A New Approach to Determining Enterprise and Personal Goodwill Upon Divorce

A NEW APPROACH TO DETERMINING ENTERPRISE AND PERSONAL GOODWILL

UPON DIVORCE

Richard R. [email protected]

Orsinger, Nelson, Downing & Anderson, LLP

Dallas Office:5950 Sherry Lane, Suite 800

Dallas, Texas 75225214-273-2400

and

San Antonio Office:1717 Tower Life BuildingSan Antonio, Texas 78205

210-225-5567

State Bar of TexasNew Frontiers in Marital Property Course

October 13 & 14, 2011San Diego, California

2011Richard R. OrsingerAll Rights Reserved

CURRICULUM VITAE OF RICHARD R. ORSINGER

Education: Washington & Lee University, Lexington, Virginia (1968-70)University of Texas (B.A., with Honors, 1972)University of Texas School of Law (J.D., 1975)

Licensed: Texas Supreme Court (1975); U.S. District Court, Western District of Texas (1977-1992; 2000-present);U.S. District Court, Southern District of Texas (1979); U.S. Court of Appeals, Fifth Circuit (1979);U.S. Supreme Court (1981)

Certified: Board Certified by the Texas Board of Legal Specialization Family Law (1980), Civil Appellate Law(1987)

Organizations and Committees:

Chair, Family Law Section, State Bar of Texas (1999-2000)Chair, Appellate Practice & Advocacy Section, State Bar of Texas (1996-97)Chair, Continuing Legal Education Committee, State Bar of Texas (2000-02)Vice-Chair, Continuing Legal Education Committee, State Bar of Texas (2002-03)Member, Supreme Court Advisory Committee on Rules of Civil Procedure (1994-present);

Chair, Subcommittee on Rules 16-165aMember, Pattern Jury Charge Committee (Family Law), State Bar of Texas (1987-2000)Supreme Court Liaison, Texas Judicial Committee on Information Technology (2001-present)Tx. Bd. of Legal Specialization, Civil Appellate Law Advisory Commission (Member 1994-1997, 1999-2001, 2003-2006) and Civil Appellate Law Exam Committee (1990-present; Chair 1991-1995)Tx. Bd. of Legal Specialization, Family Law Advisory Commission (1987-1993)Member, Supreme Court Task Force on Jury Charges (1992-93)Member, Supreme Court Advisory Committee on Child Support and Visitation Guidelines

(1989, 1991; Co-Chair 1992-93; Chair 1994-98)Member, Board of Directors, Texas Legal Resource Center on Child Abuse & Neglect, Inc. (1991-93)President, Texas Academy of Family Law Specialists (1990-91)President, San Antonio Family Lawyers Association (1989-90)Associate, American Board of Trial AdvocatesFellow, American Academy of Matrimonial LawyersDirector, San Antonio Bar Association (1997-1998)Member, San Antonio, Dallas and Houston Bar Associations

Professional Activities and Honors:

Texas Academy of Family Law Specialists Sam Emison Award (2003)State Bar of Texas Presidential Citation for innovative leadership and relentless pursuit of excellence for continuing

legal education (June, 2001)State Bar of Texas Family Law Sections Dan R. Price Award for outstanding contributions to family law (2001)State Bar of Texas Gene Cavin Award for Excellence in Continuing Legal Education (1996)State Bar of Texas Certificate of Merit, June 1995, June 1996, June 1997 & June 2004Listed in the BEST LAWYERS IN AMERICA (1987-to date)2005 Listed in Texas Top 100 Lawyers by Texas Monthly Superlawyers Survey

Continuing Legal Education and Administration:

Course Director, State Bar of Texas Practice Before the Supreme Court of Texas Course (2002, 2003, 2004, 2005)Co-Course Director, State Bar of Texas Enron, The Legal Issues (March, 2002) [Won national ACLEA Award]Course Director, State Bar of Texas Advanced Expert Witness Course (2001, 2002, 2003, 2004)Course Director, State Bar of Texas 1999 Impact of the New Rules of DiscoveryCourse Director, State Bar of Texas 1998 Advanced Civil Appellate Practice CourseCourse Director, State Bar of Texas 1991 Advanced Evidence and Discovery CourseDirector, Computer Workshop at Advanced Family Law Course (1990-94)

and Advanced Civil Trial Course (1990-91)Course Director, State Bar of Texas 1987 Advanced Family Law Course Course Director, Texas Academy of Family Law Specialists First Annual Trial Institute, Las Vegas, Nevada (1987)

Books and Journal Articles:

Chief Editor of the State Bar of Texas TEXAS SUPREME COURT PRACTICE MANUAL (2005)Chief Editor of the State Bar of Texas Family Law Section's EXPERT WITNESS MANUAL (Vols. II & III) (1999) Author of Vol. 6 of McDonald Texas Civil Practice, on Texas Civil Appellate Practice, published by Bancroft-WhitneyCo. (1992) (900 + pages)A Guide to Proceedings Under the Texas Parent Notification Statute and Rules, SOUTH TEXAS LAW REVIEW (2000)(co-authored)---Obligations of the Trial Lawyer Under Texas Law Toward the Client Relating to an Appeal, 41 SOUTH TEXAS LAWREVIEW 111 (1999)---Asserting Claims for Intentionally or Recklessly Causing Severe Emotional Distress, in Connection With a Divorce,25 ST. MARY'S L.J. 1253 (1994), republished in the AMERICAN JOURNAL OF FAMILY LAW (Fall 1994) and Texas FamilyLaw Service NewsAlert (Oct. & Dec., 1994 and Feb., 1995)---Chapter 21 on Business Interests in Bancroft-Whitney's TEXAS FAMILY LAW SERVICE (Speer's 6th ed.)---Characterization of Marital Property, 39 BAY. L. REV. 909 (1988) (co-authored)---Fitting a Round Peg Into A Square Hole: Section 3.63, Texas Family Code, and the Marriage That Crosses StatesLines, 13 ST. MARY'S L.J. 477 (1982)

SELECTED CLE SPEECHES AND ARTICLES

State Bar of Texas' [SBOT] Advanced Family Law Course: Intra and InterFamily Transactions (1983); Handling the Appeal: Procedures and Pitfalls(1984); Methods and Tools of Discovery (1985); Characterization andReimbursement (1986); Trusts and Family Law (1986); The Family Law Casein the Appellate Court (1987); Post-Divorce Division of Property (1988); MaritalAgreements: Enforcement and Defense (1989); Marital Liabilities (1990);Rules of Procedure (1991); Valuation Overview (1992); Deposition Use inTrial: Cassette Tapes, Video, Audio, Reading and Editing (1993); The GreatDebate: Dividing Goodwill on Divorce (1994); Characterization (1995);Ordinary Reimbursement and Creative Theories of Reimbursement (1996);Qualifying and Rejecting Expert Witnesses (1997); New Developments inCivil Procedure and Evidence (1998); The Expert Witness Manual (1999);Reimbursement in the 21st Century (2000); Personal Goodwill vs. CommercialGoodwill: A Case Study (2000); What Representing the Judge or Contributingto Her Campaign Can Mean to Your Client: Proposed New Disqualificationand Recusal Rules (2001); Tax Workshop: The Fundamentals (2001); BlueSky or Book Value? Complex Issues in Business Valuation (2001); PrivateJustice: Arbitration as an Alternative to the Courthouse (2002); International& Cross Border Issues (2002); Premarital and Marital Agreements: Representingthe Non-Monied Spouse (2003); Those Other Texas Codes: Things the FamilyLawyer Needs to Know About Codifications Outside the Family Code (2004)

SBOT's Marriage Dissolution Course: Property Problems Created by CrossingState Lines (1982); Child Snatching and Interfering with Possess'n: Remedies(1986); Family Law and the Family Business: Proprietorships, Partnershipsand Corporations (1987); Appellate Practice (Family Law) (1990); Discoveryin Custody and Property Cases (1991); Discovery (1993); Identifying andDealing With Illegal, Unethical and Harassing Practices (1994); Gender Issuesin the Everyday Practice of Family Law (1995); Dialogue on Common EvidenceProblems (1995); Handling the Divorce Involving Trusts or Family LimitedPartnerships (1998); The Expert Witness Manual (1999); Focus on Experts:Close-up Interviews on Procedure, Mental Health and Financial Experts (2000);Activities in the Trial Court During Appeal and After Remand (2002)

UT School of Law: Trusts in Texas Law: What Are the Community Rightsin Separately Created Trusts? (1985); Partnerships and Family Law (1986);Proving Up Separate and Community Property Claims Through Tracing (1987);Appealing Non-Jury Cases in State Court (1991); The New (Proposed) TexasRules of Appellate Procedure (1995); The Effective Motion for Rehearing(1996); Intellectual Property (1997); Preservation of Error Update (1997);TRAPs Under the New T.R.A.P. (1998); Judicial Perspectives on AppellatePractice (2000)

