When Separate Property Has Not Changed Form
Identifying certain types of separate property that
exist at the end of a marriage is relatively straightforward. Tangible assets that are unique in nature,
such as a specific piece of real estate, for example, are easy to
identify. There can be little
disagreement that a premarital piece of real estate, for example an undeveloped
lot, that exists at the end of a marriage is the same property that existed at
the beginning of the marriage.
Unfortunately, even simple examples, such as an undeveloped lot, require
further analysis to determine if they still remain separate property at the end
of the marriage. This analysis is performed by analyzing each
transaction or event that affects the asset during the marriage. These events, as introduced in Chapter One
of the book, can by classified by transaction/event codes and are discussed
later in this chapter.
When Separate Property Changes Form
When separate property changes form, the asset
tracing task can become complicated.
When one unique tangible asset is exchanged for another unique tangible
asset, the asset tracing is relatively straightforward. But when the proceeds of assets sales are
deposited into a bank account, for example, it becomes difficult to distinguish
one dollar from another. This is made
more complicated when marital property is commingled with separate property in
the bank account. What then happens
when a purchase is made out of the bank account that has become
commingled? What is the nature of the
assets purchased from the commingled account?
The answers are theoretically simple but sometimes
practically complex. Under the Colorado
Statutes 14-10-113 (2)(b) and (3), if the party claiming separate property
cannot answer the above questions to the court's satisfaction, then the
property will be presumed to be marital property. How then does a party claiming separate property satisfy the
court that it has produced an asset tracing accounting that overcomes the
presumption that all property existing at the end of a marriage is
marital?
Attributes of a Successful Asset Tracing
In the author's opinion, a properly prepared asset
tracing should be in accordance with the Colorado Statutes and case law,
presented by using general accepted accounting methodologies. The asset tracing should categorize all
transactions that have occurred to a separate asset, from its creation until
the end of the marriage, into separate and marital components. The categorization of each transaction
should be consistent with the Colorado Statutes, case law, and the facts and
circumstances surrounding the asset.[1] [2] [3]
Asset Tracing Transactions and Events
As discussed in Chapter One of this book, most of
the transactions and events that affect separate property can be categorized as
follows:
1. Transactions/events that
create separate property
2. Transactions/events that
create a marital component to separate property
3. Transactions/events that
reduce the separate or marital component of property
The actual categorization of each transaction will
require input from the attorney to the accountant as to the legal basis for
categorization. The following is a
discussion of asset tracing principles that may affect the classification of
transactions as separate or marital:
Transactions/Events that Create Separate Property
Property acquired prior to date of marriage
Property acquired prior to the marriage is generally
considered separate property.[4] Determining the specific items of separate property and their respective
values at the date of the marriage is a factual issue. The accountant is often called upon to
document the existence of premarital property and to assist in the valuation
process. For example, the value of a
closely held business at the date of marriage is often determined by a
qualified accounting expert witness performing a business valuation.
Property acquired by gift, bequest, devise or descent
Property acquired subsequent to the marriage by
gift, bequest, devise or descent (gifts) is generally considered separate
property.[5] The accountant is often called upon to verify gifts by tracing
the gifts to gift tax returns or other documents. If the purported gift is not traceable to supporting documents,
then it usually becomes a legal issue to be resolved by the attorney in the
case.
Property
acquired in exchange for property acquired prior to the marriage or in exchange
for property acquired by gift, bequest, devise, or descent
If property acquired in exchange for property
acquired prior to the marriage or in exchange for property acquired by gift,
bequest, devise, or descent is properly traced, it will be preserved as
separate property.[6] However, other transactions or events discussed elsewhere in this
chapter may change the character of the property to a mixture of separate and
marital property or to totally marital property.
Property acquired by a spouse after a decree of legal separation
Property acquired by a spouse after a decree of
legal separation is generally considered separate property.[7] However, if the property is acquired with marital property, asset
tracing may be required to establish the separate and marital components of the
property.
Property excluded by valid agreement of the parties
Property excluded by valid agreement of the parties
is generally considered separate property.[8] This refers to pre and post marital agreements between the
parties. A pre or post marital
agreement is essentially a financial contract just like any other partnership
agreement.
