July 2009
MemphisDivorce.com e-newsletter

The MemphisDivorce.com e-Newsletter is a service provided by Miles Mason Family Law Group PLC to clients, friends, and persons requesting family law updates through e-mail from: www.MemphisDivorce.com. With offices in Brentwood and Memphis, Tennessee we serve Middle and West TN, Northern Mississippi and Eastern Arkansas.

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Miles Mason, Sr. AT NACVA

Miles Mason, Sr., JD, CPA, has been asked to serve as an instructor for the National Association of Certified Valuation Analysts’ (NACVA) Forensic Accounting Academy, the premier training program for forensic accountants.

Presented six times a year at various cities around the country, the Forensic Accounting Academy is an intensive, five-day program that offers hundreds of practical, realistic and immediately usable forensic accounting tools.

Mason, a founding member of Miles Mason Family Law Group, PLC, practices family law exclusively out of the firm’s Memphis and Nashville/Brentwood, Tenn. offices.

To Have and to Hold

Considering Goodwill
in Professional Practice Valuations
for Marital Dissolutions

by Shannon Farr, CPA·ABV, a Valuation Manager with Decosimo Advisory Services in Chattanooga, Tennessee. Reprinted with permission.

The fair market value standard contemplates both a hypothetical willing and able buyer and seller, neither under compulsion to buy or sell. However, in marital dissolution, many courts have recognized that a spouse with a successful professional practice is not a “willing seller.”

Two of the most important duties of divorce courts are: (1) the determination of alimony and child support provisions, (2) the distribution of assets and liabilities between the two spouses. The first is based on the parties’ income on an ongoing basis, while the second is based on assets held at a specified date. The assumption is often made that a professional practitioner’s current income will be ongoing for purposes of the determination of alimony and child support. It is incongruent in this setting to then assume, for purposes of the property settlement, that the professional practitioner is willing and able to sell his/her source of income-the practice.

Furthermore, the most significant effect the standard of value has on the valuation is the treatment of goodwill. Fair market value is designed to capture the value of all of an entity’s assets, whether tangible or intangible, including goodwill. As the treatment of goodwill for marital dissolution purposes has evolved, the concepts of two distinct goodwill types, personal and enterprise, have developed. These concepts are aptly described in a 2003 case decided by the Supreme Court of Appeals of West Virginia, May v. May, (No. 31123), which involved a solo dental practice. In May, the court provided the following definitions in its ruling:

“Enterprise goodwill” is an asset of the business and may be attributed to a business by virtue of its existing arrangements with suppliers, customers or others, and its anticipated future customer base due to factors attributable to the business.

“Personal goodwill” is a personal asset that depends on the continued presence of a particular individual and may be attributed to the individual owner’s personal skill, training or reputation.

In the May case, the Court ruled that personal goodwill, being intrinsically tied to the attributes and skills of an individual, is not marital property. On the other hand, enterprise goodwill, which is attributable to the business itself, is marital and therefore subject to equitable distribution.

Business Valuation Resources, LLC, maintains a state-by-state summary of the legal cases establishing precedent for treatment of goodwill in marital dissolution, entitled “Goodwill Hunting in Divorce,” which is available at its website, www.bvrresources.com. The latest edition of that publication, accessed March 24, 2009, is the source for the following summary of how various states presently treat this issue.

Currently, Georgia and Alabama are the only two states that have yet to decide whether the goodwill of a professional practice constitutes marital property. It is also unclear whether there should be a further distinction between enterprise goodwill (marital) and personal or professional goodwill (non-marital).

Tennessee is one of four states which preclude characterizing goodwill in a professional practice-whether personal or enterprise-as marital property. In other words, only the net tangible assets of a professional practice are considered marital property in Tennessee. However, a distinction has been made by Tennessee courts in cases involving larger-scale medical operations, which run more like business enterprises than sole professional practices.

Fourteen states currently make no distinction, considering both personal and enterprise goodwill as marital. Twenty-eight states, along with the District of Columbia, have established case law that differentiates between enterprise and personal goodwill; e.g., the majority of states have adopted the view that enterprise goodwill continuing with the business, absent the presence of the professional practitioner, be considered marital property, whereas personal goodwill would not.

A recent Kentucky decision departed from previous case law established in that state. In her February 19, 2009 opinion in Gaskill v. Robbins , Kentucky Supreme Court Justice Mary Noble summarized some of the issues with which courts have wrestled in determining the value of professional practices for purposes of property distribution:

The valuation of a business is complicated, often speculative or assumptive, and at best subjective. This is particularly true in a divorce case where the business is a professional practice with only one practitioner, clients or patients come to the business to receive that particular person’s direct services, the business is not actually being sold, and the success of the business depends upon the personal skill, work ethic, reputation, and habits of the practitioner.

