Professional Goodwill of Medial Practice is Separate Property

Bloggers note: Hazard is considered by many of Tennessee’s most experienced forensic accountants to a be a cornerstone case that all forensic accountants and family lawyers should study and know.

Hazard v. Hazard, 833 S.W.2d 911 (Tenn. Ct. App.  1991)

Professional Goodwill of Professional Practice is Separate Property

Patrick and Myra Hazard were married in 1980  At the time of the marriage, Mrs. Hazard had a Bachelor of Science degree in Nursing, was also certified by the University of Tennessee as a Pediatric Nurse Practitioner,  and was employed as a Registered Nurse.  Mr. Hazard was a medical doctor in his final year of fellowship training in pulmonary medicine.  After completing the final year of his fellowship, he began a private practice, Memphis Critical Care Association, which was centered around his medical specialty of pulmonary medicine with emphasis on critical care patients. The 1990 gross income of Memphis Critical Care Associates was approximately $600,000 and Mr. Hazard’s 1990 personal gross income was approximately $200,000. Mrs. Hazard’s income as a registered nurse at the time of trial was approximately $35,000 per year.

The Hazards had two children together, and Mrs. Hazard assisted her husband working at his medical practice in the early years.  However, the amount of time Mr. Hazard spent away from home took its toll, and after ten years of marriage, Mrs. Hazard filed for divorce on the grounds of her husband’s insensitivity to the emotional needs of herself and her children, in addition to the evidence she found that he was having an extramarital affair.  Mr. Hazard countered his wife’s allegations by asserting that she was uncooperative and demanding and would not recognize his need to take care of his patients. He claimed that his wife had falsely accused him of infecting her with sexually transmitted diseases and engaging in extramarital affairs. Mr. Hazard also accused his wife of having had engaged in an extramarital affair after they had separated.

At the divorce trial, the value of Mr. Hazard’s medical practice, Memphis Critical Care Association, was in dispute.  Mr. Hazard’s expert witness, Paul King, was experienced in the sale of medical practices and familiar with the conduct of the private practice of medicine from a business perspective. He had valued medical practices similar to Mr. Hazard’s in the past. He based his $42,818 valuation of the practice upon the value of the accounts receivable, cash on hand, equipment, fixtures, office equipment and supplies and the active and inactive medical charts.

That figure was much less than the $629,000 value established by Mrs. Hazard’s expert witness, CPA Mickey Ison.  Mr. Ison testified that he participated in business evaluations for some years and was familiar with the sale price of medical practices in Memphis. He opined that Mr. Hazard’s medical practice was a personal service business and believed that someone who would buy such a personal service business would be the most concerned with annual gross revenues. Mr. Ison further testified that he determined the value of the medical practice based on the fair market approach, the value asset approach and the capitalization of income approach, which have all been established as proper methods for valuations of closely held corporations. He also acknowledged that part of his valuation of Mr. Hazard’s medical practice included good will, but claimed that the value of the practice would not change even if there was no good will involved.   This conclusion was based on his assumption that purchasers of personal services businesses are concerned primarily with gross receipts and not hard assets, so that goodwill would be insignificant to such a purchaser.

The trial court valued Mr. Hazard’s medical practice at $200,000 and then awarded Mrs. Hazard half of that has her interest in the marital property.  Mr. Hazard disagreed with the decision and filed an appeal.  The Appellate Court also disagreed with the trial court’s valuation of the medical practice on the basis that there was no proof in the record to support that finding.  The Appellate Court listed the elements of a business which should be taken into account when determining the value of a business in order to make an equitable division of property upon divorce. These factors include the physical assets such as the furniture, buildings, library, and accounts receivable, since all these factors properly weighted, should have a definite value.

However, the Appellate Court did not believe that professional good will should be considered part of the marital estate. Although Mrs. Hazard’s expert, Mickey Ison, testified that he was not considering the future income stream of the medical practice to determine the present day value, the Court believed that Mr. Ison used the gross income approach to determine the value of the medical practice, which necessarily takes into consideration an expectation that the income will hold true for the future. The Court noted that, considering the personal nature of Mr. Hazard’s professional practice and the speculative nature of future income, that approach was inappropriate. Consequently, the Appellate Court decided that the $42,818 medical practice appraisal offered by Mr. Hazard’s expert was the more reasonable valuation amount.

This post is part of a series, Appreciation of Separate Property: The Forensic Accountant’s Full Employment Act.

To learn more, visit When Professionals Divorce in Tennessee: Valuing Professional Practices.