Premarital agreements should make property settlements simpler and more
predictable. Unfortunately, a poorly
drafted premarital agreement can often complicate a property settlement and add
a greater degree of uncertainty than would otherwise exist without an agreement. Without a premarital agreement, the
accountant's task is to assist his or her client in identifying available
assets and to classify them into marital and separate categories. With a premarital agreement, the
accountant's job becomes one of preparing an accounting of what each party is
due under the agreement.
Without an agreement, marital assets are identified
and the court determines the division.
With a premarital contract, it is often necessary to prepare a complete
accounting of every transaction during the marriage. This is analogous to the
accounting done for a business,
which would include the preparation of cash receipts and disbursements
journals, general ledgers, balance sheets and income statements. Preparing an accounting after many years of
marriage is time-consuming and extremely expensive, although it can be
done. It is analogous to putting a
multi-thousand piece jigsaw puzzle together with many damaged or missing
pieces.
Once the accounting for the agreement is completed,
the accountant and attorney must consider how it relates to the other
provisions of Colorado Statute Section 14-10-113.
Transmutation of property
As it relates to asset tracing, transmutation refers
to a change in the character of property from separate to marital or vice
versa. Whether or not a transmutation
of property has occurred is a legal conclusion and should be decided by the
attorney. The most common types of
transmutation that might occur are as follows:
Transmutation by
agreement. An example would be a valid
pre or post marital agreement between the parties.[9]
Transmutation by title. An example would be when separate property is
retitled to a form of joint title.[10]
Transmutation by interspousal
gift. An example would be when one
spouse makes a gift to the other spouse.[11]
Transmutation by use. This refers to the concept that separate property
used by both spouses may become marital property.[12]
Transactions/Events
that Create a Marital Component to Separate Property
Appreciation
in value of separate property during the marriage
Appreciation in the value of separate property
during a marriage is considered marital property.[13] In order to determine appreciation in separate property, it is
necessary to value separate property both at the time it is created and at the
end of the marriage. The difference in
these two values being the marital component of otherwise separate
property. If separate property has not
changed form during the marriage, it should be sufficient to compute the
appreciation at the end of the marriage.
If, however, the separate property has changed form during the marriage,
it may be necessary to compute appreciation of separate property each time it
changes form. For example, if a stock
brokerage account is separate property at the time of marriage, over time it
will develop a marital component.[14] Each time a stock is sold, the proceeds must be categorized as
separate and marital property. The
portion of the proceeds that represents the value at the date of marriage would
be separate and the appreciation since the date of marriage would be marital property.
Income during
the marriage
Income during the marriage is generally considered
to be marital property.[15] [16] [17] Therefore, any income earned
during the marriage that is used to acquire, maintain, and carry an asset
during the marriage could create a marital component to separate property. For example, in the above stock brokerage
account, dividend and interest income earned during the marriage would create a
marital component to the account. If a
pre-marital stock is sold and a replacement stock purchased, the resulting
stock could contain marital components because of dividend income, interest
income, and appreciation on the sale of the pre-marital stock used to purchase
a portion of the replacement stock.
Use of marital
property to carry, maintain or improve separate property
Use of marital property to carry, maintain or
improve separate property could create a marital component to separate
property.[18] For example, assume pre-marital separate property worth $100,000
is subject to a $50,000 mortgage at the date of marriage. During the marriage, marital property is
used to reduce the mortgage to $20,000.
Also assume the property did not appreciate in value during the
marriage. Presumably, the increase in
equity resulting from the mortgage reduction would create a marital component
of $30,000 in the property.[19]
Transactions/Events
That Reduce the Separate or Marital Component of Property
Distributions/withdrawals
Distributions and withdrawals from a separate asset
reduce the separate asset.[20] While the withdrawal from the separate asset may create another
separate asset, the specific asset from which the withdrawal occurs will be
reduced by the amount of the withdrawal.
When the withdrawal is made from an asset that
contains both marital and separate property components, the withdrawal must by
categorized as marital, separate, or a combination of both. This process can become quite cumbersome in
an asset tracing accounting, with each withdrawal requiring an analysis of its
nature. The following methods of
categorization may be appropriate.
If the expenditure is to
maintain separate property or to be exchanged for other separate property, it
can be categorized as reducing the separate property component of the account.
