Opinion ID: 2635274
Heading Depth: 2
Heading Rank: 1

Heading: Professional Goodwill

Text: James disputes the magistrate judge's characterization of his portion of the professional goodwill in DCI as community property to be divided in a divorce. This Court has held that good will is an appropriate factor in determining the value of a business. Olsen v. Olsen, 125 Idaho 603, 606, 873 P.2d 857, 860 (1994). The goodwill of a business is the custom which it attracts, and the benefits or advantage it receives from constant or habitual customers, and the probability that the old customers will continue to come to the place. Harshbarger v. Eby, 28 Idaho 753, 761, 156 P. 619, 621 (1916); see also McAffee v. McAffee, 132 Idaho 281, 286, 971 P.2d 734, 739 (1999). The question presented by this case is whether goodwill is an appropriate factor to consider in determining the community property value of a professional services corporation, an issue of first impression. Any division of property in a divorce proceeding begins with the presumption that all property acquired after marriage is community property. Reed, 137 Idaho at 58, 44 P.3d at 1113. The trial court reasoned that James acquired all of his interest in DCI during marriage and that the value of his interest in DCI, including goodwill, was community property. There seems to be no principled reason to treat the goodwill of a business differently when it is a professional services corporation. The property rights of individuals with professional educations and licenses do not differ from the rights of people engaged in other types of business. Determining the value of goodwill in small professional services corporations may indeed be difficult, since Idaho law treats personal skill and reputation as separate assets rather than community property. See Wolford v. Wolford, 117 Idaho 61, 67, 785 P.2d 625, 631 (1990) (holding that personal attributes, including knowledge, skill, and reputation, were not property, either separate or community); Olsen, 125 Idaho at 606, 873 P.2d at 860 (stating that knowledge, background, and talent are personal assets rather than community property). Where a professional business is an independent entity, however, goodwill is calculable and divisible in divorce just as goodwill in any other business. DCI was such an independent entity, and it was possible for the magistrate judge to distinguish between James' identity and the separate identity of DCI. A practitioner's knowledge, skill, and background are personal attributes. To the extent a professional services corporation has goodwill value beyond these personal assets, however, that goodwill is community property.
Applying a capitalized excess earnings analysis, the trial court found the net value of DCI's assets to be $290,120.00, of which $130,554.00 was community property, commensurate with James' 45% ownership in the practice. James alleges error in the magistrate judge's reliance on the capitalized excess earnings method to value James' interest in DCI's professional goodwill and on the data submitted by Sally's expert. This Court reviews the magistrate judge's valuation under an abuse of discretion standard. As noted above, review of a lower court's exercise of discretion is conducted under a three-tiered inquiry: (1) whether the lower court rightly perceived the issue as one of discretion; (2) whether the court acted within the outer boundaries of such discretion and consistently with any legal standards applicable to specific choices; and (3) whether the court reached its decision by an exercise of reason. Chandler, 136 Idaho at 249, 32 P.3d at 143. The Court has repeatedly stated that the valuation of community property is within the discretion of the trial court. Id. Here, the magistrate judge correctly perceived that he had great discretion in weighing the strength and credibility of the evidence. Under the second prong of the abuse of discretion inquiry, the magistrate judge was within the outer bounds of the law in relying upon the capitalized excess earnings method employed by Sally's expert. As the Court discussed in Chandler, there are many methods for assigning the goodwill value of a business, and [h]ow the trial court assesses and weighs each method and variable with it, in each particular case, is within that court's discretion. 136 Idaho at 250, 32 P.3d at 144. As generally applied, the capitalized excess earnings method measures the value of a business by multiplying the net excess earnings of the business by a predetermined capitalization rate to obtain a present value of the future income stream likely to be generated by the business. Olsen, 125 Idaho at 606, 873 P.2d at 860. James challenges the magistrate judge's citation to Olsen in his conclusion that the capitalized excess earnings method is especially helpful in calculating the value of a business featuring the sales of services. . . . James directs the Court to Olsen's express finding that the business in that case featuring the sale of services was not a professional service corporation. However, Olsen addresses professional services corporations only to specifically leave undecided any questions related to such corporations. The magistrate judge acted both within his discretion and within reason in relying upon the capitalized excess earnings method to value James' interest in his practice. To satisfy the second prong and fall within the outer bounds of a judge's discretion, the magistrate judge's findings must also be supported by substantial and competent evidence. Reed, 137 Idaho at 56, 44 P.3d at 1111. A finding supported by substantial and competent, although conflicting, evidence will not be disturbed on appeal. Id. at 58, 44 P.3d at 1113. James claims error in the magistrate judge's decision to rely on data from Sally's expert when the magistrate judge acknowledged that the expert had misapplied the capitalized excess earnings method. The trial court noted that the expert should have considered both James' and Dr. Overly's incomes, expressed as a weighted average, and subtracted the comparative incomes of two practicing dermatologists. Instead, the expert's analysis of goodwill focused only on James' practice. The record reflects that the magistrate judge considered testimony from both parties' experts that DCI had goodwill and that James had an interest in that goodwill. In estimating James' interest in the goodwill of DCI, Sally's expert first calculated James' average income, weighted more heavily towards his most recent annual salary. The expert then compared James' average income with the average compensation of a doctor with the same specialty and in the same geographic region as James. In determining the average income of a local dermatologist, the expert consulted the 2001 Physician Compensation and Production Survey, published by the Medical Group Management Association and also relied on his own familiarity with the local market. Concluding that the appropriate income to compare to James' was $423,023.00the average compensation for dermatologists in the ninetieth percentile of earnings nationwidethe expert then subtracted this number from James' average income to reach excess earnings. He then applied a capitalization rate of 22.1% to reach a goodwill value of $210,747.00. Importantly, in evaluating the accuracy of this number as a reflection of James' interest in DCI's goodwill, the magistrate judge made the factual findings that DCI's name, location, and reputation had value separate and apart from James' skill, and was designed to attract new patients not familiar with either James or Dr. Overly. The magistrate judge did not err in concluding that James' interest in DCI's goodwill totaled $210,747.00 and the record is sufficient to support the magistrate judge's findings.