, Damages, and theNonScientific Expert (2000), Rules/Legislation Preview (State Perspective)(2002); College of Advanced Judicial Studies: Evidentiary Issues (2001); ElPaso Family Law Bar Ass’n: Foreign Law and Foreign Evidence (2001);American Institute of Certified Public Accounts: Admissibility of Lay andExpert Testimony; General Acceptance Versus Daubert (2002); Texas andLouisiana Associations of Defense Counsel: Use of Fact Witnesses, LayOpinion, and Expert Testimony; When and How to Raise a DaubertChallenge (2002); SBOT In-House Counsel Course: Marital Property Rights

in Corporate Benefits for High-Level Employees (2002); SBOT 19th AnnualLitigation Update Institute: Distinguishing Fact Testimony, Lay Opinion &Expert Testimony; Raising a Daubert Challenge (2003); State Bar CollegeSpring Training: Current Events in Family Law (2003); SBOT PracticeBefore the Supreme Court: Texas Supreme Court Trends (2003); SBOT 26th

Annual Advanced Civil Trial: Distinguishing Fact Testimony, Lay Opinion& Expert Testimony; Challenging Qualifications, Reliability, andUnderlying Data (2003); SBOT New Frontiers in Marital Property: BustingTrusts Upon Divorce (2003); American Academy of Psychiatry and theLaw: Daubert, Kumho Tire and the Forensic Child Expert (2003); AICPA-AAML National Conference on Divorce: Cutting Edge Issues–NewAlimony Theories; Measuring Personal Goodwill

Distinguishing Personal Goodwill From Enterprise Goodwill

TABLE OF CONTENTS

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

II. THE INEQUITIES OF MODERN DIVORCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A. The Partnership Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2B. The Reliance Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3C. The Restitution Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3D. Human Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4A. WHAT IS GOODWILL? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1. Seeking a Better Legal Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62. Accounting Definitions of Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103. Goodwill as Residual Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114. Pulling Identifiable Intangibles Out of Residual Goodwill. . . . . . . . . . . . . . . 145. What Tax Law Says About Separable Intangible Assets. . . . . . . . . . . . . . . . 18

B. THE DIVISIBILITY OF GOODWILL UPON DIVORCE. . . . . . . . . . . . . . . . . . . . 20Arizona. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Arkansas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21California. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Colorado. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Connecticut. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25District of Columbia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Florida. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Illinois. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Indiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Kansas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Kentucky. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Louisiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Maryland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Massachusetts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Missouri. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Nebraska. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Nevada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33New Jersey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33New York. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Oklahoma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Pennsylvania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41South Carolina. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Tennessee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Texas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43


Utah. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Virginia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Washington. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Wisconsin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

C. VALUING GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461. Goodwill of the Going Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462. Commercial or Enterprise Goodwill vs. Personal Goodwill. . . . . . . . . . . . . . 46

(a) Valuing Other Intangible Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 47(b) Determining Personal Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

3. What’s Left is Entity Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49D. HOW DOES PERSONAL GOODWILL COMPARE TO “HUMAN CAPITAL”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49


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Distinguishing Personal Goodwillfrom Enterprise Goodwill

byRichard R. Orsinger

Board Certified in Family Law& Civil Appellate Law

Texas Board of Legal Specialization

I. INTRODUCTION. This article deals with theissues of personal goodwill and the way it relatesto the concept of human capital. In a divorce,human capital can be considered a justificationfor, or measure of, compensatory alimony. Thistopic is covered in another paper by the author,Cutting Edge Issues: New Alimony Theories;Measuring Personal Goodwill, AICPA/AAMLNational Conference on Divorce (2006), whichdiscusses compensatory alimony under theAmerican Law Institute’s PRINCIPLES OF THE LAWOF FAMILY DISSOLUTION. Human capital can alsobe addressed through property division, as NewYork does, by valuing the human capitalmanifested in a professional degree or professionallicense and dividing its value in a divorce. Moststates, however, consider a spouse’s human capitalto be personal, and to amount to nothing morethan post-divorce income which belongsexclusively to the spouse who earns it, even if thathuman capital was built up during the marriage.

The concept of human capital also finds its wayinto the discussion of personal goodwill versusenterprise goodwill, in Section III of this Article.The business-owning spouse–who is thehypothetical seller in the hypothetical sale of thebusiness at fair market value at the time ofdivorce–has personal goodwill, which to someextent includes his or her human capital. Moststates exclude the value of this personal goodwillfrom the property division on divorce. But thebusiness itself can also (and almost always does)have human capital, which is different from thespouse’s own 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.

The analysis of goodwill upon divorce points upthe inadequacy of certain core legal concepts,dating back more than 100 years, to address lifeand divorce in the 21st century. Our economy iswell into a transition from the sale of goods to thespeedy provision of services and information at alower price, and from a focus on tangible assets toa focus on intangible assets. Due to cars, airplanes,telecommunications, and personal computers,physical proximity is no longer a condition to acommercial or even professional transaction. Dueto the relaxation of international trade barriers,vendors increasingly face world-wide pricecompetition. Due to economies of scale, Walmartsare replacing individual stores. Due to lack ofspare time, mail order catalogues, cable shoppingchannels, and the internet are fast becoming ourprimary marketplaces for everything but freshfood. Location, location, location--the hallmark ofthe historical conception of goodwill--is becomingless important, or non-important. But our propertylaw, and our marital property law, are laggingbehind this transition. Additionally, the financialaccounting profession in America recognizesintangible assets, like goodwill, as assets to bereflected on the business balance sheet only whenthey are purchased, and not when they are self-created. Recognizing all identifiable intangibleassets, whether purchased or self-created, as assetswhich belong to the business not only willrevolutionize the way investors look at companies,but it will also (eventually) affect the legaldiscussion of personal versus enterprise goodwill,and perhaps even human capital as an asset toconsider on divorce.

II. THE INEQUITIES OF MODERNDIVORCE. The problem for (most typically)women under “no fault” or unilateral divorce wasdescribed in Aspasia Tsaoussis, ProtectingHomemakers' Marriage-Specific InvestmentsUnder No-Fault Divorce: A Model forRestructuring Alimony in Civil Law Countries, 6AM. L. & ECON. REV. 217, 220-221 (2004) :

Marriage is a long-term contract in whichthe timing of the promises exchanged


2

between the spouses is veryasymmetrical: the wife typically deliversher promise early in the marriage (bybearing and rearing children), whereas thehusband delivers his promise later in themarriage (by providing adequate financialsupport to his family). Since the husband'sincome as the primary wage-earnerusually increases as he approaches thepeak of his career, at a time when the wifehas already "performed" her part of themarriage contract, the husband has anincentive to exit the marriage at this laterstage. Thus, divorce may have adetrimental impact on the economicwell-being of wives, especially if they hadbeen full-time homemakers duringmarriage.

Cynthia Lee Starnes, a Professor of Law atMichigan State University College of Law,describes the problem of divorce in the followingway, in Mothers as Suckers: Pity, Partnership,and Divorce Discourse, 90 IOWA L. REV. 1513,1515-16 (April 2005):

Because time and energy spent caring forchildren are not invested in education,training, or labor-force participation,primary caretaking often reduces earningsand ultimately earning capacity. Recentstudies confirm that motherhood isassociated with a significant decline inwages, which increases with the numberof children in the household.

Several approaches are taken by different state inequitably distributing the loss arising from brokenexpectations upon divorce. Each approach hasdeficiencies if the marriage ends before sufficientproperty has been accumulated to reward thewife/mother adequately for her non-economiccontributions made at the expense of building herown human capital in terms of increased earningcapacity.

A. The Partnership Approach. One approach to

distributing the loss on divorce is a partnershipapproach to acquired property, resulting in anequal or near even split of accumulated assets atthe time of divorce. See e.g. Alicia Brokars Kelly,Rehabilitating Partnership Marriage as a Theoryof Wealth Distribution at Divorce: in Recognitionof a Shared Life, 19 WISCONSIN WOMEN'S L.J. 141(2004). This is the approach in communityproperty jurisdictions where equal co-ownershipis recognized throughout the marriage as well asupon divorce. The partnership approach does noteliminate inequities of divorce in instances wherethe marriage ends before sufficient wealth isaccumulated to compensate the under-employedspouse. And the partnership approach has beencriticized because of the law’s focus on tangibleassets. In many marriages, the most valuable assetis “human capital.” Human capital has beendescribed as “human skills, knowledge, andexperience acquired or increased throughinvestments of time, energy, and money in anindividual as a form of wealth enhancing futureincome.” Alicia Brokars Kelly, RehabilitatingPartnership Marriage as a Theory of WealthDistribution at Divorce: In Recognition of aShared Life, 19 WIS. WOMEN’S L.J. 141, 143, 163-64 (2004). If the wife raised children andmaintained the home while the husbandprogressed in his career, increasing his earningcapacity, then by explicit or tacit agreement thepartners specialized in different areas for theirjoint benefit. Where child-rearing responsibilitiesend when the children go off to college or careers,the future benefits of this division of labor andspecialization manifest through the husband’senhanced future earnings. A component of thosefuture earnings is the husband’s future labor. Butanother component of those earnings is the maritalpartners’ investment in raising the husband’searning capacity by investing in his human capital.Since post-divorce earning capacity is, in moststates, not divisible property upon divorce, thepartnership approach to divorce sometimes leavesthe most valuable asset of the marriage out of theequation.

The New York Court of Appeals addressed the


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issue of human capital by recognizing a husband’smedical license as marital property to be dividedon divorce, in O’Brien v. O’Brien, 489 N.E.2d 712(N.Y. 1985). This approach was followed inWoodworth v. Woodworth, 337 N.W.2d 332(Mich. App. 1983) (husband’s law degree ismarital property), and In re Marriage ofWashburn, 677 P.2d 152 (Wash. 1984) (husband’sveterinary degree is community property subjectto division on divorce). This approach wasrejected in Stevens v. Stevens, 492 N.E.2d 131(Ohio 1986), on the grounds that a professionaldegree is not property because it has no exchangevalue, is personal to the holder, terminates ondeath, cannot be transferred or pledged, and ismerely an intellectual achievement. Id. at 117-18.An additional ground for rejection was thedifficulty in valuing a degree or license, due to thespeculative nature of predicting future earnings.Id. at 118-19. The court in Stevens instead heldthat “the future value of a medical degree acquiredby one of the parties during marriage...should beconsidered an element in reaching an equitableaward of alimony....” Id. at 134. Thus, in theStevens case allowance was made for humancapital through alimony, as opposed to propertydivision. Most states have rejected (or wouldreject– if asked) the concept of human capital asan asset, because they believe that it isindistinguishable from future income, which is inmost states not a marital asset. Where the inequitycannot be addressed through alimony (as inTexas), the deficiency in the partnership approachcan be unjust.

B. The Reliance Approach. Another suggestionfor rectifying the inequities of divorce is thereliance model, where “a homemaker'schildbearing and child-rearing services, herinvestment in the human capital of the primarybreadwinner, her choice to be economicallydependent in order to enhance the economicproductivity of her husband, her decision to foregoan education or to compromise her career, and soon” is compensated based on the husband’s wages.Aspasia Tsaoussis, Protecting Homemakers'Marriage-Specific Investments Under No-Fault

Divorce: A Model for Restructuring Alimony inCivil Law Countries, 6 AM. L. & ECON. REV. 217,224 (2004). As Brinig and Carbone point out,given the increased earning capacity of women inrecent years, the economic reliance is notnecessarily all by the wife. They comment that“[w]hen a working wife leaves a lucrative positionto care for the children or her husband foregoes acareer enhancing transfer because she would notbe able to relocate, the economic consequencestranscend the traditional notions of support and thedivision of marital property.” Brinig & Carbone,The Reliance Interest in Marriage and Divorce, 62TUL. L. REV. 855, 856 (1988). The problem withthe reliance rationale is that the traditional remedyto protect the reliance interest is to restore theparties to the position they would have been in hadthe contract (in this context marriage) never beencreated. Id. at 870. This explains rehabilitativealimony, which attempts to afford thedisadvantaged spouse the financial wherewithallto recover some lost earning capacity. In reality,however, no amount of education can make up forbeing off the career path for a long time. Inpractice, alimony awards in some states tendtoward protection of the “expectation interest,”which calls for the parties to be put in the positionthey would have been in had the “contract” beenperformed. While no states split income forever,some states permit judges to continue alimonypayments past four to eight years of schooling.

C. The Restitution Approach. A thirdsuggestion for rectifying the inequities of divorceis restitution. Restitution requires three elements:(i) the defendant must have received a cognizablebenefit; (ii) the benefit must have been conferredat the plaintiff's expense; and (iii) the defendant'sretention of the benefit must be unjust. Ira M.Ellman, The Theory of Alimony, 77 CAL. L.REV. 1,25 (1989); Pyeatte v. Pyeatte, 135 Ariz. 346, 661P.2d 196, 204 (Ariz. Ct. App. 1982). Underrestitution theory, the disadvantaged spouse’srecovery is measured by the amount of herinvestment. For example, in Pyeatte, the wife wasawarded a money judgment on divorce tocompensate her for her contribution to the


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husband’s legal education, where the divorceoccurred soon after the education was completed.

D. Human Capital. Traditionally, economistshave seen the generation of wealth as arising fromthe three factors of production: land, labor, andcapital goods. The use of the term “humancapital” in modern neoclassical economicliterature is said to date back to Jacob Mincer'spioneering article Investment in Human Capitaland Personal Income Distribution in The Journalof Political Economy in 1958. Gary Becker, in hisbook HUMAN CAPITAL, published in 1964, arguesthat a person invests in his or her own humancapital (via education, training, medical treat-ment), and that person’s income depends partly onthe rate of return on that human capital. GaryBecker later received a Nobel Prize for his workon 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 bankaccount, a hundred shares of IBM stock,assembly lines, or steel plants in theChicago area. These are all forms ofcapital in the sense that they are assetsthat yield income and other useful outputsover long periods of time.

But these tangible forms of capital are notthe only ones. Schooling, a computertraining course, expenditures of medicalcare, and lectures on the virtues ofpunctuality and honesty also are capital.That is because they raise earnings,improve health, or add to a person's goodhabits over much of his lifetime.There fo re , economis t s r egardexpenditures on education, training,medical care, and so on as investments inhuman capital. They are called humancapital because people cannot beseparated from their knowledge, skills,

health, or values in the way they can beseparated from their financial andphysical assets.

Education and training are the mostimportant investments in human capital.Many studies have shown that highschool and college education in theUnited States greatly raise a person'sincome, even after netting out direct andindirect costs of schooling, and even afteradjusting for the fact that people withmore education tend to have higher IQsand better-educated and richer parents.Similar evidence is now available formany years from over a hundred countrieswith different cultures and economicsystems. The earnings of more educatedpeople are almost always well aboveaverage, although the gains are generallylarger in less developed countries.

* * *

The economics of human capital havebrought about a particularly dramaticchange in the incentives for women toinvest in college education in recentdecades. Prior to the sixties Americanwomen were more likely than men tograduate from high school but less likelyto continue on to college. Women whodid go to college shunned or wereexcluded from math, sciences, economics,and law, and gravitated toward teaching,home economics, foreign languages, andliterature. Because relatively few marriedwomen continued to work for pay, theyrationally chose an education that helpedin "household production"—and no doubtalso in the marriage market—byimproving their social skills and culturalinterests.

All this has changed radically. Theenormous increase in the laborparticipation of married women is the


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most important labor force change duringthe past twenty-five years. Many womennow take little time off from their jobseven to have children. As a result thevalue to women of market skills hasincreased enormously, and they arebypassing traditional "women's" fields toenter accounting, law, medicine,engineering, and other subjects that paywell. Indeed, women now compriseone-third or so of enrollments in law,business, and medical schools, and manyhome economics departments have eithershut down or are emphasizing the "newhome economics." Improvements in theeconomic position of black women havebeen especially rapid, and they now earnjust about as much as white women.

Of course, formal education is not theonly way to invest in human capital.Workers also learn and are trained outsideof schools, especially on jobs. Evencollege graduates are not fully preparedfor the labor market when they leaveschool, and are fitted into their jobsthrough formal and informal trainingprograms. The amount of on-the-jobtraining ranges from an hour or so atsimple jobs like dishwashing to severalyears at complicated tasks likeengineering in an auto plant. The limiteddata available indicates that on-the-jobtraining is an important source of the verylarge increase in earnings that workers getas they gain greater experience at work.Recent bold estimates by ColumbiaUniversity economist Jacob Mincersuggest that the total investment inon-the-job training may be well over $100billion a year, or almost 2 percent ofGNP.

An article by John F. Tomer, Personal Capitaland Emotional Intelligence: an IncreasinglyImportant Intangible 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 trendamong economists to look beyond physicalcapital, natural resources, and labor, as bases forwealth creation, and to consider human capital asa basis. Tomer says that “the term capital hasincreasingly come to refer to intangible factorssuch as the enhanced human capacities owing toeducation and training.” While a long list ofeconomists dating back several centuries recog-nized human capital, according to Tomer theseeconomists were contemplating personal skills andabilities. Tomer notes, for example, that “PaulRomer [1990, 253] breaks down workers' humancapital endowment into three types of skills thatare relevant for production: (1) physical skillssuch as eye-hand coordination and strength, (2)educational skills acquired in primary andsecondary school, and (3) scientific talent acquiredin post-secondary education.” Tomer, however,focuses on a new type of human capital, what hecalls social and organizational capital, that “are theproduct of activities that create socialrelationships.” This type of capital reposes “not inindividuals per se but in the relationships orconnections between people.”