Once the separate property component of the account is reduced to zero, the
separate property ceases to exist and the asset tracing for that particular
asset is complete.
A question often arises when
a spouse intends to exchange separate property in a commingled fungible type
asset account (that has been properly traced to comply with Colorado Statute
14-10-113) for other replacement separate property. What methodology should be used to determine the marital and
separate components of the replacement property? Assume for example that a cash account contains $300,000, of
which $100,000 is the wife's separate property and $200,000 is marital
property. Also assume that the wife
writes a check on the account to purchase a vacation home for $100,000 and it
is the wife's intent that she exchange her separate property contained in the
checking account to purchase the home.
What is the compositional mix of separate and marital property in the
replacement vacation home? Two possible
answers are as follows:
Pro-rata Method
Under the pro-rata method,
the vacation home would consist of $33,333 of separate property and $66,667 of
marital property. Under this method the
distribution or withdrawal from an asset containing separate and marital
property would always be proportional to the relationship of separate to
marital property contained in the asset account at the time of the withdrawal
to purchase the exchange property.
Positive attributes of method
This is a
mechanical test and is easy to apply.
Negative attributes of method
This method precludes, or at
least severely limits a spouse's ability to exchange separate property. In the above example, why should a spouse
not be allowed to use $100,000 of separate property in the cash account to
acquire $100,000 of replacement separate property? This method, in effect, limits the spouse's freedom to exchange
separate property.
Intent or Facts and Circumstances Method
Under the intent method, the
vacation home would consist of $100,000 of separate property and no marital
property. Under this method the
distribution or withdrawal from an asset containing separate and marital
property would be determined by the contemporaneous intent of the party
withdrawing the funds. To the extent
that enough separate property exists in the asset to purchase exchange separate
property, the resulting exchanged property would be classified as separate
property.
Positive attributes of method
This method allows a spouse
the opportunity to exchange separate property without being forced to include a
marital component to the exchanged property.
Since it is not a mechanical test, it allows the court the opportunity
to examine the spouse's intent along with the surrounding facts and
circumstances.
Negative attributes of method
This is a facts and
circumstances test and is more difficult to apply than the pro-rata method.
Colorado Statute 14-10-113
does not explicitly endorse either method.
The author is not aware of any Colorado case law that explicitly
endorses either method. Therefore, until
there is controlling case law, it is presumed that the court will make its
decision based on each individual judge's impression of the legislative intent
of Section 14-10-113.
If the expenditure is related
to marital property, it can be categorized as reducing the marital component of
the account until it is exhausted. It
would then reduce separate property.
Under the "Family
Expense Doctrine," if a withdrawal is used to pay a family living expense,
the withdrawal is deemed from marital property, to the extent of marital
property in the account[21]. Any expenditure in excess of the marital property in the account
would reduce separate property.
Under the
"Marital-Property-Out-First" rule, any withdrawal from the account is
deemed marital to the extent there are marital funds in the account. There is a difference between this approach
and the Family Expense Doctrine. The
Family Expense Doctrine requires proof that the withdrawal was used to pay for
family living expenses while the Marital-Property-Out-First doctrine assumes,
whenever there is a withdrawal during the marriage, marital property is reduced
first.[22]
The accountant should seek guidance from the
attorney on which methodologies are accepted by the local courts and on how to
categorize withdrawals accordingly.
Depreciation
in value
Depreciation or reduction in value reduces separate
property.[23] Reductions in value should apply to each item of identifiable
separate property and thus not be netted against appreciation of another
separate asset.[24] When the asset contains elements of both separate and marital
property, the accountant must make a determination to apply the depreciation in
value to the separate and or marital components of the asset. If the marital component of the asset was
the result of temporary appreciation, then logically, the depreciation should
reduce the marital component to the extent of any appreciation. Any depreciation in excess of marital appreciation
would then reduce separate property.
If the marital component of the
property was the result of marital funds contributed to the asset, a logical
approach would be to reduce the marital and separate components of the assets
on a pro-rata basis. As with all
classifications, the accountant should consult with the attorney when questions
arise.
Commingling
Black's Law Dictionary defines commingle as "to
put together in one mass."[25] As it relates to asset tracing, commingling refers to the mixing
of separate and marital property in the same asset or account. When separate and marital property are mixed
during a marriage, there is a presumption that the entire asset or account is
marital. The presumption is overcome by
a showing that the property was acquired by the method listed in subsection (2)
of 14-10-113 of the Colorado Statutes.