SBOT's Advanced Evidence & Discovery Course: Successful MandamusApproaches in Discovery (1988); Mandamus (1989); Preservation of Privileges,Exemptions and Objections (1990); Business and Public Records (1993); GrabBag: Evidence & Discovery (1993); Common Evidence Problems (1994);Managing Documents--The Technology (1996); Evidence Grab Bag (1997);Evidence Grab Bag (1998); Making and Meeting Objections (1998-99);Evidentiary Issues Surrounding Expert Witnesses (1999); Predicates andObjections (2000); Predicates and Objections (2001); Building Blocks ofEvidence (2002); Strategies in Making a Daubert Attack (2002); Predicatesand Objections (2002); Building Blocks of Evidence (2003); Predicates &Objections (High Tech Emphasis) (2003)

SBOT's Advanced Civil Appellate Practice Course: Handling the Appeal froma Bench Trial in a Civil Case (1989); Appeal of Non-Jury Trials (1990);Successful Challenges to Legal/Factual Sufficiency (1991); In the Sup. Ct.:Reversing the Court of Appeals (1992); Brief Writing: Creatively Craftingfor the Reader (1993); Interlocutory and Accelerated Appeals (1994); Non-JuryAppeals (1995); Technology and the Courtroom of the Future (1996); Are Non-Jury Trials Ever "Appealing"? (1998); Enforcing the Judgment, Including Whileon Appeal (1998); Judges vs. Juries: A Debate (2000); Appellate Squares (2000);Texas Supreme Court Trends (2002); New Appellate Rules and New TrialRules (2003); Supreme Court Trends (2004)

SBOTs Annual Meeting: Objections (1991); Evidentiary Predicates andObjections (1992-93); Predicates for Documentary & Demonstrative Evidence(1994); Dont Drink That! Thats My Computer! (1997); The Lawyer asMaster of Technology: Communication With Automation (1997); TechnologyPositioning (1999); Objections Checklist (2000); Evidence from Soup to Nuts(2000)

Various CLE Providers: SBOT In-House Counsel Course: Marital PropertyRights in Corporate Benefits for High-Level Employees (2002); SBOT 19thAnnual Litigation Update Institute: Distinguishing Fact Testimony, Lay Opinion& Expert Testimony; Raising a Daubert Challenge (2003); State Bar CollegeSpring Training: Current Events in Family Law (2003); SBOT Practice Beforethe Supreme Court: Texas Supreme Court Trends (2003); SBOT 26th AnnualAdvanced Civil Trial: Distinguishing Fact Testimony, Lay Opinion & ExpertTestimony; Challenging Qualifications, Reliability, and Underlying Data (2003);SBOT New Frontiers in Marital Property: Busting Trusts Upon Divorce (2003);American Academy of Psychiatry and the Law: Daubert, Kumho Tire and theForensic Child Expert (2003)

A New Approach to Determining Enterprise and Personal Goodwill Upon Divorce

TABLE OF CONTENTS

I. INTRODUCTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A. THE IMPORTANCE OF INTANGIBLE ASSETS IN THE NEW ECONOMY.. . . . . 1B. HUMAN CAPITAL. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2C. THE ACCOUNTANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2D. THE LAWYERS... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

II. HUMAN CAPITAL... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

III. THE LEGAL CONCEPTION OF GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5A. WHAT IS GOODWILL?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1. Seeking a Better Legal Conception of Goodwill.. . . . . . . . . . . . . . . . . . . . . . . . . 52. Goodwill as Residual Value.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

IV. THE ACCOUNTING CONCEPTION OF GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9A. GOODWILL AS EXCESS PURCHASE PRICE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9B. DEFINITION OF PERSONAL GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10C. PULLING IDENTIFIABLE INTANGIBLES OUT OF RESIDUAL GOODWILL.. . . 10

1. What Constitutes an Intangible Asset (for Accounting Purposes)?. . . . . . . . . . . 112. Assembled Workforce is Part of Residual Goodwill.. . . . . . . . . . . . . . . . . . . . . 133. Some Say that Assembled Workforce Can be Valued.. . . . . . . . . . . . . . . . . . . . 174. The Argument That Goodwill is not an Asset.. . . . . . . . . . . . . . . . . . . . . . . . . . 18

IV. WHAT TAX LAW SAYS ABOUT GOODWILL AND SEPARABLE INTANGIBLE ASSETS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

V. THE DIVISIBILITY OF GOODWILL UPON DIVORCE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Arizona.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Arkansas.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21California.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Colorado.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Connecticut.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24District of Columbia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Florida. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Illinois.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Indiana... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Kansas.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Kentucky.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Louisiana.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Maryland.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Massachusetts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Michigan.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Missouri.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Nebraska.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Nevada.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31New Jersey.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31New York.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Ohio... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Oklahoma.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Pennsylvania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37


South Carolina... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Tennessee.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Texas.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Utah. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Virginia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Washington.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40West Virginia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Wisconsin.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

VI. TWO SUGGESTIONS ON HOW TO ATTACK THE PROBLEM OF GOODWILL UPON DIVORCE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41A. THESIS NO. ONE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41B. THESIS NO. TWO.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

VII. VALUING GOODWILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43A. GOODWILL OF THE GOING BUSINESS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43B. COMMERCIAL OR ENTERPRISE GOODWILL VS. PERSONAL GOODWILL.. . . 43

1. Valuing Other Intangible Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442. Determining Personal Goodwill.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

a. Adjusting for Knowledge, Skill and Experience.. . . . . . . . . . . . . . . . . . 44b. Profits Tied to the Seller.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45c. Whats Left is Entity Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

C. HOW DOES PERSONAL GOODWILL COMPARE TO HUMAN CAPITAL?. . . . 46



by

Richard R. OrsingerBoard Certified in Family Law& Civil Appellate Law by the

Texas Board of Legal Specialization

I. INTRODUCTION. Our society, in fact ourworld, is in the midst of a significant transformationin which the focus of our economic and personal livesis shifting away from what we call tangible assetsand toward what we call intangible assets. A recentbut telling indication is the fact that on August 10,2011, for a brief moment, the market capitalizationof Apple Corporation (which makes workplace toolsand electronic toys but earns billions of dollars sellingother peoples intellectual property) exceeded thatof Exxon Mobil Corporation (which uses a largenumber of heavy industrial assets to retrieve,transport, and refine oil from the ocean bottoms,deserts, and arctic wastelands). The accountingprofession is making some effort to keep up with thesechanges, but it is a running a decade behind in somerespects and isnt event trying in others. The legalprofession has been extremely slow to react to thesechanges, and antiquated legal doctrines are causinginjustices to occur of which the courts are unawarebecause the lawyers themselves are unaware of thechanges.

A. THE IMPORTANCE OF INTANGIBLEASSETS IN THE NEW ECONOMY. In the mindof the law, the goodwill of a business is whateverit is that makes the business more than the sum ofits parts. In the past, when all the assets of a businesswere physical things, the extra value of the businesswas associated with location, or buying habits, orpersonal connections between the business ownerand sales staff and the customer. This is a visualizationdating back to the general store on Main Street. Inthe present economy of shopping from mail ordercatalogues, on cable tv, and over the internet, withphysical delivery by mail, Federal Express, or UPS,and delivery of software, entertainment andinformation over telephone lines, coaxial cable ormicrofiber wires, of free trade and world-wide price

competition, of huge Walmarts replacing small stores,of HMOs and PPOs and hospitals controlling the flowof medical care, and of lawyer advertising, the oldloyalty-based conception of goodwill of a businesshas been replaced by brand loyalty, convenience, andprice, as the factors that keep customers coming.

In todays economy, the things that make mostbusinesses valuable are intangible assets. Considerthis: the richest man in America does not sell cars,or hamburgers, or oil. He sells CDs with 0's and 1'son them.

The importance of intangible assets is thedistinguishing feature of the new economy. Byand large, existing financial statements recognizethose assets only when they are acquired fromothers. Accounting standard setters shoulddevelop a basis for the recognition andmeasurement of internally generated intangibleassets.

Wayne S. Upton, Jr., Special Report: Business andFinancial Reporting, Challenges from the NewEconomy, FINANCIAL ACCOUNTING STANDARDSBOARD (April 2001), on line at .

Internally-created intangible assets are becomingincreasingly important in business and harder toignore. An October 2001 report by Leonard I.Nakamura of the Federal Reserve Bank ofPhiladelphia estimated that U.S. companies investin intangibles at a rate of $1 trillion per year, whichmeans that businesses are investing nearly as muchin intangibles as they are in plant and equipment(business investment in fixed nonresidential plantand equipment in 2000 was $1.1 trillion). Nakamuraalso suggested that a third of the value of U.S.