Tomer discusses other terms used to describehuman capital, 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 embodiedin individuals. However, personal capitaldiffers from standard human capital inthat the human capacity involved is notthe type developed by academic educationor by the usual types of job-relatedtraining. The personal capital capacitiesare fundamentally different fromcognitive intelligence or intellectualknowledge. Personal capital relates to anindividual's basic personal qualities andreflects the quality of an individual'spsychological, physical, and spiritualfunctioning [Tomer, 1996, 626-27;


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Tomer, 2001, 251]. Further, it mirrorsone's internal biochemical balance,physical health and conditioning,psychological strengths and weaknesses,and purpose in life. A person's stock ofpersonal capital is partly a product ofone's genetic inheritance, partly a result ofthe life-shaping events that one hasencountered, and partly an outcome ofone's efforts to mature and to grow innonintellectual ways. It is in partproduced intentionally. Personal capitalqualities are related to a person's capacityto work or consume in that they underliethe more specific capacities (standardhuman capital and consumption capital)that a person invests in to be qualified forwork tasks or to be able to enjoyconsumer goods. Moreover, certainpersonal capital qualities are aprerequisite for developing successfulorganizational relationships (social andorganizational capital) [Tomer, 1999a,46-48]. Personal capital capacities expandone's achievement possibilities.

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 statesexclude from the property division upon divorce.

The foregoing economic description of “humancapital” suggests that a property-based approach todealing with disparate earning capacity upondivorce (such as putting a value on a professionaldegree or professional license) will encountercomplexities that may overwhelm the legalanalysis or the valuation process.

III. PERSONAL AND ENTERPRISEGOODWILL. In some states personal goodwillis divisible on divorce and in some states it is not.In some states enterprise goodwill (sometimescalled commercial goodwill or professionalgoodwill) is divisible on divorce and in somestates it is not. Part of the differences in law

results from differences in meaning of the term“goodwill.” The following discussions break theterm “goodwill” down into components that canbe more accurately discussed. Because someappellate cases use the term “professionalgoodwill” to mean the enterprise goodwill of aprofessional business, and other cases use the term“professional goodwill” to mean the personalgoodwill of a professional, in order to avoidconfusion this article will not use the term“professional goodwill.”

A. WHAT IS GOODWILL? Goodwill can beviewed from both a legal perspective and anaccounting perspective. Because family law inAmerica consists of fifty-one different bodies oflaw, there is great variety in the legal approachesto goodwill upon divorce. There are someprinciples that are shared between states due to thecommon heritage of English law (Louisianaexcepted) defining what constitutes “property.”But there are wide differences in the law ofdifferent states on the question of what constitutesgoodwill, and what goodwill is divisible ondivorce.

1. Seeking a Better Legal Definition. Onemember of Congress said this about goodwill, inconnection with the savings and loan crisis:“Goodwill is not cash. It is a concept, and ashadowy 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 classic American legal definition of goodwillwas given by Justice Story in his treatise onpartnership law:

the advantage or benefit, which isacquired by an establishment, beyond themere value of the capital, stock, funds, orproperty employed therein, inconsequence of the general publicpatronage and encouragement, which itreceives from constant or habitualcustomers, on account of its local


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position, or common celebrity, orreputation for skill or affluence, orpunctuality, or from other accidentalcircumstances or necessities, or even fromancient partialities or prejudices.

Story, COMMENTARIES ON THE LAW OFPARTNERSHIP § 99 (6th Ed.1868). This definitionwas cited by the U.S. Supreme Court inMetropolitan Nat. Bank v. St. Louis Dispatch Co.,49 U.S. 436, 446, 13 S.Ct. 944, 948 (U.S. Sup. Ct.1893).

The U.S. Supreme Court once described goodwillas “that element of value which inheres in thefixed and favorable consideration of customers,arising from an established and well-known andwell-conducted business.” 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 hastaken different forms over the years, theshorthand description of good-will as "theexpectancy of continued patronage," Boev. Commissioner, 307 F.2d 339, 343(CA9 1962), provides a useful label withwhich to identify the total of all theimponderable qualities that attractcustomers to the business. See HoustonChronicle Publishing Co. v. UnitedStates, 481 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 describethe aggregate of all of the intangibles of abusiness.... Since a normal rate of returnusually is calculated on tangible assets

only, goodwill has been used as asynonym for the return on all theintangibles of a business. In a morerestricted sense, goodwill is theexpectancy that the old customers willresort to the old place. It is the sum totalof all the imponderable qualities thatattract customers and bring patronage tothe business without contractualcompulsion. Another definition equatesgoodwill with a rate of return oninvestment which is above normal returnsin the industry and limits it to the residualintangible asset that generates earnings inexcess of a normal return on all othertangible and intangible assets.

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

Other federal courts have described goodwill:Houston Chronicle Publishing Co. v. UnitedStates, 481 F.2d 1240, 1248 (5th Cir. 1973) (the"ongoing expectation that customers would utilize[a company'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 imponderablequalities which attract the customer of abusiness--what brings patronage to the business");Dodge Bros., Inc. v. United States, 118 F.2d 95,101 (4th Cir. 1941) ("reasonable expectancy ofpreference in the race of competition"); IthacaIndustries, 97 T.C. 253 (slip op. at 17-18), 1991WL 151392 (1991) (“While goodwill andgoing-concern value are often referred toconjunctively, technically going-concern value isthe 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 acontinuous course of dealing, which may beexpected to continue indefinitely"), aff’d, IthacaIndustries, Inc. v. Commissioner, 17 F.3d 684 (4thCir. 1992).


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In Canterbury v. Commissioner, 99 T.C. 223, 247(1999), the Tax Court said: “The essence ofgoodwill is a preexisting business relationshipfounded upon a continuous course of dealing thatcan be expected to continue indefinitely.Computing & Software, Inc. v. Commissioner, 64T.C. 223, 233 (1975). Goodwill is characterized as‘the expectancy of continued patronage, forwhatever reason.’ Boe v. Commissioner, 307 F.2d339, 343 (9th Cir.1962), affg. 35 T.C. 720 (1961);see Philip Morris, Inc. v. Commissioner, 96 T.C.606, 634 (1991), affd. ---affd. 970 F.2d 897 (2dCir., 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 intangiblevalue. In some instances it may not be possible tomake a separate appraisal of the tangible andintangible assets of the business. The enterprisehas a value as an entity. Whatever intangiblevalue there is, which is supportable by the facts,may be measured by the amount by which theappraised value of the tangible assets exceeds thenet book value of such assets.”

State court appellate opinions describe goodwill invarious ways.

<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 abusiness or practice that exceeds the combinedvalue of the physical assets.’ . . . The marketvalue of goodwill is the amount a willing buyerwould pay for a professional practice in excess ofthe value of the physical assets. . . . A value basedupon the capitalization of excess earnings method

is the capitalization at a fair rate of return of theamount by which the average income of theprofessional practitioner exceeds the hypotheticalsalary that would be earned as an employee withsimilar qualifications.” [citations omitted]

<Yoon v. Yoon, 711 N.E.2d 1265, 1268-69 (Ind.Sup. Ct. 1999): “Goodwill has been described asthe value of a business or practice that exceeds thecombined value of the net assets used in thebusiness. . . . Goodwill in a professional practicemay be attributable to the business enterprise itselfby virtue of its existing arrangements withsuppliers, customers or others, and its anticipatedfuture customer base due to factors attributable tothe business. It may also be attributable to theindividual owner's personal skill, training orreputation. This distinction is sometimes reflectedin the use of the term ‘enterprise goodwill,’ asopposed to ‘personal goodwill.’ Enterprisegoodwill ‘is based on the intangible, but generallymarketable, existence in a business of establishedrelations with employees, customers andsuppliers.’ . . . Factors affecting this goodwill mayinclude a business's location, its name recognition,its business reputation, or a variety of other factorsdepending on the business. Ultimately thesefactors must, in one way or another, contribute tothe 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 notnecessarily marketable in the sense that there is aready and easily priced market for it, but it is ingeneral transferrable to others and has a value toothers.”

<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, capablestaff and personnel, high credit standing,reputation for superior products and services, and


9

favorable location. See also AccountingPrinciples Board, Op. 17, "Intangible Assets," inFASB Financial Accounting Standards 266-72(1981). [FN3] In a broad sense goodwill includesa whole host of intangibles including the qualityof management, the ability of the organization toproduce and market efficiently, and the existenceand nature of competition. Some writers have beencareful to differentiate between going concernvalue and goodwill. See Paulsen, "Goodwill andGoing Concern Value Reconsidered," Mergers &Acquisitions, Winter 1980, at 10. Goodwill iskeyed to reputation; going concern value to theenhanced value of the assets due to their presencein an established firm. See Danzig & Robison,"Going Concern Value Reexamined," The TaxAdviser, Jan. 1980, at 32. Going concern value hasmany of the characteristics of goodwill and inmany situations will constitute an asset enhancingthe value of an enterprise. In that event it will bea component of the property subject to equitabledistribution. Going concern value may beprevalent in some law firms. It is probably notsignificant in an individual law practice. . . .

FN3. APB Opinions areauthoritative statements by theAmerican Institute of CertifiedPublic Accountants of generallyaccepted accounting principles.See "Forward," FASB FinancialAccounting Standards, supra; 2APB 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 extent towhich future estimated earnings exceed the normalreturn on the investment. Walker, "WhyPurchased Goodwill Should be Amortized on aSystematic Basis," 95 J. Acc'tancy 210, 213(1953); accord, Rev.Rul. 59-60, § 4.02(f), 1959-1C.B. 237, 241 (stating that value of goodwill "restsupon the excess of net earnings over and above afair return on the net tangible assets"). The pricepaid for goodwill then is equivalent to the excess

of actual earnings over expected earnings based ona normal rate of return on investment. Walker,supra, at 213; see Kerley, "Intangible Assets," in1 Accountants' Handbook 23-10 (L. Seidler & D.Carmichael 6th ed.1981). When goodwill exists,it has value and may well be the most lucrativeasset of some enterprises.

Variances in the forms of an enterprise do noteliminate goodwill, though they may affect itsworth. Goodwill may be present whether that formis a partnership, corporation, joint venture, orindividual proprietorship. See Grayer v. Grayer,147 N.J.Super. 513, 520, 371 A.2d 753 (App. Div.1977); Scherzer v. Scherzer, 136 N.J.Super. 397,400, 346 A.2d 434 (App. Div.1975) (holding noessential difference so far as equitable distributionprinciple is concerned between an interest in anindividual business and one held in corporatename: "The form should not control"), certif. den.,69 N.J. 391, 354 A.2d 319 (1976). Moreover,goodwill exists in personal service enterprises aswell as other businesses. 2 B. Bittker, FederalTaxation of Income, Estates and Gifts ¶ 51.9.3, at51-53 (1981).

In a publicly held corporation one candetermine the total value of a businesswhose stock is publicly traded andtherefore its goodwill by the market priceof the stock. G. Catlett & N. Olson,Accounting for Goodwill 14 (1968). Theexcess over the book or market value ofits assets, however, may also be due tomany and diverse conditions affecting theeconomy as a whole and an industry inparticular. The value of stock in a closelyheld corporation is not fixed by publictrading. Its computation dependsprimarily on the earning power of thebusiness "since goodwill by natureencompasses all those intangibleattributes of a business whose quality canbe demonstrated only by a company'sability to make profits." Id. [Strike-overadded to avoid confusion]


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The calculation of goodwill may dependupon the purpose for which themeasurement is being made. The federalInternal Revenue Service has prescribed aformula approach for income, gift andestate tax purposes. See Rev.Rul. 68-609,1968-2 C.B. 327. The market place, asnoted above, may often provide adifferent figure. Accountants will usuallynot reflect goodwill on a balance sheetuntil after a business has been sold andthen state goodwill in terms of the excesspaid for the net assets over book value. G.Catlett & N. Olson,supra, at 17. Itsevaluation may be complex and difficult.

Judge Pressler in Lavene v. Lavene, 148N.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 of an intangible nature and is commonlydefined as the expectation of continued publicpatronage. . . . Among the elements whichengender goodwill are continuity of name,location, reputation for honest and fair dealing,and individual talent and ability.” [Citationsomitted]

2. Accounting Definitions of Goodwill. Theaccounting profession has developed definitions ofgoodwill. Financial Accounting Standards BoardOpinion No. 16, Business Combinations 316(1970) says: "[T]he excess of the cost of theacquired company over the sum of the amountsassigned to identifiable assets acquired lessliabilities assumed should be recorded asgoodwill." FASB’s Financial AccountingStatement 142 defines goodwill in its Glossary as“[t]he excess cost of an acquired entity over thenet of the amounts assigned to assets acquired andliabilities assumed.” FASB’s June 30, 2005Exposure Draft of the replacement to FAS 141proposes to revise the FAS 142 Glossarydefinition of goodwill to read: “Goodwill: Futureeconomic benefits arising from assets that are notindividually identified and separately recognized.”Exposure Draft, p. 172. FAS 142, ¶ 21, providesthat “[t]he implied fair value of goodwill shall bedetermined in the same manner as the amount ofgoodwill recognized in a business combination isdetermined. That is, an entity shall allocate the fairvalue of a reporting unit to all of the assets andliabilities of that unit (including any unrecognizedintangible assets) as if the reporting unit had beenacquired in a business combination and the fairvalue of the reporting unit was the price paid toacquire the reporting unit. The excess of the fairvalue of a reporting unit over the amountsassigned to its assets and liabilities is the impliedfair value of goodwill.”

Mark O. Dietrich, in Identifying and MeasuringPersonal Goodwill in a Professional Practice,CPA EXPERT (Spring 2005) [reprinted in Dietrich,Segregating Personal and Enterprise Goodwill,THE FIRST EVER AICPA/ASA NATIONALBUSINESS VALUATION CONFERENCE p. 30-14


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(2005), hereafter called “the Dietrich Segregatingarticle”], described personal goodwill in thefollowing terms:

Personal goodwill, then, is the asset thatgenerates cash profits of the enterprisethat are attributed to the businessgenerating characteristics of theindividual, and may include any profitsthat would be lost if the individual werenot present.

3. Goodwill as Residual Value. The wide-ranging discussion over what constitutes divisiblegoodwill upon divorce can be narrowed byrefining the concept of goodwill. In somewritings, 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.This concept of goodwill is more easily measuredthan defined: the measure of this form ofgoodwill is the difference between the price abuyer would pay to buy the going business as awhole and the prices buyers would pay to buyeach individual tangible asset of the business soldseparately. But modern property law recognizesmany intangible assets as enforceable andtransferrable property rights, and these enforceableand transferrable intangible property rights shouldbe discussed and valued in the context of theirspecific legal framework (such as trademark law,trade secret law, contract law applied to long termemployment agreements or covenants not tocompete, etc.), rather than being lumped into thecatch-all category of goodwill. This articlesuggests that the term “goodwill” should used todescribe the narrower category of the ineffablequalities of a particular business that contribute toprofitability, beyond not only tangible assets butalso beyond specifically identifiable intangibleassets that are transferrable with or without thesale of a business. This article also suggests thatthe true nature of “residual goodwill” of mostcompanies in the present mobile, digital andworld-wide economy, where goods and servicesare increasingly fungible, has shifted from

supplier/customer preferences to self-created“human capital” that will stay with the businessafter a sale, including not only research anddevelopment, but also “enhanced humancapacities owing to education and training,” socialand organizational capital of the business, andpersonal capital of co-owners and employees whowill stay with the business (see discussion of JohnTomer, Para. II.D above). These investments,which the business has made in itself, are usuallyexpensed and therefore are not carried as assets onthe balance sheet and are not usually thought of asassets with separably determinable value. As wegrow in our ability to identify and value thehuman capital intangible assets of businesses, thenthese intangible assets too can move out of“residual goodwill” and be recognized as assets ofthe business, further increasing the accuracy ofwhat must be excluded in some states as personalgoodwill in a divorce.

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

Thesis No. One. This article proposes a thesis,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 separable 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 andcompetes.

Restated in business valuation terms, valuing abusiness using the income method yields a valuefor the business based on the use of all tangibleand intangible assets combined. The value oftangible assets can be determined by appraisals,and a reasonable rate of return on that invested


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capital can be determined. The value of intangiblerights that are recognized under contract law orintellectual property law or are otherwiseseparable from goodwill can, admittedly withmore difficulty, be valued and a reasonable rate ofreturn on that invested capital can be determined.Out of the “residual goodwill,” the value of boththe enterprise goodwill and the personal goodwillcan be estimated based on projecting the drop infuture profits of the business that will occur whenthe seller leaves the business and competes with it.The loss in value associated with the drop inprofits is the measure of the seller’s personalgoodwill, and the remaining unallocated intangiblevalue is commercial or enterprise goodwill.Restated more succinctly, category (iii) enterprisegoodwill is what is left of profits after subtractingthe profits attributable to categories (i), (ii), and(iv).

