Valuing Community Property When One Party Provides Unreliable Business Records

Valuing Community Property When One Party Provides Unreliable Business Records

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Pursuant to the California Family Code, California community property is valued or should be valued “as near as practicable to the time of trial.” Most often, the value of an asset is determined by fair market value at or around the time of trial and the property is then distributed in accordance with community property laws. However, for certain types of assets which may have speculative value, determining the fair market value can be complicated, especially when one party does not keep good records.

 

In In re Marriage of Nelson (2006) 139 Cal.App.4th 1546, Wife started a retail business known as Arista’s Flowers and Dolls in 1988 which was never a very profitable business. The parties separated in 1999. After separation, Wife moved the retail business to another location and incurred $41,000 for moving costs and expenses. She closed the business in 2004, shortly before trial. Husband’s experts could not adequately value Wife’s business because of poor record keeping. For example, (1) there was an unexplained loss of $115,000 between 1999 and 2001, (2) gross profit percentage for 2000 and 2001 was inexplicably inconsistent, (3) inventory for 12/99 and 1/01 was inexplicably identical, and (4) income statements for 2000 and 2001 were inconsistent with income tax returns for those years. One expert opined that it was impossible to value a retail business without reliable income statements and balance sheets for the previous 3 to 5 years. Husband, therefore, asked the trial court to value business as of date of separation and offered his expert’s opinion of book value as of that date ($156,000), which the expert extrapolated from Wife’s 1998 tax return and other business income documents of Wife.

The trial court valued the business as of the date of separation because:

 

(1) the state of Wife’s record keeping and subsequent disclosures made it difficult, if not impossible, to calculate the value of this business since the date of separation,” and

 

(2) the business was a sole proprietorship run by the Wife alone from the date of separation.

 

Wife appealed and the Court of Appeal held that the alternate valuation date was approved due to Wife’s bad record keeping. A party cannot benefit from the confusion for which he or she is responsible. “There is no requirement in a ‘bad bookkeeping’ case that the proprietor must have intentionally created the uncertainty” (Nelson, at 1551). “[W]hen a party precludes an expert’s trial-date valuation because he or she does not provide needed information, a valuation as of another time is appropriate because it is made ‘as near as practicable to the time of trial.'” (Id).

 

Thus, if one is contemplating a dissolution or in the midst of one, it is important to keep accurate and detailed records which might be used to value community assets. This is true especially in a business valuation which may be highly disputed, uncertain, and may fluctuate during the proceedings.