Furniture & Appliance Business Valued in TN Divorce
- At September 19, 2013
- By Miles Mason
- In Business Valuation, Divorce, Home
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Tennessee business valuation law case summary – furniture and appliance business. Divorce and family law from the Court of Appeals.
Janice Blalock Yates v. William Mark Yates — Increase in value of husband’s stock. How to put a price tag on close-held company’s stock in divorce.
Defendant William Yates (“husband”) appealed the final divorce decree entered by the trial court. The parties were married for 17 years and had one child. Throughout the marriage, husband, who had a B.S. degree from the University of Tennessee at Knoxville, worked in his family’s furniture and appliance business, General Appliance and Furniture Company, located in Dyersburg. The husband’s father, Billy Yates, had been the president of General Appliance for almost 50 years. At the time of trial, the husband managed the company’s appliance division. The husband, also a General Appliance director, owned 10% of the company’s stock, and his average income for the three years prior to trial was more than $125,000.
The wife had only a high school education and worked outside the marital home for only seven years of the parties’ 17-year marriage. The wife worked at General Appliance for approximately four of the seven years. Primarily, the wife served as the family’s homemaker and as caretaker of the parties’ child. The wife also supported the husband by participating in General Appliance business trips and social functions. In 1995, the wife was diagnosed with chronic fatigue and immune dysfunction, and was seeking counseling to treat depression associated with this illness. Despite her illness, the wife was physically capable of working. Since the parties’ separation, the wife had tried to find employment at various retail establishments; however, the wife had been offered only part-time, minimum-wage employment at a health food store.
In the final divorce decree, the trial court awarded the parties joint custody of their minor daughter, with the wife to have primary physical custody of the child, per the parties’ stipulation. The trial court ordered the husband to pay child support in the amount of $1,559 per month based on the court’s finding that the husband’s gross annual income was $126,958. In calculating the husband’s gross annual income, the trial court included bonuses which the husband had received the previous three years from General Appliance. These bonuses averaged $45,000 per year.
On appeal from the final divorce decree, the husband contended that the trial court erred: (1) in ruling that the increase in value of the husband’s company stock was marital property; (2) in valuing the increase in value of that stock; (3) in including the husband’s previous bonus income in calculating the his gross income for purposes of determining child support; (4) in ruling that the marital home, which was titled in the husband’s name, constituted marital property; and (5) in awarding the wife alimony for a period of 12 ½ years.
The court of appeals concluded that the trial court properly ruled that the increase in value of the husband’s General Appliance stock was marital property. Husband received the General Appliance stock prior to the parties’ marriage, so the stock was husband’s separate property. Any increase in value of the stock during the parties’ marriage, however, constituted marital property, provided each party substantially contributed to the preservation and appreciation of the stock.
Applying the foregoing standard, the appellate court concluded that the evidence supported the trial court’s finding that the wife substantially contributed to the preservation and appreciation of husband’s. Wife worked as a bank teller early in the parties’ marriage but left when she experienced complications with her pregnancy. Wife did not work outside the home when the parties’ child was young. During this time, and throughout the marriage, she was the child’s primary care giver and the family’s homemaker. In addition, wife made other, more direct contributions to General Appliance. She worked at the business for about four years during the parties’ marriage, three of those years as manager of the business’s video rental operation. She also accompanied husband on business trips, attended company dinners and meetings, and helped to organize company social functions. Several times a year, wife baby-sat her niece so that her brother-in-law (husband’s brother) could travel on company-related business. The court of appeals concluded that—taken as a whole—wife’s direct and indirect contributions to the business was a substantial contribution to the preservation and appreciation of husband’s stock.