In other words, the presumption that property that exists at the end of
a marriage is marital, is overcome by uncommingling the asset. This is accomplished by the process of asset
tracing.[26] [27] [28] Asset tracing, as discussed in Chapter One, is an accounting
process that traces an asset from its separate property beginnings through all
of its mutations and demonstrates that the resulting asset in existence at the date
of divorce is either separate, marital, or a combination of the two.
Transmutation
of property
See previous discussion in this chapter.
Other Asset
Tracing Issues
Fungability
The concept of fungability is closely related to the
issue of commingling of marital and separate property. Black's Law Dictionary defines Fungible
Things as "Moveable goods which may be estimated and replaced according to
weight, measure, and number. Those
things one specimen of which is as good as another, as is the case with
half-crowns, or pounds of rice of the same quality."[29] The most common fungible asset encountered in asset tracing is
money. It is virtually impossible to
distinguish one dollar from another in a bank account or a money market account. Additionally, in our modern society, assets
are rarely traded or exchanged directly for other assets. They are almost always sold for money that
is immediately deposited and commingled with other funds in a cash or brokerage
money market account.
Once a previously separate asset is sold, converted
to cash, and commingled into a fungible type account, it becomes necessary to
perform a detailed asset tracing of that account. This is necessary because any subsequent asset purchase in the
account or withdrawal from the account cannot be properly classified into
separate and marital components without first knowing the amount of separate
and marital property in the account immediately before the purchase or
withdrawal. In other words, the
components of a fungible type asset account must be accounted for on a
cumulative basis.
Entity vs.
Aggregate Issues
For asset tracing purposes, should an asset account
be viewed as an asset entity separate from its underlying components or as an
aggregate asset viewed as a collection of assets within the account? For example, under a strict entity approach,
in a stock brokerage account containing five stocks, and a money market
account, the brokerage account itself would be considered the asset for tracing
purposes. Under the aggregate approach,
the underlying stocks and cash account would individually be considered the
assets for tracing purposes.
Cash accounts, as discussed in the fungability
section of this chapter, by their very nature must be traced using an entity
approach. Money market accounts are
similar in nature to cash accounts, in that they are fungible and generally do
not have gain and loss transactions apart from dividend income credited to the
account.
Brokerage accounts are partly fungible and partly
not fungible. Most brokerage accounts
hold specifically identifiable assets in addition to fungible cash or money
market type assets. Therefore, in the
author's opinion, a proper brokerage account tracing should use an aggregate
tracing for all specifically identifiable assets (securities) held in the
account and an entity tracing approach for all fungible cash or money market
type assets held in the account.
When specifically identifiable assets are sold,
deposited into a money market account, and new specifically identifiable assets
are purchased from the money market account, the tracing process must by
necessity combine both aggregate and entity tracing methods to properly trace
all assets in a brokerage type account.
The use of a
strict entity tracing method applied to a brokerage account can result in the
overstatement of separate property in a brokerage account. This can be demonstrated by the following asset tracing
spreadsheets. For three periods of
time, separate spreadsheets have been prepared for a brokerage account on the
entity tracing method and on the aggregate/entity tracing method.[30]
At the end of the first period, separate property is
overstated by $50,000 on the entity tracing spreadsheet. This is the result of netting $50,000 of
unrealized losses on Stock A against $50,000 of unrealized gains on Stock B.[31] [32]
At the end of the second period, separate property
is overstated by $25,000 under the entity tracing method. This is the result of netting $25,000 of
cumulative unrealized losses on Stock A against $60,000 of cumulative
unrealized gains on Stock B. In
addition, on the entity tracing spreadsheet, it is now impossible to trace the
separate and marital components of each individual asset contained in the
brokerage account. The separate component
of Stocks A and B could be reconstructed by
comparing their value at the beginning of period one to their respective
values at the end of period two.[33] The separate property component of Stock D, a replacement stock
acquired subsequent to marriage, cannot be determined without a tracing of the
money market account from which it was purchased. Because it was not specifically traced under the entity tracing,
the separate property component of the money market account cannot be
determined. Without an aggregate/entity
tracing, the separate property components of both Stock D and the money market
account would now be lost.
