Gentile v. Gentile, 2013 U.S. App. LEXIS 5051 (March 13, 2013)
In appealing the fair market value determination of his medical practice, the husband claimed that the trial court erred when it included goodwill as a divisible asset and that its conclusion had no support in the record.
The husband, a successful plastic surgeon, was the sole owner of a medical practice that had a main office and two smaller offices. In addition, he had two personal service contracts with two aesthetic laser companies. Both the husband and wife retained experts to compute the value of the practice—one of numerous areas of contention.
Gaps and inconsistencies.
At trial, at the end of 2011, the husband testified that he earned approximately $143,500 per annum from the practice but also had income from the service contracts. The latter income, he said, went into his personal accounts because these proceeds were not related to his practice but were personal payments to him. Various official court documents revealed inconsistent statements as to his income. For example, in a document from October 2011, he stated his income as $455,000 per year. He admitted that his tax returns indicated his gross income in 2007 was about $1.1 million, in contrast to $673,000 in 2008 and $564,000 in 2009.
He also stated that the corporation repaid substantial loans to him arising out of the purchase of equipment and expenses. He admitted that his corporate receipts book contained at least a six-month gap and that he had taken “at least a couple thousand” from the practice’s cash proceeds.
Experts for both parties used the net asset approach to determine the business’s fair market value. The husband’s expert said he considered financial information from the practice, including depreciation schedules, payables, long-term debts, and equipment values. Further, he researched the values of comparable practices and visited the main office. And he considered depreciation expenses, tax effect of the income, receivables, which he put at 30%, and the value of inventory on hand. In his computation, he made several deductions related to the $220,000 the practice owed to the husband, a $67,650 bill for website development, a $40,000 debt to another company, as well as taxes. He determined there was no value for the practice’s goodwill and concluded the FMV was $16,300. (Elsewhere the opinion states the value as $16,500.)
On cross-examination, the husband’s expert acknowledged that financial data for plastic surgeries suggested a global upward trend in performance. He also believed the husband’s income had increased from 2007 to 2008. He admitted he had not investigated whether the husband voluntarily understated his income during the divorce proceedings or had hidden assets. Similarly, regarding the value of equipment, he did not procure an independent valuation but used the figures the husband provided.
Moreover, he admitted that, although the husband had told him that there were no corporate distributions in 2010 and 2011, he knew the husband received payment in 2010. He further acknowledged that he excluded the husband’s consulting income from the laser companies, and finally he stated that the IRS would consider the family’s lifestyle in its determination of
whether there had been full disclosure of all reportable income.
The husband’s accountant also testified, verifying that the business was an S corporation. In 2010, it had gross receipts of nearly $1.1 million and listed deductions of $404,000 and net income of $155,000. The corporation paid some of the husband’s expenses, which either were charged to it or reclassified as personal distributions to him.
The wife’s expert served both to critique the rivaling opinion and undertake a valuation. One area of his criticism related to the deductions the other expert made for loans and debts. While the husband’s expert listed the $220,000 loan as a corporate liability, he should have considered it an asset for the sole shareholder, that is, the husband. As for the $40,000, it was a three-year debt that the creditor had not tried to collect. It was a mistake not to assign a value for goodwill, the wife’s expert said. The Goodwill Registry, an accepted standard, provided a value for the type of practice at issue, which was $171,000, he concluded.
He also noted that the husband realized or collected about 70% of his receivables, not 30% as the husband’s expert claimed. Moreover, his conversations with the wife and former employees of the husband showed the practice took in some $200,000 in cash each year that did not appear on the books. When he combined these findings with the assets of the practice, the wife’s expert calculated the business’s total assets amounted to nearly $694,000.
After deducting for liabilities, he concluded the FMV of the practice was $679,000. But he also stated that if one excluded the imputed unreported additional cash revenue, the FMV was $486,000.
The trial court’s valuation found pros and cons as to both computations. Regarding the $220,000 loan, the court subtracted that sum from the value of the practice but included it as an additional asset of the parties. It agreed with the wife’s expert that the $40,000 debt was not a true liability considering that in three years the creditor had made no attempt to collect it. The court credited the wife’s expert regarding the value of goodwill but dismissed that expert’s claim of there being $200,000 annually in unreported cash.
The court found the practice had $333,000 in assets, $171,000 in goodwill, $204,000 in debt, and $73,000 in liabilities. Accordingly, the total value was approximately $227,000, a figure roughly in the middle of the experts’ valuations.
In appealing the divorce decree to the Court of Appeals of Ohio, both parties objected to the value the trial court had assigned to the practice. The husband specifically challenged the inclusion of goodwill as a divisible asset. The reviewing court briskly rejected the challenge. In deriving its calculations, the trial court carefully considered the evidence on record, the appellate court concluded, and it upheld the FMV determination of the practice.