Thesis No. Two. This article proposes a secondthesis, that the reduction in future profitsattributable to the business’s loss of the seller’spersonal goodwill contains three components: (i)the loss in profits associated with losing theseller’s knowledge, skill and experience; (ii) theloss in profits associated with losing co-owners,employees, co-owners, employees, suppliers,customers or referral sources as a result of theseller leaving the business; and (iii) the loss inprofits associated with losing co-owners,employees, suppliers, customers or referralsources as a result of the seller competing with thebusiness. (Further discussion is warranted aboutwhether the possible loss of co-owners oremployees not under long term contracts shouldbe factored into a reduction in future revenues orshould instead be treated as a variation on a “keyman” discount).

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 sub-stituted for by hiring a new employee withequivalent knowledge, skill and experience, whilethe loss of profits to the business resulting from

the seller’s leaving, or leaving and competing,cannot be made whole by hiring a new employee.

Note that the reasonable compensation assigned tothe seller in normalizing the historical profits ofthe business is identical to the cost of hiring areplacement employee with similar knowledge,skill and experience, so there is no net loss to thebusiness purely from the loss of the seller’sknowledge, skill and experience. The knowledge,skill and experience component of the seller’spersonal goodwill can be fully accounted for byassessing reasonable compensation for the seller’sservices. See Section III.C.2(b) below. In otherwords, the familiar process of normalizingbusiness profits, by adjusting the seller’scompensation to a reasonable compensation level,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,since the needed knowledge, skill and experiencecan be acquired by paying an employeecompensation commensurate with the seller’slevel of knowledge, skill and experience.

The loss to the business of losing the seller’s tiesto co-owners, employees, suppliers, customers andsources of future business cannot be replaced byhiring a new employee with equivalentknowledge, skill and experience, since the newemployee will have none of the seller’srelationships with co-owners, employees, sup-pliers, customers, and sources of future business.See Section III.C.2(b) below. These are the typesof relationships discussed above in connectionwith John Tomer’s concept of “social capital,” asdistinguished from the more traditional concept of“standard human capital,” such as knowledge,skill and 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 connectionwith the business (i.e, keeping his/her name on thedoor, face in advertisements, etc.). See Martin Ice


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Cream Co. v. Commissioner, 110 T.C. 189, 207(1998) (“This court has long recognized thatpersonal relationships of a shareholder-employeeare not corporate assets when the employee has noemployment contract with the corporation. Thosepersonal assets are entirely distinct from theintangible corporate asset of corporate goodwill.).

Note that a selling owner’s relationship-basedconnections to suppliers, customers, and sourcesof future business are not necessarily entirelybased on personal relationships. Customers whodon’t personally know the selling owner could feelan attraction to the selling owner based on aperception arising from advertising, or word-of-mouth, or prominence in the community, or theseller’s membership in a certain church, or race,gender or ethnicity, or any other attribute, so longas the attribute is perceived to be connected to theseller of the business, and not to the business or toa co-owner or employee of the business, or to atrademark or brand name, etc.

The distinction between the effect of the seller’sleaving versus the effect of competing issupported by the fact that a seller can leave abusiness without competing with it, such as bydeath, retirement, or relocation to another market.A buyer will pay more for the business when theseller has died, retires, or moves to a differentmarket, than the buyer will pay if the seller isexpected to compete with the business after thesale. 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 justbecause the seller leaves, even if he or she doesnot 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 are

enforceable. The value of the covenant not tocompete can be measured by the projected loss inprofits attributable to the seller’s competing withthe business, which by the way equates to theprice the business will pay for a noncompeteagreement. This equality causes some valuators tosay that market data on the cost of covenants notto compete reflects this loss of profits expectedfrom the seller’s competition in a particularcompany being valued. This equality is warpedby the difference in treatment between thepurchase price for stock and the price paid for anon-compete agreement. This equality is furtherwarped by the seller’s tax incentive to translate thecost of a noncompete agreement into a consultingagreement that is deductable to the business as acurrent expense.

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 co-owners, employees, suppliers,customers and sources of future business that“drift away” because the selling owner has left thebusiness.

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 thatthe seller’s historical compensation is normalizedto a level that matches the seller’s level ofknowledge, skill and experience, so that a suitablereplacement employee can be hired at thenormalized compensation level. However, theloss to the business which results from terminationof personal relationships between the seller andco-owners, employees, suppliers, customers, andsources of future business, cannot be erased byhiring a new employee with equivalentknowledge, skill and experience, because the newemployee will have none of these personalrelationships. This loss of relationships must begauged separately, by projecting the increased cost


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and lost revenue that the business will sufferbecause those historical ties have been severed.And the business may suffer a loss arising fromthe seller’s mere departure, even if the seller doesnot compete. One the other hand, if the seller doescompete, the losses occasioned by the seller’sdeparture may be mostly subsumed in the lossesoccasioned by the seller’s competing.

4. Pulling Identifiable Intangibles Out ofResidual Goodwill. The lawyer and businessvaluator should account for intangible assetsseparately from residual goodwill, where possible.Not only may the capitalization rates for differentintangible assets be different, depending on thelongevity and risk of the asset, but alsoidentifiable intangible assets of the business aretransferrable with the business, and thus are notpart of personal goodwill. The accountingprofession is going to have to lead the legalprofession in this effort to pull recognizedintangible rights out of residual goodwill, becausemany appellate courts are still quoting a 138 yearold mercantile definition of goodwill, and citingcomponents of goodwill that prevailed before theonset of telecommunications, the automobile, theairplane, personal computers, and worldwide pricecompetition. This is not to say that the accountingprofession has fully adjusted to the “neweconomy” where intangibles are an importantsource of wealth. FASB now says to reportintangible rights that are separable from goodwillwhen such rights are purchased, but not whensuch rights result from self-investment. There maybe an unstated reluctance to treat expenditures onself-created intangibles as capital investments andnot expenses, since that would increase currentearnings (and bonuses and stock options based onimproved earnings) and would be hard to police.But until self-created intangible assets arerecognized as assets and included on the balancesheet, the balance sheet will continue to be of littleuse in valuing a business, and the entity valuederived by business valuators from the normalizedincome statement, in conjunction with a cap rateor income multiplier, will continue to reflect valuein excess of recognized assets, which people will

continue to call “goodwill,” which some courtswill continue to say is not divisible upon divorce.

The Importance of Intangible Assets in the “NewEconomy.” The historical focus of the courtsystem has been on goodwill as some specialpreference in the minds of past or existingcustomers. In the present economy of shoppingfrom mail order catalogues, on cable tv, and overthe internet, with delivery by mail, e-mail,Federal Express, or UPS, of the delivery ofsoftware, entertainment and information overtelephone lines or coaxial cable, or satellite, offree trade and world-wide price competition, ofhuge Walmarts replacing small stores, of HMOsand PPOs and hospitals controlling the flow ofpatients, and of lawyer advertising, the oldconception of goodwill, which now applies mostlyto brand recognition (customer loyalty) and fast-food franchises (location), is important to fewerand fewer companies. In the 21st century, formany corporations most of the goodwill of thebusiness is its human capital.

The importance of intangible assets is thedistinguishing feature of the neweconomy. By and large, existing financialstatements recognize those assets onlywhen they are acquired from others.Accounting standard setters shoulddevelop a basis for the recognition andmeasurement of internally generatedintangible assets.

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


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which means that “businesses are investing nearlyas much in intangibles as they are in plant andequipment (business investment in fixednonresidential plant and equipment in 2000 was$1.1 trillion).” Nakamura also suggested that athird of the value of U.S. corporate assets areintangibles. By “intangibles” Nakamura means“private expenditures on assets that are intangibleand necessary to the creation and sale of new orimproved products and processes. These includedesigns, software, blueprints, ideas, artisticexpressions, 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 createprivate rights to sell new products.” Leonard I.Nakamura, What Is the U.S. Gross Investment inIntangibles? (At Least) One Trillion Dollars aYear!, <http://www.phil.frb.org/files/wps/2001/wp01-15.pdf>.

According to investment researcher JackCiesielski: “For 168 companies in the S & P 500that had intangibles in 1990 and in 1999, theaverage ratio of intangibles to total assets was13% in 1990 and grew to 18% by 1999. The resultis even more startling when intangibles arecompared to common equity: in 1990, the averageratio was 49%, and it swelled to nearly 73% by1999.” <http://www.accountingobserver.com/co-mmentary/briefs/2001/fasb-goodwill.asp>

Consider this: the richest man in the world doesnot sell cars, or hamburgers, or oil. He sellsintangible assets.

Financial Accounting’s Treatment of IntangibleAssets. Accounting in the USA has treated self-investment in intangibles as an expense rather thanan investment, so the value of this self-investmentdoes not show up on the balance sheet, and theincome statement fails to capture this investmentin future income. Thus income appears to beattributable in a mysterious way to “goodwill” ininstances when it is really attributable to self-investment in intangible assets that are notcaptured on either the balance sheet or the income

statement.

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

26. An asset has three essentialcharacteristics: (a) it embodies a probablefuture benefit that involves a capacity,singly or in combination with other assets,to contribute directly or indirectly tofuture net cash inflows, (b) a particularentity can obtain the benefit and controlothers' access to it, and (c) the transactionor other event giving rise to the entity'sright to or control of the benefit hasalready occurred. Assets commonly haveother features that help identify them—forexample, assets may be acquired at a costand they may be tangible, exchangeable,or legally enforceable. However, thosefeatures are not essential characteristics ofassets. Their absence, by itself, is notsufficient to preclude an item's qualifyingas an asset. That is, assets may beacquired without cost, they may beintangible, and although not exchangeablethey may be usable by the entity inproducing or distributing other goods orservices. Similarly, although the ability ofan entity to obtain benefit from an assetand to control others' access to itgenerally rests on a foundation of legalrights, legal enforceability of a claim tothe benefit is not a prerequisite for abenefit to qualify as an asset if the entityhas the ability to obtain and control thebenefit in other ways.

It is clear that many intangible assets meet thisFASB 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 Statements141, Business Combinations, and 142, Goodwill


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and Other Intangible Assets. The stated reasonwas that “[a]nalysts and other users of financialstatements, as well as company managements,noted that intangible assets are an increasinglyimportant economic resource for many entities andare an increasing proportion of the assets acquiredin many transactions.” A more accurateassessment of intangible assets was desired.

FAS 141 said this about recognizing intangibleassets separately from goodwill:

Intangible assets

39. An intangible asset shall berecognized as an asset apart fromgoodwill if it arises from contractual orother legal rights (regardless of whetherthose rights are transferable or separablefrom the acquired entity or from otherrights and obligations). If an intangibleasset does not arise from contractual orother legal rights, it shall be recognized asan asset apart from goodwill only if it isseparable, that is, it is capable of beingseparated or divided from the acquiredentity and sold, transferred, licensed,rented, or exchanged (regardless ofwhether there is an intent to do so). Forpurposes of this Statement, however, anintangible asset that cannot be sold,transferred, licensed, rented, or exchangedindividually is considered separable if itcan be sold, transferred, licensed, rented,or exchanged in combination with arelated contract, asset, or liability. Forpurposes of this Statement, an assembledworkforce shall not be recognized as anintangible asset apart from goodwill.Appendix A provides additional guidancerelating to the recognition of acquiredintangible assets apart from goodwill,including an illustrative list of intangibleassets that meet the recognition criteria inthis paragraph.

FAS 142 requires that intangible assets, of

acquired companies, must be amortized over theiruseful lives, or if the useful life is indefinite, thatthe intangible be tested annually for impairment.This alters the previous rule requiring intangibleassets to be amortized over an arbitrary 40 yearperiod. This also results in business valuatorshaving to evaluate each intangible asset based onthe attributes of that intangible asset. FAS 142lists in Appendix A the following examples ofintangible assets: customer lists, patents,copyright, broadcast licenses, airline routeauthority, and trademarks. FAS 142 only appliesto acquired intangibles, and GAAP does notrequire that intangibles developed internally by abusiness must be disclosed on the balance sheet.

As mentioned above, a researcher for FASBauthored a report that dealt in detail withintangible assets: Wayne S. Upton, Jr., SpecialReport: Business and Financial Reporting,Challenges from the New Economy, FINANCIALACCOUNTING STANDARDS BOARD (April 2001), online at <http://www.fasb.org/articles&reports/sr_new_economy.pdf#76>. He describesintangible assets as follows:

The Intangibles Research Center at NewYork University offers two possible defi-nitions:

Broad Definition—Intangibles arenonphysical sources of probable futureeconomic benefits to an entity oralternatively all the elements of a businessenterprise that exist in addition tomonetary and tangible assets. [Footnotereference omitted.]

Narrow Definition—Intangibles arenonphysical sources of probable futureeconomic benefits to an entity that havebeen acquired in an exchange ordeveloped internally from identifiablecosts, have a finite life, have market valueapart from the entity, and are owned orcontrolled by the entity.


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The FASB Exposure Draft, BusinessCombinations and Intangible Assets,offered: Intangible assets are noncurrentassets (not including financialinstruments) that lack physical substance.

Id. at 68. [Footnote omitted] Upton describes thelong list of intangible assets contained on ExhibitA to FASB Exposure Draft, BusinessCombinations and Intangible Assets, latershortened by FASB. Id. at 68-69. Uptonobserves: “The items on the list of potentialintangible assets share a common characteristic.Each is separable from the entity or exists byvirtue of contractual or legal rights. Separabilityand contractual/legal rights are not essentialcharacteristics of an asset, but they are evidence ofone characteristic that is essential—control.” Id.70-71. Upton’s paper contains a thoroughdiscussion of what constitutes an intangible assetof a business. This discussion is an excellentreference for intangible assets that might bedifferentiated from residual goodwill.

The June 30, 2005 Exposure Draft of the proposedreplacement to FAS 141, is available at<http://www.fasb.org/draft/ed_business_combinations_replacement_of_fas141.pdf>. Thisdocument is a good source of recent analysis ondifferentiating intangible assets from goodwill.The Exposure Draft defines goodwill as “theexcess of the fair value of the acquiree, as a whole,over the net amount of the recognized andidentifiable assets acquired and liabilitiesassumed.” [emphasis added] FASB ProposedStatement of Financial Accounting StandardsExposure Draft (Business Combinations: areplacement of FASB Statement No. 141) No.1204-001 (June 30, 2005), p. xiv-xv. TheExposure Draft proposes:

An intangible asset is identifiable if itarises from contractual or other legalrights (the contractual-legal criterion) oris separate (separability criterion).Intangible assets that meet thecontractual-legal criterion are identifiable

even if the asset is not transferrable orseparable from the acquiree or from otherlegal rights and obligations.

Id. at 31. The Exposure Draft continues:

A29. The separability criterion meansthat the acquired intangible asset iscapable of being separated or dividedfrom the acquiree and sold, transferred,licensed, rented, or exchanged, eitherindividually or together with a relatedcontract, asset, or liability. Exchangetransactions provide evidence that anintangible asset is separable from theacquiree and might provide informationthat can be used to estimate its fair value.An acquired intangible asset meets theseparability criterion if there is evidenceof exchange transactions for that type ofasset or an asset of a similar type (even ifthose exchange transactions are infrequentand regardless of whether the acquirer isinvolved in them). For example, customerand subscriber lists are frequentlylicensed and thus meet the separabilitycriterion. Even if an acquiree believes itscustomer l is ts have differentcharacteristics from other customer lists,the fact that customer lists are frequentlylicensed generally means that the acquiredcustomer list meets theseparability criterion.

A30. An intangible asset that meets theseparability criterion should berecognized separately from goodwill evenif the acquirer does not intend to sell,license, or otherwise exchange that asset.The separability criterion is met becausethe asset is capable of being separatedfrom the acquiree or combined entity andsold, transferred, licensed, rented, orotherwise exchanged for something elseof value. For example, because anacquired customer list is generallycapable of being licensed, it meets the


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separability criterion regardless ofwhether the acquirer intends to license it.

Id. at 30-31. The Exposure Draft goes on todiscuss in great detail when an intangible assetshould be recognized separately from goodwill.Although the proposed FAS applies only toacquired intangible assets and not self-createdintangible assets, the criteria developed in theExposure Draft could be used by businessvaluators to justify a decision to remove a self-created intangible asset from “residual goodwill”and identify it as an asset of the business. That ofcourse leads to another discussion, about how toseparately value these intangible assets, a topicwhich should have more play at valuationconferences and in valuation literature.

5. What Tax Law Says About SeparableIntangible Assets. Before the adoption ofInternal Revenue Code § 197, there was muchlitigation over whether an intangible asset was orwas not depreciable under IRC § 167. Adeduction was allowed if the taxpayer proved thatthe intangible asset (1) had an ascertainable valueseparate and distinct from goodwill, and (2) had alimited useful life, the duration of which could beascertained with reasonable accuracy. NewarkMorning Ledger Co. v. U.S., 507 U.S. 546, 558,113 S.Ct. 1670, 1676 (1993). This struggle wassupplanted by IRC § 197, which specifies intan-gibles that can be amortized. Although notintended for this purpose, the list of intangibleassets in Section 197(d) could be considered as alist of intangible assets of a business that areseparable from goodwill in a divorce.

