Before The
Committee on Judiciary
The
Massachusetts Medical Society (MMS) wishes to be recorded in support of S.764, “An
Act Relative to the Valuation of Professional Practices in Divorce
Proceedings.” The MMS is grateful to
Senator Michael Brady for filing this legislation.
This
bill would ensure that professional corporations, including physician office
practices, be valued at fair market value, as defined consistently with federal
statutes governing other transactions involving physician practices.
Prior to 1997, “the Massachusetts probate courts in divorce
proceedings treat the value of a corporation as the price at which the property
would change hands between a willing seller and a willing buyer, neither being
under any compulsion to buy or sell and both having relevant knowledge of
relevant facts. This definition is
referred to as the fair market valuation standard as defined by the Internal
Revenue Service. The concept of tax affecting derives from the difference in
tax treatment of S and C corporations. C corporations pay tax on earnings at
the corporate level, while S corporation earnings pass through to their
shareholders on a pro rata basis and are taxed to the shareholders when earned
by the corporation, whether or not the corporation pays dividends. When C
corporations are valued using the income approach, earnings are reduced by the
applicable corporate taxes to determine an accurate value. Valuators also
reduce S corporation earnings for taxes. In some instances, valuators base that
adjustment on an assumed personal tax rate, but, more commonly, they base the
adjustment on corporate tax rates.
In Bernier v. Bernier, 449 Mass.
774 (2007), the SJC was presented with the novel question of whether to
discount the value of an S corporation by “tax affecting” income at the rate
applicable for C corporations, where one spouse would receive ownership of all
shares of the S corporation after the divorce and the other would be required
to relinquish all ownership in the business. The SJC concluded that doing so
seriously understates the fair market value of the S corporation structure and
fails to compensate the seller for the loss of those benefits”.1
This legislation would reinstate this
definition for professional corporations, in particular when the professional is going to stay
with the corporation and continue to provide services.
H.3588, An Act Relative to Valuing Professional Practices at
Fair Market Value in Divorce Proceedings
(F.Moran) has the same intent as S.764 and is also supported
by the MMS.
1. Valuation of Closely held Corporations. Berluti, McLaughlin and Kutin LLP