At the end of the third period, separate property in
the brokerage account is overstated by $38,842. This is the result of netting $25,000 of cumulative unrealized
losses on Stock A and $9,017 of cumulative net losses on Stock D against
cumulative unrealized gains of $90,000 on Stock B, and the result of allocating
$4,825 too little separate property to the distribution of $45,000 from the
money market account to purchase a limited partnership interest. The separate component of Stocks A and B
could be reconstructed by comparing their value at the beginning of period one
to their respective values at the end of period three.[34] Without an aggregate/entity tracing, the separate property
components of both Stock D and the money market account would now be lost. In addition, the separate property component
of the limited partnership interest purchased by a withdrawal from the money
market account would be commingled with the marital component and thus lose its
separate property component.[35]
See Spreadsheets on Following 6 Pages
Not Available Online
Different Asset Tracing Standards for the Parties
In addition to preparing an asset tracing accounting
for his or her client, an accountant may be called upon to give expert
testimony as to whether, in the expert's opinion, his or her client's spouse
has uncommingled an asset. Is there a
difference between the asset tracing standards imposed on the party claiming
separate property and the party attempting to refute a claim of separate
property?
An adequate asset tracing of an asset, as it relates
to the party claiming separate property, would involve categorizing all
transactions that have occurred to the asset, from its creation until the end
of the marriage, into separate and marital components. The categorization of each transaction must
be consistent with the Colorado Statutes, case law, and the facts and
circumstances surrounding the asset.
If the party claiming separate property or his or
her accounting expert does not produce an asset accounting as described above,
what would constitute an adequate asset accounting by the opposing party or his
or her accounting expert? Would the
standards be different? The answer to
the latter question, in the author's opinion, is yes.
According to the Colorado Statutes 14-10-113
subsection (3), there is a presumption that all property acquired by either
spouse subsequent to the marriage is marital property. During a marriage, an asset account, a stock
brokerage account for example, will usually have many transactions. These transactions can include income
earned, sales of appreciated securities, contributions of additional property,
distributions from the account, and securities purchased subsequent to the
marriage. If a party is unable to
identify specific items of property that have existed in the same form during
the entire marriage, the separate property in the brokerage account will become
commingled with marital property. It is
therefore the burden of the party claiming separate property to uncommingle the
brokerage account by producing an asset tracing accounting to preserve the
separate property. In the absence of
such an asset tracing accounting, the opposing accounting expert should be able
to rely on the presumption that untraced property in a commingled account is
marital property.[36] [37]
The opposing party's accounting expert should, in
theory, be required to account for any separate property documented by the
claiming party and presume that the remaining property in a commingled account
is marital.
Need to Trace all Transactions in an Account
Is it necessary to trace, in detail, all
transactions in an asset account in order to perform a proper asset tracing
accounting? Using a stock brokerage
account as an example, the answer in the author's opinion is a qualified
no. Certain transaction types always
result in marital property. Generally
all income during the marriage and appreciation of separate property during a
marriage results in marital property.
Using a shortcut approach to tracing, if the accountant uses accurate
annual income and appreciation summaries, provided by the brokerage company,
and classifies all income and appreciation occurring during the period as
marital property and all depreciation occurring to separate property as
reducing separate property, it is theoretically possible to correctly state the
marital and separate components of the account at the end of a marriage.
Contributions to an account and disbursement from
the account, however, must be accounted for on a transaction by transaction
basis. This is due to the fact that
contributions and disbursements do not always result in the increase or
reduction of one property type, but can be from separate, marital, or a
combination of both.
In the author's opinion, the use of shortcut asset
tracing methods should be avoided when possible and are an inferior method of
asset tracing when compared to a detailed aggregate/entity asset tracing.
Strategic planning
Because asset tracing is a time consuming process,
not engaging an accounting expert early on in a case can be a strategic
mistake. Take the following example:
Two attorneys, we will call them Mr. Easy and Mr.
Thoughtful, are involved in a divorce case.
Mr. Easy's client is claiming a material amount of separate
property. His client thinks he can
present his separate property claims himself and does not want to spend much
money on the divorce process. Mr.
Thoughtful, upon hearing of the separate property claims of Mr. Easy's client,
immediately hires an expert accounting witness to evaluate Mr. Easy's client's
separate property claims.
