No. 85-275 INTHE SUPREME COURT OF THE STATEOF MONTANA 1986

INRE THEMARRIAGE OF RONALD KEITH HULL, Petitioner and Appellant, and JANEANN HANKS HULL, Respondent and Respondent.

APPEAL FROM: District Court of the Eighteenth Judicial District, In and for the County of Gallatin, TheHonorable JosephB. Gary,Judgepresiding.

COUNSEL OF RECORD:

ForAppellant: Harrison,Loendorf & Poston;John P. Poston,Helena, Montana

For Respondent: Morrow, Sedivy & Bennett; Edmund P. Sedivy,Jr., Bozeman, Montana

Submitted on Briefs: Oct. 31, 1985 Decided: January 21, 1986

Filed:Mr. Justice Fred J. Weber delivered the Opinion of the Court. In November 1983, the Gallatin County District Court entered a decree of dissolution of the marriage of Ronald K. Hull (husband) and Jane Ann Hanks Hull (wife). In February, 1985, the findings of fact, conclusions of law and judgment

were entered with regard to property distribution, maintenance and support. The husband appeals. We affirm in part and reverse and remand in part. The issues for review are: 

### I. Did the District Court erred in determining that goodwill of husband's sole professional anesthesiology practice is amarital asset subject to property division in a dissolutionofmarriage? 2. Did the District Court err in setting the value of the goodwill attributable to the husband's anesthesiology practice? 3. Did the District Court abuse its discretion in distributing the marital propertywithout regard to aportion of thedebtpayable by husband? The parties were married in 1971. At that time the husband had completed medical school at the University of Kansas and the wife had completed her training as an el-ementaryteacher. During the next few years the husband

was completinghis residency training in several specialties, ending with anesthesiology. During the same time, the wife did some teaching but was unable to find full time teaching iobs in most places. In 1-976,the parties moved to Alaska where the husband practiced private anesthesiology for one year. At that time the parties adopted the first of two children. The wife thenbecame a full timemother. In 1977, the family moved to Bozeman so that the husband could begin the practice of anesthesiology. Since that date the husband has been doing business as a professional corporation,working in a co-operative arrangement with two other anesthesiologists in sharing an office. These three doctors perform anesthesiology in Bozeman Deaconess Hospital on a basis whereby they set up their own schedulesand rotate the patients as they require services. Essentially these three have amonopoly on the anesthesiologypractice in Bozeman,as the only other person giving anesthetics is a general practitioner who does not work nights. The husband's practice is based in the hospital and he does not follow-up or see patients in an office. The anesthesiologist is normally assigned to apatient by room number and neither the surgeon nor the patient normally select the anesthesiologist. During 1982, and immediately prior to the parties' divorce, the three anesthesiologists each earned approximately the same annual net income, being something

over $130,000. This net income figure includes their respective contributionsto their ownpensionplans. In 1982 the husband received $104,085 net salary and contributed 25% of his gross salary, $26,021.29 to his pension plan. During each of the past five years, the husband's salary has increased. At the time of the divorce, the husband was 39 and the wifewas 37years of age. Since residing inMontana thewife has pursued a master's degree in counselingand is seeking to obtain certification as a drug and alcohol counselor. She testified that she was interested in obtaining a Ph.D. in clinicalpsychology and counseling. During the marriage the parties acquired a substantial amount ofproperty. Because of the nature of the issues,we will set forth the description of the assets and the values fixedby theDistrictCourt:NET ASSETS TOWIFE Cash value

## - N.W. Mutual Life Insurance Pension profits sharingplan Cash onhand House Silver Dodge car Furniture Sapphire ring Trailer Alaska land Paymortgage onhouse Tnterest inprofit sharing plan Gun TOTAL NET ASSETS TO HUSBAND Ranch Heifers Farm equipment Tools Furniture 1977 Subaru Corporationbook value Pension profit sharingplan Cash onhand Equitable policies