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

(1) In general.--Except as otherwiseprovided in this section, the term "section197 intangible" means--

(A) goodwill,(B) going concern value,

(C) any of the following intangibleitems:(i) workforce in place includingits composition and terms andconditions (contractual orotherwise) of its employment,(ii) business books and records,operating systems, or any otherinformation base (including listsor other information with respectto current or prospectivecustomers),(iii) any patent, copyright,formula, process, design, pattern,knowhow, format, or othersimilar item,(iv) any customer-basedintangible,(v) any supplier-based intangible,and(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 (orother arrangement to the extent sucharrangement has substantially thesame effect as a covenant not tocompete) entered into in connectionwith an acquisition (directly orindirectly) of an interest in a trade orbusiness or substantial portionthereof, 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 valueresulting from future provision of goods orservices pursuant to relationships (contractual orotherwise) in the ordinary course of business withcustomers.” The term "supplier-based intangible"is defined in § 197(d)(3) to mean “any valueresulting from future acquisitions of goods orservices pursuant to relationships (contractual orotherwise) in the ordinary course of business with


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suppliers of goods or services to be used or soldby the taxpayer.” Note that workforce in place islisted as an amortizable intangible. In contrast,FAS 141 specifically excludes assembledworkforce as a separable intangible asset, becausereplacement cost (the cost to hire and train acomparable assembled workforce) is “not arepresentationally faithful measurement of the fairvalue of the intellectual capital acquired in abusiness combination” and FASB believes that“techniques to measure the value of an assembledworkforce and the related intellectual capital withsufficient reliability 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.

Court cases recognize “going concern value” asdistinguishable from goodwill. In Citizens andSouthern Corp. v. C.I.R., 91 T.C. 463, 481 n. 9,1988 WL 90987 (1988), aff'd, 900 F.2d 266 (11thCir. 1990), the court said:

Going concern value as distinguishedfrom goodwill is the additional element ofvalue which attaches to property byreason of its existence as an integral partof a going concern. VGS Corp. v.Commissioner, 68 T.C. 563, 591 (1977).Going concern value is 'bottomed on theability of the acquired business togenerate sales without any interruptionbecause of the take-over.' Winn-DixieMontgomery Inc. v. United States, 444F.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.Goodwill has been defined as the'expectancy of BOTH continuous excess

earning capacity and also of competitiveadvantage or continued patronage.'Wilmot Fleming Engineering Co. v.Commissioner, 65 T.C. 847, 861 (1976).(Emphasis added.) On the other hand,going concern value has also beendescribed as related less to the businessreputation and the strength of customerloyalty, than to the operating relationshipof assets and personnel inherent in anongoing business. Going concern valuehas been defined as 'the additionalelement of value which attaches toproperty by reason of its existence as anintegral part of a going concern.' VGSCorp. 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 businessactivity without interruption and tocontinue generating sales after anacquisition. Computing & Software Inc.v. Commissioner, 64 T.C. 223, 235(1975). While courts have blurred thesedistinctions between goodwill and goingconcern value, they are differentconceptually. See United States v.Cornish, 348 F.2d 175, 184 (9th Cir.1965); Computing & Software Inc. v.Commissioner, supra at 234-235;Winn-Dixie Montgomery, Inc. v. UnitedStates, 444 F.2d 677, 685 (5th Cir. 1971).

Going concern value therefore includes thestandard human capital of remaining owners andemployees, and the social and organizationalcapital of the business.

B. THE DIVISIBILITY OF GOODWILLUPON DIVORCE. A recent law review articleevaluated the law of goodwill and divorce, andhad this to say:

There is a split among states regarding thetreatment of goodwill in a divorceproceeding. Eight states, including Ohio,


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have not decided the issue, [FN22] whilethe remaining states follow one of thefollowing three approaches. The majorityposition, and the position advocated inthis article, holds that enterprise goodwillis marital property, but personal goodwillis separate property. [FN23] The minorityposition holds that all goodwill is maritalproperty. [FN24] Lastly, four states holdthat goodwill is never marital property.[FN25]

[FN22]. Alabama, Georgia, Idaho, Iowa,Maine, Ohio, South Dakota, Vermont.

[FN23]. Alaska, Arkansas, Connecticut,Delaware, Florida, Hawaii, Illinois,Indiana, Maryland, Massachusetts,Minnesota, Mississippi, Missouri,Nebraska, New Hampshire, Oklahoma,Oregon, Pennsylvania, Rhode Island,Texas, Utah, Virginia, West Virginia,Wisconsin, Wyoming. See Richmond,779 P.2d 1211 (Alaska); Wilson, 741S.W.2d 640 (Arkansas); Eslami, 591 A.2d411 (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, 534 N.W.2d294 (Minnesota); Singley, 846 So. 2d1004 (Mississippi); Hanson, 738 S.W.2d429 (Missouri); Taylor, 386 N.W.2d 851(Nebraska); Watterworth, 821 A.2d 1107(New Hampshire); Travis, 795 P.2d 96(Oklahoma); Lankford, 720 P.2d 407(Oregon); Solomon, 611 A.2d 686(Pennsylvania); Moretti, 766 A.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.2d 536 (West Virginia);

Root, 65 P.3d 41 (Wyoming).

[FN24]. Arizona, California, Colorado,Kentucky, Michigan, Montana, Nevada,New Jersey, New Mexico, New York,North Carolina, North Dakota,Washington. See Wisner v. Wisner, 631P.2d 115 (Ariz. App. Div. 1 1981);Lopez, 1974 Cal. App. LEXIS 1040(California); Huff v. Huff, 834 P.2d 244(Colo. 1992); Heller v. Heller, 672S.W.2d 945 (Ky. App. 1984); Kowaleskyv. Kowalesky, 384 N.W.2d 112 (Mich.App. 1986); Stufft v. Stufft, 950 P.2d1373 (Mont. 1997); Ford v. Ford, 782P.2d 1304 (Nev. 1989); Dugan, 457 A.2d1 (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.2d266 (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, SouthCarolina, Tennessee. See Powell v.Powell, 648 P.2d 218 (Kan. 1982); Pearcev. Pearce, 482 So. 2d 108 (La. App. 4thCir. 1986); Donahue v. Donahue, 384S.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 suchgoodwill is divisible. Where they occurred,descriptions of how goodwill should be valued areincluded.

Arizona. Mitchell v. Mitchell, 732 P.2d 208, 211-12 (Ariz. 1987): “We note that some jurisdictions


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hold that the goodwill of a professionalpartnership or proprietorship is not a divisiblemarital asset. . . . However, because theprofessional practice of the sole practitioner orpartner will continue after dissolution of themarriage, with the same goodwill as it had duringthe marriage, we find that a refusal to considergoodwill as a community asset does not comportwith Arizona's statutory equitable distributionscheme. We prefer to accept the economic realitythat the goodwill of a professional practice hasvalue, and it should be treated as property upondissolution of the community, regardless of theform of business.” [citations omitted].

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 maritalproperty, it must be a business asset with valueindependent of the presence or reputation of aparticular individual--an asset which may be sold,transferred, conveyed or pledged. Thus, whethergoodwill is marital property is a fact question anda party, to establish goodwill as marital propertyand divisible as such, must produce evidenceestablishing the salability or marketability of thatgoodwill as a business asset of a professionalpractice.”

<Williams v. Williams, 108 S.W.3d 629, 642-43(Ark. App. 2003): “[F]or goodwill to be maritalproperty, it must be a business asset with valueindependent of the presence or reputation of aparticular individual. . . . To establish goodwill asmarital property and thus be divisible, the partymust produce evidence establishing the salabilityor marketability of that goodwill as a businessasset of a professional practice. The Tortorich and

Wilson cases confirm that the burden is on theparty who seeks to establish goodwill as a maritalasset to produce convincing proof delineatingbetween professional goodwill on the one handand personal goodwill on the other. . . . Mr.Schwartz admitted in his testimony that he did notattribute any value to Dr. Alonzo Williams'personal reputation. He stated that he ‘... didn'tdistinguish between the goodwill that developedbetween any personal and any professional. . . .Dr. Williams attributes his draw of patients tovarious factors. Specifically, he testified that hehas a group of twenty to thirty physicians withwhom he maintains regular contact and fromwhom he receives referrals. Dr. Williams contendsthat he receives much of his business based uponreferrals. He testified that these referrals keepcoming because the referring doctors are hispersonal friends and know that he will treat thepatient well regardless of financial circumstances.Dr. Alonzo Williams testified that the racialmakeup of his patient base is over 80% AfricanAmerican. Dr. Williams is one of the only twoA f r i c a n A me r i c a n b o a r d c e r t i f i e dgastroenterologists in Arkansas. The burden ofproof is with the Plaintiff, not the Defendant, todelineate the facets of goodwill. The court findsthat the Plaintiff has failed to do so.’”

California.

<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 thepost-marital efforts of either spouse, then, as aconsequence, the value of community goodwill issimply the market value at which the goodwillcould be sold upon dissolution of the marriage,taking into consideration the expectancy of thecontinuity of the practice.”

<In re Marriage of Foster, 117 Cal.Rptr. 49, 53-54(Cal. App. 1974): “The value of communitygoodwill is not necessarily the specified amount ofmoney that a willing buyer would pay for such


22

goodwill. In view of exigencies that are ordinarilyattendant a marriage dissolution the amountobtainable in the marketplace might well be lessthan the true value of the goodwill. Communitygoodwill is a portion of the community value ofthe professional practice as a going concern on thedate of the dissolution of the marriage. Asobserved in Golden, '. . . in a matrimonial matter,the practice of the sole practitioner husband willcontinue, with the same intangible value as it hadduring the marriage. Under the principles ofcommunity property law, the wife, by virtue of herposition of wife, made to that value the samecontribution as does a wife to any of the husband'searnings and accumulations during marriage. Sheis as much entitled to be recompensed for thatcontribution 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,transferred to another. . . .’ Husband's ‘earningcapacity and reputation in his profession as amotion picture director which greatly exceeds thatof most persons involved in that profession’ or, inthe trial court's shorthand, his ‘elite professionalstanding,’ cannot be sold or transferred. His highstanding among other motion picture directors isentirely personal to him. He cannot confer onanother director his standing as No. 13 incumulative box office revenues during 1985-1996. He cannot sell this standing to another,because a buyer would not be John McTiernan, nomatter how much the buyer was willing to pay.For the same reason, and unlike a law or medicalpractice, husband cannot transfer his ‘eliteprofessional standing.’ That standing is his, andhis alone, and he cannot bestow it on someone

else. Thus, an essential aspect of a propertyinterest is absent. The fact that husband's ‘eliteprofessional standing’ is not transferableeffectively refutes the trial court's conclusion thathusband's ‘practice’ as a motion picture director islike the ‘practice’ of an attorney or physician. Thepractice of an attorney, physician, dentist, oraccountant is transferable, but husband's ‘eliteprofessional standing’ is his alone, and notsusceptible to being transferred or sold.”

Colorado.

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

The district court selected a value basedon the excess earnings method, which is agenerally accepted method fordetermining the present value ofsomeone's interest in a business. See In reMarriage of Bookout, 833 P.2d 800,804-805 (Colo.App.1991) (affirming trialcourt's use of excess earnings approach);Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1,9 (1983) (adopting excess earningsapproach in valuation of law practice forpurposes of divorce proceeding); In reMarriage of Hall, 103 Wash.2d 236, 692P.2d 175, 179-80 (1984) (trial court mayconsider various methods for valuinggoodwill of spouse participating inpartnership, including excess earningsmethod or formula in partnershipagreement); Alan S. Zipp, DivorceValuation of Business Interests: ACapitalization of Earnings Approach, 23Fam.L.Q. 89, 102 (1989) (capitalizationof excess earnings approach is one of themethods recommended by the AmericanInstitute of Certified Public Accountantsand is a method relied on by the InternalRevenue Service to value a business fortax purposes). The excess earningsapproach capitalizes the amount by whichthe attorney's historical earnings exceedthat which an attorney with similareducation, experience and capabilities


23

earned during that period. See Bookout, at803, 805; Dugan, 457 A.2d at 9. Thismethod results in a valuation thatrepresents the value of both the tangibleassets and goodwill of the husband'spartnership interest on the dissolutiondate. [FN14] Zipp, supra, at 91, 102. Theexcess earnings valuation method is anappropriate valuation in a dissolutionproceeding because it provides the presentvalue of the partnership interest to theparticipating spouse and ‘avoids theproblem of valuing a business on the basisof postdivorce earnings and profits.’ Id. at89, 102. . . .

The husband also argues that the districtcourt's use of the excess earnings methodresults in a "double dipping" by the wifeinto the husband's income. The husbandcontends that the excess earningsapproach converts his future income intoproperty which is then divided betweenthe spouses. He contends that "doubledipping" occurs because that same futureincome is the source from which thewife's maintenance is paid. The husbandcontends that the wife receives doublebenefits from the same source: thehusband's future income. We disagree.

As stated above, the excess earningsapproach is a valuation method whichcapitalizes the excess earnings based on acomparison of the husband's past earningsto the past earnings of an attorney in thesame area with the same education,experience, and capabilities. Based onthese historical earnings, this methodprovides a valuation which represents thepresent value of the husband's partnershipinterest. The excess earnings approachdoes not convert the husband's futureincome into property; on the contrary, itavoids valuing a business or partnershipon the basis of postdivorce earnings andprofits. 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 capitalizingexcess income, his future income streamis valued and divided as property.Therefore, he argues that basing an orderof maintenance and child support uponthe same income inequitably awards wifea double recovery. We disagree.

The few courts that consider personalgoodwill as nothing more than probablefuture earning capacity have concludedthat goodwill is not a divisible maritalasset. See Kimbrough v. Kimbrough, 228Neb. 358, 422 N.W.2d 556 (1988);Holbrook v. Holbrook, 103 Wis.2d 327,309 N.W.2d 343 (1981); see generallyA.H. Rutkin, Family Law & Practice §37.05(1) (1991). However, this minorityview is contrary to the law which we haveadopted in this jurisdiction. See In reMarriage of Nichols, 43 Colo.App. 383,606 P.2d 1314 (1979) (the value ofgoodwill incident to a practice is an assetacquired during the marriage).

Furthermore, the value of goodwill whichis to be determined at the time ofdissolution is not synonymous with aspouse's expectation of future earnings. Inre Marriage of Lukens, 16 Wash.App.481, 558 P.2d 279 (1976); In re Marriageof Fortier, 34 Cal.App.3d 384, 109Cal.Rptr. 915 (1973). See also Dugan v.Dugan, supra (future earning capacity perse is not goodwill). Such earnings aresimply a factor which are considered todecide if goodwill exists, In re Marriageof Lopez, 38 Cal.App.3d 93, 113Cal.Rptr. 58 (1974), and it is this latterasset that is valued and allocated betweenthe parties to a dissolution. Stern v. Stern,66 N.J. 340, 331 A.2d 257 (1975).


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Goodwill reflects not simply a possibilityof future earnings, but a probability basedon existing circumstances. Dugan v.Dugan, supra.

In a dissolution of marriage proceeding,the value of goodwill should be measuredby arriving at a present value based uponpast results and not by accounting for thepostmarital efforts of the professionalspouse. However, the method of valuationthat, as here, capitalizes the historical pastearnings of the business at an appropriatecapitalization rate to identify a value ofthe goodwill possessed by the business atthe date of dissolution avoids the problemof valuing a business on the basis ofpost-dissolution earnings and profits. SeeIn re Marriage of Foster, 42 Cal.App.3d577, 117 Cal.Rptr. 49 (1974).

Thus, a valuation on the basis of pastearnings represents the advantagecurrently possessed by the business asshown by its historical ability to earnincome in excess of that which would beearned if the owner had invested intangible property and leased it to otherbusinesses. Zipp, Divorce Valuation ofBusiness Interests: A Capitalization ofEarnings Approach, 23 Fam.L.Q. 89 at109 & 111 (1989); see generally Udinsky,Putting a Value on Goodwill, 9 Fam.Adv.37 (1986).

Goodwill is a property or asset whichsupplements the earning capacity ofanother asset, a business, or a profession,and, therefore, it is not the earningcapacity itself. In re Marriage of Hall, 103Wash.2d 236, 692 P.2d 175 (1984).Hence, while both a practicingprofessional and a salaried professionalbring an earning capacity comprised ofskill and education to their positions, thegoodwill directly supplements the earningcapacity only of the practicing

professional. In re Marriage of Keyser,820 P.2d 1194 (Colo.App.1991).

Thus, we conclude that the identification,valuation, and division of husband'sgoodwill as a portion of his physicaltherapy practice did not divide husband'sfuture income. Therefore, wife did notreceive a double recovery.

