< Previousconcluding that while there were substantial distributions, the couple “also returned significant income to the business,” and that all of the income should be considered marital. Her capitalization of earnings method yielded a value for ALC of $2,732,400. For her adjusted book value method analysis, Wife’s expert used the appraiser’s 2017 equipment value and determined that the adjusted book value of ALC was $4,397,300. 3 She chose the adjusted book value method, claiming that it more accurately reflected the “true value” of the business and its equipment and property. To determine the active appreciation for ALC, Wife’s expert used Husband’s expert’s 2003 date-of-marriage value, disregarding the fact that the two values were determined using different methodologies. Adjusting for inflation as the only passive appreciation component, she concluded that active appreciation to be included in the marital estate was $3,339,122. The trial court largely accepted Husband’s expert’s analysis, based on her greater experience in active appreciation engagements, her use of the date of separation as a valuation date, and her matching methods for date-of- marriage and date-of-separation values. However, the trial court disagreed with the expert’s conclusion that the appreciation in value was largely passive. The trial court adjusted the 2003 date-of-marriage value for inflation and attributed the remaining increase in value to active appreciation. With that change, the trial court valued ALC at $842,600 for purposes of distribution. The Analysis Wife appealed both the trial court’s ruling on transmutation and its reliance on Husband’s valuation expert. Husband cross-appealed on the trial court’s active appreciation analysis of the East 56th Avenue property. The Alaska Supreme Court 4 began its analysis as follows: “Typically, a spouse’s individual property obtained prior to marriage remains that spouse’s separate property. But separate property becomes marital through transmutation if ‘one spouse intends to donate separate property to the marital estate and engages in conduct demonstrating that intent.’” 5 “Sharing property during a marriage,” the court continued, “is not dispositive because there must be an intent to donate, convey, or gift the property to the marital estate.” 6 3 The opinion does not mention whether Wife’s expert made any effort to reconcile the 61 percent difference between the two indications of value. 4 In Alaska, decisions in civil cases are appealed directly to the supreme court. 5 2024 Alas. LEXIS 22 at *17, quoting Kessler v. Kessler, 411 P.3d 616, 619 (Alaska 2018). 6 Ibid. 7 2024 Alas. LEXIS 22 at *33 (emphasis in original), citing Hansen v. Hansen, 125 P.3d 299, 305–06 (Alaska 2005). The trial court, as finder of fact, assessed the parties’ credibility and intent, and it concluded that Husband had never actually intended to gift the ALC ownership to the marriage. While self-serving testimony on its own should not be a basis for a trial court ruling, the supreme court concluded that the trial court’s reliance on Husband’s testimony was supported by his conduct of repeatedly holding himself out to third parties as the sole owner of the business. The supreme court also disagreed with Wife’s argument that the trial court’s valuation of the ALC’s active appreciation was reversible error. Active appreciation rests on three separate, but related, findings: 1. That the separate property appreciated in value during the marriage; 2. That there were marital “contributions” to the property; and 3. That there is a causal relationship between the marital contributions and at least some of the property’s appreciation in value. The burden of proving active appreciation is split between the parties. The proponent of active appreciation must show the first and second elements. Then the burden shifts to the property owner to show the absence of a causal connection. The responsibility of assessing the conflicting arguments (and, often, conflicting expert reports) rests with the trial court. An appellate court can only overturn the trial court if there is clear error in the trial court’s analysis. In this case, the trial court clearly documented its rationale for evaluating the disputed evidence, ultimately correcting some of the conclusions of the expert witness it found more reliable. Husband challenged the trial court’s finding that the appreciation in value of the East 56th Avenue property was active when much of it was due to the investment through his separate property, ALC. The supreme court pointed out the flaw of Husband’s argument. This position “runs contrary to our precedent, which recognizes that either party may make contributions to the separate property, and so long as those efforts occurred during the marriage, they constitute marital contributions to the property’s active appreciation.” 7 Husband admitted that ALC was responsible for increasing the value of the real estate, essentially confirming the trial court’s conclusion. 