## - cashvalue SUBTOTAL $272,205.00 Less mortgage indebtedness to be paid by Petitioner [mortgage debt onhouse distributed to wife]TOTAL As pointed out by the District Court, the real bone of contentionwas the assignmentof goodwill to the individually owned corporate practice of the husband. The wife called as her expert witness a CPA who valued husband's professional corporation. He valued the net physical assets at $33,000, which was the figure furnished by the accountant for the husband, so there is no dispute as to that amount. In addition,the wife's CPA assigned a going concern or qoodwill value to the professional corporationof $103,410. These two figures togethermake the $136,410 listed as corporationbook value on the District Court list of net assets distributed. Husband contends that no goodwill or going concern value should have been assigned.Did the District Court err in determining that goodwill of husband's sole professional anesthesiology practice is a marital asset subject to property division in a dissolution of marriage? No Montana cases have specifically addressed the issue of goodwill in aprofessional.medicalpractice. The District Court set forth a memorandum of authorities upon which it based its conclusion. We substantially agree with the holdings on the part of the District Court. The District Court pointed out that in Cromwell 

### v. Cromwell (1977), 174 Mont. 356, 570 P.2d 1129,this Court held that there must be recognitiongiven to the mostvaluable asset of themarriage, that being the job, education and training of Mr. Cromwell. At most this could be interpreted as an implication of the recognition of goodwill of a professionalpractice. In the 1973 annotation entitled Accountability 

### - for Goodwill 

### - of Professional Practice 

## - in Actions Arising from Divorce 

### - or Separation, 52 A.L.R.3d 1344, we find limited authority. Starting in 1956 a fewCalifornia cases recognized the accountability for goodwill of aprofessionalpractice in actions arising from a divorce. On the other hand, Texas refused to recognize goodwill. of a medical practice for divorcepurposes. However, the annotations subsequentto the original.article suggest that a majority of the courts are assigning goodwill to professional practices. The District Court found Platter of Marriage of Fleege (Wash. 1979)

## , 588 P.2d 1136,to be well-reasoned authoritywhichwas adoptedby the District Court. In Fleege, the husband was a dentist whose expert testified that he had never known of a dentist selling his practice and including a factor of goodwill. In opposition, the wife produced testimony of two certified public accountants who served clients in medical and dentalprofessions and who testified that the value of a dental practice' ineluded a goodwill- factor, which had a present value. These CPA's testified that the dentists' net profits exceeded the average practitioner by $50,000 and gave an opinion that the value of the goodwill would be equal to gross receipts over a two or three month period. Additional testimony was given to suggest a total valuation of the practice, counting tangible property and goodwill, of $200,000. In reversing the lower court and remanding the cause for a determinationof the value of the goodwill of the dental practice as it existed on the date of dissolution, taking into account the testimony of experts and other factors, the Fleege court made the following statements: Goodwill is property of an intangible nature and is commonly defined as the expectation of continued public patronage. [cases cited] Among the elementswhich engender goodwill are continuity of name, location, reputation for honest and fair dealing,and individual talent and ability. [case cited]



# . . .while the goodwillof a professional practice may notbe readilymarketable and the determination of its exact value may be difficul.t,that element may nevertheless be found to exist in a given professional practice. The d.eterminationof its value can be reached with the aid of expert testimony and by consideration of such factors as thepractitioner's age,health, past earningpower, reputation in the community for judgment, skill, and knowledge, and his compa.rative professional success.



# ..

# . In sustaininga judgment adopting thatvalue, the California appellatecourt said: The value of community goodwill is not necessarily the specified amount of money that a willing buyer would pay for such goodwill. In view of exigencies that are ordinarily attendant [upon] a marriage dissolution the amount obtainable in the marketplace might well be less than the true value of the goodwill. Community goodwill is a portion of the community value of the professional practice as a going concern on the date of the dissolution of themarriase. As observed in Golden 