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corporate assets are intangibles. By intangiblesNakamura means private expenditures on assets thatare intangible and necessary to the creation and saleof new or improved products and processes. Theseinclude designs, software, blueprints, ideas, artisticexpressions, recipes, and the like. They also includethe testing and marketing of new products that area necessary sunk cost of their first sale to customers.It is the private expense to create private rights tosell new products. Leonard I. Nakamura, What Isthe U.S. Gross Investment in Intangibles? (At Least)One Trillion Dollars a Year!, .

According to investment researcher Jack Ciesielski:For 168 companies in the S & P 500 that hadintangibles in 1990 and in 1999, the average ratioof intangibles to total assets was 13% in 1990 andgrew to 18% by 1999. The result is even morestartling when intangibles are compared to commonequity: in 1990, the average ratio was 49%, and itswelled to nearly 73% by 1999. .

B. HUMAN CAPITAL. Economic theory at onetime adhered to the view that land and labor werethe only two components of economic life. Eventuallyaccumulated capital entered the picture, so that land,labor, and capital became the three components ofeconomic life. Until the 1950s, economic theorymostly assumed that labor power was static and couldnot be enhanced.1 Beginning in the 1950s, economistsdeveloped the idea of human capital, or education,training, medical care, and other additions toknowledge and health that improved the capabilitiesof the individual worker.2 This view approachededucation and training as an investment rather thana cultural experience.3 University of ChicagoProfessor T. W. Schultz established that the Americaneconomy has long had a higher return on "humancapital" than on physical capital.4 In 1964, anotherUniversity of Chicago Professor Gary Beckerpublished his book HUMAN CAPITAL, which likenedhuman capital to investments in factories andmachines. Becker argued that one could invest inhuman capital (via education, training, medicaltreatment) and that a persons output depended partlyon the rate of return on his or her human capital.5

Texas, along with most other states, considers aspouses human capital to be personal to the spouse,and to amount to no more than post-divorce earningswhich belong exclusively to the spouse who earnsit after divorce. That human capital, which we inTexas call personal goodwill, is not property and,even if that capital was developed during marriage,or enhanced during marriage, the other spouse hasno claim to it upon divorce.

Human capital finds its way into the discussion ofenterprise goodwill versus personal goodwill, inSection VI of this Article.

The business-owning spousewho is the hypotheticalseller in the hypothetical sale of the business at fairmarket value at the time of divorcehas personalgoodwill, which to some extent includes his or herhuman capital. Most states exclude the value of thispersonal goodwill from the property division ondivorce. But the business itself can also (and almostalways does) have human capital, and in most statesthis human capital of the business is included inenterprise goodwill that has a value that can bedivided in a divorce.

C. THE ACCOUNTANTS. The accountingprofession has been making some effort to keep pacewith the transition from a tangible toward anintangible based economy. In June of 2001 theFinancial Accounting Standards Board (FASB)supplanted its outdated APB Opinion 17, IntangibleAssets, with Financial Accounting Standard No. 142,Goodwill and Other Intangible Assets. Gone was theassumption of Opinion 17 that goodwill and otherintangible assets were wasting assets that should beamortized over a 40-year period. Henceforth, goodwilland intangible assets with indefinite useful lives wouldbe tested at least annually for impairment. Intangibleassets with definite useful lives were to be amortizedover those useful lives, not an arbitrary 40 years.

Also in June 2001 FASB issued Financial AccountingStandard No. 141, Business Combinations (updated2007), which gave directions on how accountantsshould allocate the purchase price when one businessbought another, including how to allocate part of thepurchase price to intangible assets and goodwillacquired by purchase. FAS 141 supplanted APBOpinion 16. Opinion 16 required that accountants

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separately recognize intangible assets when they couldbe identified and nameda crude concept in a worldwith a multiplicity of intangible assets that were newand strange. FAS No. 141 requires that intangibleassets acquired through the purchase of a businessbe recognized as assets apart from goodwill if theyare identifiable, which means that they meet oneof two criteriathe separability criterion or thecontractual-legal criterion. These concepts arediscussed in Section IV.B.1 below. FAS No. 141 alsogives an illustrative list of intangible assets that meeteither of those criteria.

FAS 141 and 142 thus represent a modernization ofthe accounting professions approach to intangibleassets, including goodwill. However, the accountingprofession still lags behind the economy in that eventhis updated recognition of intangible assets onlyapplies when one business acquires another businessand pays more than the value of the tangible assets,which requires that the excess price paid must beallocated between intangible assets and residualgoodwill. The accounting profession still does notrecognize self-created intangible assets as separablefrom goodwill and it is still behind-the-times (butnot nearly as behind as the legal profession).

D. THE LAWYERS. The lawyers, meaning bothpractitioners and judges, have lagged far behind theeconomists and the accountants in adapting to thechange from tangible to intangible assets and therecognition of human capital. This is partly becausethere are 51 versions of family law in America, andpartly because the law changes slowly through casedecisions, or fitfully through infrequent statutoryenactments. There is no governing body of lawyersor judges whose task it is to upgrade and modernizethe legal conceptual framework relating to intangibleassets and goodwill. This places the responsibilityfor change on the lawyers who litigate businessvaluation issues to be alert to these new developmentsin our economy, and to pursue them in the courtsystem.

II. HUMAN CAPITAL. The use of the termhuman capital in modern neoclassical economicliterature is said to date back to Jacob Mincer'spioneering article Investment in Human Capital andPersonal Income Distribution in The Journal ofPolitical Economy in 1958. Nobel Prize-winning

Economist Gary Becker, in his book HUMAN CAPITAL,published in 1964, argues that a person invests in hisor her own human capital (via education, training,medical treatment), and that persons income dependspartly on the rate of return on that human capital. A discussion by Gary Becker of the concept of humancapital is available on the internet,. Some of Beckers important pointsare:

To most people capital means a bank account,a hundred shares of IBM stock, assembly lines,or steel plants in the Chicago area. These areall forms of capital in the sense that they areassets that yield income and other useful outputsover long periods of time.

But these tangible forms of capital are not theonly ones. Schooling, a computer trainingcourse, expenditures of medical care, andlectures on the virtues of punctuality and honestyalso are capital. That is because they raiseearnings, improve health, or add to a person'sgood habits over much of his lifetime. Therefore,economists regard expenditures on education,training, medical care, and so on as investmentsin human capital. They are called human capitalbecause people cannot be separated from theirknowledge, skills, health, or values in the waythey can be separated from their financial andphysical assets.

Education and training are the most importantinvestments in human capital. Many studies haveshown that high school and college educationin the United States greatly raise a person'sincome, even after netting out direct and indirectcosts of schooling, and even after adjusting forthe fact that people with more education tendto have higher IQs and better-educated and richerparents. Similar evidence is now available formany years from over a hundred countries withdifferent cultures and economic systems. Theearnings of more educated people are almostalways well above average, although the gainsare generally larger in less developed countries.

* * *The economics of human capital have broughtabout a particularly dramatic change in the

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incentives for women to invest in collegeeducation in recent decades. Prior to the sixtiesAmerican women were more likely than mento graduate from high school but less likely tocontinue on to college. Women who did go tocollege shunned or were excluded from math,sciences, economics, and law, and gravitatedtoward teaching, home economics, foreignlanguages, and literature. Because relatively fewmarried women continued to work for pay, theyrationally chose an education that helped in"household production"and no doubt also inthe marriage marketby improving their socialskills and cultural interests.

All this has changed radically. The enormousincrease in the labor participation of marriedwomen is the most important labor force changeduring the past twenty-five years. Many womennow take little time off from their jobs even tohave children. As a result the value to womenof market skills has increased enormously, andthey are bypassing traditional "women's" fieldsto enter accounting, law, medicine, engineering,and other subjects that pay well. Indeed, womennow comprise one-third or so of enrollmentsin law, business, and medical schools, and manyhome economics departments have either shutdown or are emphasizing the "new homeeconomics." Improvements in the economicposition of black women have been especiallyrapid, and they now earn just about as much aswhite women.

Of course, formal education is not the only wayto invest in human capital. Workers also learnand are trained outside of schools, especiallyon jobs. Even college graduates are not fullyprepared for the labor market when they leaveschool, and are fitted into their jobs throughformal and informal training programs. Theamount of on-the-job training ranges from anhour or so at simple jobs like dishwashing toseveral years at complicated tasks likeengineering in an auto plant. The limited dataavailable indicates that on-the-job training isan important source of the very large increasein earnings that workers get as they gain greaterexperience at work. Recent bold estimates byColumbia University economist Jacob Mincer

suggest that the total investment in on-the-jobtraining may be well over $100 billion a year,or almost 2 percent of GNP.