The appellate court also decided that the evidence supported the trial court’s finding that husband himself substantially contributed to the preservation and appreciation of his stock in General Appliance. Although husband and his father attempted to convince the trial court that husband’s father was solely responsible for any increase in value in the stock, the trial court, in its discretion, rejected this testimony. The evidence indicated that husband had worked at General Appliance, a closely-held, family-owned corporation, since his graduation from the University of Tennessee. By the time of trial, husband was a company director and head of its appliance division. Husband was responsible for appliance inventory, purchasing, and customer retail sales. The trial court’s finding was further supported by the testimony of the company’s CPA who stated that husband’s father’s participation in the company had “slacked off” the preceding year.
In holding that the trial court properly found the increase in value of husband’s stock to be marital property, the court of appeals distinguished the present case from the cases cited by husband. In an earlier decision, the court affirmed the trial court’s finding that husband’s 150,000 shares of company stock constituted non-marital property where the evidence showed that husband’s job performance had, if any, a negative influence upon the increase in value of the stock. In a supreme court case, a 125-acre farm was deemed to be non-marital property where the evidence showed that the appreciation in value of the property was due solely to the construction of an interstate across the farm. In contrast, the evidence here demonstrated that husband served as a manager and director of General Appliance during the period in question, and the trial court was justified in finding that his activities substantially contributed to the preservation and appreciation of the stock.
As for the trial court’s valuation of the increase in value of the stock, husband said that the trial court erred in rejecting the testimony of his expert, Richard Johnson, as to the fair market value of the stock. In Blasingame, the Tennessee Supreme Court recognized three methods for determining the value of a corporation: (1) the market value method; (2) the asset value method; and (3) the earnings value or capitalization of earnings method. Johnson, a CPA considered the latter two methods, the net asset value method and the capitalization of earnings method. After considering a weighted combination of these two methods, Johnson arrived at an adjusted value for husband’s stock, which represented 10% of the company’s stock. Johnson testified that the adjusted value of the stock was $42,096 in 1979 and $253,703 at the time of trial, for an increase in the stock’s value of $211,607. Johnson then arrived at the fair market value of the stock by taking the adjusted value of the stock and making certain discounts for the stock’s lack of marketability, husband’s minority interest in the company, and the imminent retirement of husband’s father—all which Johnson testified would negatively affect the stock’s market value. In Johnson’s opinion, the fair market value of the stock in 1979 when husband received the stock was $14,734, and the fair market value of the stock at the time of trial was $63,426, for an increase in value of $48,692.
The trial court found the increase in value of the stock to be $211,606, the same as the increase in the stock’s adjusted value. In so finding, the trial court specifically rejected Johnson’s testimony as to the discounts he took in arriving at the stock’s fair market value. The court of appeals explained that the trial court, in its discretion, was free to place a value on the parties’ marital assets, including husband’s stock, as long as the value was within the range of the evidence submitted. In this case, the trial court’s finding that the increase in value of husband’s stock was $211,606 was within that range. Moreover, the appellate court’s review of state case law convinced it that the trial court was justified in rejecting the expert’s testimony as to the fair market value of the stock. The court of appeals previously held that the market value method was an improper method for determining the value of the stock of a closely-held corporation because that stock was rarely traded and there was no established market for it. Thus, the court of appeals said, the market value method should be given little weight, if any in the valuation of stock of a closely-held corporation.
The court of appeals held that the trial court did not err in rejecting Johnson’s testimony as to the fair market value of husband’s stock. The evidence showed that General Appliance was a closely-held corporation and that there was no established market for its stock. As the market value method should have been given little, if any, weight in the valuation of husband’s stock, the trial court properly selected a valuation which emphasized the latter two methods of valuation, the net asset value method and the capitalization of earnings method. A valuation which emphasized the net asset value method was particularly appropriate in this case because of General Appliance’s established pattern of accumulating earnings over the years.
The final divorce decree entered by the trial court was affirmed.
No. 02A01-9706-CH-00122, 1997 WL 746377 (Tenn. Ct. App. Dec. 4, 1997).
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 Germantown, Tennessee and serves West Tennessee and Nashville. Contact Us today at (901) 683-1850.