## - [v. Golden, 270 Cal.App.2d 401, 75 Cal.Rptr. 735 (1969)], 

# ".

.. in a matrimonialmatter, the practice of the sole practitioner .husbanb. will continue, with the same intangible value asit had during the marriage. Under the principles of community property law, the wife,by virtue ofher position ofwife,made to thatvalue the same contributionas does a wife to any of the husband's earnings and accumulations during marriage. She is as much entitled to be recompensed for that contributionas if itwere representedby the increased value of stock in a family business." (270 Cal.App.2d 401, 405, 75 Cal.Rptr. 735.) (Footnote omitted.) In re Marriage of Foster, supra, 42 Cal.App.3d at-584, 117 

### c~~.RP=.at 53.



# ..

# . While there have been a number of courts which have refused to assign a value to the goodwill of a professional practice in a divorce proceeding, the modern tendency is to acknowledge the economic facts and take such goodwill into account. [casesomitted]



# ..

# . The value of goodwill to the professional spouse, enabling him to continue to enjoy the patronage engendered by that goodwill, constitutes a community asset and should be considered by the court indistributing the communityproperty. That value is real,and themere fact that it cannotbe precisely determined should not deter the court from assigning it a reasonable value within the evidence. While Montana is not a community property state as are the states of Washington and California, the principles are applicable under the provision of S 40-4-202, MCA, which requires a considerationof a multitude of factors, including the opportunityof each of theparties for future acquisition of capital assets and income. We adopt the 

### aria-lysis of theWashington court in Fleege. We hold that the goodwill of a professional anesthesiology practice may be a marital asset subject to property division in amarriage dissolution.

Did the District Court err in setting the value of the goodwill attributable to the husband's anesthesiology practice? The husband contends that itwas improper to assign any dollar value to the goodwill of his anesthesiologypractice. He presented testimony by his own accountant and by the twoanesthesiologists with whom he is associated in ord-erto substantiatethe absenceofvalue in a goodwill sense. In opposition,the wifepresented the testimony of a CPA residing in Bozeman who specializes in valuing businesses. Because of the strong insistence that goodwillhas no value, and in order to afford some guidance in other cases,wewill analyze the testimony of thewife's CPA at some length. Mr. Ness, the wife's CPA, submitted a written report showing thebasis forhisvaluation,pointing out thathe had

no interest, present or contemplated, in the corporation,and that he made thevaluation for use in arriving at a property settlement in the pending divorce. Thepertinent portion of the testimony and report of Mr. Ness may be summarized as follows: Mr. Ness in his practice as a CPA does not do a great deal of tax work but does business evaluation type work, including extensive work with colleges and universities in regard to financing. In making his evaluation he first sought authoritative sources from professional organizations such as the Instituteof Business Appraisers. He quoted the following from a work published by the American Medical Association in 1981 entitled Valuing 

### - A Medical Practice

## - - A Short Guide For Buyers and Sellers: 

## - For the last 25 yearsmedical practices were rarely bought or sold. The reasonwas simple: physician demand had exceededphysician supply. A newdoctor merely opened a practice and patients soon arrived. Now there is a growing market for medical practices, spurred by the rapid increase in the number of physicians, which is far outpacing the growth inU.S. population. Because it sometimes is harder and takes longer to build a new practice today, buying an existing one again is becoming attractive to somenewdoctors. He quoted from other authorities, including a Texas dental journal which pointed out that in the dental area, the advantage of buying an existing practice, even including apayment for goodwill, was becoming greater. Mr. Ness reached the conclusion that the desirability of living in Bozeman, coupled with the limited market available, logically imply that the anesthesiol-ogy practice in Bozeman could have significant value in excess ofphysical assets. Mr. Ness found in various resource works that the general approach was that a goodwill value does attach to a medical practice. However, he did not find any widely accepted formula for valuing a medical practice. He did point out that during the past 10 years, an organizationhad been started which specializes exclusively in the sale of medical practices and that such organization advertises extensively in the American Medical Association Journal. In addition, the journal and other American Medical Association publications contain numerous ads for sale and purchase of medical practices across the country. In discussing the nature of the valuation, Mr. Ness considered the adverse effect of the limited population in the Rozeman area, and also considered thepositive effect of living in the Gallatin Valley,which generally is adesirable place to live. In order to demonstrate the presence or absence of goodwill, he then analyzed the earning powers of the husband

as compared to other medical doctors in the sameprofession. He used a publication entitled Profile 

