Testimony in Support of S.764 an Act Relative to the Valuation Of Professional Practices in Divorce Proceedings

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

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