Connecticut. Eslami v. Eslami, 591 A.2d 411,418-19 (Conn. Sup. Ct. 1991): “It can hardly bedoubted that the increment of value, looselytermed goodwill, that arises from the establishedreputation of a business for the quality of its goodsor services may often be found to enhance thevalue of professional as well as other enterprisesby increasing their ability to attract patrons.Relatively few courts have wholly rejectedconsideration of the goodwill of a professionalpractice in determining the value of the propertyheld by the parties in a dissolution action. . . .Several courts have recognized that the goodwillof an established practice may have value, butdisapprove of the capitalization of excess earningsmethod of valuation, insisting upon evidence ofvalue based on comparable sales or partnershipwithdrawal agreements. . . . We agree with thecases that recognize that goodwill may constitutean element of value distinct from the tangibleassets of a medical practice. Its value, however,must be determined on the basis of the price thata willing buyer would pay in excess of thetangible 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 andability of the practitioner through a sale, it cannotbe said to have any significant market value, eventhough it may enhance the earning power of thepractitioner so long as he continues to work in the


25

same community. ‘[I]f goodwill depends on thecontinued presence of a particular individual, suchgoodwill, by definition, is not a marketable assetdistinct from the individual.’ Taylor v. Taylor,supra, 222 Neb. at 731, 386 N.W.2d 851. Avaluation method that does not differentiatebetween the goodwill of the practice as a saleableentity and the practitioner's own earning power asenhanced by such goodwill may well result incounting the same basis for a financial award indissolution cases twice, once as an asset of hisestate subject to allocation and again, as acomponent of his earning capacity forming thebasis for alimony. In theory, at least, thecapitalization of excess earnings method ofevaluating goodwill seeks to determine the price aprospective purchaser would pay to acquire thestream of income in excess of the amount hewould expect to earn by engaging in theprofession through other avenues. In economicterms, if radiologists were so scarce that thedemand for such services overwhelmed thesupply, there would be little advantage in buyingan established practice at a substantial price for thegoodwill component rather than establishing anew practice. The supply-demand relationship istheoretically reflected in both components of thecapitalization formula, the determination of excessearnings and the capitalization factor. Thus theformula is related to market value, but provides analternative to the comparable sales method fordetermining that value. The difficulty lies not inthe theory but in its application, particularly withrespect to the basis for calculating the amount ofexcess income and selecting the capitalization rate.Although evidence of comparable sales wouldordinarily be more persuasive, we hold thatcapitalization of excess income is a permissiblemethod for determining the value of the goodwillof a professional practice, despite difficulties in itsapplication. We have previously approved thecapitalization of projected net income as apermissible accounting technique for determiningthe value of a closely held corporationcharacterized as a ‘one-man’ business.” [Citationsomitted]

District of Columbia. McDiarmid v. McDiarmid,649 A.2d 810, 814-15 (D.C. Ct. App. 1994): “Asthe District of Columbia has not heretoforeaddressed the question of whether professionalgoodwill is subject to distribution upon dissolutionof marriage, we have examined the cases of oursister jurisdictions and considered how they haveaddressed and resolved this issue. We found that‘[t]here is no specific consensus as to a definitionof professional goodwill, whether a solepractitioner of any profession can have goodwill,or what method or methods should be used tovalue professional goodwill.’ Thompson v.Thompson, 576 So.2d 267, 269 (Fla.1991). Thejurisdictions are divided as to whether professionalgoodwill in a law practice may be marital propertysubject to distribution upon dissolution ofmarriage. A number of courts have concluded thatprofessional goodwill in a law practice is notproperty subject to equitable distribution. Thesecourts have concluded that the concept ofgoodwill is indistinguishable from future earningcapacity and thus too remote and speculative to bevalued. . . . 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 thesecases.’”

Florida. Thompson v. Thompson, 576 So.2d 267,270 (Fla. Sup. Ct. 1991): “If a law practice hasmonetary value over and above its tangible assetsand cases in progress which is separate anddistinct from the presence and reputation of theindividual attorney, then a court should considerthe goodwill accumulated during the marriage asa marital asset. The determination of the existenceand value of goodwill is a question of fact and


26

should be made on a case-by-case basis with theassistance of expert testimony.” [Footnoteomitted]

Illinois.

In re Marriage of Schneider, 824 N.E.2d 177,185-86 (Ill. 2005): “In this case, as in Talty, thepersonal goodwill in Earl's dental practice wasconsidered by the circuit court in assessing thecriteria in section 503(d) and in deciding to awardJodi a disproportionate share of the marital assets.Any further consideration of that goodwill invaluing Earl's dental practice would amount to animpermissible double counting. Accordingly, wefind that the appellate court erred in holding thatpersonal goodwill should have been included inthe valuation of Earl's dental practice. . . . Thegoodwill in a professional practice is generallypersonal in nature, while the goodwill in acorporation might include both personal andenterprise goodwill. Talty, . . . As we recognizedin Talty, the duplication of the factors . . . set forthin section 503(d) of the Act is limited to personalgoodwill and does not extend to enterprisegoodwill.”

In re Marriage of Talty, 652 N.E.2d 330, 334 (Ill.1995): “To the extent that goodwill inheres in thebusiness, existing independently of William'spersonal efforts, and will outlast his involvementwith the enterprise, it should be considered anasset of 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 thedealership ends, it should not be consideredproperty. ”

Indiana. Yoon v. Yoon, 711 N.E.2d 1265, 1268-69(Ind. Sup. Ct. 1999): “Goodwill has beendescribed as the value of a business or practicethat exceeds the combined value of the net assetsused in the business. . . . Goodwill in aprofessional practice may be attributable to thebusiness enterprise itself by virtue of its existingarrangements with suppliers, customers or others,

and its anticipated future customer base due tofactors attributable to the business. It may also beattributable to the individual owner's personalskill, training or reputation. This distinction issometimes reflected in the use of the term‘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).Factors affecting this goodwill may include abusiness's location, its name recognition, itsbusiness reputation, or a variety of other factorsdepending on the business. Ultimately thesefactors must, in one way or another, contribute tothe 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 notnecessarily marketable in the sense that there is aready and easily priced market for it, but it is ingeneral transferrable to others and has a value toothers.”

Kansas. Powell v. Powell, 648 P.2d 218, 223-24(Kan. Sup. Ct. 1982): “ The question of whetherthis court should adopt the theory that good will ofa professional practice is a marital asset to bedivided at divorce is, in the final analysis, a publicpolicy issue. . . . We are not persuaded aprofessional practice such as Dr. Powell's has agood will value. The practice is personal to thepractitioner. When he or she dies or retires nothingremains. The professional's files and lists of clientsare of no use to others. The very nature of aprofessional practice is that it is totally dependentupon the professional. We refuse to adopt thetheory that good will in a professional practice isan asset subject to division in a divorce action.”

Kentucky.


27

<Gomez v. Gomez, 168 S.W.3d 51, 56 (Ky. App.2005): “In this case the trial court found thepractice of Bluegrass Radiology with respect tothose physicians entering or exiting the practice tobe significant. 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 aphysician entering or leaving the practice had topay or was paid a percentage of the accountsreceivable value. No calculation for goodwill wasincluded. The trial court found this evidence to bepersuasive along with evidence that when thegroup had discontinued its practice at anotherhospital it did not receive any payment forgoodwill. The description of how the practice hadhistorically valued itself is, in essence, a buy-sellagreement. And while buy-sell agreements orcorporate by-laws have been rejected as the basisfor valuing a professional practice where thiswould not accurately reflect the value of thebusiness, Clark, supra 782 S.W.2d at 60, they maybe used as a factor in reaching a determinationregarding the value of a professional business. . .. And while we would have reached a differentconclusion on the evidence presented in this case,the trial court's determination that no goodwillexisted because of the historical way in which thepractice valued itself is supported by substantialevidence.”

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

This Court, in Heller, supra, specificallyruled that the goodwill contained in abusiness or professional organization is afactor to be considered in arriving at thevalue of the practice. This Courtexplained goodwill in Heller.Specifically, professional practices thatcan be sold for more than the value oftheir fixtures and accounts receivablehave goodwill. Heller, supra, at 948.Goodwill in essence is the expectationthat patrons or patients will return because

of the reputation of the business or firm.This goodwill has specific pecuniaryvalue. Goodwill has also been defined asthe excess of return in a given businessover the average or norm that could beexpected for that business. Hanson v.Hanson, 738 S.W.2d 429 (Mo.1987). Theage, health and professional reputation ofthe practitioner, the nature of the practice,the length of time the practice has been inexistence, past profits, comparativeprofessional success, and the value of itsother assets, are all factors of goodwill.Poore, supra. It is the growing trend ofcourts in this country to consider goodwillin valuing a corporation. . . . Thus, thetrial court was correct in consideringgoodwill.

The trial court in the case at bar adopted acapitalization of excess earnings methodfor evaluating the goodwill of thisprofessional corporation. Under thismethod, the goodwill value is based inpart on the amount that the earnings of theprofessional spouse exceed those whichwould have been earned by a professionalwith similar education, experience, andskill as an employee in the same generalarea. Poore, supra, 331 S.E.2d at 271.Specifically, four steps are involved in thecapitalization of excess earnings method.First, the court must ascertain what aprofessional of comparable experience,expertise, education and age would beearning as an employee in the samegeneral locale, determine and average theprofessional's net income before federaland states income taxes for a period ofapproximately five years, compare theactual average with the employee norm,and multiply the excess by a capitalizationfactor. Taylor v. Taylor, 222 Neb. 721,386 N.W.2d 851 (1986). Dr. Mackin, theappellee's expert who calculated the valueof the goodwill, used these same stepsoutlined above. He specifically


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concentrated on a three-year period of Dr.Clark's earnings. He used a survey ofdoctors in appellant's OB-GYN specialtywho had been surveyed by the AmericanMedical Association. Dr. Mackin used aweighted multiplication factor to gainresults that closely correlated with themethods used in the survey. Contrary toappellant's assertion, the method involvescalculating the professional's pastearnings, not future earnings. There is noindication from the evidence in the case atbar that the trial court incorrectly appliedthe capitalization of excess earningsmethod. The findings correctly show thetrue value of the corporation's goodwill.

The capitalization of excess earningsmethod is a widely accepted method andthe most often used. Taylor, supra, 386N.W.2d at 857; Poore, supra, 331 S.E.2dat 271; Levy, supra, 397 A.2d at 380.There are a number of acceptable methodswhich courts may adopt. There is nodefinitive rule or best method for valuinggoodwill. Poore, supra; Hurley v. Hurley,94 N.M. 641, 615 P.2d 256, 259 (1980).The determination of goodwill is aquestion of fact rather than law, and eachcase must be determined on its own factsand circumstances. Poore, supra, Hurley,supra. Thus, the trial court was correct inadopting and applying the capitalizationof excess earnings method.

Louisiana.

<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).The Depner court specified, and we agree:

Professional medical competence ispersonal to the physician and cannot beattributed to the corporation because it is

a personal relationship between physicianand patient, not between corporation andpatient. Since goodwill must adhere tosome principal property or right it istherefore dependent upon the property orright of either the corporation or theindividual or both. In examining thegoodwill in this case we find that it existsindependent of the corporation. Absentthe corporation it exists, absent thephysician it does not exist. Therefore it isnot an asset of the corporation. Thecorporation may profit from thisrelationship but it cannot share in it. Thecorporation cannot share in a personalrelationship between physician andpatient.

There is no basis on these facts to support Mrs.Pearce's concept and claim for corporateprofessional goodwill. Dr. Pearce's future earningshave no present value susceptible of partition as acommunity asset. Mrs. Pearce is not entitled toequity in her ex-husband's potential earnings byclaiming one-half as goodwill.”

<Rao v. Rao, 2005 WL 2898066,*15 (La. App.2005): “The evidence clearly supports theconclusion that the hypothetical value postulatedby Mrs. Rao's expert accountant was largely basedupon goodwill attributable to the personalqualities and patient relationships of Dr. Rao andhis fellow stockholder physicians using thecorporate facilities as part of their professionalpractice. Although Louisiana Endoscopy Center,Inc. is not a professional medical corporation perse, we conclude it was intended by the parties tobe an extension of a professional medical practicegroup in accordance with the federal "safe harbor"regulations. It is inappropriate to use suchgoodwill attributable to Dr. Rao in the valuation ofcommunity corporate stock. . . . Although theissue has not been specifically addressed by thelegislature and seems to be res nova, we concludeit is likewise inappropriate to incorporate goodwillattributable to the personal, professional qualitiesof the other physician stockholders in such


29

valuation.” [Footnote omitted]

Maryland. Prahinski v. Prahinski, 582 A.2d 784,787-88 (Md. Sup. Ct. 1990): “Because thequestion of whether professional goodwill ismarital property is one of first impression inMaryland, we found it beneficial to review thedecisions of the courts of other states which haveaddressed the issue. This review revealed threepositions. 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 acase-by-case examination to determine howgoodwill should be treated. It is interesting to notethat the classification of a jurisdiction as acommunity property state or an equitabledistribution state is not determinative of itstreatment of goodwill. . . . After reviewing thesethree alternatives and the rationale of theirrespective supporting cases, we are of the opinionthat the goodwill of a solo law practice is personalto the individual practitioner. Goodwill in suchcircumstances is not severable from the reputationof the sole practitioner regardless of thecontributions made to the practice by the spouse oremployees. In order for goodwill to be maritalproperty, it must be an asset having a separatevalue from the reputation of the practitioner. Weare not convinced that the goodwill of a solo lawpractice can be separated from the reputation ofthe attorney. It is the attorney whose name,whether on the door or stationery, is theembodiment of the practice. We are cognizant thatin this computer age many law practices, and inLeo's practice in particular, much of the researchand "form" work is done by nonlawyers. In thefinal analysis, however, it is the attorney alonewho is responsible for the work that comes out ofthe office. Rule of Professional Conduct 5.3(c). Inthe instant case, the responsibility is solely Leo's,and no amount of work done by Margaret willshift the responsibility to her. The attorney'ssignature or affidavit places his seal of approvalon the work being done and makes the attorneyliable for its accuracy and authenticity. This

professional assurance is what might haveconvinced some clients to use Leo F.X. Prahinski,Attorney-at-Law, instead of going to a titlecompany to have their settlements completed. Theassurance would end should Leo somehow removehimself from the practice. Therefore, the goodwillgenerated by the attorney is personal to him and isnot the kind of asset which can be divided asmarital 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, seegenerally Gregory, The Law of EquitableDistribution § 6.03 (1989)."

<Champion v. Champion, 764 N.E.2d 898 (2002):"Whether a business takes the form of acorporation, partnership, or sole proprietorship,does not affect the valuation method that a courtmay use even though some methods may betterlend themselves to particular types of businessassociations. See 2 McCahey, Valuation andDistribution of Marital Property § 22.08, at 22-102& 22-103 (2001). The willing buyer/willing sellertest is used to determine the fair market value of asole proprietorship for Federal estate and gift taxpurposes, see id. at § 24.07[2], and the guidelinesestablished for such purposes are relevant indivorce litigation. [FN5] See 2 Budd &Zupcofska, Massachusetts Divorce Law PracticeManual § 14.4, at 14-23 (MCLE 2000). In theabsence of a determinable market value, expertscommonly value a closely held business by theassignment 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)."


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<Sampson v. Sampson, 369, 816 N.E.2d 999,1007-08 (Mass. Ct. App. 2004):

In the instant case, unlike Champion v.Champion, supra, a capitalized incomemethod was utilized by both parties'experts in valuing the wife's business.Such a method requires subtraction frombusiness income of a reasonable salaryexpense for the operator of the business.. . . Without subtraction of a sumrepresenting a reasonable salary, there issignificant concern that the business maybe overvalued. Moreover, where such asalary is subtracted, it facilitates theidentification of those portions of a givenasset providing separate bases of propertyassignment and alimony as articulated byDalessio v. Dalessio, supra.

Here, however, the expert whosetestimony was credited by the judge didnot adjust directly for the owner-operator's salary. Rather, whilerecognizing that an owner-operator'ssalary should be subtracted, the expert didnot do so. Instead, the expert deducted thesalary of the business's sole employeeother than the wife, a customer servicesrepresentative whose much lower annualsalary had ranged from $17,532 to$23,264 over a five year period. Withoutexplanation in his report, the expertconcluded that the customer servicesrepresentative's salary was an appropriatesalary for a "part-time owner." The expertalso summarily concluded that the part-time owner could do the work of thecustomer services representative as wellas her own.

Read closely, other parts of the report raisesignificant questions about the appropriateness ofthe smaller salary deduction. For example, theexpert recognizes only that it "may be possible" toreplace the owner, but not with someone with theowner's familiarity with the agency's operations.

The expert's report is also inconsistent. On the onehand, it emphasizes the value of the two-personoperation, particularly in terms of its abilitysimultaneously to maintain its high qualityservice, market to new customers, and position theagency for future growth; on the other hand, itfinds that one part-time owner can perform allthese functions for the small salary of the currentcustomer services representative. The judge doesnot address these critical and questionable aspectsof the expert's valuation. See Redding v. Redding,398 Mass. 102, 108, 495 N.E.2d 297 (1986) ("Anyfailure in the decision-making process to considerand explain the effect of an important fact mayrequire reversal of the judgment in order to permitconsideration 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'sincome for the purposes of determiningher need for support, the judge made noadjustments, concluding that she wouldearn $41,912 a year. The $41,912 wasbased on what she was earning from thebusiness without recognizing that some ofthat income had been attributed to thevalue of the business itself. For thatadditional income, the husband hadalready been compensated by providinghim with an otherwise disproportionateshare of the proceeds from the sale of thehouse. See Murphy v. Murphy, 6 A.D.3d678, 775 N.Y.S.2d 370 (2004). Cf. Ratteev. Rattee, 146 N.H. at 47-48, 767 A.2d415. Concerns are thereby raised thateither the value of the business wasinflated by artificially deflating the salaryof the owner-operator or, conversely, thatthe wife's income was inflated whendetermining her need for support."

