Medical Clinic Valued at $950,000 in Tennessee Divorce
Tennessee business valuation law case summary – medical practice. Divorce and family law from the Court of Appeals.
Theresa Mae Witt, M.D. V. William Stephen Witt, M.D. — valuation of physician’s practice (from 1992).
After a bench trial in this divorce action between two radiologists, the Williamson County Chancery Court awarded a divorce to Dr. Theresa Witt (“wife”) and divided the marital property. The parties met in 1977 when both were residents at the Vanderbilt University Hospital. Husband was married and had a son. Wife was single but had a son by a previous marriage. The parties carried on an affair before husband’s divorce. He divorced and married wife in January of 1981. At that time husband was Chief of Radiological Services at the Veterans’ Administration Hospital in Nashville. Wife finished her residency in radiology and obtained a position working at Nashville’s General Hospital in a contract with Vanderbilt.
In 1983, the Witts established a professional corporation known as Witt, M.D., P.C. Wife deposited all her earnings into the corporate account; husband did not deposit his income from the VA Hospital but did deposit other income from several sources. Wife paid the family bills from that account and the expenses involved in renovating their home.
In 1983 and 1984, husband established an out-patient diagnostic clinic in Nashville. Witt, M.D., P.C. helped get clinic started—it by advanced funds to pay the start-up costs. The clinic became a financial success, and husband’s involvement in it gave rise to many of the disputes in this case. In 1986, husband had an affair with a much younger woman. In 1988, she bore his child. Husband said that his relationship with the other woman was prompted by wife’s refusal to have children. In May 1988, husband told wife about child by the other woman. He left the marital home and at the time of the trial was living with the other woman and his son.
The trial judge ordered husband to pay wife $500,000, in addition to the other marital property she received. This was based on findings concerning the value of husband’s private practice, findings that wife’s contract with Vanderbilt University had no value as a marital asset, that husband had dissipated the marital assets by entering into an unfavorable lease agreement with Charlotte Medical Properties, and a conclusion that wife should share in the increase in value of the marital home.
Value of Husband’s Medical Practice
Husband raised two issues dealing with the value of his medical practice: (1) whether testimony on the value of the practice, offered by wife’s expert, was admissible; and (2) whether the medical practice should have been valued at its net asset value as a matter of law. In support of his position, husband relied on the court of appeals earlier decision in Smith, where it held that professional goodwill could not be considered in placing a value on a law practice that was part of the marital property. The court of appeals was otherwise convinced that in excluding the professional goodwill, husband’s practice had a value over and above the net asset value. The clinic employed eight people providing CT scans and MRI examinations. Husband worked a full day at the VA Hospital and then went to the clinic to apply his expertise to the work performed during the day by technicians. Husband’s professional fees were billed separately from the technical fees generated by the technicians. One expert examined the professional component at 36% and the technical component at 64%. Husband’s accountant had the opposite percentages: he gave the professional component 72% and the technical component only 28%. The gap between the two figures persuaded the trial judge to disregard both and go with a figure in between. The trial judge found that the net asset value of the clinic amounted to $950,000. The court of appeals believed that the evidence did not weigh against that finding. The evidence further showed that husband had a net income from the clinic of $143,786 in 1986, $390,060 in 1987, and $147,736 in 1988. The trial judge set a value on the medical practice at $1,300,000, i.e., $350,000 over and above the net asset value. The court of appeals thought the part of the business that did not include husband’s professional goodwill had a substantial value and that the trial judge’s valuation of $350,000 for that portion of the business was supported by the evidence.
Dissipation of Assets
Husband’s clinic was leased from Charlotte Medical Properties, an entity he established in 1985 with six other partners. The base rent was $10,100 per month—an amount sufficient to pay the industrial revenue bonds used to purchase the clinic. Also, the lease called for additional rents based on the clinic’s income from the technical services it rendered. For the years 1987 through 1990, the clinic paid additional rents of roughly $1,000,000. In those same years the clinic prepaid its rent in substantial amounts. No explanation was given for the decision to prepay the rent, and the record was unclear as to whether any additional rents were even due for the years when substantial additional payments were made. The trial judge did not place a value on the amount of dissipation; however, the court of appeals thought that the record showed dissipation occurred in some amount.
As a result of this, the judgment of the trial court was affirmed and the cause was remanded to the Chancery Court of Williamson County for further proceedings.
No. 01-A-019110CH00360, 1992 WL 52746, (Tenn. Ct. App. Mar. 20, 1992), Rehearing Granted, Apr. 22, 1992, Permission to Appeal Denied by Supreme Court of Tennessee Sep. 8, 1992.
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.
