In Re Marriage of Fonstein

Summary

Harold's law partnership interest was community property, and the trial court valued it at the present value of his contractual withdrawal payments. It then cut that figure from $110,417 to $49,977 for estimated income taxes he would owe if he ever withdrew. The Supreme Court held that was error because no taxable event had occurred or was shown to be coming, and the court upheld the use of the 8 percent equity figure and rejected Harold's argument that the interest was a mere expectancy. It reversed the property division and remanded for revaluation without tax consequences and a readjusted division.

What it means for the financial analysis

In a valuation of a partnership interest for division, a discount for hypothetical taxes on a future withdrawal or sale is not supported unless a taxable event has occurred or will occur in the division itself. Analysts should present values before speculative tax effects and keep any tax adjustment separate, tied to proof of a specific, immediate liability.

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