Michigan.

<Kowalesky v. Kowalesky, 384 N.W.2d 112


31

(Mich. App. 1986): Kowalesky cite: "We believethat neither Revenue Ruling 59-60 nor any othersingle method should uniformly be applied invaluing a professional practice. Rather, this Courtwill review the method applied by the trial court,and its application of that method, to determine ifthe trial court's valuation was clearly erroneous.[FN1] . . .FN1. Our discussion should not be readas prohibiting trial courts from using RevenueRuling 59-60 in their decisions if they find ithelpful or as prohibiting parties from using it inpresenting their cases. Since the trial court in thecase at bar did not apply the ruling, we need notdecide if doing so is erroneous. We only concludethat use thereof is not required."

<Conger v. Conger, 2000 WL 33388397, *1-2(Mich. Ct. App. 2000) (unpublished opinion):"The holder's interest method is utilized in divorceproceedings to quantify the present value of abusiness to its proprietor. One commentatordescribed this valuation method as follows:Applying the holder's interest measure of value toa personal service business such as a professionalpractice is simply an extension of the principles ofcase specific valuation commonly used by trialcourts in dividing marital assets under equitabledistribution principles. Stripped to its core, theholder's interest value means that: (1) If an interestin 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) assumingthe owner will sell the business to a third party ...(2) then the appropriate value for divorcesettlement purposes, that is, for determining theoffsetting amount of cash or value of otherproperty for the nonowner spouse, is the value tothe owner, not the lower [fair market value]....[A]doption of the holder's interest measure ofvalue simply brings into conformity the valuationof personal service businesses with the way mostother marital assets have been valued for years.[Cunningham, Equitable Distribution andProfessional Practices: Case Specific Approach toValuation, 73 Mich. B J 666, 667 (July 1994).] In

the present case, the circuit court recognized itsown discretion in choosing the valuation methodto apply. The court exercised that discretion bychoosing the holder's interest method, reasoningthat the closely held corporation was worth moreto 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. Althoughdefendant acknowledges that no Michigan courthas ever distinguished between business andpersonal goodwill, he urges this Court to acceptthe holdings of various foreign jurisdictions and torecognize a distinction between personal andbusiness goodwill for the purpose of businessasset valuations. Because defendant failed to raisethis issue before the trial court, it is unpreservedfor appeal. Further, we are unpersuaded of theneed to adopt a distinction between personal andbusiness goodwill, for purposes of valuingbusiness assets in the context of a divorce action."

Missouri. Hanson v. Hanson, 738 S.W.2d 429,434-35 (Mo. Sup. Ct. 1987): “[G]oodwill isrecognized as property in this state; thatrecognition is not dependent on a traditionalmercantile setting. Goodwill may exist in bothcommercial and professional entities. Irrespectiveof the setting in which it is found, the meaning ofgoodwill does not change. It is property whichattaches to and is dependent upon an existingbusiness entity; the reputation and skill of anindividual entrepreneur--be he a professional or atraditional businessman--is not a component of theintangible asset we identify generally as goodwill.With the caveats which follow, we hold thatgoodwill in a professional practice acquired duringa marriage is marital property subject to divisionin a dissolution of marriage proceeding. We definegoodwill within a professional setting to mean thevalue of the practice which exceeds its tangibleassets and which is the result of the tendency ofclients/patients to return to and recommend thepractice irrespective of the reputation of the


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individual practitioner. Our understanding ofgoodwill is thus consistent with and no broaderthan the economic, accounting and legal definitionwhich existed prior to the advent of Dugan,Fleege and cases reaching similar results.Goodwill is not dependent, however, on themanner in which the professional practice isorganized nor the size of the practice itself. Werecognize, as is implied in Geesbreght, 570S.W.2d at 427, that goodwill will more likely existin larger professional practices than in the officesof sole practitioners. This is so because reliance bypatients/clients on the reputation and skill of theindividual practitioner is, in most cases, inverselyrelated to the number of practitioners in thepractice. However, to the extent that, for instance,competent evidence exists that clients/patients will return to the place of the practice--orrecommend it to acquaintances who have not yetpatronized it--irrespective of the presence of theindividual professional, goodwill exists in the solopractice. Professional goodwill may not beconfused 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.”

Nebraska. Taylor v. Taylor, 386 N.W.2d 851,857-58 (1986): “Virtually any income-producingentity, regardless of the nature of the businessorganization, may have an asset of recognizedvalue beyond the tangible assets of such entity, anintangible asset generally characterized asgoodwill. To the extent that such intangible asset'svalue results from recurrent customer patronage,there is no question that goodwill is propertywhich may be considered as a part of the maritalestate for the purpose of a dissolution proceeding.. . . However, difficulty may arise in valuing aprofessional practice, because goodwill is likely todepend on the professional reputation andcontinuing presence of a particular individual inthat practice. . . . The particularized questionbecomes: Is professional goodwill, solely

dependent 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 ofprofessional goodwill evanesces when oneattempts to distinguish it from future earningcapacity. Although a professional business's goodreputation, which is essentially what its goodwillconsists of, is certainly a thing of value, we do notbelieve that it bestows on those who have anownership interest in the business, an actual,separate property interest. The reputation of a lawfirm or some other professional business isvaluable to its individual owners to the extent thatit assures continued substantial earnings in thefuture. It cannot be separately sold or pledged bythe 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 distinctfrom the personal reputation of a particularindividual, as is usually the case with manycommercial enterprises, that goodwill has animmediately discernible value as an asset of thebusiness and may be identified as an amountreflected in a sale or transfer of such business. Onthe other hand, if goodwill depends on thecontinued presence of a particular individual, suchgoodwill, by definition, is not a marketable assetdistinct from the individual. Any value whichattaches to the entity solely as a result of personalgoodwill represents nothing more than probablefuture earning capacity, which, although relevantin determining alimony, is not a properconsideration in dividing marital property in adissolution proceeding.”

Nevada. Ford v. Ford, 782 P.2d 1304, 1309 (Nev.1989): “Goodwill exists in a going professionalpractice, whether or not a sale is in the offing. . . .. In the instant case, the district court heardevidence of Dr. Ford's ongoing medical practice.Although Dr. Ford testified that his practice was


33

not salable, potential problems in selling thepractice will not eliminate the goodwill whichattaches to it, nor its value as an asset to beconsidered in equitable distribution. Dugan v.Dugan, 92 N.J. 423, 457 A.2d 1, 6 (1983).Accordingly, the district court properly declined tofollow the restrictive reasoning of Hanson [v.Hanson, 738 S.W.2d 429, 435 (Mo. Sup. Ct.1987)] and correctly found that goodwill existedin Dr. Ford's surgical practice.”

New Jersey.

<Dugan v. Dugan, 457 A.2d 1, 6 (N.J. Sup. Ct.1983):

Our limited concern involves theexistence of goodwill as property and itsevaluation for purposes of equitabledistribution under N.J.S.A. 2A:34-23 withrespect to attorneys and in particularindividual practitioners. Though otherelements may contribute to goodwill inthe context of a professional service, suchas locality and specialization, reputation isat the core. Paulsen, supra, at 10. It doesnot exist at the time professionalqualifications and a license to practice areobtained. A good reputation is earnedafter accomplishment and performance.Field testing is an essential ingredientbefore goodwill comes into being. Futureearning capacity per se is not goodwill.However, when that future earningcapacity has been enhanced becausereputation leads to probable futurepatronage from existing and potentialclients, goodwill may exist and havevalue. When that occurs the resultinggoodwill is property subject to equitabledistribution.We held in Lynn v. Lynn, 91 N.J. 510, 453A.2d 539 (1982), that a license to practicemedicine and a medical degree were notproperty. They reflected only a possibilityof future earnings. This holding wasconsonant with the proposition in Stern v.

Stern, 66 N.J. 340, 345, 331 A.2d 257(1975), that potential earning capacity isnot property within the meaning of thestatute, though relevant on the issues ofalimony and of determining equitableproportions for the distribution ofproperty.

When, however, the opportunity providedby the license is exercised, then goodwillmay come into existence. Goodwill is tobe differentiated from earning capacity. Itreflects not simply a possibility of futureearnings, but a probability based onexisting circumstances. Enhancedearnings reflected in goodwill are to bedistinguished from a license to practice aprofession and an educational degree. Inthat situation the enhanced future earningsare so remote and speculative that thelicense and degree have not been deemedto be property. The possibility ofadditional earnings is to be distinguishedfrom the existence of goodwill in a lawpractice and the probability of itscontinuation. Moreover, unlike the licenseand the degree, goodwill is transferableand marketable. Though there is anapparent limitation on the part of anindividual practitioner to sell a lawpractice, the same is not true in a lawfirm.After divorce, the law practice willcontinue to benefit from that goodwill asit had during the marriage. Much of theeconomic value produced during anattorney's marriage will inhere in thegoodwill of the law practice. It would beinequitable to ignore the contribution ofthe non-attorney spouse to thedevelopment of that economic resource.An individual practitioner's inability tosell a law practice does not eliminateexistence of goodwill and its value as anasset to be considered in equitabledistribution.


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<Seiler v. Seiler, 706 A.2d 249, 251-252 (N.J.Super. Ct. App. Div. 1998):

Whether the goodwill generated by amanager of a "captive insurance agency"is an asset of the manager or of theinsurance company which the managerrepresents has not been addressed in NewJersey. Two other jurisdictions haveaddressed similar questions, with oppositeresults.

In In re Marriage of Zeigler, 69Wash.App. 602, 849 P.2d 695, 696(1993), the husband was a "captive agent"of State Farm Insurance Company. Thehusband's agreement with State Farmprovided that all sales were limited toState Farm approved products, allpolicyholder names and informationpertaining to the policies were tradesecrets of State Farm, the agency's leasedcomputer system, software, and recordswere the sole property of State Farm, theagency's book of policyholders belongedto State Farm, and the agency could notassign or sell the book of policyholders toanyone. Ibid. The husband controlled theorganization of and paid the expense ofthe agency. Ibid. The agreement alsocontained a no-compete clause. Ibid.

The court concluded that "the Agency'scaptive status means that any reasonableexpectation of continued patronage isindistinguishably intertwined with thereputation and goodwill of State Farm."Id. at 698. Because State Farm retainedthe vital rights to the policyholders andthe stream of renewals from them, anygoodwill attached primarily to State Farm,not its captive agent. Ibid. Thus, there wasno goodwill in the Agency to equitablydistribute. Ibid.

The Colorado Court of Appeals faced a

similar situation in In re the Marriage ofG r a f f , 9 0 2 P . 2 d 4 0 2 , 4 0 5(Colo.Ct.App.1994), and explicitlydisagreed with Zeigler. Graff alsoinvolved a State Farm agency run by thehusband. Id. at 404. The husband set hisown hours, decided the location of hisoffice, hired and fired his own employeesand set their salary, selected andpurchased his own supplies, wascharacterized in his State Farm contract asan independent contractor, and reportedhis income as that of a business onSchedule C of his tax return. Ibid. Thehusband was unable to sell his rights tothe State Farm contract. Ibid. The courtfound that the restrictions on the transferof the agency did not preclude theexistence of goodwill. Id. at 405. Despitethe restrictions on the husband's agency,the facts that he controlled his businessexpenses, that he had stated his interest asa business ownership with the InternalRevenue Service, that the net income ofthe business had increased substantiallyunder the husband's ownership, and thatthe husband had no plans to discontinuehis relationship, supported the trial court'sfinding that the agency had goodwill.Ibid.

Despite Graff's criticism of Zeigler, weare satisfied that the Zeigler ruling ispersuasive given the more comparablefacts of Zeigler to this case. Allstate hasestablished a sales structure to encourageindividual initiative and the opportunityto earn significant income. Defendant'sability to earn a substantial income mustnot blind us to the fact that he is anemployee of a major insurance companyselling its insurance products inaccordance with the terms and conditionsestablished by his employer. Thecompensation scheme does not transforma person in defendant's position into anindependent entrepreneur. He remains a


35

salesman whose job is to aggressivelysolicit new clients and retain old clients.

Certainly, defendant has much morediscretion and control over the conditionsof his employment than many employees;nevertheless, he remains an employeewith significant limitations imposed onhim by his employer. Unlike anindependent insurance agent, he cannothire and fire employees without thepermission of Allstate. He can sell noproduct other than Allstate. He has notransferrable book of accounts. Like anyemployee, he can be terminated.

Defendant's reputation in the communitymay have generated new business;however, that can be said for anysalesman. We cannot ignore that thecaptive agent, like defendant, is selling aproduct of a major national insurancecompany which has fashioned its ownreputation for price, quality and serviceover many years with the assistance of aformidable national, regional and localadvertising campaign.

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,146 Misc.2d 101, 549 N.Y.S.2d 544 [S.Ct.,Nassau County]), a law degree (Cronin v. Cronin,131 Misc.2d 879, 502 N.Y.S.2d 368 [S.Ct.,Nassau County]), an accounting degree (Vanascov. Vanasco, 132 Misc.2d 227, 503 N.Y.S.2d 480[S.Ct., Nassau County]), a podiatry practice(Morton v. Morton, 130 A.D.2d 558, 515N.Y.S.2d 499), the licensing and certification of aphysician's assistant (Morimando v. Morimando,145 A.D.2d 609, 536 N.Y.S.2d 701), a Mastersdegree in teaching (McGowan v. McGowan, 142A.D.2d 355, 535 N.Y.S.2d 990), a Master's degreeand a permanent certificate in school

administration (DiCaprio v. DiCaprio, 162 A.D.2d944, 556 N.Y.S.2d 1011 [4th Dept.1990] ), afellowship in the Society of Actuaries (McAlpinev. McAlpine, 143 Misc.2d 30, 539 N.Y.S.2d 680[S.Ct., Suffolk County] ), the celebrity career of anopera singer (Elkus v. Elkus, 169 A.D.2d 134, 572N.Y.S.2d 901), the increase in value of the wife'scareer 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 capacity attributedto a former Congressional career (Martin v.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, likeO'Brien, base their finding of marital property onthe "enhanced earning capacity" which the "thingof value" provided to its holder. See, e.g.,McGowan v. McGowan, 142 A.D.2d 355, 535N.Y.S.2d 990 (2d Dept. 1988).”

<Golub v. Golub, 527 N.Y.S.2d 946,950 (Sup. Ct.New York County 1988):

There seems to be no rational basis uponwhich to distinguish between a degree, alicense, or any other special skill thatgenerates substantial income. Indetermining the value of marital property,all such income generating assets shouldbe considered if they accumulated whilethe marriage endured. If one spouse hassacrificed and assisted the other in aneffort to increase that other spouse'searning capacity, it should make nodifference what shape or form that assettakes so long as it in fact results in anincreased earning capacity. The rationalein both O'Brien and McGowan forawarding the spouse an economic interestin the intangible asset seems to have beenbased on a view of the asset as"investments in the economic partnershipof the marriage and the product of theparties' joint efforts." (McGowan, supra ).


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The noncelebrity spouse should beentitled to a share of the celebrity spouse'sfame, limited, of course, by the degree towhich that fame is attributable to thenon-celebrity spouse (25 UCLA LawReview, 1095). The source of the famemust still be traced to the marital efforts.

Thus, as in O'Brien, if a spouse devoteshimself or herself to the familythroughout the marriage, giving up careeropportunities, and no liquid assets exist,the court should compensate this spousefor his or her contribution enabling him orher to pursue his or her career and not justa terminable maintenance award. Forexample, if instead of medical school thespouse went to music school and becamea celebrated pianist, in equity bothaccomplishments must be treated equally.

The question, therefore, presented isshould O'Brien be extended so as not toprejudice a spouse who is married to anon-professional?

This court answers the question in theaffirmative and holds that the skills of anartisan, actor, professional athlete or anyperson whose expertise in his or hercareer has enabled him or her to becomean exceptional wage earner should bevalued as marital property subject toequitable distribution. Thus, althoughplaintiff's celebrity status is neither"professional" nor a "license"(Morimando, supra ) its increase in valueis marital property; despite the difficultiespresented 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):

The husband contends that the theoreticalvalue of the sales and consultancybusiness is $315,622; the wife contendsits value is $1,600,000. These disparate

conclusions result from two majorvaluation differences. First, the partiesdisagree on the amount of reasonablecompensation that should be deductedbefore determining the value of thebusiness component of the husband'searnings. Only earnings over and abovereasonable compensation can form thebasis for the valuation of the ownershipinterest under the capitalization ofearnings methodology. The wife arguesthat a reasonable compensation figure is$400,000 while the husband contends it is$750,000. . . . The court finds $400,000to be the reasonable compensation figure.Both expert witnesses conceded that nodirect, statistical source exists for personsholding comparable positions to that heldby the husband. However, the court findsthat the wife's expert presented cogentarguments to support his assessment ofreasonable compensation. Mr. Johnsonconsidered the compensation received bythe IDI officers, related, statistical sourcesfor corroborative comparison, and thehusband's historical earnings. . . . Incontrast, Mr. Friedman gave littlejustification for how he arrived at his$750,000 figure other than from his ownexperience in auditing and valuingbusinesses. Moreover, he gave fewspecifics to justify his conclusion . . . . Insum, the court found Mr. Johnson'sassessment of the husband's reasonablecompensation more credible.