An article by John F. Tomer, Personal Capital andEmotional Intelligence: an Increasingly ImportantIntangible Source of Economic Growth, 29 EASTERNECONOMIC JOURNAL p. 453 (2003), , discusses a trend among economists tolook beyond physical capital, natural resources, andlabor, as bases for wealth creation, and to considerhuman capital as a basis. Tomer says that the termcapital has increasingly come to refer to intangiblefactors such as the enhanced human capacities owingto education and training. While a long list ofeconomists dating back several centuries recognizedhuman capital, according to Tomer these economistswere contemplating personal skills and abilities. Forexample, Paul Romer [1990, 253] breaks downworkers' human capital endowment into three typesof skills that are relevant for production: (1) physicalskills such as eye-hand coordination and strength,(2) educational skills acquired in primary andsecondary school, and (3) scientific talent acquiredin post-secondary education. Tomer focuses on anew type of human capital, what he calls social andorganizational capital, that are the product ofactivities that create social relationships. This typeof capital reposes not in individuals per se but inthe relationships or connections between people.

Tomer discusses other terms used to describe humancapital, including social capital, and psychologicalcapital. Tomer chooses to use the term personalcapital, and says:

Personal capital is a kind of human capitalbecause it relates to a capacity embodied inindividuals. However, personal capital differsfrom standard human capital in that the humancapacity involved is not the type developed byacademic education or by the usual types ofjob-related training. The personal capitalcapacities are fundamentally different fromcognitive intelligence or intellectual knowledge.Personal capital relates to an individual's basicpersonal qualities and reflects the quality of anindividual's psychological, physical, and spiritualfunctioning [Tomer, 1996, 626-27; Tomer, 2001,

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251]. Further, it mirrors one's internalbiochemical balance, physical health andconditioning, psychological strengths andweaknesses, and purpose in life. A person's stockof personal capital is partly a product of one'sgenetic inheritance, partly a result of thelife-shaping events that one has encountered,and partly an outcome of one's efforts to matureand to grow in nonintellectual ways. It is in partproduced intentionally. Personal capital qualitiesare related to a person's capacity to work orconsume in that they underlie the more specificcapacities (standard human capital andconsumption capital) that a person invests into be qualified for work tasks or to be able toenjoy consumer goods. Moreover, certainpersonal capital qualities are a prerequisite fordeveloping successful organizationalrelationships (social and organizational capital)[Tomer, 1999a, 46-48]. Personal capitalcapacities expand one's achievementpossibilities.

Tomer comments: Unlike tangible capital, humancapital cannot be removed or alienated from anindividual to be sold. This type of capital is akinto the personal goodwill that so many states excludefrom the property division upon divorce.

The foregoing economic description of humancapital suggests that a property-based approach todealing with disparate earning capacity upon divorce(such as putting a value on a professional degree orprofessional license) will encounter complexities thatmay overwhelm the legal analysis or the valuationprocess. The more natural way to address this issueis through post-divorce alimony.

III. THE LEGAL CONCEPTION OFGOODWILL. In some states enterprise goodwill(sometimes called commercial goodwill orprofessional goodwill) is divisible on divorce andin some states it is not. In some states personalgoodwill is divisible on divorce and in some statesit is not. Part of the differences in law results fromdifferences in meaning of the term goodwill. Thefollowing discussions break the term goodwill downinto components that can be more accuratelydiscussed. Because some appellate cases use the termprofessional goodwill to mean the enterprise

goodwill of a professional business, and other casesuse the term professional goodwill to mean thepersonal goodwill of a professional, in order to avoidconfusion this Article will not use the termprofessional goodwill.

A. WHAT IS GOODWILL? Goodwill can beviewed from both a legal perspective and anaccounting perspective. Because family law inAmerica consists of fifty-one different bodies of law,there is great variety in the legal approaches togoodwill upon divorce. There are some principlesthat are shared between states due to the commonheritage of English law (Louisiana excepted)pertaining to goodwill. There are some principlesthat are shared between states because of commonnotions of what constitutes property. But thereare wide differences in the law of different states onthe question of what constitutes goodwill, and whatgoodwill is divisible on divorce.

1. Seeking a Better Legal Conception of Good-will. One member of Congress said this aboutgoodwill, in connection with the savings and loancrisis: "Goodwill is not cash. It is a concept, anda shadowy one at that. 135 Cong. Rec. 11795 (1989)(remarks of Rep. Barnard), cited in U.S. v. WinstarCorp., 518 U.S. 839, 854, 116 S.Ct. 2432, 2445 (U.S.Sup. Ct. 1996).

The earliest English definition of goodwill wasgiven by Lord Eldon in Cruttwell v. Lye, 34 Eng. Rep.129 (Ch. 1810), which said: The goodwill whichhas been the subject of sale is nothing more than theprobability that the old customers will resort to theold place. The classic American legal definition ofgoodwill was given by Justice Story in his treatiseon partnership law:

the advantage or benefit, which is acquired byan establishment, beyond the mere value of thecapital, stock, funds, or property employedtherein, in consequence of the general publicpatronage and encouragement, which it receivesfrom constant or habitual customers, on accountof its local position, or common celebrity, orreputation for skill or affluence, or punctuality,or from other accidental circumstances ornecessities, or even from ancient partialities orprejudices.

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Story, COMMENTARIES ON THE LAW OF PARTNERSHIP 99 (6th Ed.1868). This definition was cited by theU.S. Supreme Court in Metropolitan Nat. Bank v.St. Louis Dispatch Co., 49 U.S. 436, 446, 13 S.Ct.944, 948 (1893).

The U.S. Supreme Court once described goodwillas that element of value which inheres in the fixedand favorable consideration of customers, arising froman established and well-known and well-conductedbusiness, in Des Moines Gas Co. v. City of DesMoines, 238 U.S. 153, 165, 35 S.Ct. 811, 814 (U.S.Sup. Ct. 1915).

The U.S. Supreme Court more recently said this aboutgoodwill:

Although the definition of goodwill has takendifferent forms over the years, the shorthanddescription of good-will as "the expectancy ofcontinued patronage," Boe v. Commissioner,307 F.2d 339, 343 (CA9 1962), provides a usefullabel with which to identify the total of all theimponderable qualities that attract customersto the business. See Houston ChroniclePublishing Co. v. United States, 481 F.2d, at1248, n. 5.

Newark Morning Ledger Co. v. U.S., 507 U.S. 546,555-56, 113 S.Ct. 1670, 1675 (U.S. Sup. Ct. 1993).

The U.S. Court of Claims once said this aboutgoodwill:

Goodwill sometimes is used to describe theaggregate of all of the intangibles of abusiness.... Since a normal rate of return usuallyis calculated on tangible assets only, goodwillhas been used as a synonym for the return onall the intangibles of a business. In a morerestricted sense, goodwill is the expectancy thatthe old customers will resort to the old place.It is the sum total of all the imponderablequalities that attract customers and bringpatronage to the business without contractualcompulsion. Another definition equates goodwillwith a rate of return on investment which isabove normal returns in the industry and limitsit to the residual intangible asset that generates

earnings in excess of a normal return on all othertangible and intangible assets.

Richard S. Miller & Sons, Inc. v. United States, 537F.2d 446, 450-51 (Ct. Cl. 1976) (citations omitted).

Other federal courts have described goodwill: HoustonChronicle Publishing Co. v. United States, 481 F.2d1240, 1248 (5th Cir. 1973) (the "ongoing expectationthat customers would utilize [a company's] servicesin the future"), cert. denied, 414 U.S. 1129 (1974);Grace Bros., Inc. v. Commissioner, 173 F.2d 170,175-76 (9th Cir. 1949) ("the sum total of thoseimponderable qualities which attract the customerof a business--what brings patronage to the business");Dodge Bros., Inc. v. United States, 118 F.2d 95, 101(4th Cir. 1941) ("reasonable expectancy of preferencein the race of competition"); Ithaca Industries, 97T.C. 253 (slip op. at 17-18), 1991 WL 151392 (1991)(While goodwill and going-concern value are oftenreferred to conjunctively, technically going-concernvalue is the ability of a business to generate incomewithout interruption, even though there has been achange in ownership; and goodwill is a 'preexisting'business relationship, based on a continuous courseof dealing, which may be expected to continueindefinitely"), affd, Ithaca Industries, Inc. v.Commissioner, 17 F.3d 684 (4th Cir. 1992).

In Canterbury v. Commissioner, 99 T.C. 223, 247(1999), the Tax Court said: The essence of goodwillis a preexisting business relationship founded upona continuous course of dealing that can be expectedto continue indefinitely. Computing & Software,Inc. v. Commissioner, 64 T.C. 223, 233 (1975).Goodwill is characterized as the expectancy ofcontinued patronage, for whatever reason. Boe v.Commissioner, 307 F.2d 339, 343 (9th Cir.1962),affg. 35 T.C. 720 (1961); see Philip Morris, Inc. v.Commissioner, 96 T.C. 606, 634 (1991), affd. ---affd.970 F.2d 897 (2d Cir., June 25, 1992).