On the day of Mr. Easy's client's deposition, Mr.
Easy is surprised to see Mr. Thoughtful show up at the deposition with an
accounting expert witness. During the
course of the deposition, it becomes apparent to Mr. Easy that his client is
being asked detailed asset tracing questions, and worse, it becomes apparent
that his client's responses to the questions do not help his separate property
claims.
Five days later, and sixty days before the permanent
orders hearing, Mr. Easy's secretary deposits Mr. Thoughtful's expert's
detailed asset tracing report on Mr. Easy's desk. Mr. Easy immediately reads the report and is quite alarmed to
find the expert's report refutes the vast majority of Mr. Easy's client's
separate property claims. Mr. Easy is
also mindful that, under the Colorado Rules of Civil Procedure rule 26.2, his
asset tracing expert's report, if he had been thoughtful enough to engage one,
would be due today.
Mr. Easy, now in a semi-panic, calls to hire his
favorite accounting expert. Mr. Easy is
concerned that under the Colorado Rules of Civil Procedure rule 26.2 his expert
witness has only twenty days to produce a report, and worse yet, the report
will be limited to rebutting the subject matter of the opposing expert. Mr. Easy reaches his expert's secretary who
informs Mr. Easy that the accountant is on vacation and will return in ten
days.
Ten days later, the accounting expert is sitting in
Mr. Easy's conference room sorting through a mass of documents in an attempt to
analyze the asset tracing issues in Mr. Thoughtful's expert's report.
Three days later, the accounting expert informs Mr.
Easy that he needs several key documents from the opposing party in order to
refute the opposing expert's report.
Mr. Easy immediately phones Mr. Thoughtful's office and requests the
documents.
Four days later, Mr. Thoughtful returns Mr. Easy's
phone call and informs him that Mr. Thoughtful's client is on an extended
vacation and will not return until two days before the permanent orders
hearing. Mr. Thoughtful explains that
only his client knows the location of the information and in addition,
expresses little sympathy for Mr. Easy's eleventh hour request.
Twenty days from the delivery by Mr. Thoughtful of
his expert's asset tracing report on the due date of Mr. Easy's expert's
rebuttal report, Mr. Easy's expert informs Mr. Easy that without the additional
information it is impossible to refute Mr. Thoughtful's expert's report.
Two weeks later, the case
settles based on Mr. Thoughtful's expert's report.
Discovery
An adequate asset tracing cannot be prepared without
documentation. Documentation, by way of
an analogy, is the raw material of asset tracing. Discovery is the formal legal process of obtaining the raw
material to prepare an asset tracing.
Discovery in Colorado marital dissolutions is governed by the
"General Rules of Civil Proceedure, Rule 26.2 General Provisions Governing
Discovery; Duty of Disclosure (Domestic Relations)."[38] The discovery schedule is determined by "The Colorado Rules
of Civil Proceedure Rule 16.2 Case Management (Domestic Relations)."[39] The discovery process usually consists of the follow elements:
Each party requests documents
from the opposing party.[40]
Each party may issue
interrogatories (questions) to be answered by the opposing party.[41]
Each party may submit
requests for admissions to the opposing party.
Each party may hold
depositions of opposing witnesses.
Since discovery is a formal legal process, and the
rules and timing of the process are defined under the Colorado Rules of Civil
Procedure, it is imperative that the accountant and attorney anticipate and coordinate
their efforts to obtain information through the discovery process. Special thought should be given to
information needed for the asset tracing that will not be provided by the
opposing party in Pattern Interrogatories, Pattern Production of Documents, and
mandatory disclosures. As was
demonstrated by the example in the Strategic Planning section, missed
opportunities to gather documentation relevant to an asset tracing may preclude
or seriously impede an accounting expert from preparing an asset tracing or
refuting the asset tracing of an opposing accounting expert.
It is not uncommon in most divorce cases that one
spouse will have more access to documentation than another. If the accounting expert represents the
spouse having access to the majority of information needed to complete an asset
tracing, the discovery process is obviously less important to the asset tracing
task. If, however, the accounting
expert represents the spouse without access to information, the discovery
process is crucial to the engagement.