The second significant dispute in thevaluation concerned what capitalizationrate should be applied based on anassessment of the risk factors of thebusiness. In the capitalization of earningsvaluation method, after deduction ofreasonable compensation, a capitalizationrate must be applied to the remainingearnings to determine the value of thebusiness. Both parties agree that thecapitalization rate here should be


37

determined using the "build-up method".This approach adds to a risk freeinvestment rate all relevant risk factors,including for the overall market, theparticular industry, and the specificbusiness being valued, to ultimatelydetermine the risk a hypothetical buyer ofthe business would have to assume. Fromthis number, the valuator can calculate therate of return a buyer would want toreceive to assume that risk, therebyarriving at the fair market value of thebusiness. The wife's expert concluded thata 25% capitalization rate (capitalizationmultiple of 4) was appropriate; thehusband's expert proffered a capitalizationrate of 44.3% (capitalization multiple of2.25). . . .

In performing the build up of the riskfactors, the experts were in generalagreement through assessing the historicalrisk premium (the risk factors from a riskfree investment through a smallcapitalized corporation). The majordiscrepancies arose in determining therisk factors for the specific business beingvalued. Both experts conceded that thedetermination of those risk factors islargely subjective . . . . The courtconcludes that the assessment by Mr.Johnson is more credible and supportedby the evidence.

FN9. Through that calculation, thewife's expert found a 19% ratewhereas the husband's expert found a17.3% rate. . . .

The main difference arises from Mr.Friedman's assignment of a 32% riskfactor for dependence upon a key person,that being the husband. The court findsthat the assignment of such a high riskfactor is not reflected in the reality of thebusiness during the period subject tovaluation. For instance, Mr. Friedman

assigned as a high risk factor the stabilityof the business's earnings. He contendedthat the earnings of the business areentirely dependent on the husband and thereal estate industry. . . . While this is true,during the period subject to valuation, thehusband's earnings increased each yearlending weight to the conclusion that thebusiness has stable earnings. Similarly,Mr. Friedman included as a high riskfactor the fact that there is no continuityof customer base. In point of fact, thehusband often had repeat customers . . .and, both historically and through thevaluation period, was able to obtain newjobs without any evidence of difficulty. Inaddition, although Mr. Friedman notedthat the growth potential of the companymight be a risk factor, he conceded thatthe husband's earnings had increasedduring the period under valuation. Thus,not only was this not a risk factor (Mr.Friedman subtracted 5% from his riskassessment because of the business'sgrowth), but lent support to theconclusion that Mr. Friedman overstatedthe other risk factors. . . .

Mr. Johnson acknowledged that certainrisk factors exist (e.g. key-person, sizepremium, customer concentration, etc.) aswell as lack of marketability. However,the court finds Mr. Johnson's assessmentthat a hypothetical buyer would seek torecapture the purchase price in 4 yearsreasonable not only with respect to theaccounting methodology he employed,but also as supported by the evidence ofthe success of the business. . . . [Recordreferences and footnotes omitted]

<White v. White, 611 N.Y.S.2d 951, 953 (N.Y.Supreme Court, Appellate Division 1994):

The first point of contention centers onSupreme Court's evaluation of defendant'sinterest in his law firm and the


38

distribution of 15% of this asset toplaintiff. Supreme Court accepted theopinion of plaintiff's expert that, pursuantto the capitalization of earnings approach,defendant's interest as of April 2, 1990had a value of $431,000. In contrast,defendant's expert, utilizing the net assetapproach, fixed the value at $19,409.Parenthetically, we note that becausedefendant's professional practice is wellestablished, the valuation of his license isnot an issue as it is deemed to havemerged and been subsumed by thepractice (see, McSparron v. McSparron,190 A.D.2d 74, 80-81, 597 N.Y.S.2d743).

The capitalization of earnings method isappropriate to use when evaluating a lawpractice and is apt to more accuratelyreflect its value than the net asset method(see, Nehorayoff v. Nehorayoff, 108Misc.2d 311, 437 N.Y.S.2d 584;Annotation, Valuation of Goodwill inLaw Practice for Purposes of DivorceCourt's Property Distribution, 77 ALR4th683). Thus, Supreme Court did not abuseits discretion in rejecting defendant'sevaluation.

<Nehorayoff v. Nehorayoff, 437 N.Y.S.2d 584,588, 591 (Sup. Ct. Nassau Cty. 1981): “The mostvigorously contested issue in this case was thevalue of Dr. Nehorayoff's half interest in PlazaWomen's Medical Realty, Inc., a closely heldcorporation primarily engaged in the terminationof pregnancies and related laboratory work. Eachside called an expert witness as to value. Mrs.Nehorayoff's expert testified that in his expertopinion the value of the half interest was in therange of $675,000 to $1,350,000. The Doctor'sexpert testified that in his expert opinion thecorporation had no value. The valuation ofclosely held and professional corporations is adifficult problem confronting the courts withincreasing frequency. To date no consistentapproach to valuation has been arrived at. . . .

Taking into consideration the actual and imputedearnings 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.”

Ohio.

<Hardy v. Hardy, 2005 WL 2660627, *5 (OhioCt. App. 2005): “The parties both offered expertopinion evidence concerning the value of theconsulting business. Nancy's expert opined thatthe business is worth $140,000, using pastrevenues and a multiplier factor to arrive atprojected future revenues on which her opinionwas based. Lawrence's expert valued the businesson the basis of its capital assets, as well asgoodwill and future potential, and opined that thevalue of the business is only nominal. . . . Themagistrate found that the valuation provided in theopinion of Lawrence's expert was more reliable.Nancy objected. The trial court overruled theobjection, stating: ‘The court finds that defendant'sbusiness, L.R. Hardy & Associates, has little or nomarket value. The business is effectively aconsulting business providing personal service tovarious defense contractors. The business' onlyproduct is the personal service provided by Mr.Hardy. There are no capital assets in the business;he has no client base; and he has no individualcontracts with any firm that could be sold. Thereare no appreciable business assets to be divided.’. . . .Lawrence's consulting business is maritalproperty, to the extent that it represents an‘interest’ Lawrence has that he acquired during themarriage. . . . Like a professional practice, itsvalue when the marriage terminates may bedetermined in relation to anticipated futurerevenues. See Barone v. Barone, (Sept. 1, 2001),Lucas App. NO. L-98-1328. However, thatdepends on the particular facts, including thenature of the activity as well as the owner/spouse'sexpected capacity to generate revenues. Those arequestions of fact for the trial court to determine.Lawrence was sixty-nine years of age at the timeof the divorce. The future revenues of hisconsulting business are limited by his age and the


39

nature of the business. The trial court could, in itsdiscretion, find that evidence on which Nancy'sexpert relied is too tenuous to support a finding ofany particular value, and instead adopt thevaluation offered by Lawrence's expert.[Paragraph numbers omitted]

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

Goodwill is an integral part of thevaluation of a professional business in adivorce proceeding. Kahn v. Kahn (1987),42 Ohio App.3d 61, 64. "Thecomprehensive definition of 'goodwill' is'the advantage or benefit, which isacquired by an establishment, beyond themere value of the capital, stock, funds, orproperty employed therein, inconsequence of the general publicpatronage and encouragement, which itreceives from constant or habitualcustomers, on account of its localposition, or common celebrity, orreputation for skill or affluence, orpunctuality, or from other accidentalcircumstances or necessities, or even fromancient partialities or prejudices.' " Spaydv. Turner, Granzow & Hollenkamp(1985), 19 Ohio St.3d 55, 59.

The experts' differing values of plaintiff'slaw practice arise from their assessmentof the goodwill of the practice. Severalmethods for valuing professionalgoodwill are recognized, including: (1)capitalization of net profits (or straightcapitalization), (2) capitalization of excessearnings, (3) the IRS method (known asthe "formula" approach), which subtractsa reasonable rate of return on tangibleassets and salary from average earnings,(4) market value, and (5) buy-sellagreements. Kell v. Kell (Dec. 14, 1993),Ross App. No. 92CA-1931, unreported.Nesser employed the "excess earnings"method to calculate the goodwill of

plaintiff's law practice. In arriving at theconclusion that the practice had nogoodwill, Nesser used plaintiff's actualearnings for each year between 1981 and1984, initially subtracted the estimatedreturn on assets, and then subtracted theestimated earnings for plaintiff's peergroup of similarly situated attorneys. Theestimated earnings of plaintiff's peergroup was calculated with the help of theAltman & Weil and OSBA reportsbecause the trial court's earlier calculationwas criticized in Clymer III for not usingfactors to make the value representative ofplaintiff's peer group. With those reports,the trial court's calculation, premised onNesser's testimony, considers the factorsClymer III indicated would make thereasonable compensation calculation moreaccurate, such as the attorney's area ofpractice, firm size, experience andpopulation where the practice is located.

Nesser then weighed the differencebetween actual and reasonable earnings,less the return on assets, to arrive at anexcess earnings number, that then wascapitalized to arrive at the amount ofgoodwill possessed by defendant's lawpractice. In Nesser's calculations, plaintiffmade less than the peer group Nessercompared him to in each year andtherefore had no excess earnings and,accordingly, no goodwill. . . . The trialcourt did not abuse its discretion inadopting Nesser's analysis over theanalysis of defendant's expert.

<Kahn v. Kahn, 536 N.E.2d 678, 682 (Ohio Ct.App. 1987): “Another contention of the appellantis that by placing a value on the goodwill of aprofessional practice that we are placing a valueon the defendant's medical degree. The OhioSupreme Court has told us that "a professionaldegree cannot be categorized as 'property.' " . . .Looking back at the definitions of "goodwill"previously presented shows that much more than


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the degree is valued in a goodwill calculation.Goodwill is an intangible value of an ongoingmedical practice. An ongoing sole professionalmedical practice, by definition, requires aprofessional physician with a degree, since itwould be both unethical and illegal to have anuneducated or unlicensed doctor practicingmedicine as sole practitioner. Furthermore, thevalue of goodwill can be calculated independentlyof the value of the degree. "A professional maynot have any goodwill; for example, he may justbe starting his practice or he may be a salariedemployee. Yet, his professional degree and hislicense to practice are of substantial economicbenefit to him." Kennedy & Thomas, Putting aValue on: Education and Professional Goodwill(1979), 2 Family Advocate 3, 5. Since goodwillcan be calculated independently of the value of thedegree it is erroneous to assume that by placing avalue on the goodwill of a medical practice thatwe are treating the medical degree as maritalproperty. . . . We, like the trial court, recognizethat goodwill is an integral part of the valuation ofa professional business in a divorce proceeding.

Oklahoma. Travis v. Travis, 795 P.2d 96, 100(Okla. Sup. Ct. 1990): “This Court has previouslyfound that a law practice can be considered jointlyacquired property subject to division as part of amarital estate. . . . In contrast to the physical assetsof a law office, the reputation of the lawyer cannotbe purchased by another seeking to acquire anestablished law practice. If Mr. Travis were tocease his practice of law, he would not be free tosell his files to a succeeding lawyer because sucha sale would violate Rule 1.8(j) of the Rules ofProfessional Conduct which prohibits a lawyeracquiring a proprietary interest in a lawsuit. Thisgeneral rule has its basis in common lawchamperty and maintenance. See, Comment, Rule1.8. Mr. Travis would only be able to divide a feewith a succeeding lawyer depending upon theclient's agreement to retain the succeeding lawyer,the client's agreement in writing to a fee division,both lawyers' assuming joint responsibility for therepresentation, and the total fee being reasonable.Rule 1.5, Rules of Professional Conduct, 5

O.S.Supp.1989, ch. 1, app. 3-A. Establishingearning capacity is much less speculative thantrying to establish a good will value of a lawpractice. Projected earnings can be considered inestablishing support alimony which, unlikeproperty division of good will, may be adjustedupward or downward at a later date. . . . BecauseOklahoma law allows such an adjustment, andbecause law practices cannot be bought and soldas can other professional practices, we concludethat a consideration of the earning capacity of alawyer and subsequent setting of support alimonybased upon that earning capacity is more equitablethan the speculative division of good will in thelaw practice of a sole practitioner.” [Citationsomitted]

Pennsylvania.

<Solomon v. Solomon, 611 A.2d 686, 691-92 (Pa.Sup. Ct. 1992): “This is the first time this Courthas been presented with the propriety of includingthe value of the good will of a business as amarital asset, where good will was not subject tothe partnership agreement itself. Generally, weagree with the Superior Court that if a businessqualifies as marital property pursuant to 23 P.S. §401(e), then to the extent that such business hasestablished good will, such value should beconsidered for purposes of equitable distribution.”[Footnote omitted]

<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 notbased on personal characteristics of Husband.Rather the goodwill value the expert attributed tothe practice was based on criteria such as locationand customer lists. This aspect of the practice'sgoodwill was properly subject to equitabledistribution. . . . However, the determination ofwhether a business has established good will iscontrolled by the nature of the business itself.Since good will is essentially positive reputation,the factors that have given rise to the positivereputation will necessarily control thedetermination of whether good will exists for


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purposes 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 isthat of the single individual and not the entity ingeneral, and this value is not capable of survivingthe disassociation of the individual from thebusiness entity. However, as the singleindividual's contributions become less substantial,the good reputation enjoyed by a business entitybecomes less related to the single individual andmore a product of the business entity in general,and thus, more capable of surviving thedisassociation of the single individual. In the casesub judice, the record facts indicate that Williamwas engaged as a sole practitioner of veterinarymedicine specializing in the breeding of horses.The Superior Court determined that given thesubstantial record evidence that the success ofWilliam's business was dependent solely on hisown expertise, the trial court did not abuse itsdiscretion in finding that William's business hadno good will value.

“Kathleen claims that the reputation of thebusiness was based not only upon William'sprofessional contributions, but also upon thecontributions of other members of the staff, whichincluded veterinarians, together with the generalfacilities and commodities of the businessunrelated to veterinary practice or the breeding ofhorses. We disagree.

“It is evident that the trial court paid greatattention to the conflicting evidence concerninggood will value. The trial court found particularlypersuasive the testimony of numerous clientsconcerning the importance of William'sprofessional expertise in sustaining the variousaspects of the business. In contrast, the trial courtwas not persuaded by Kathleen's claim that theother commodities of the business and theexistence of other staff veterinarians supported afinding of good will separate and apart fromWilliam's professional reputation. The trial courtspecifically found that the contributions of other

veterinarians were minor in that only two recentlygraduated veterinarians were employed for a briefperiod of time and they brought no new businessto the practice. Accordingly, the trial court foundthat William's business possessed no good willvalue. As there was more than sufficient evidenceto support a finding that William's businesspossessed no good will value outside hisprofessional reputation, we hold that the SuperiorCourt did not abuse its discretion in affirming thedecision of the trial court on this issue.”

South Carolina. Donahue v. Donahue, 384 S.E.2d741 (S.C. Sup. Ct. 1989):

The decision as to the inclusion of goodwill of aprofessional practice in a marital estate is, "in thefinal analysis, a public policy issue." . . . Thefollowing is a well-recognized definition ofgoodwill:

Goodwill may be properly enoughdescribed to be the advantage or benefitwhich is acquired by an establishmentbeyond the mere value of the capital,stock, funds, or property employedtherein, in consequence of the generalpublic patronage and encouragementwhich it receives from constant orhabitual customers, on account of its localposition or common celebrity, orreputation for skill or affluence, orpunctuality, or from other accidentalcircumstances or necessities, or even fromancient partialities or prejudices.

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

It attaches to the person of theprofessional man or woman as a result ofconfidence in his or her skill and ability.[cite omitted] It does not possess value orconstitute an asset separate and apart fromthe professional's person, or from hisindividual ability to practice hisprofession. It would be extinguished in


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the event of the professional's death,retirement or disablement.

. . . ‘The very nature of a professionalpractice is that it is totally dependent uponthe professional.’ [citation omitted] Thedefinitions set forth above indicate theintangible nature of the goodwill asset. Itis this intangibility which inevitablyresults in a speculative valuation. Thebasis of this Court's concern in Casey wasthe speculative element involved invaluation of goodwill. In light of thedefinitions above, we see similarproblems in the valuation of goodwill ofa professional practice. Accordingly, wehold that the family court erred in placinga value upon, and consequently dividingthe goodwill of the husband's dentalpractice.”); Casey v. Casey, 362 S.E.2d 6,6-7 (S.C. 1987) (“Courts from otherjurisdictions are divided as to whethergoodwill is marital property divisibleupon divorce. . . . The issue is one of firstimpression in this state. . . . When thegoodwill in a business is dependent uponthe owner's future earnings, it is toospeculative for inclusion in the maritalestate. . . . Moreover, these futureearnings are accounted for in an award ofalimony. . . . We hold that goodwill inHusband's fireworks business does notconstitute marital property subject toequitable distribution.”). [citationsomitted]

Tennessee. Smith v. Smith, 709 S.W.2d 588, 591(Tenn. App. 1985): “The next question is whatelements of a profession are taken into account inarriving at the value of that profession forpurposes of making an equitable division. Thephysical assets, of course, such as the furniture,buildings, library, etc., are things that have anascertainable value and should be taken intoaccount. The accounts receivable, properlyweighted, should have a definite value. The mosttroublesome question involves the good will of the

firm. Is that an asset that can be considered part ofthe marital property? Other states are split on thequestion, although a clear majority hold that thegood 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 shouldadopt the rule that professional good will is a partof the marital estate. We find the position taken bythe Wisconsin 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 orvested property right at the time of the divorce orthat it qualifies as property subject to division bydecree of the court. It did not possess value orconstitute an asset separate and apart from hisperson, or from his individual ability to practicehis profession. It would be extinguished in eventof his death, or retirement, or disablement, as wellas in event of the sale of his practice or the loss ofhis patients, whatever the cause.”

