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Division of professional interest in corporation

Often in Texas divorce cases, lawyers are tasked with determining the divisible interest in a professional corporation. This involved determining the individual’s interest in the corporation and then obtaining the value of the interest. Often a CPA with experience in divorce litigation as well as valuation of business entities is hired to assist in this endeavor. A new recent case out of the Fort Worth Court of Appeals illustrates the complexities of dividing a professional’s interest in a corporation.

The husband was a non-CPA partner in KPMG, a national CPA firm. He joined the firm as a shareholder and borrowed money from a third-party lender for his buy-in to the firm. This buy-in funded the husband’s capital account. The membership documents defined the value of the interest in the corporation as being the value of the capital account. In spite of the definition of the valuation method of the interest in the company, wife’s expert testified that husband should also have an interest in the professional goodwill of the company independent of the interest in the company.

Goodwill that exists separate and apart from a professional’s personal skills, ability, and reputation is divisible upon divorce. To determine whether goodwill that is subject to division upon divorce attaches to a professional practice, first, goodwill must be determined to exist independently of the personal ability of the professional spouse, and then if such goodwill is found to exist, the court must determine whether that goodwill has a commercial value in which the community estate is entitled to share. While a partnership agreement is only a factor to consider in the present value of the partnership interest, the questions of whether a business possesses goodwill and if so, what the value of that goodwill consists of, are fact questions for the trier of fact.

The trial court determined that wife’s expert lacked credibility and disregarded his valuation method, instead opting for the method of valuation stated in the membership agreement and testified to by the national director of husband’s company. So, husband’s capital account was the value of the loan proceeds minus the remaining balance on the loan.

Hill v. Hill, 02-12-00332-CV, 2014 WL 92795 (Tex. App.—Fort Worth 2014, no pet. h.) (mem. op.) (1/9/14).