Therefore, one of the first tasks of the attorney and accountant in an
asset tracing engagement is to ascertain who controls the data.
The type and duration of documentation needed will
depend on the assets being traced. If
the asset to be traced is a fungible type asset, such as a bank account or
stock brokerage account, detailed monthly information from the date of marriage
or gift until the end of the marriage may be needed. If the asset to be traced is a tangible asset that has not
changed form, less information will be needed.
The following is a list of possible source documents to be obtained:[42]
All statements from bank,
savings and loan, individual retirement, and brokerage accounts as well as all
canceled checks, deposit slips, check registers, and broker advices
A listing by each spouse of
property acquired by gift or inheritance
Gifts tax and estate tax
returns supporting claims of separate property
A listing with fair market
values by spouse of separate property at the date of the marriage
Pre-marital and post-marital
agreements
Legal documents evidencing
ownership of assets including deeds
Notes and collateral
documents
Individual and business
income tax returns
Personal financial statements
Paying attention to the quality of documentation
used in an asset tracing is essential.
The accountant should be mindful that every entry in the asset tracing
accounting is subject to scrutiny at his or her deposition and at trial. Therefore, a special effort should be made
to obtain the most reliable and convincing information. A gift tax return for example, filed
contemporaneously and under penalty of perjury
would usually be given more credibility than a deposition statement that an
undocumented gift had occurred.
When the court is presented with conflicting asset
tracing results by opposing expert witnesses, it must decide which is more
credible. The quality of documentation
along with the soundness of the methodologies used will be taken into
consideration by the court in determining which expert will prevail. The expert witness should be mindful that
when deciding which expert witness is more credible, the court will favor the
witness presenting the greater weight or preponderance of evidence.[43] The concept of preponderance deals with deciding which evidence
is more credible and convincing and relates to its quality as well as quantity.
In a perfect world, expert witnesses would not
encounter conflicting documentation. As
a practical matter, it is often encountered.
Resolving issues of conflicting documentation necessitates the use of
professional judgment by the expert witness.
If, for example, the accountant has a contemporaneously written document
signed under penalty of perjury (i.e. a tax return) that is in direct conflict
with the deposition testimony of a spouse, the accountant must make a decision
about which information to rely on. In
these situations, in the author's opinion, the accountant should discuss the issue
with the attorney. In the final
analysis, the accountant must rely on his or her objective professional
judgment and be prepared to explain his or her position to the court. The Certified Public Accountant (C.P.A.)
should be mindful that under Rule 102 of the AICPA's Code of Professional
Conduct, "a member shall maintain objectivity and integrity, shall be free
of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others."
For an expert accounting witness, there is a fine
line between adhering to the professional obligation not to subordinate his or
her professional judgment to others and deferring to attorneys for legal
conclusions. Since non-attorney expert
accounting witnesses are generally not qualified to render legal opinions and
conclusions, they must by necessity defer to attorneys for guidance on
classifying transactions that involve legal issues and conclusions. Unfortunately, it is not always clear to the
accountant when he or she should consult with the attorney. As a general rule, the author suggests that
the accountant consult the attorney whenever he or she has a question. With experience, the accountant will develop
a feel for when it is appropriate to consult with the attorney. When questioned at deposition or at trial,
the accountant should disclose to the court whenever he or she has deferred to
any legal conclusion supplied by the attorney.
Professional standards of C.P.A. expert witnesses
Certified Public Accountants who perform litigation
services are bound by professional standards issued by the American Institute
of Certified Public Accountants (AICPA).