Prior to the Gaskill case, no distinction was made between personal and enterprise goodwill in Kentucky; both were considered marital assets, a precedent established in that state in Heller v. Heller, 672 S.W. 2d at 947-48. Since the Heller case was decided in 1984, trial courts throughout the nation have considered this issue, leading to the development of the concepts of the two goodwill types. In its Gaskill decision, the Kentucky Court looked to other states, citing West Virginia’s May as an example, concerning how this distinction is applied. The Court also noted that, to consider personal goodwill marital, effectively attaches the professional spouse’s future earnings, to which the former spouse generally has no claim.

A professional practice may have elements of both personal and enterprise goodwill. The operation itself may possess intangible elements, such as location, a recognized telephone number, computer systems, operating procedures, a trained and assembled staff, and patient or client files, which comprise the enterprise goodwill. Additionally, the patient or client relationships, which result from the trust and respect of the professional, represent personal goodwill. The concept of transferability is closely linked to distinguishing between these two types of goodwill. A professional typically cannot easily sell or transfer his or her reputation, skills, or knowledge, while enterprise goodwill elements are more readily transferred to a new owner.

Decosimo professionals have worked on a number of professional practice valuation cases. If you or your client need to discuss a potential case in confidence, please call us at 800.782.8382.

Shannon W. Farr, CPA·ABV
Decosimo Advisory Services
Tallan Financial Center, Suite 900
Two Union Square
Chattanooga, Tennessee 37402

Family Law Case Histories of Note

Janice Schaap Johnson v. Mark Lanier Johnson - M2008-00236-COA-R3-CV View - Williamson County - Husband filed Petition to Modify Child Support because, among other things, one of the minor children turned eighteen. Following a hearing on the matter, the trial court found that a significant variance in the circumstances existed to require the modification of each party’s child support obligation. On appeal, Wife raised issues with the trial court’s (1) imputation and calculation of both party’s annual income; (2) allocation of the children’s private school tuition; (3) failure to hold a hearing on Wife’s Motion to Rehear; (4) suspension of discovery and failure to address a pending Motion to Compel; and (5) failure to award legal expenses. Finding that the trial court did not err, the Court of Appeals affirmed its decision in all respects.

Carie C. Brooks v. Douglas J. Brooks - M2007-00351-COA-R3-CV View - Robertson County - A father of two who fell chronically behind on his child support asked the trial court to reduce the amount of the obligation because of a reduction in his income. The court found that the father did not prove a significant reduction in income, but it reduced his obligation anyway because the older child had reached his majority, and the father was therefore no longer responsible for his support. However, the trial court did not make the reduction retroactive to the child’s eighteenth birthday, but instead to a later date corresponding to the father’s eventual compliance with another of its orders. The court also found the father found guilty of thirty counts of criminal contempt for disobeying its orders, including seven counts for failing to pay installments of child support in full after his child’s emancipation. The father argues on appeal that since the trial court has no authority to order child support beyond a child’s minority, it should not have held him in contempt for failing to pay such support. Although a party is obligated to obey the orders of the court even when those orders are later determined to be invalid, the Court of Appeals agreed with the father that under the unusual circumstances of this case, those counts of contempt should be vacated. The Appellate Court reversed the trial court’s order as to the date the reduction in the father’s child support obligation became effective, and vacated the findings of contempt against him for failing to make payments in accordance with that order. The Court of Appeals remanded this case to the trial court for calculation of the amounts actually paid by the father from October of 2005 through the hearing on the final order and the calculation of any arrearage or overpayment, and affirmed twenty-two of the twenty-three remaining findings of separate counts of contempt against the father.

Mary Margaret Wester v. Ronald Allan McDow - M2006-02457-COA-R3-CV View - Davidson County - In this highly contentious divorce case, the trial court found both parties in contempt of its orders and ordered them each to serve ten days in jail, starting immediately. The parties were released after 12 hours, and the remainder of their sentences were stayed for six months to be vacated upon future compliance with court orders. The wife argued on appeal that her sentence should have been suspended or vacated rather than stayed, and that the trial court erred by sentencing her without taking the principles of Tenn. Code Ann. § 40-35-103 into account. Because this court cannot provide any real or practical relief, the Court of Appeals declined to address the issues raised by the wife and dismissed the appeal as moot.

Ingrid Maria Rogers v. Robert Donald Rogers - M2008-00918-COA-R3-CV View - Rutherford County - In this parental relocation case, mother seeks to move to Germany with the parties’ two minor children. The Court of Appeals determined that the evidence preponderates against the trial court’s finding that the mother’s relocation had a reasonable purpose. The Appellate Court, therefore, reversed the trial court’s decision.