Rev. Rul. 59-60, 4.02(f), 1959-1 C.B. 237, 241 saysthis about goodwill: In the final analysis, goodwillis based upon earning capacity. The presence ofgoodwill and its value, therefore, rests upon the excessof net earnings over and above a fair return on thenet tangible assets. While the element of goodwillmay be based primarily on earnings, such factors asthe prestige and renown of the business, the ownership

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of a trade or brand name, and a record of successfuloperation over a prolonged period in a particularlocality, also may furnish support for the inclusionof intangible value. In some instances it may not bepossible to make a separate appraisal of the tangibleand intangible assets of the business. The enterprisehas a value as an entity. Whatever intangible valuethere is, which is supportable by the facts, may bemeasured by the amount by which the appraised valueof the tangible assets exceeds the net book value ofsuch assets.

State court appellate opinions describe goodwill invarious ways.


Goodwill can be translated into prospective earnings.From an accounting standpoint goodwill has also beenperceived of in terms of the extent to which futureestimated earnings exceed the normal return on theinvestment. Walker, "Why Purchased GoodwillShould be Amortized on a Systematic Basis," 95 J.Acc'tancy 210, 213 (1953); accord, Rev.Rul. 59-60, 4.02(f), 1959-1 C.B. 237, 241 (stating that valueof goodwill "rests upon the excess of net earningsover and above a fair return on the net tangibleassets"). The price paid for goodwill then is equivalentto the excess of actual earnings over expected earningsbased on a normal rate of return on investment.Walker, supra, at 213; see Kerley, "Intangible Assets,"in 1 Accountants' Handbook 23-10 (L. Seidler & D.Carmichael 6th ed.1981). When goodwill exists, ithas value and may well be the most lucrative assetof some enterprises.

Variances in the forms of an enterprise do noteliminate goodwill, though they may affect its worth.Goodwill may be present whether that form is apartnership, corporation, joint venture, or individualproprietorship. See Grayer v. Grayer, 147 N.J.Super.513, 520, 371 A.2d 753 (App. Div. 1977); Scherzerv. Scherzer, 136 N.J.Super. 397, 400, 346 A.2d 434(App. Div.1975) (holding no essential difference sofar as equitable distribution principle is concernedbetween an interest in an individual business and oneheld in corporate name: "The form should notcontrol"), certif. den., 69 N.J. 391, 354 A.2d 319(1976). Moreover, goodwill exists in personal serviceenterprises as well as other businesses. 2 B. Bittker,Federal Taxation of Income, Estates and Gifts 51.9.3, at 51-53 (1981).

In a publicly held corporation one can determinethe total value of a business whose stock is publiclytraded and therefore its goodwill by the market priceof the stock. G. Catlett & N. Olson, Accounting forGoodwill 14 (1968). The excess over the book ormarket value of its assets, however, may also be dueto many and diverse conditions affecting the economyas a whole and an industry in particular. The valueof stock in a closely held corporation is not fixed bypublic trading. Its computation depends primarilyon the earning power of the business "since goodwillby nature encompasses all those intangible attributesof a business whose quality can be demonstrated onlyby a company's ability to make profits." Id. [Strike-

over added to avoid confusion]

The calculation of goodwill may depend upon thepurpose for which the measurement is being made.The federal Internal Revenue Service has prescribeda formula approach for income, gift and estate taxpurposes. See Rev.Rul. 68-609, 1968-2 C.B. 327.The market place, as noted above, may often providea different figure. Accountants will usually not reflectgoodwill on a balance sheet until after a business hasbeen sold and then state goodwill in terms of theexcess paid for the net assets over book value. G.Catlett & N. Olson,supra, at 17. Its evaluation maybe complex and difficult. Judge Pressler in Lavenev. Lavene, 148 N.J. Super. 267, 275, 372 A.2d 629(App. Div.), certif. den., 75 N.J. 28, 379 A.2d 259(1977), commented:

There are probably few assets whose valuationimposes as difficult, intricate and sophisticated a taskas interests in close corporations. They cannot berealistically evaluated by a simplistic approach whichis based solely on book value, which fails to deal withthe realities of the good will concept, which does notconsider investment value of a business in terms ofactual profit, and which does not deal with thequestion of discounting the value of a minorityinterest.


Retired University of New Mexico ManagementProfessor Allen M. Parkman, who had an economistlegal background, discussed the legal conception ofgoodwill in his chapter A Systematic Approach toValuing the Goodwill of Professional Practices(1998).6

2. Goodwill as Residual Value. The wide-rangingdiscussion over what constitutes divisible goodwillupon divorce can be narrowed by refining the conceptof goodwill. In some older writings, the termgoodwill is used to describe all value of a goingbusiness beyond the value of the tangible assets ofthe business, i.e., goodwill consists of all intangiblevalue of the business. The measure of this form ofgoodwill is the difference between the price a buyerwould pay to buy the going business as a whole andthe prices buyers would pay to buy each individualtangible asset of the business sold separately. Butthis conception of goodwill is overbroad because itlumps into goodwill intangible assets that can bevalued on an individual basis.

Modern property law recognizes many intangibleassets as enforceable and transferrable property rights,and these enforceable and transferrable intangibleproperty rights should be discussed and valued inthe context of their specific legal framework (suchas trademark law, trade secret law, contract lawapplied to long term employment agreements orcovenants not to compete, etc.), rather than beinglumped into the residual catch-all category ofgoodwill. This Article suggests that the termgoodwill should used to describe the narrowercategory of the ineffable qualities of a particularbusiness that contribute to profitability, beyond notonly tangible assets but also beyond specificallyidentifiable intangible assets that are transferrablewith or without the sale of a business. This Articlealso suggests that the true nature of residualgoodwill of most companies in the present mobile,digital and world-wide economy, where goods andservices are increasingly fungible, has shifted fromstable supplier/customer relationship to self-createdhuman capital that will stay with the business aftera sale, including not only research and development,but also enhanced human capacities owing toeducation and training, social and organizationalcapital of the business, and personal capital ofemployees who will stay with the business (see

discussion of John Tomer, Section I.B. above). Theseinvestments, which the business has made in itself,are usually expensed and therefore are not carriedas assets on the balance sheet and are not usuallythought of as assets with separably determinablevalue. As we grow in our ability to identify and valuethe human capital intangible assets of businesses,then these intangible assets too can move out ofresidual goodwill and be recognized as assets ofthe business, further increasing the accuracy of whatmust be excluded in some states as personal goodwillin a divorce.

This residual goodwill must be subdivided in thecontext of divorce into a category called commercialgoodwill or enterprise goodwill and a categorycalled personal goodwill. In many states, includingTexas upon divorce, commercial goodwill orenterprise goodwill is part of the value to be dividedin the property division, while personal goodwillis not.

IV. THE ACCOUNTING CONCEPTION OFGOODWILL. The accounting profession has beendeveloping and refining its conception of goodwillin recent years.

A. GOODWILL AS EXCESS PURCHASEPRICE. Financial Accounting Standards BoardOpinion No. 16, Business Combinations 316 (1970)says: "[T]he excess of the cost of the acquiredcompany over the sum of the amounts assigned toidentifiable assets acquired less liabilities assumedshould be recorded as goodwill." In 2001, theFinancial Accounting Standards Board (FASB) issuedFinancial Accounting Statement 142, which definesgoodwill in its Glossary as [t]he excess cost of anacquired entity over the net of the amounts assignedto assets acquired and liabilities assumed. FAS 142, 21 provides that [t]he implied fair value of goodwillshall be determined in the same manner as the amountof goodwill recognized in a business combinationis determined. That is, an entity shall allocate the fairvalue of a reporting unit to all of the assets andliabilities of that unit (including any unrecognizedintangible assets) as if the reporting unit had beenacquired in a business combination and the fair valueof the reporting unit was the price paid to acquirethe reporting unit. The excess of the fair value of areporting unit over the amounts assigned to its assets

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and liabilities is the implied fair value of goodwill.

B. DEFINITION OF PERSONAL GOODWILL.Mark O. Dietrich, in Identifying and MeasuringPersonal Goodwill in a Professional Practice, CPAEXPERT (Spring 2005) [reprinted in Dietrich,Segregating Personal and Enterprise Goodwill, THEFIRST EVER AICPA/ASA NATIONAL BUSINESSVALUATION CONFERENCE p. 30-14 (2005), hereaftercalled the Dietrich Segregating article], describedpersonal goodwill in the following terms:

Personal goodwill, then, is the asset thatgenerates cash profits of the enterprise that areattributed to the business generatingcharacteristics of the individual, and may includeany profits that would be lost if the individualwere not present.

Associate Professor of Law Darian M. Ibrahim saidthis about personal goodwill:

Distinguishing personal goodwill from businessgoodwill is often difficult and always fact-specific. Personal goodwill may be mistakenfor business goodwill, and vice versa. Inaddition, goodwill may belong to both a businessand its owner, making valuation problematic.There is also a danger, due to the prevalenceof business goodwill as a legal concept and therelative obscurity of personal goodwill as a legalconcept, that buyers and sellersnot to mentionthe courts and the IRSwill routinely treat allgoodwill as business goodwill. [Footnotesomitted].

