Internet Company Valued in Divorce | TN Business Valuation

Tennessee business valuation law case summary – Internet Company, Magibox. Tennessee divorce and family law from the Tennessee Court of Appeals.

Marcus v. Marcus, 1998 WL 29645 (Tenn. Ct. App.).

Ellen and Louis Marcus had been married for twenty years and had a fifteen year old son.  The husband stipulated that he was at fault due to inappropriate marital conduct.

The wife had both an undergraduate and masters degree in library science.  She had been employed on and off during the marriage as a librarian, program director for a public TV station, secretary, substitute teacher, and owner of a small needlework business.  She earned little or no income.  At the time of the divorce, she had been employed in a clerical position at a private boys’ school, Memphis University School, and earned about $1,500 per month.  Because of her employment, their son also received free tuition at the school.  She also earned about $450 per month from a sewing business that she owned.

The husband had a college degree and had been the primary wage earner during the marriage.  He had been in the retail clothing business.  From 1987-92, he had been employed by Majestic Athletic Wear in Pennsylvania, eventually being promoted to President of that company with a salary of $185,000 plus bonuses.  When his employment was terminated, he accepted a job in Memphis as Senior Vice President of Sales and Marketing for Wang’s International, and earned a salary between $125,000 and $150,000.  In 1994, that employment was terminated, and he formed an internet business, Magibox Incorporated.  The husband owned 90% of the shares of that company.  The husband testified that he drew $4,000 per month from that company.  The wife alleged, however, that he actually drew $8,000, but dropped that amount to $4,000 only after the couple had begun discussions about child support and alimony.

The trial court based its child support determination on the husband’s having an earning capacity of $97,200.  On appeal, the husband first argued that this was error, because the trial court had not first made a determination that he was willfully and voluntarily unemployed.  The court of appeals agreed, and remanded in order for the trial court to make a determination of the husband’s actual income.

The trial court valued Magibox at $84,000 and awarded 90% of this amount to the husband, since he owned 90% of the business.  This valuation was based upon an appraisal conducted by the wife’s expert witness, David Harris.  Mr. Harris appraised the business by using 60% of the company’s asset value and 40% of its earnings value.  To calculate the earnings value, Mr. Harris used the previous eight months of Magibox’s earnings, and annualized this to one year.

On appeal, the husband argued that the trial court erred, and that only the trial court should have considered only the asset value, and not the earnings value.  He argued that a determination of the earnings value must take into consideration a minimum of three years’ corporate earnings, and the business had not existed for three years.  He argued that Mr. Harris’s appraisal did not clearly and convincingly demonstrate that the earnings he used would have been accurate over a longer period.

The Court of Appeals disagreed, and affirmed the trial court’s ruling on this point.  The court found that the evidence was clear and convincing enough to show that the eight months of data were adequate.  Therefore, the Court of Appeals affirmed this portion of the trial court’s ruling.

See original opinion for exact language. Legal citations omitted.

To learn more about Tennessee business valuation law, see Business Valuation in Tennessee Divorce Law. To learn more about the division and valuation of professional practices in divorce, see When Professionals Divorce in Tennessee: Valuing Professional Practices.

Miles Mason, Sr. JD, CPA handles complex divorce matters including business valuations and forensic accounting issues. View his professional biography listing books and articles published on business valuation and forensic accounting, seminars presented to lawyers, judges, business valuation experts, and forensic accountants. Miles Mason, Sr. authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. The Miles Mason Family Law Group, PLC’s offices are located in Memphis, Tennessee and serves West Tennessee and Nashville.