These services are defined as consulting services. C.P.A.'s who perform consulting services
must adhere to the AICPA's Statement on Standards for Consulting Services and
to the general standards of the
accounting profession contained in the AICPA Code of Professional Conduct. Any C.P.A. offering asset tracing services
should be familiar with the content of the above documents as well as the
following AICPA publications:
Application of AICPA
Professional Standards in the Performance of Litigation Services - Consulting
Services Special Report 93 - 1
Conflicts of Interest in
Litigation Services Engagements Consulting Services Special Report 93 - 2
Providing Litigation Services
- Consulting Services Practice Aid 93 -4
Communicating in Litigation
Services: Reports - Consulting Services Practice Aid 96 -3
Report Writing Standards
Non authoritative guidance for report writing by
C.P.A. expert witnesses can be found in the AICPA's Communicating in Litigation Services: Reports - Consulting Services
Practice Aid 96 -3. The follow is
an example of an expert's report on an engagement that includes material asset
tracing:[44]
Expert's Preliminary Report
I. Introduction and Assignment
I was retained by Sally Smith and asked to do the
following:
Prepare a schedule of assets,
liabilities, and net worth to be used for property settlement purposes. The schedule reflects the following:
1. A listing of the couple's marital and separate property,
including fair market values and
ownership
2. The assets and liabilities that are subject to distribution
(marital property)
3. For illustrative purposes, the portion of each marital asset and
liability which a particular spouse would be entitled to under an equal distribution
4. A proposed distribution of marital assets and liabilities between
the spouses assuming an equal distribution
Prepare an accounting of
Sally Smith's separate property
Review data and information
submitted by Dick Smith related to his claims of separate property and render
an opinion as to the validity of his claims
II. Expert Opinions
It is my expert opinion that the amounts reflected
as separate and marital property throughout this report are consistent with the
Uniform Dissolution of Marriage Act section 14-10-113. All items reflected as separate property
have been traced and accounted for and are not marital property. In my expert opinion, all items claimed by
Dick Smith as separate property, and not classified in my report as separate
property, have not been traced and accounted for in a manner that overcomes the
presumption that they are marital property.
III. Work Performed
I reviewed the information listed below under
"Information Considered."
This information included both Petitioner's and Respondent's
disclosures, financial affidavits, claims of separate property, gift tax
returns of June Smith, inheritance documents, Dick's deposition testimony and
other supporting documentation. I then
prepared an accounting related to separate property claims. This accounting is contained in Tabs G, H,
I, J, K, L, M, N, O, P, Q and S of my report.
Based on the above information, I prepared a
Schedule of Assets, Liabilities, and Net Worth as described in the
"Introduction and Assignment" section of my report.
IV. Information Considered
In preparing this report and forming the opinions
expressed, I have considered the following:
All information contained in
this report
All information contained in
"Smith Data I, II, and III" binders
All information contained in
the expandable folder from John Sharp, Esq., including tax returns and
miscellaneous financial data
Deposition attendance and
transcript of Dick Smith
Information contained in my
files
Conversations with Sally
Smith
I have also considered my knowledge, training and
professional experience as a Certified Public Accountant.
V. Bases for Opinions
My expert opinions on classification of various
properties in my report as separate or marital are based on my understanding of
section 14-10-113 of the Colorado Uniform Dissolution of Marriage Act. They are also based on my 23 years of
experience as a Certified Public Accountant and in knowing what constitutes an
adequate accounting to trace separate property.
VI. Experts Qualifications
I am the sole proprietor of Lily Parsons &
Associates, an accounting firm specializing in litigation and dispute
resolution services engagements. I am a
Certified Public Accountant, licensed to practice in Colorado and North
Carolina. I am also a Certified
Valuation Analyst. I presently devote
approximately 50% of my time and 30% of my firm's total time in the litigation
and dispute resolution area. I have previously
testified as an expert witness in marital dissolution cases. I have previously served as court appointed
special master in cases involving complex financial issues and amounts due
under pre-marital agreements. I have
previously served as court appointed receiver in cases involving a closely held
business and real estate. A copy of my
current resume including my current and past employment, professional
affiliations, and a schedule of litigation, mediation and business valuation
engagements during the past four years is provided in Tab V.
My fees are billed based on the amount of time spent
at my billing rate of $185 per hour.
Other firm personnel working on the project include Paul Bryan at $90
per hour and Doreen Dunn at $59 per hour.
My compensation is not contingent on the outcome of this litigation.
Additional work contemplated, but not yet completed,
is the analysis of additional documents requested from Dick Smith at his
deposition but not yet received, review of June Smith's deposition transcript
when available, June Smith's 1996 gift tax returns, Dick Smith's expert's
opinions, preparation of possible demonstrative exhibits, preparation to
testify, and attendance at depositions and trial. Because of the scope of the additional work listed above, this
report is issued as a "Preliminary Report". Any modifications to this report due to additional data or
further analysis will be reflected in the issuance of a "Final
Report".
Sincerely,
Lily Parsons , C.P.A.
May 1, 1997
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