Darian M. Ibrahim, The Unique Benefits of TreatingPersonal Goodwill as Property in CorporateAcquisitions,30 DEL. J. OF CORPORATE LAW 1, 10-11(2005). 7 Professor Ibrahim cited: Bateman v. UnitedStates, 490 F.2d 549 (9th Cir. 1973); Martin IceCream Co. v. Commissioner, 110 T.C. 189 (1998);and Norwalk v. Commissioner, 76 T.C.M. (CCH)208 (1998), as cases that distinguished enterprisegoodwill from personal goodwill.

C. PULLING IDENTIFIABLE INTANGIBLESOUT OF RESIDUAL GOODWILL. The lawyerand business valuator should account for intangibleassets separately from residual goodwill, where

possible. There may be market data to help valuecertain intangible assets, and if not then intangibleassets may have discernable rates of return that canbe subtracted from the income stream used to calculateoverall value of the business, allowing such assetsto be differentiated from goodwill. Also, identifiableintangible assets of the business are transferrable withthe business, and thus are not part of personalgoodwill. The desirability of removing identifiableintangible assets from residual goodwill has beenrecognized by the accounting profession in FinancialAccounting Standard 141:8

The FASBs reasons for rejecting otherrecognition criteria suggested for Statement141

B170. Some respondents suggested that theFASB eliminate the requirement to recognizeintangible assets separately from goodwill.Others suggested that all intangible assets withcharacteristics similar to goodwill should beincluded in the amount recorded as goodwill.The FASB rejected those suggestions becausethey would diminish rather than improve thedecision usefulness of reported financialinformation.

FAS 1414 B170, p. 135.

B171. Some respondents doubted their abilityto reliably measure the fair values of manyintangible assets. They suggested that the onlyintangible assets that should be recognizedseparately from goodwill are those that havedirect cash flows and those that are bought andsold in observable exchange transactions. TheFASB rejected that suggestion. Although thefair value measures of some identifiableintangible assets might lack the precision of themeasures for other assets, the FASB concludedthat the information that will be provided byrecognizing intangible assets at their estimatedfair values is a more faithful representation thanthat which would be provided if those intangibleassets were subsumed into goodwill. Moreover,including finite-lived intangible assets ingoodwill that is not being amortized wouldfurther diminish the representational faithfulnessof financial statements.

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FAS 141 B171, p. 136.

The accounting profession is going to have to leadthe legal profession in the effort to pull recognizedintangible rights out of residual goodwill, becausesome appellate courts are still citing a 138-year-oldmercantile definition of goodwill, and citingcomponents of goodwill that prevailed before theadvent of telecommunications, the automobile, theairplane, personal computers, and the internet. Thisis not to say that the accounting profession has fullyadjusted to the new economy, where intangiblesare an important source of wealth. FASB now saysto report intangible rights that are separable fromgoodwill when such rights are purchased, but notwhen such rights result from self-investment. Untilself-created intangible assets are recognized as assetsand included on the balance sheet, the balance sheetwill continue to be of little use in valuing a business,and the entity value derived by business valuatorsfrom the normalized income statement, in conjunctionwith a cap rate or income multiplier, will continueto reflect value in excess of recognized assets, whichpeople will continue to call goodwill, which somecourts will continue to say is not divisible upondivorce.

1. What Constitutes an Intangible Asset (forAccounting Purposes)? Accounting principles inthe USA treat self-investment in intangibles as anexpense rather than an investment, so the value ofthis self-investment does not show up on the balancesheet, and the income statement fails to capture thisinvestment in future income. Thus a businesss incomeappears to be attributable in a mysterious way togoodwill in instances when it is really attributableto self-investment in intangible assets that are notcaptured on either the balance sheet or the incomestatement. The accounting profession has partlyrectified this problem, but only for intangible assetsthat are purchased, not self-created. And theaccounting profession specifically excludes workforce in place as an intangible, which is the repositoryfor much of the human capital and social capitalwithin the organization.

FASB Concepts Statement No. 6, Elements ofFinancial Statements, issued in December 1985,defined assets in the following way:

26. An asset has three essential characteristics:(a) it embodies a probable future benefit thatinvolves a capacity, singly or in combinationwith other assets, to contribute directly orindirectly to future net cash inflows, (b) aparticular entity can obtain the benefit andcontrol others' access to it, and (c) the transactionor other event giving rise to the entity's rightto or control of the benefit has already occurred.Assets commonly have other features that helpidentify themfor example, assets may beacquired at a cost and they may be tangible,exchangeable, or legally enforceable. However,those features are not essential characteristicsof assets. Their absence, by itself, is notsufficient to preclude an item's qualifying as anasset. That is, assets may be acquired withoutcost, they may be intangible, and although notexchangeable they may be usable by the entityin producing or distributing other goods orservices. Similarly, although the ability of anentity to obtain benefit from an asset and tocontrol others' access to it generally rests on afoundation of legal rights, legal enforceabilityof a claim to the benefit is not a prerequisite fora benefit to qualify as an asset if the entity hasthe ability to obtain and control the benefit inother ways.

It is clear that many intangible assets meet this oldFASB criteria for asset, and thus should beconsidered as belonging to the business, separate andapart from goodwill.

In June, 2001, the Financial Accounting StandardsBoard issued Financial Accounting Statements 141,Business Combinations,9 and 142, Goodwill and OtherIntangible Assets.10 FAS 141 was updated in 2007.The stated reason for issuing FAS 141 and 142 wasthat [a]nalysts and other users of financialstatements, as well as company managements, notedthat intangible assets are an increasingly importanteconomic resource for many entities and are anincreasing proportion of the assets acquired in manytransactions. FAS 141 defines an intangible asset in this way:

An intangible asset is an asset (not includinga financial asset) that lacks physical substance.

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As used in this Statement, the term intangibleasset excludes goodwill.

FAS 141 3(l), p. 3. Intangible assets are disting-uished from goodwill:

A19. The acquirer shall recognize separatelyfrom goodwill the identifiable intangible assetsacquired in a business combination. Anintangible asset is identifiable if it meets eitherthe separability criterion or the contractual-legalcriterion described in paragraph 3(k).

FAS A19, p. 38.

FAS 141 discusses when an asset is identifiable.This is important in determining when an intangibleasset should be recognized separately from goodwill.As noted in FAS 141:

A28. The identifiability criteria determinewhether an intangible asset is recognizedseparately from goodwill.

FAS A28, p. 41. The identifiability criterion is basedon either the separability criterion or the contractual-legal criterion:

k. An asset is identifiable if it either:

(1) Is separable, that is, capable of beingseparated or divided from the entity and sold,transferred, licensed, rented, or exchanged, eitherindividually or together with a related contract,identifiable asset, or liability, regardless ofwhether the entity intends to do so; or

(2) Arises from contractual or other legal rights,regardless of whether those rights aretransferable or separable from the entity or fromother rights and obligations.

FAS 141 3(k), p. 3. FAS 141 reiterates that thecontractual-legal criterion is independent from the separability criterion:

A20. An intangible asset that meets thecontractual-legal criterion is identifiable evenif the asset is not transferable or separable fromthe acquiree or from other rights and obligations.

FAS 141 A20, p. 38.

FAS 141 discusses the separability criterion:

A21. The separability criterion means that anacquired intangible asset is capable of beingseparated or divided from the acquiree and sold,transferred, licensed, rented, or exchanged, eitherindividually or together with a related contract,identifiable asset, or liability. An intangible assetthat the acquirer would be able to sell, license,or otherwise exchange for something else ofvalue meets the separability criterion even ifthe acquirer does not intend to sell, license, orotherwise exchange it. An acquired intangibleasset meets the separability criterion if there isevidence of exchange transactions for that typeof asset or an asset of a similar type, even ifthose transactions are infrequent and regardlessof whether the acquirer is involved in them.

A22. An intangible asset that is not individuallyseparable from the acquiree or combined entitymeets the separability criterion if it is separablein combination with a related contract,identifiable asset, or liability.

FAS 141 A21 & A22, p. 39.

FAS 142 requires that intangible assets of acquiredcompanies must be amortized over their useful lives,or if the useful life is indefinite, that the intangiblebe tested annually for impairment. This alters theprevious rule requiring intangible assets to beamortized over an arbitrary 40 year period. This alsoresults in business valuators having to evaluate eachintangible asset based on the attributes of thatintangible asset. And it requires that residual goodwillbe tested annually for impairment.

FAS 142 lists in Appendix A the following examplesof intangible assets: customer lists, patents, copyright,broadcast licenses, airline route authority, andtrademarks. FAS 142 only applies to acquiredintangibles, and GAAP does not require thatintangibles developed internally by a business mustbe disclosed on the balance sheet.