### - of Medical Practice published in 1981by theAmerican Medical Association. That publication showed that the 1979 average net income including retirement benefits, for anesthesiologists in the area of Montana, Idaho,Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico was $62,000. It also contained a table which showed the percentages of that $62,000 figure which were earned.by anesthesiologists in different age brackets from under age 35 up to age 61 and over. Using that $62,000 figure, and applying an age factor for an anesthesiologistunder 35 years of age, Mr. Ness concluded that the 1979 income to be expected was $58,336. Then using the July 1983

consumer price index factor formedical care as published by the Council of Economic Advisors, he concluded that income for 1983 would have increased to $87,224. He compared that $87,224 to the $130,106 earned by the husband and concluded that the $42,882 difference was a going concern value above the normal expected income. He concluded that the goodwill value for one year thereforewas $42,882. He adjusted this for the projected normal increase in the next five years so that the remaining excess net income attributableto goodwill

was $41,364. He then considered a capitalization rate to be applied. He testified tha.t the Internal Revenue Service regulations contained the current authoritative rulings on capitalization rates for determination of goodwill. Those regulations show between 15 and 20 percent as a proper capitalization rate. He concluded that under all of the circumstances he would be more conservative and use a 40% rate. He then divided $41,364by the 40% capitalization rate to arrive at thegoing concernorgoodwill value of $103,410. He testified that in his opinion the value of the husband's professional practicewas a total of $136,410,which included the $103,410 for going concern or goodwill value. In explaining his setting of the capitalization rate at a much more conservative rate than the IRS regulations, Mr. Ness pointed out that this was a different type of practice in which repeat business was not present as would be true with

an ordinarymedical practice. As a result he thought a very con.servative capitalization was appropriate and testified that 40% was such a rate. The husband argues thatwe should pay more attention to the testimony of the two anesthesiologists who practicewith the husband and to his own accountant rather than adoptingthe viewpoint of the CPA who was hired for analysis purposes by the wife. That is not our function on appeal. We conclude that the Ness analysis is understandable and reasonable and has considered the various fa-ctorswhich we have approved in our adoption of the Fleege analysis. We conclude that the evidence submitted by thewife through CPA Ness is understandable, substantial in nature, and reasonable. We hold that the District Court did not commit error in assigning the value it did to the goodwill attributable to husband's anesthesiologypractice.

Did the District Court abuse its discretion in distributing themarital propertywithout regard to a portion of the debtpayable by husband? The District Court in its finding of fact valued the pension and profit sharingplan of the husband at a total of $117,550. As appea.rsfrom the list of net assets distributed to wife and husband, a one-half interest or $58,775 in the pension profit sharingplan was distributed to thewife and a similar amount to the husba.nd. In its findings of fact the District Court recognized that $55,000had been borrowed from the pension and profit sharing fund by the husband and applied toward the purchase of the ranch, which was distributed to the husband at a net asset value of $57,339. The wife argues that either the ranch net asset value or the pension profit sharing plan net asset value must be reduced by the $55,000which petitioner has to pay. That contention appears reasonable under the facts of the case. As appears from the net asset value list for distribution to the wife and to the husband, the court apparently considered these as "net" value figures to each because itdeducted the residencemortgage indebtednesswhichwas to be paid by the husband in the amount of $52,216 from his net asset valuation to result in a total valuation for net asset distributionto him of $219,989. We are unable to determine from the record if the DistrictCourtmade amistake of $55,000 in the amount ofnet assets distributed to the husband. We recognize that the District Court had the discretion to award $219,989 in value less the $55,000debt owing,to thehusband if it chose to do

so. However, the record does not clearly show that to have been the intent of the DistrictCourt. We therefore remand the cause to the DistrictCourt for its redeterminationof theportion of the net assets to go to the husband as compared to the wife, taking into consideration the $55,000 obligation owing by the husband to the pension and profit sharingplan. 

# J/

We concur: /