40 The Value Examiner Legal InsightsHusband also argued that the parties had stipulated to the value of the real estate and that the cost of the 2011–2012 improvements were equivalent to the active appreciation. According to Husband, that should have capped the active appreciation included in the marital estate. The court disagreed. While the parties stipulated that the cost of the improvements was included in active appreciation, they did not stipulate that that was the only source of active appreciation. As already noted, the third prong of the active appreciation analysis, disproving the causal connection between the marital contributions and the increase in value, rests with the property owner. As the property owner, it was Husband’s burden to allocate increases in real estate value among the various alleged causes. Husband failed to establish that allocation. The supreme court affirmed the trial court in all respects. The Takeaways Divorces involving separate property are inevitably complicated. They require analyses of both (1) whether that property remains separate or has been commingled with marital assets so as to be transmuted into a marital asset, and (2) how much of the asset’s value, if any, should be reflected in the marital estate. In states that include only active appreciation of separate property in the marital estate, the issue may be further complicated by questions regarding the parties’ respective burdens of proof. 8 This opinion also addressed Wife’s appeal of the trial court’s ruling on custody and visitation, but those issues are not relevant here. Smith v. Smith The Facts Jessy (“Wife”) and Christopher (“Husband”) Smith married in 2007. In 2019, they separated, with two minor children. Wife worked as a nurse and Husband owned and operated two businesses: a landscaping business, which he began in 1995 and converted into Horticulture Services LLC (“Horticulture”) in 2008, and Midway RV and Boat Storage LLC (“Midway”), which he operated from a property he purchased in 2010. The trial court ruled that both of these businesses were Husband’s separate property and not subject to equitable distribution. 8 The Analysis Wife contended that because Horticulture was officially formed in 2008, after the marriage began, it was marital property. However, the trial court found that Horticulture was merely a formalization, for various tax and legal benefits, of a landscaping business that Husband had been operating since 1995. The appellate court acknowledged that the trial court had considered extensive evidence showing that was the case. Alternatively, Wife argued, at both the trial and appellate levels, that the business’s value increased substantially over the course of the marriage, and that increase in value was a marital asset subject to equitable distribution. While that may 41 May | June 2024 A Professional Development Journal for the Consulting Disciplinesactually have been true, Wife offered no proof at trial of how much the business’s value increased or what had caused it. As the proponent of including a separate asset’s appreciation in value in the marital estate, Wife bore the burden of proving not only the appreciation in value itself, but also that the appreciation was attributable to the actions of one or both parties. Midway was a less obvious case of separate property. Since Husband acquired the land and began the business during the marriage, it was presumed to be marital property. “The party claiming that [an] asset is separate, nonmarital property has the burden of proof and must overcome the presumption that the asset is marital property.” 9 The trial court found that Husband had purchased the land using funds borrowed from family members and a bank. He later repaid the family members using a line of credit secured by the family home. While the trial court found this sufficient to classify the real estate and the business as separate property, the appellate court disagreed. Husband may have initially purchased the land with separate property, but he later paid off the original financing with marital assets, including both cash and a credit line secured by the marital home. 9 2024 Miss. App. LEXIS 71 at *20, quoting Cannon v. Cannon, 375 So. 3d 697, 710 (Miss. Ct. App. 2023). 10 2024 Miss. App. LEXIS 71 at *22. Further, Wife testified that she helped in the operation of Midway from time to time. Husband claimed that whatever assistance she may have provided was minimal. The appellate court, however, determined that Husband’s argument was unavailing. “We assume for divorce purposes that the contributions and efforts of the marital partners, whether economic, domestic or otherwise are of equal value.” 10 Husband’s complaint that Wife did not sufficiently share the burden of running Midway was not enough to overcome the presumption that the business was a marital asset. The appellate court reversed and remanded with regard to equitable distribution and ordered the trial court to revisit the division of property, including Midway and the related real estate, in the marital estate. The Takeaways Overcoming the presumption that property acquired during the marriage is marital is a substantial hurdle. To do so requires credible evidence, not merely the complaints of a now dissatisfied participant in the marriage. Michael J. Molder, JD, CPA, CFE, CVA, MAFF, is the owner of AILA Limited, providing forensic accounting and business valuation services primarily in litigation engagements. Mr. Molder applies over 35 years of experience as a certified public accountant and commercial litigator to analyze financial misconduct claims, value business interests, and investigate fraud. As an expert witness, Mr. Molder has worked with counsel on cases involving family law issues, estate administration/litigation, shareholder disputes, and commercial damages. Email: molder@LawAndAccounting.com. Overcoming the presumption that property acquired during the marriage is marital is a substantial hurdle. To do so requires credible evidence, not merely the complaints of a now dissatisfied participant in the marriage. 42 The Value Examiner Legal InsightsJoin the team that has taught the certified training for NACVA and built successful consulting practices to expand your business. 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