As mentioned above, a researcher for FASB authoreda report that dealt in detail with intangible assets:

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Wayne S. Upton, Jr., Special Report: Business andFinancial Reporting, Challenges from the NewEconomy, FINANCIAL ACCOUNTING STANDARDSB O A R D ( A p r i l 2 0 0 1 ) , o n l i n e a t. He describes intangibleassets as follows:

The Intangibles Research Center at New YorkUniversity offers two possibledefinitions:

Broad DefinitionIntangibles are nonphysicalsources of probable future economic benefitsto an entity or alternatively all the elements ofa business enterprise that exist in addition tomonetary and tangible assets. [Footnotereference omitted.]

Narrow DefinitionIntangibles are nonphysicalsources of probable future economic benefitsto an entity that have been acquired in anexchange or developed internally fromidentifiable costs, have a finite life, have marketvalue apart from the entity, and are owned orcontrolled by the entity.

The FASB Exposure Draft, BusinessCombinations and Intangible Assets, offered:Intangible assets are noncurrent assets (notincluding financial instruments) that lackphysical substance.

Id. at 68. [Footnote omitted] Upton describes the longlist of intangible assets contained on Exhibit A toFASB Exposure Draft, Business Combinations andIntangible Assets, later shortened by FASB. Id. at68-69. Upton observes: The items on the list ofpotential intangible assets share a commoncharacteristic. Each is separable from the entity orexists by virtue of contractual or legal rights.Separability and contractual/legal rights are notessential characteristics of an asset, but they areevidence of one characteristic that isessentialcontrol. Id. 70-71. Uptons paper containsa thorough discussion of what constitutes an intangibleasset of a business. This discussion is an excellentreference for intangible assets that might bedifferentiated from residual goodwill.

FAS 141 says Goodwill is an asset representing thefuture economic benefits arising from other assetsacquired in a business combination that are notindividually identified and separately recognized.

2. Assembled Workforce is Part of ResidualGoodwill. FAS 141 rejects assembled workforce asan identifiable intangible asset:

A25. The acquirer subsumes into goodwill thevalue of an acquired intangible asset that is notidentifiable as of the acquisition date. Forexample, an acquirer may attribute value to theexistence of an assembled workforce, which isan existing collection of employees that permitsthe acquirer to continue to operate an acquiredbusiness from the acquisition date. An assembledworkforce does not represent the intellectualcapital of the skilled workforcethe (oftenspecialized) knowledge and experience thatemployees of an acquiree bring to their jobs.Because the assembled workforce is not anidentifiable asset to be recognized separatelyfrom goodwill, any value attributed to it issubsumed into goodwill.

FAS 141 continues:

Assembled workforce

B176. In developing Statement 141, the FASBdid not consider whether an assembledworkforce met either the contractual-legal orthe separability criterion for recognition as anidentifiable intangible asset. Instead, Statement141 precluded separate recognition of anassembled workforce because of the FASBsconclusion that techniques to measure the valueof an assembled workforce with sufficientreliability were not currently available. IFRS3 and IAS 38, on the other hand, did notexplicitly preclude separate recognition of anassembled workforce. However, paragraph 15of IAS 38 noted that an entity usually wouldnot have sufficient control over the expectedfuture economic benefits arising from anassembled workforce for it to meet the definitionof a separate intangible asset.

B177. In developing the 2005 Exposure Draft,

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the Boards concluded that an acquirer shouldnot recognize an assembled workforce as aseparate intangible asset because it meets neitherthe contractual-legal nor the separabilitycriterion. The views of respondents whocommented on recognition of an assembledworkforce were mixed.

Some agreed with its proposed recognitionprohibition. Others suggested that the Boardsreconsider that prohibition; they generally said that an assembled workforce is already valuedin many situations for purposes of calculatinga contributory asset charge in determining thefair value of some intangible assets. (In usingan excess earnings income valuationtechnique, a contributory asset charge is requiredto isolate the cash flows generated by theintangible asset being valued from thecontribution to those cash flows made by otherassets, including other intangible assets.Contributory asset charges are hypotheticalrental charges for the use of those othercontributing assets.) Those respondents opposeda prohibition on recognizing an assembledworkforce as a separate intangible asset; theyfavored permitting acquirers to assess whetheran assembled workforce is separable in eachsituation and to recognize those that areseparable.

B178. In reconsidering the proposal in the 2005Exposure Draft, the Boards concluded that theprohibition of recognizing an assembledworkforce should be retained. Because anassembled workforce is a collection ofemployees rather than an individual employee,it does not arise from contractual or legal rights.Although individual employees might haveemployment contracts with the employer, thecollection of employees, as a whole, does nothave such a contract. In addition, an assembledworkforce is not separable, either as individualemployees or together with a related contract,identifiable asset, or liability. An assembledworkforce cannot be sold, transferred, licensed,rented, or otherwise exchanged without causingdisruption to the acquirers business. In contrast,an entity could continue to operate aftertransferring an identifiable asset. Therefore, an

assembled workforce is not an identifiableintangible asset to be recognized separately fromgoodwill.

B179. The Boards observed that neitherStatement 141 nor IAS 38 defined an assembledworkforce and that inconsistencies have resultedin practice. In addition, some who objected tothe recognition prohibition in the 2005 ExposureDraft apparently consider an assembledworkforce to represent the intellectual capitalof the skilled workforcethe (often specialized)knowledge and experience that employees ofan acquiree bring to their jobs. However, theBoards view an assembled workforce as anexisting collection of employees that permitsan acquirer to continue to operate an acquiredbusiness from the acquisition date, and theydecided to include that definition in thisStatement (paragraph A25).

B180. The Boards observed that the value ofintellectual capital, in effect, is recognizedbecause it is part of the fair value of the entitysother intangible assets, such as proprietarytechnologies and processes and customercontracts and relationships. In that situation, aprocess or methodology can be documented andfollowed to the extent that the business wouldnot be materially affected if a particularemployee left the entity. In most jurisdictions,the employer usually owns the intellectualcapital of an employee. Most employmentcontracts stipulate that the employer retains therights to and ownership of any intellectualproperty created by the employee. For example,a software program created by a particularemployee (or group of employees) would bedocumented and generally would be the propertyof the entity. The particular programmer whocreated the program could be replaced by anothersoftware programmer with equivalent expertisewithout significantly affecting the ability of theentity to continue to operate. But the intellectualproperty created in the form of a softwareprogram is part of the fair value of that programand is an identifiable intangible asset if it isseparable from the entity. In other words, theprohibition of recognizing an assembledworkforce as an intangible asset does not apply

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to intellectual property; it only applies to thevalue of having a workforce in place on theacquisition date so that the acquirer can continuethe acquirees operations without having to hireand train a workforce.11

The rationales for this refusal to segregate assembledworkforce from residual goodwill were expressedin the Revised Minutes of the October 18, 2006 FASBmeeting.12 The following lengthy excerpt isilluminating:

TOPIC 1: Assembled Workforce

1. Ms. Eastman stated that the Boards havereaffirmed that an identifiable (that is,contractual or separable) intangible asset canbe measured with sufficient reliability andshould be recognized separately from goodwill.However, the Exposure Draft specificallyprecludes the recognition of an acquiredassembled workforce separately from goodwill,which is consistent with FASB Statement No.141, Business Combinations. The staff believesthat in a principles-based standard, all intangibleassets should be subject to the same recognitioncriteria. Therefore, it would be inconsistent topreclude the recognition of any identifiableintangible asset, including an assembledworkforce.

2. Regardless of what the Board decides onrecognition, the staff believes the Board shouldclarify the meaning of an assembled workforce.Otherwise, there could be an inconsistency inthe measurement of an assembled workforcewhen calculating contributory asset capitalcharges. Also, there is the potential for doublecounting in the valuation of intellectual propertyintangible assets when the fair value of theassembled workforce includes the intellectualcapital related to the development of these otherintangible assets. There are two general viewsfor the meaning of an assembled workforce:

a. View 1: An assembled workforce is theintellectual capital of the skilled workforceof which the acquirer has obtained thebenefit as a result of the acquisition. Thisview implies that the assembled workforce

is the (specialized) knowledge andexperience that the employees bring to theirjobs.

b. View 2: An assembled workforce is acollection of employees that allows theacquirer to continue to operate on Day One.That is, the acquirer does not need to gothrough the process of finding, hiring, andtraining the employees because they arealready in place and operating on acontinuous business as usual basis. Thisview would eliminate the potential fordouble counting.

