September 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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Tips for Financial Success in Economically-Challenging Times

Miles Mason, Sr. JD, CPA endorses Dave Ramsey, the noted financial author, radio host, television personality, and motivational speaker.

All professional staff with Miles Mason Family Law Group attend Financial Peace University - Workplace Edition online. Each of the 13 Lessons deals with a different topic that centers around personal finance. Dave teaches about how to save money, live on a budget, communicate about money, eliminate debt, find bargains, and experience the joy of giving.

"Dave Ramsey’s conservative financial advice can change lives," Miles says. "Even though I am both a lawyer and CPA, I thought I knew everything I needed to know about personal finance. I was wrong. I have learned a great deal from Dave Ramsey on the radio and website. I also have attended EntreLeadership program for small business owners. It was outstanding as well."

Ramsey's current company, The Lampo Group, is headquartered in Brentwood, Tennessee, and oversees three divisions geared toward financial counseling.

To sign up for Dave Ramsey's free enewsletter, go to http://www.daveramsey.com/etc/cms/newsletters_5286.htmlc

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

Donald Earl Covill vs. Taylor Renee Covill - E2008-00557-COA-R3-CV View Hamilton County - In this divorce case, the trial court dissolved the parties’ marriage, established a parenting plan under which Donald Earl Covill (“Father”) was designated as the primary residential parent of the parties’ two children, and divided the marital estate. Taylor Renee Covill (“Mother”) appealed. Mother questioned the propriety of the parenting plan and challenges the trial court’s determination that real property in Georgia belonged to Father’s mother. As a part of her argument with respect to the property in Georgia, Mother contended that a “confidential relationship” existed between the parties, which was violated by Father when he failed to advise her of his purchase of this property. The Court of Appeals affirmed.

Cynthia Lee Zimmerman v. Richard Lance Zimmerman - M2008-01722-COA-R3-CV View Williamson County - The husband fled the state without making any provisions for his wife’s support. Wife filed a petition for legal separation and asked the trial court for permission to sell the marital home to pay her living expenses. After the home was sold, the trial court allowed the wife to use half the net proceeds for support and placed the other half in escrow. Both parties subsequently filed for divorce. After a hearing at which the court declined to consider awarding alimony to the wife because of procedural reasons, the court declared the parties divorced pursuant to Tenn. Code Ann. § 36-4-129(b). The court divided the remaining funds from the sale of the marital home between the parties, giving most of the money to the husband in the belief that wife’s earlier receipt of proceeds from the home amounted to an earlier division of marital property in the wife’s favor. The wife argued on appeal that she was entitled to a greater share of the remainder because the first half of the proceeds was actually awarded to her as a form of support and was used for that purpose, and thus that the funds previously escrowed constituted the only marital property within the court’s power to divide. The Court of Appeals agreed, and amended the trial court’s division of marital property, but affirmed its decision not to award alimony to the wife.

Cydnie Browning O’Rourke v. James Patrick O’Rourke - M2007-02485-COA-R3-CV View Separate Dissenting Opinion - View WIlliamson County - Respondent appealed the trial court’s judgment finding her guilty on two counts of criminal contempt and imposing a sentence of twenty days in jail, with sixteen days suspended. The Court of Appeals affirmed.

George A. Herbison v. Michelle Dawn (Fuqua) Herbison - M2008-00658-COA-R3-CV View Humphreys County - This is a divorce case involving the distribution of marital property. Prior to the parties’ marriage, the husband owned and operated a medical supply business, and continued to operate the business after they were married. The business experienced some increase in value during the marriage. After the parties separated, the business’ increase in value was very substantial. The husband filed for divorce. Subsequently, he filed a motion for partial summary judgment. The trial court declared the parties divorced and adopted the consent permanent parenting plan, reserving for trial issues relating to child support and the division of the marital estate. After the trial, the trial court found that the wife had not substantially contributed to the increase in value of the husband’s business, and that it remained the husband’s separate property. The trial court then divided the marital property. The wife appealed, arguing that the increase in value of the husband’s business is marital property and that the distribution of the marital estate was inequitable. The Court of Appeals affirmed, finding that the evidence does not preponderate against the finding that the increase in the value of the company is the husband’s separate property and finding no abuse of discretion in the trial court’s distribution of the marital estate.

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.

Upcoming Miles Mason Family Law Group PLC Seminars

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.

Travels with Miles

Not too Cool for School - Forensic Accounting Academy seminar in Denver, CO.

Birds of a Forensic Feather - Dinner with David, Miles, Maryann, and friend in August 2009 at a great German restaurant in Milwaukee, WI after teaching Day 5 of NACVA’s Forensic Accounting Academy.

Family Fun

"Baja" - the Mason's new family law cat.

Miles Mason Family Law Group PLC

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