Valuation of Premarital Interest in Closely Held Corporation Reversed in Lebanon, Tennessee Divorce: Bates v. Bates

July 22, 2020 K.O. Herston 0 Comments

Facts: Husband and Wife have married and divorced each other twice.

During their first marriage, Husband became the general sales manager of a car dealership and acquired 20% of that company.

When they divorced the first time, their marital dissolution agreement awarded Husband his interest in the company.

When they remarried 3 ½ years later, Husband still owned his 20% interest.

The 80% owner died during their second marriage, and Husband borrowed money to purchase that 80% interest.

Seventeen years after Husband and Wife remarried, Wife filed for divorce.

Both parties presented expert testimony regarding the value of Husband’s 20% interest at the time of their second marriage.

Tennessee property valuationWife’s expert provided two valuations. First, he determined the company was valued at over $2 million. After applying discounts for lack of marketability and lack of control, he valued Husband’s 20% interest at the time of the marriage to be $255,000. Second, he valued Husband’s 20% interest to be $100,000 because, per his agreement with the majority owner, that was the maximum amount he would receive if he was terminated.

Husband’s expert valued his 20% interest at the time of the marriage at $1.32 million.

The trial court found Wife’s expert to be credible and Husband’s expert to lack credibility. Husband’s 20% interest at the time of the marriage was classified as his separate property and valued at $100,000.

Husband appealed.

On Appeal: The Court of Appeals reversed the trial court.

When determining the value of a marital asset, Tennessee courts should consider all competent and relevant evidence regarding the value of that asset. The parties must present competent evidence for the court to consider in making a proper valuation determination. A Tennessee court is then free to place a value on a marital asset within the range of the evidence.

Husband argued that the trial court erred in relying on his buy-sell agreement with the majority owner limiting the value of his 20% interest to $100,000 if he was terminated because he was never terminated.

Tennessee law recognizes that the value established in a buy-sell agreement of a closely held corporation, not signed by the non-shareholder spouse, is not binding on the non-shareholder spouse but is considered, along with other factors, in valuing the interest of the shareholder’s spouse.

The Court agreed that the termination provision was inapplicable:

The termination provision . . . affected the value of the [20% interest] only if he was terminated. Because Husband was never terminated, this provision does not affect the value of his premarital interest. Moreover, because the record contained no evidence that Husband ever intended to sell his shares, the [buy-sell agreement with the majority owner] is not applicable for determining value.

Thus, the $100,000 value offered by Wife’s expert was reversed.

The Court then examined the $255,000 value offered by Wife’s expert after considering the company’s income, assets, and fair market value and adjusting for the lack of marketability and control.

Determining the value of a closely held corporation is not an exact science. Tennessee courts have not articulated a consistent approach to valuing this type of asset. However, Tennessee courts recognize IRS Revenue Ruling 59-60 as the most comprehensive guide to making this determination.

IRS Revenue Ruling 59-60 contains nine factors that should be considered when determining a closely held corporation’s value:

  • the nature of the business;
  • the economic status of the industry and the nation at the date of valuation;
  • book value;
  • earnings;
  • dividends and dividend-paying capacity;
  • the existence or lack of goodwill or other intangible value;
  • sales of the stock and the size of the block to be valued;
  • the selling price of comparable securities relative to their earnings, dividends, and asset values; and
  • the life insurance proceeds received by a corporate beneficiary on a policy covering the sole or controlling shareholder.

The Court found the alternate valuation offered by Wife’s expert applied these principles and the reasoning was “persuasive”:

We conclude, therefore, that [Wife’s expert’s] alternate method provided the appropriate valuation. The trial court’s finding of value is increased to $255,000.

Because the value of Husband’s separate property changed, the trial court’s division of property and award of alimony were vacated and remanded for reconsideration, given the corrected value of Husband’s premarital interest in the company.

Bates v. Bates (Tennessee Court of Appeals, Middle Eastern Section, July 9, 2020).

Valuation of Premarital Interest in Closely Held Corporation Reversed in Lebanon, Tennessee Divorce: Bates v. Bates was last modified: July 19th, 2020 by K.O. Herston

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