3. Some constituents have raised concerns aboutthe decision usefulness, materiality, and costsof recognizing an assembled workforceseparately from goodwill. However, the staffbelieves that in terms of decision usefulness andmateriality, for some industries, particularlythose that are service- or people-intensive, theseparate recognition of an acquired assembledworkforce would provide decision-usefulinformation. The staff also noted that the fairvalue of an assembled workforce might beimmaterial in some industries, particularly ifView 2 is chosen, but to preclude recognitionaltogether is inconsistent with a principles-basedstandard. In fact, the difference in materialityby entity or industry is one of the reasons thatan assembled workforce should be recognizedas it gives users an indication of the main valuedrivers of a business. In terms of the cost ofpreparation, the staff believes that becauseassembled workforces currently are valued forthe purpose of calculating the contributory assetcapital charges for the valuation of otherintangible assets, there will be no additionalcosts involved if the exception for assembledworkforce is removed. As for subsequentaccounting, the useful life could be estimatedfrom historical employee turnover data. Animpairment of the assembled workforce wouldbe evident, for example, when substantiallyhigher turnover occurs than what was assumedin the initial determination of the useful life.

4. Ms. Eastman noted that at the October 19,2006 IASB Board meeting, the IASB Board

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supported View 2 (all IASB Board membersagreed) and agreed that a separable assembledworkforce should be separately recognized(seven IASB Board members agreed; five didnot).

5. The Board generally supported View 2 inclarifying the meaning of an assembledworkforce (all Board members agreed).However, the Board concluded that an assembledworkforce should not be recognized as anintangible asset separately from goodwillbecause it is generally not separable (all Boardmembers agreed).

6. Mr. Trott stated that for an intangible assetto be identifiable, that intangible asset wouldhave to either arise from a contractual-legal rightor be separable. He believes that an assembledworkforce neither meets the contractual-legalright criterion nor the separable criterion becausean assembled workforce is not contractuallybased and cannot be sold separately from thebusiness. Ms. Eastman stated that someconstituents believe that an assembled workforceis separable in combination with other assets(for example, a division within an organization).An example of a separable assembled workforcewould be a consulting firm that leases out itsemployees to other corporations for an extendedperiod of time. She also clarified that the staffis not stating that an acquirer should alwaysseparately recognize an assembled workforce;if that assembled workforce is not separable,then the acquirer should not recognize itseparately from goodwill. Mr. Trott respondedby stating that if the Board was to agree that anassembled workforce is separable in combinationwith its other related assets, that would defeatthe purpose of the separable criterion becausethe measurement of that assembled workforcewould include the measurements of all the otherrelated assets. In the case of the consulting firmleasing out its employees, Mr. Trott believesthat the consulting firms product is the servicesprovided by its employees and, therefore, it isnot possible to differentiate between the valueof the employees and the value of the servicesprovided by those employees. Mr. Crooch agreedwith Mr. Trott. Ms. Seidman added that if the

Board was to support the separate recognitionfor the consulting firms assembled workforce,the Board would be supporting View 1, whichis not the Boards view of the meaning of anassembled workforce.

7. Mr. Batavick stated that although he agreesthat an assembled workforce is a collection ofemployees that allows the acquirer to continueto operate on Day One (View 2), he also couldenvision some circumstances in which theintellectual capital (that is, the specialized skillset of the employees) could be valuable to theacquirer (View 1). As for whether an assembledworkforce could be recognized separately fromgoodwill, he believes that an assembledworkforce does not meet the separabilitycriterion and should not be recognized separatelyfrom goodwill. Furthermore, he questions thevalue of the information provided by separatelyrecognizing an assembled workforce fromgoodwill. Even if one could substantiate thatthere is value in that information, requiring theseparate recognition of an assembled workforcewould add complexity to the final Statementon business combinations because not onlywould the Board have to provide recognitionand measurement guidance, it also would haveto provide impairment and amortizationguidance, which would prolong the businesscombinations project. He concluded by statingthat he believes that an assembled workforcedoes not meet the separability criterion as statedin existing guidance for intangible assets.

8. Ms. Seidman supported View 2. ParagraphB169 in Statement 141 states that . . .replacement cost is not a representationallyfaithful measurement of the fair value of theintellectual capital acquired in a businesscombination. In response to the staffs questionabout whether that statement is valid, she notedthat she believes that statement is outdated nowthat FASB Statement No. 157, Fair ValueMeasurements, has been issued. Consequently,she believes that statement should be deleted.As for whether the Board should remove theexception for separate recognition of assembledworkforce, Ms. Seidman stated that,on-balanceshe would vote to keep the prohibition. She

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stated that if one believes that the nature of anassembled workforce is the cost of accumulatingthe employees, then there are two reasons fordisallowing its separate recognition fromgoodwill. First, to the extent that an assembledworkforce needs to be combined with otherrelated assets to meet the definition of separable,not only would that be too broad of aninterpretation of the term separable, the valuationof that assembled workforce would include abroad number of elements, which would notprovide particularly useful information. Second,the nature of an assembled workforce seems tomirror a transaction cost (that is, the acquireris basically reimbursing the acquiree for payingthe acquirers costs to assemble theseemployees). Ms. Seidman emphasized that oneof the themes of the Statement on businesscombinations is that the cost of assembling anasset is not part of the fair value of the assetitself. By supporting View 2, the Board wouldessentially be clarifying that an assembledworkforce is of a different nature than the othertypes of intangible assets that are separable andrecognized separately from goodwill. Mr. Youngagreed with Ms. Seidman.

9. Mr. Linsmeier stated that while he believesan assembled workforce has aspects of bothViews 1 and 2, he supports View 2. Limitingthe definition of an assembled workforce toView 2 would help acquirers account for anassembled workforce because the intellectualcapital portion might be recognized in otherassets at the acquisition date in a businesscombination. He stated that while he agreed withthe other Board members that an assembledworkforce is generally not separable, hequestioned whether the Board should make thatdecision for preparers. If unique circumstancesexist in the acquisition whereby the acquirercould separately value the workforce, thatacquirer should be allowed to recognize thatassembled workforce apart from goodwill.Although he understood the transaction costnotion as stated by Ms. Seidman, he believesthat at the acquisition date, an acquirer is notrecognizing a transaction cost. He believes thatat the acquisition date, the acquirer is receivingan asset because the acquirer could continue

operations without expending resources toconstruct a workforce. Mr. Linsmeier does notsupport prohibiting separate recognition.However, if the Board does prohibit recognition,the basis for conclusions should explain that theBoard believes it would be a challenge for anassembled workforce to meet the separabilitycriterion and that it would not be a commonoccurrence for an acquirer to be able toseparately recognize an assembled workforce.

10. Mr. Herz agreed with Mr. Linsmeier. Hestated that an acquirer is acquiring all thetangible and intangible assets of a business,including a workforce that is trained and readyto operate on the date of acquisition, and allthose assets contribute to the value of theacquiree. He believes that whether an assembledworkforce is separable would depend on thebusiness model of the acquiree. Similar to Mr.Linsmeier, Mr. Herz stated that the staff shouldstate the reason that the Board supports theprohibition is because it believes that anassembled workforce generally is not separableand should not be separately recognized, whichis consistent with the principle that onlyidentifiable intangible assets should berecognized separately from goodwill. Heclarified that he supports View 2, even thoughhe believes that View 1 is correct from aneconomic point of view. However, themeasurement issues associated with View 1 leadshim to support View 2.

3. Some Say that Assembled Workforce Canbe Valued. Willamette Management Associates, anationwide business valuation firm founded in 1969,takes the view that assembled workforce can bevalued. In Pamela J. Garland and David M. Chiang,Valuation of the Assembled Workforce IntangibleAsset for Property Taxation Purposes p. 52 (Spring2006),13 the authors wrote this:

Most industrial and commercial organizationsrecognize their employeesand other formsof human capitalas a valuable intangible asset.Recognizing the value of a company's assembledworkforce is not a new concept. Companies oftenanalyze the value of their human capitalintellectual property (e.g., an assembled

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workforce) for a variety of transactional,financing, accounting, taxation, and litigationpurposes.

Id. p. 52. The authors go on to say:

Many corporate CEOs have publicly stated thatthe assembled workforce is one of theircompanys most valuable assets. However, fewcompanies incur the effort or expense toperiodically quantify the value of theirassembled workforce intellectual property.Numerous court cases have concluded that anentitys assembled workforce is a discreteintangible asset that has a measurable value.

Id. at 54. The authors cite: Ithaca Industries, Inc.v. C.I.R., 17 F.3d 684 (4th Cir. 1994); and BurlingtonNorthern R.R. Co. v. Bair,815 F.Supp. 1223 (S.D.Iowa, 1993), aff'd, 60 F.3d 410 (8th Cir. 1995). Theauthors go on to discuss how to value workforce inplace. If assembled workforce is valued, and it isestablished that it will stay with the company if thebusiness is sold, then the value of assembledworkforce can be withdrawn from the category ofresidual goodwill, and avoid being treated the waythat undifferentiated goodwill is treated in litigation,including divorce.

4. The Argument That Goodwill is not an Asset. Walter P. Schuetze was the Chief Accountant,Division of Enforcement, at the U.S. Securities andExchange Commission up until February, 2000, whileFASB was considering the updated treatment ofintangible assets. Mr. Schuetze was one of FASBsoriginal sev

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