<Geesbreght v. Geesbreght, 570 S.W.2d 427, 435-36 (Tex. Civ. App.--Fort Worth 1978, writdism'd): “‘Good will’ is sometimes difficult todefine. In a personal service enterprise such as thatof a professional person or firm, there is adifference in what it means as applied to ‘JohnDoe’ and as applied to ‘The Doe Corporation’ or‘The Doe Company’. If ‘John Doe’ builds up areputation for service it is personal to him. If ‘TheDoe Company’ builds up a reputation for servicethere may be a change in personnel performing theservice upon a sale of its business but the sale ofsuch business naturally involves the right tocontinue in business as "The Doe Company". The"good will" built up by the company wouldcontinue for a time and would last while the newmanagement, performing the same personalservices, would at least have the opportunity tojustify confidence in such management while it


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attempted to retain the ‘good will’ of customerclients of the former operators. At least theopportunity to have time to try to preserve the‘good will’ already existent and to use it as anentrance into the identical field of operations in apersonal service type of business would be presentwhere the name of the business is a companyname as distinguished from the name of anindividual. Therein does it have value, plus thevalue of the opportunity to justify confidence inthe new management by the customer/clients ofthe predecessor owner(s). It is as applied to theforegoing that we consider Emergency Medicineto possess what we treat as ‘good will’ as part ofits worth and value under the circumstances of thiscase, and therefore an asset which would havevalue to some extent apart from John's person as aprofessional practitioner.”

<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.[citing Nail.] . . . When good will is not attachedto the person of the professional man or woman, itis property that may be divided as communityproperty. [citing Geesbreght.] . . . Once aprofessional practice is sold, the good will is nolonger attached to the person of the professionalman or woman. The seller's actions will no longerhave significant effect on the good will. The valueof the good will is fixed and it is now property thatmay be divided as community property.”

Utah.

<Sorensen v. Sorensen, 839 P.2d 774, 775 (UtahSup. Ct. 1992): “It would not be equitable torequired him to pay his wife part of the valueascribed to the goodwill, because the goodwill ofa sole practitioner is nothing more than his or herreputation for competency. . . . We believe . . .that unless the professional retires and his practiceis sold, his reputation should not be treateddifferently from a professional degree or anadvanced degree: both simply 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 bythe parties and both worked in the business. Thus,we see no problem in the award of a limitedamount for the goodwill of the catering business.”

Virginia. Howell v. Howell, 523 S.E.2d 514, 520(Va. Ct. App. 2000): “Discounting future earningsis not an inherently flawed method of valuationbecause it is based on projected future earnings.The value of goodwill can have two components.Professional goodwill (also designated asindividual, personal, or separate goodwill) isattributable to the individual and is categorized asseparate property in a divorce action. Practicegoodwill (also designated as business orcommercial 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 inHunton & Williams. It represented the premiumdue to the husband's association with Hunton &Williams, the economic advantage he enjoyedbecause he was a partner in that firm. It includedno value attributable to him personally, and it didnot rely upon any earnings due to the husband'sown expertise, reputation, experience, skill,knowledge, or personality. As applied, thediscounted future earnings method was not aflawed method of valuation. In valuing thegoodwill of the partnership interest, courts musttake special care not to confuse the owner spouse'spersonal future earning capacity with practicegoodwill attributable to the law firm in order toavoid double counting. "Further, particular caremust be given that future earnings capacity andreputation not be confused with professionalgoodwill."”


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Washington.

<Hall v. Hall, 692 P.2d 175 (Wash. Sup. Ct.1984): “The husband here contends that the Fleegedoctrine should be reconsidered because (1) itpresents confusing and unfair criteria foridentifying and evaluating the economic benefit toone spouse or the other, from a professionaldegree and career; and, (2) it is unfair where, ashere, it requires the determination that only one oftwo spouses, with identical professionaleducations and earning capacities, has professionalgoodwill. These contentions are based on thefailure to distinguish between professionalgoodwill and personal earning capacity of theprofessional. Goodwill is a property or assetwhich usually supplements the earning capacity ofanother asset, a business or a profession. Goodwillis not the earning capacity itself. It is a distinctasset of a professional practice, not just a factorcontributing to the value or earning capacity of thepractice. . . . Discontinuance of the business orprofession may greatly diminish the value of thegoodwill but it does not destroy its existence.When a professional retires or dies, his earningcapacity also either retires or dies. Nevertheless,the goodwill that once attached to his practice maycontinue in existence in the form of establishedpatients or clients, referrals, trade name, locationand associations which now attach to formerpartners or 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. . . . Goodwillshould be measured by arriving at a present valuebased upon past results and not by accounting forthe postmarital efforts of the professional spouse.. . . Factors to be considered include the length oftime the professional has been practicing, hiscomparative success, his age and health, andparticularly the past profits of the practice, whichwould reflect any income previously generated byhis goodwill. Additionally, because goodwill doesnot exist separately but is incidental to the other

assets of the business, attention should be given tothe physical and fixed resources of the practice.”[Citations omitted]

<Matter of Marriage of Fleege, 588 P.2d 1136,1138 (Wash. Sup. Ct. 1979): “[W]hile thegoodwill of a professional practice may not bereadily marketable and the determination of itsexact value may be difficult, that element maynevertheless be found to exist in a givenprofessional practice. The determination of itsvalue can be reached with the aid of experttestimony and by consideration of such factors asthe practitioner's age, health, past earning power,reputation in the community for judgment, skill,and knowledge, and his comparative professionalsuccess. A dentist who has practiced many yearsand established a good reputation can expect hispatients to return to him and to speak of him in amanner that enhances that reputation andencourages others to seek his services. Also, hecan expect a large number, if not most, of thesepatients to accept as their dentist a person towhom he sells his practice. These prospects are apart of goodwill, and they have a real pecuniaryvalue.”

Wisconsin. Holbrook v. Holbrook, 309 N.W.2d343, 345, 353-54 (Wis. Sup. Ct. 1981):“Originally, goodwill was said to exist only incommercial business, and not in a professionalbusiness which depends upon the skill andreputation of a particular person. . . . Becausegoodwill has no existence apart from the businessto which it attaches, courts have determined thatthere can be no income tax deduction for loss ofgoodwill; the loss of goodwill cannot becompensated 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 severalmembers, all of whom have presumably


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contributed to the goodwill of the business.Valuation of one individual's goodwill interest inthe business would be almost pure speculation. . .. We are not persuaded that the concept ofprofessional goodwill as a divisible marital assetshould be adopted in Wisconsin. We are notobliged nor inclined to follow the twisted andillogical path that other jurisdictions have made indealing with this concept in the context of divorce.. . . The concept of professional goodwillevanesces when one attempts to distinguish it fromfuture earning capacity. Although a professionalbusiness's good reputation, which is essentiallywhat its goodwill consists of, is certainly a thingof value, we do not believe that it bestows onthose 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 substantialearnings in the future. It cannot be separately soldor pledged by the individual owners. The goodwillor reputation of such a business accrues to thebenefit of the owners only through increasedsalary.” [Footnotes omitted]

C. VALUING GOODWILL. The methods ofvaluing the goodwill of a business are well-known. In a sale, commercial or enterprisegoodwill is the difference between the sales priceand the value of tangible assets plus identifiableintangible assets (leases, intellectual propertyrights, employment agreements, covenants not tocompete, etc.). This market-based measure ofgoodwill is as far as the financial accountingprofession has traditionally been willing to go,because it fears that any further subdivision ofgoodwill into sub-components is too subjective.In a divorce, there is no sale, so the valuator mustestimate the fair market value of the business, andthus estimate the excess in sale price above thevalue of tangible assets and separable andtransferrable intangible assets. The objectivityprovided by an actual sale, a prerequisite toreporting a value on a balance sheet, is thus absentfrom the valuation process. In a personal servicebusiness, the valuator must not include in the date-

of-divorce value any post-divorce labors, and, inmost states the valuator must segregatecommercial or enterprise goodwill from thepersonal goodwill of the owner. Goodwill in aprofessional practice is usually determined usingthe excess earnings method or a capitalization ofearnings stream, with some subjective downwardadjustment for personal goodwill.

1. Goodwill of the Going Business. The TaxCourt recognizes three ways to measure the valueof goodwill of a business: (i) the bargain of theparties (where agreement was reached as a resultof arm's-length bargaining between parties withadverse legal interests); (ii) the "residual" or "gap"method (subtract the value of the tangible assets,i.e. cash, cash equivalents and other tangible assetsfrom 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). SeeR.M. Smith, Inc. v. Commissioner, 591 F.2d 248,252-253 (3d Cir. 1979) (the residual method isinaccurate whenever the buyer paid too little ortoo much for the interest in the business); PhilipMorris, Inc. and Consol. Subs. v. Commissioner,96 T.C. 606 (1991), affd. without publishedopinion, 970 F.2d 897 (2d Cir. 1992) (residualmethod rejected because a control premium wasincluded in price paid). Under the excess earningsapproach to valuing goodwill reflected in Rev.Rul. 68-609, 1968-2 C.B. 327, the incomeattributable to tangible assets is deducted from netincome of the business, and the remaining incomeis attributed to goodwill, which is then capitalized.Philip Morris Inc. and Consol. Subsidiaries v.Commissioner, 96 T.C. 606, 633 (1991).

2. Commercial or Enterprise Goodwill vs.Personal Goodwill. Valuing the commercial orenterprise goodwill of a going business requiresthe valuator to differentiate the commercial orenterprise goodwill (or goodwill that can betransferred in a sale of the business) from thepersonal goodwill of the business owner (goodwill


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that cannot be transferred in the sale of thebusiness if the owner leaves the business). Thisdifferentiation is complicated by the fact that someof the personal goodwill may actually transferwith the sale of the business if (i) the previousowner continues to work for the business, (ii)lends the use of his name or image to the business,or (iii) the selling owner has died, retires, relocatesto another market or agrees not to compete withthe 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 areprotectable under contract or other law or areseparable and transferrable, leaving a residualgoodwill. See Section III.A.3 above. The valuatornext determines the reduction in profits resultingfrom the seller leaving the business, or competingwith it, as the case may be. Capitalizing theremaining profit yields the business’s commercialor enterprise goodwill.

(a) 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 ofintangible value that must be allocated to residualgoodwill. A checklist of non-goodwill intangibleassets of a going business could be drawn fromInternal Revenue Code § 197(d), including: goingconcern value; workforce in place; business booksand records, operating systems, or any otherinformation base; any patent, copyright, formula,process, design, pattern, knowhow, format, orother similar item; any customer-based intangible(i.e., composition of market, market share, and anyother value resulting from future provision ofgoods or services pursuant to relationships,contractual or otherwise, in the ordinary course ofbusiness with customers); any supplier-basedintangibles (i.e., value resulting from futureacquisitions of goods or services pursuant torelationships, contractual or otherwise, in theordinary course of business with suppliers of

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 competingwith it.

The valuation of intangible assets that arerecognized as legally enforceable or separable andtransferrable is more concrete in the sense thatthese non-goodwill intangible assets are moresusceptible to a replacement cost analysis or amarket 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. SeeCanterbury v. Commissioner, 99 T.C. 223, 249(1992), and cased cited therein.

One might ask, if enterprise goodwill isconsidered 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 ofthe fight over what is enterprise goodwill and whatis personal goodwill. Valuing non-goodwillintangible assets forces the valuator to be concreteon as many components of value as is possible,and it reduces the size of the “residual goodwill”that must be calculated by process of elimination.However, in many cases this may be an effort forwhich the client cannot afford to pay.

The effort to individually value separable andtransferrable intangible assets can be time-consuming and therefore costly. Limited fundingin a divorce may force the valuator to aggregateintangible assets for purposes of valuation.

(b) Determining Personal Goodwill. This


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article proposed that the first step in determiningpersonal goodwill is to remove the factor ofknowledge, skill and experience from the goodwilldetermination by including that factor in theadjustment made to normalize the owner’shistorical compensation. The remainder of thegoodwill can then be divided into the sellingowner’s relationship-based personal goodwill andenterprise goodwill.

Adjusting for Knowledge, Skill and Experience.It is a thesis of this article that, in using an excessearnings approach to valuing a business, the bestway to account for the knowledge, skill, andexperience component of personal goodwill is toadjust 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] (“. . .some portion of the personal goodwill issue canoften be minimized by properly addressingreasonable compensation”). A highly skilled,experienced professional perhaps is entitled to ahigher level of compensation in nationalcompensation surveys. For example, in a surveyof all physicians, including all years of practice, anexperienced physician would tend toward a higherpercentile than younger physicians, and aspecialist would tend toward a higher percentilethan nonspecialists. If the physician in question isboard certified, and the survey data reflectscompensation of similar specialists, then a highlevel of skill may be assumed for all, and perhapsno special consideration of pushing the physicianto the higher median levels is warranted, in thatthe level of skill is already expressed in the surveydata. At any rate, in normalizing the seller’shistorical compensation, a compensation level willbe reached that should permit the business to hirea replacement employee with knowledge, skill andexperience comparable to the Seller’s with nofurther adverse effect on profitability.

Profits Tied to the Seller. It is another thesis ofthis article that the relationship-based componentof personal goodwill can best be measured by

projecting the reduction in profits to the businessthat will occur after the seller leaves the business,or competes with it. If profits decline after thesale, and all other factors remain the same, thenthe amount of reduced profit is a measure of therelationship-based portion of the personalgoodwill of the seller. This assumption isweakened in instances where the buyer bringspersonal goodwill to the business to replace thelost personal goodwill of 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 article p.30-5 (“Measuring profits attributable to the selleris analogous to determining personal goodwillversus the enterprise (business) ‘goodwill’ orintangible value”). According to Dietrich, indetermining the value of a covenant not tocompete, the valuator must prepare an “alternatevaluation” of the business, assuming that the sellerleaves the business and competes with it. TheDietrich Segregating article, p. 30-5. Thedifference between the normal business valuation(assuming a continuation of historicalprofitability) and the alternate valuation is thevalue of the covenant not to compete. Where theseller leaves the business but does not intend tocompete (death, retirement, relocation to anothermarket), the “alternate valuation” would be madeon the assumption that the seller leaves withoutcompeting.

The creation of an alternate-valuation couldrequire some serious financial modeling that couldcost more than the client wants or can afford topay.

Determining how the seller’s leaving the business,or competing with it, will affect that business willvary from business to business. When thevaluation is undertaken in connection withdivorce, the valuator cannot uncritically acceptnon-binding statements by the owner’s “buddies”that favorable supply relationships, or customers,or sources of future business, or valued


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employees, will sever connections to the businessif the owner sells. The risk of such severancesshould be objectively analyzed. While loyaltydoes exist, most people make business decisionsbased on self-interest, when the cost of loyalty ishigh.

A possible factor to consider in assessing theeffect of future competition by the seller is anystatutory or common law prohibitions against theseller’s damaging the value of what he is selling,such as a common law protection of customerlists, 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, andany market 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]. Dietrich discusses Texas Business & CommerceCode §15.50, which provides that covenants not tocompete involving a physician cannot deny to thephysician access to a list of his patients whom hehas seen or treated within one year of thetermination of employment. However, thelanguage of the statute evidently relates tocovenants not to compete incident to employment,and may or may not apply to covenants not tocompete relating to the sale of a medical practice.Sales information from states with weakenforcement of covenants not to compete shouldbe studied to see whether the combined sales priceand cost of a covenant not to compete is less thanin states that enforce such covenants. The factorof competition may prove to be less we imagine.

3. What’s Left is Entity Goodwill. In an income

approach, if the seller’s historical compensation isadjusted to reflect his/her knowledge, skill andexperience, and if the valuator adjusts theprojection of future profits downward to reflectthe loss of the seller’s personal relationships, thenthe personal goodwill portion of the overallgoodwill of the business is measured by thereduction in future profits tied to the seller’sleaving and competing. Any goodwill left aftermaking these adjustments is, by process ofelimination, enterprise goodwill.

D. 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 tangibleand intangible assets of the business, and whatconstitutes enterprise 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 alimonyupon divorce, a lawyer may want to prove up thevalue of the human capital, or personal goodwillenhanced during marriage, in support of anunequal property division, or some alternativetheory of recovery, perhaps in equity, perhaps inrestitution and unjust enrichment, perhaps in someother area of law. Proving only the value of thebusiness, including only enterprise goodwill,leaves the judge with no numbers to considerregarding the value of the personal goodwill of thebreadwinning spouse.