Case Notes: Valuing assets in equitable distribution

The recent case of Balicki v. Balicki, 4 A.3d 654 (Pa. Super. 2010), has the potential to be a disaster for both divorcing parties and attorneys. The case originated in Allegheny County, having first been heard by Master Patricia Miller and then, on appeal, by trial court Judge Alan Hertzberg.

In a narrow sense, the Pennsylania Superior Court upheld the court trial analysis that discounted the value of marital assets (an insurance agency) by about 23% as a result of the taxes and sale expenses involved.

When valuing an asset for divorce, Pennsylvania law requires the court to deal with the "The Federal, State and local tax ramifications associated with each asset to be divided, distributed or assigned, which ramifications need not be immediate and certain." 23 PaCSA 3502 (10.1).

The Court must also deal with "The expense of sale, transfer or liquidation associated with a particular asset, which expense need not be immediate and certain". 22 PaCSA 3502 (10.2).

In Balicki, Master Miller considered the tax and sale costs associated with the insurance business, but decided not to apply the discount because she did not think the business would be sold by Husband, since it had been in his family for generations and his children might inherit the business. It was long thought that the law only required the court to "consider" these costs in valuing an asset.

However, the language of Balicki may mean that the court must consider tax ramifications when valuing assets.

The Superior Court wrote:

"It is crystal clear that the Legislature intended to stop the practice of the lower courts analyzing the prospect of sale of an asset, and Master Miller was wrong to do so. We believe the Legislature intends the assets simply be given the value they would have at distribution, after deducting every expense necessary to achieve liquidation."

(As a side note, when a court writes that something is "crystal clear" it usually means that the matter is murky and uncertain and when a court writes that something "simply" needs to happen, the "simple" event is usually complex and difficult.)

Discounting marital assets for costs of sale and taxes is already routinely done with real estate where, for example, Allegheny County typically applies an 8% discount on the appraised value of a house to account for brokers fees and transfer taxes. But consider if you had to apply costs of sale and tax ramifications to every asset. Cars, businesses, sofas etc. The additional work would be an incredible drain on client money and attorney time.

Hopefully,Balicki will be narrowly interpreted in future decisions to avoid this potential disaster. It is almost inconceivable that divorcing parties would need to do all this extra work. In any event, parties and attorneys will need to pay attention to the Balicki case and may now need to pay special attention to the tax consequences and costs of sale of almost every asset.

As always, speak to your attorney before applying this case to your circumstances. In the interest of clarity, I did not address several aspects of this opinion. Also, almost all rules have exceptions and the exceptions often have exceptions.