Randall Edgar Mann, III v. Deborah Jennings Mann - M2008-02014-COA-R3-CV View - Davidson County - The father of the parties’ minor children filed this action opposing the mother’s request to relocate with the children to Knoxville, Tennessee, so that she could reside with her new husband. Her reasons were that her new husband, a civil engineer, lived and worked in Knoxville, his income was substantially more than hers, her husband could not obtain an equivalent income if he relocated to Nashville, and her employer had agreed that she could transfer to Knoxville and retain her present job. Because the mother was spending substantially more time with the children the criteria in Tenn. Code Ann. § 36-6-108(d) applies. The trial court found the move was not for a reasonable purpose, it posed a specific and serious harm to the children, and it was not in the children’s best interests. Based upon those findings, the trial court denied mother’s request to relocate with the children. This appeal followed. The Appellate Court determined that the father failed to establish that the mother did not have a reasonable purpose to relocate or that the relocation posed a threat of specific and serious harm to the children; thus, the father failed to establish an essential ground upon which the mother’s request to relocate could be denied by the trial court. Because no ground exists upon which to deny the requested relocation, the Court of Appeals reversed the judgment of the trial court and remanded with instructions, as Tenn. Code Ann. § 36-6-108(d) directs, to grant the mother’s request to relocate with the children and to modify the parenting plan after affording the parties the opportunity to present evidence relevant to that issue.

Leslie Roehm Reese v. Jeffrey Klocko - M2007-02486-COA-R3-CV View - Davidson County - In this appeal, the Appellate Court is asked to determine whether the trial court unfairly denied the incarcerated pro se appellant the opportunity to fully and fairly participate in his divorce trial via telephone; whether the trial court unfairly revisited its earlier division of the marital estate; and whether the trial judge displayed bias against the appellant in rendering her opinion. The Court of Appeals affirmed the trial court’s grant of a divorce to the appellee. However, the Court of Appeals found that the trial court erred in proceeding to trial without ruling on the appellant’s discovery motion. Therefore, portions of the trial court’s order were vacated regarding classification of the marital home as separate property and remanded to the trial court to dispose of the motion and to classify the marital home after the appellant is afforded an opportunity to present his arguments regarding the marital home. The Court of Appeals declined to remove the trial judge from the case.

Deborah Miller Gentile v. Michael Charles Gentile - M2008-00734-COA-R3-CV View - Williamson County - The trial court found Husband to be in criminal contempt during the pendency of a contested divorce action and imposed a sentence of ten days in jail, suspending eight days conditioned upon Husband’s completion of a parenting class. The trial court did not find Wife in contempt for failure to comply with its discovery order. Husband appealed. The Court of Appeals reversed in part and affirmed in part.

Joseph Ateca v. Teresa Price Ateca - M2007-02843-COA-R3-CV View - Davidson County - Mother appealed the trial court’s order modifying primary residential parent status and naming Father primary residential parent of the parties’ minor child. The Court of Appeals affirmed.

Why Do We Pick These Particular Cases? Each month, many appellate decisions are available from which to choose. We include in the e-Newsletter all family law cases from the Supreme Court of Tennessee, most appellate cases originating from Shelby, Davidson, and Williamson County Circuit and Chancery Courts, and a handful of cases from across the state and occasionally from across the U.S. Our goal is to provide an array of cases most likely of interest to our readers.

Two TNBarU.com Seminars of Note

Miles Mason and Robert Vance will give you the business tools you need without having to leave the office. Check out these two informative online seminars at www.tnbaru.com:

Who To Hire as Your Expert and How to Get Started:
July 29, Noon-1 p.m., CST

Business valuations appear in many different types of shareholder disputes, minority freezeout cases, estate tax matters and divorce. Most business, tax, and family law litigators will eventually handle a case requiring a business valuation. Business valuation experts have one or more credentials from several different national organizations. Who to Hire as Your Expert and How to Get Started describes best practices in finding the right valuation expert, engagement planning, and discovery process. The presenters offer practical tips on reports, deposition, mediation strategy, and presenting evidence at trial.

What You Need to Know in Tennessee
July 29, 1:30-2:30 p.m. CST

Each state’s case law presents specific definitions, requirements, and limitations for business valuations. Tennessee is no different. What You need to Know in Tennessee presents an overview of important concepts addressed in Tennessee appellate cases and discusses in detail several very important cases every litigator should know. understanding the specific nuances in Tennessee can make the difference between success and failure. While valuation experts may have a greater understanding of economic theory and methodology, attorneys should have a commanding knowledge of Tennessee law.

Upcoming Miles Mason Family Law Group PLC Seminars

TennBarU - Business Valuation in Tennessee Seminar by Miles Mason, Sr., July 29, 2009, Nashville, Tenn.

It's a small, small world - Hear Miles speak about forensic accounting issues and earn CPE credits at the AICPA National Forensic Accounting Conference from Sept.23-25th, 2009, at the Walt Disney World Swan in Lake Buena Vista, FL. Go to www.cpa2biz.com for more information.

Premarital Agreements - Miles Mason, Sr. and Patrick Mason, Financial Planners Association, on November 4, 2009, Memphis, Tenn.

AICPA National Business Valuation Conference - "Mock Deposition for a Business Valuation Engagement" by Robert Vance, Miles Mason, Sr. & Brent McDade, November 15-17, 2009, San Francisco, Ca.

Miles Mason Family Law Group PLC

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