Georgia’s Supreme Court Addresses Separate Property and Goodwill

Experts historically used Thomas v Thomas (1989)  and related cases as the basis for calculating separate and marital interest in certain assets using a source-of-funds approach and methodology. In recent years, the source-of-funds approach has been eroded by such cases as  Lerch v. Lerch (2005) and Coe v. Coe   (2009) in which the Supreme Court determined that a party which would have been entitled to a separate property claim under a source-of-funds analysis had converted his/her separate property to marital property by making a gift to the marriage.   In Lerch v. Lerch, the trial court ruled the parties’ home as 50% marital and 50% separate because the husband owned the home prior to the marriage and later conveyed the property to himself and his wife as tenants in common with rights or survivorship.  Georgia’s Supreme Court reversed the trial court’s ruling and indicated that the property was 100% marital because the husband transferred separate property into marital property when he converted the deeded into both parties’ names as tenants in common with rights of survivorship by Deed of Gift.  In Coe v. Coe, the husband claimed the trial court erred by equitably distributing the marital home he purchased with separate monies received from a personal injury claim.    The Supreme Court affirmed the trial court’s ruling stating although the property was purchased with separate monies, the marital home was deeded in both parties’ names; thus, transforming separate property into marital property subject to equitable distribution.

On November 22, 2010, Georgia’s Supreme Court’s ruling on separate property remained consistent with Lerch and Coe in Miller v. Miller.  In Miller, the husband claimed the trial court erred in the distribution of the marital home and an Amelia Island lot because the source of funds used to purchase these properties was not considered.  According to the husband, both properties were purchased with proceeds from the sale of his premarital residence.   The trial court determined both the marital home and the Amelia Island lot were subject to equitable distribution for the following reasons:

  1. The premarital residence was title in both parties names and listed both parties as sellers;
  2. Proceeds from the sale of the premarital property was placed in the parties’ joint operating account;
  3. The new residence was conveyed to both parties when purchased;
  4. The parties borrowed against the marital residence to purchase the Amelia Island lot.

The Supreme Court affirmed the trial court’s determination.

Miller v. Miller also shined some light on another major divorce issue, personal and enterprise goodwill in a medical practice.  The husband challenged the trial court’s valuation of his medical practice, where the wife’s expert used a combination of the asset, market, and income approach to determine the value.  According to the husband, all methods used to value the business were inappropriate for the following reasons:

  1. Market approach – market for solo medical practices was nonexistent;
  2. Asset approach – salary was close to the earnings of someone in his profession which left very little to no excess earnings to capitalize;
  3. Income approach – earnings were capitalized which counted his income twice by awarding part of the business in equitable distribution and using that same income for support awards.

The Supreme Court affirmed the trial court’s rulings stating the valuation of the husband’s medical practice was appropriate for the following reasons:

  1. All three methods of valuing goodwill were considered;
  2. Market approach – wife’s expert utilized two national databases to justify use;
  3. Asset approach – paying a normal salary did not mean excess earnings were nonexistent;
  4. Income approach – wife’s expert considered the business’ S corporation designation, excluded annual income representing reasonable compensation for services, and capitalized actual past earnings instead of estimating future earnings based upon a future growth rate.

Note that we are not attorneys and not qualified to give legal advice.  Nothing in this article should be construed as giving legal advice.  The purpose of our articles is to educate and inform, alerting our readers to possible issues of interest to them.  Please consult your attorney for advice specific to your individual situation if you think these issues may apply to you.

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IAG Forensics

IAG Forensics & Valuation is a CPA firm that specializes in forensic accounting, fraud investigation, business valuation and litigation support.

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