Printing Company w/ Stock Restriction Valued in TN Divorce
Tennessee business valuation law case summary – printing company. Tennessee divorce and family law from the Tennessee Court of Appeals.
Davis v Davis – Tennessee Business Valuation Divorce Case | Printing Company with Stock Restriction
The Tennessee Court of Appeals was asked to review the claim of Mr. Davis which stated that the Cocke County Circuit Court’s valuation of his closely held corporation in divorce proceedings was in error. This case involved the divorce of the 17-year marriage between William H. Davis and Daira F. Davis. The Davis’s were married in April 1981 and had one child. The couple separated in November 1994, and Mr. Davis filed for divorce in July 1996. After a trial, the trial court granted the divorce.
At issue is Mr. Davis’s business which was established in 1971. When the parties married, Mr. Davis and his brother, Horace Davis (H. Davis”) were the principal shareholders of United Business Forms, Inc. (“UBF”), a closely held corporation engaged in printing. At the time of trial Mr. Davis and H. Davis each owned 2550 shares of stock in UBF which equaled slightly less than 50% of the corporate stock, with a third shareholder owning the remaining few shares. In 1985 Mr. Davis and H. Davis were the sole shareholders of UBF, and entered into a Stock Redemption Agreement at that time, which was at issue on the appeal. A second issue for the court of appeals was the trial court’s valuation of UBF. The trial court determined that on January 1, 1981, UBF had a value of $22,000, and at the time material to the litigation, the company had a value of $517,705. Mrs. Davis was awarded $208,386.00 as her interest in UBF.
The court of appeals observed that trial court failed to make a determination as to whether UBF was Mr. Davis’s separate property or marital property. This, according to the appellate court, was the initial step in determining the division and valuation of property in a divorce. The court of appeals was left to make that determination prior to its evaluation as to whether the trial court erred in its value determination and in dividing the marital assets. In light of the fact that Mr. Davis owned UBF stock before the marriage, the appellate court found that UBF was Mr. Davis’s separate property. However, the company’s increase in value during the marriage was marital property as stated in state statutes.
“Substantial contribution” includes direct or indirect contribution of a spouse as homemaker and family manager; these indirect contributions in the home constitute contributions to the appreciation or preservation of the other spouse’s separate property. After reviewing the testimony of Mrs. Davis, the court of appeals found that she did substantially contribute to the appreciation of UBF. In addition to Mrs. Davis’s role as homemaker and parent—indirect contributions to UBF—she also contributed directly to UBF when she was employed at UBF on two occasions, made a business trip with Mr. Davis to purchase equipment for UBF, and attended a convention. Although UBF was Mr. Davis’s separate property, the court of appeals concluded that the increase in value of UBF was considered a marital asset.
Mr. Davis argued that the trial court erred in assessing his value in UBF at $517,705.00. He asserted that UBF was subject to the Stock Redemption Agreement, and that this agreement provided that UBF had the right to redeem the stock for $175,000. If it failed to do so, the other stockholders had the right to purchase his stock for the same price. Mr. Davis claimed that the value of his shares of UBF could not exceed $175,000.00. He also argued that the trial court erred in adopting the opinion of LeRoy Bible, a CPA. According to Mr. Davis, Bible, who testified on behalf of Mrs. Davis on the value of the UBF stock, did not consider the effect of the Stock Redemption Agreement in arriving at conclusion that the shares of UBF were worth between $518,503.00 and $517,705.00.
Mr. Davis cited Erwin v. Erwin, an unreported opinion of the court of appeals, in arguing that a trial court must consider the effect stock redemption agreements on a corporation when placing a value on that asset. Although the appellate court agreed with Mr. Davis’s argument as to what the decision held with regard to valuing an asset when a stock redemption agreement is in place, the case also said that if the stockholder continued to hold onto the shares of stock, he would be free to continue to reap all the benefits of ownership without offering it for sale.
Ms. Davis argued that trial court had a wide range of values for the shares based on the testimony. The trial court decided on a value of $517,705.00. She also argued that the methods used by both experts were valid means of placing a value on a corporation, and that there was no requirement that trial courts rely on stock redemption agreements when assessing the value of a corporation for the purpose of dividing assets in a divorce.
Both parties presented expert testimony at the trial as to the value of UBF. Mr. Ray Adams, a CPA, testified on behalf of Mr. Davis, and Bible testified on behalf of Ms. Davis. Adams used a “capitalization of income” method and a “weighted average” method to determine the value of UBF. Under the “normal average,” Adams arrived at a value of $126,900. The weighted average he arrived at was $142,200. Adams applied a discount in arriving at those values for lack of control and lack of marketability. Adams also testified that he did not consider a method of valuation based on comparable sales of similarly situated businesses because he could not find any. Adams testified as to the value of UBF based on using a “cost method,” which was $270,800.00. Finally, after averaging the results under each method he used, Adams testified that he arrived at the figure of $180,000. Adams stated that the book value for UBF was $1,095,000. Tax liability was subtracted from that amount; a discount was taken for a minority share; and a discount was taken for lack of marketability to arrive at an approximate value of $270,800.00.
Bible, who again testified on behalf of Ms. Davis, stated that he valued the business in December 1980, a few months prior to the marriage of the Davis’s. Bible stated that Mr. Davis’s share of UBF based on that valuation was $20,000 to $22,000. Bible also valued UBF in December 1996 using a “weighted average.” The CPA testified that the preferred method of placing a value on UBF was to find a comparable sale, but he, like Adams, was unable to find one. According to Bible, the method he used is referred to by the Internal Revenue Service as the “industry standard.” Discounts were taken for lack of control and marketability, and Bible arrived at $203 per share multiplied by the number of shares Mr. Davis owned to arrive at a total of $518,000. Bible testified that a value of $517,705 which he arrived at using numbers that Adams had provided was also a fair representation of the value of Mr. Davis’s interest in UBF.
Even though the court of appeals agreed with Mr. Davis that the stock redemption agreement should be considered in placing a value on the shares of UBF, there was no evidence that Bible did not consider the agreement in arriving at his figures. Bible was not asked on direct or cross-examination whether he considered the stock redemption agreement when valuing Mr. Davis’s share of the corporation. It was Mr. Davis’s responsibility to insure that Bible had the appropriate documentation in order for the CPA to do a competent valuation of his corporation.
There can be no automatic assumption that just simply because Mr. Davis argued that Bible did not consider the stock redemption agreement that it was true; nor can the appellate court assume that the value of Mr. Davis’s stock was $175,000 because the stock redemption agreement could prevent its sale at a higher price. The court of appeals found no evidence or rule of law to overrule the trial court’s valuation of Mr. Davis’s share in UBF at $517,705. The judgment of the trial court was affirmed as modified, and the case was remanded to the trial court.
Davis v Davis, No. E2000-02678-COA-R3-CV (Tenn. Ct, App., 2001).
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 and 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.
