Opinion ID: 1147555
Heading Depth: 1
Heading Rank: 3

Heading: Dr Ford's Cross-Appeal

Text: After trial, the district court held that Dr. Ford's medical practice was community property and had a value of $181,926, including goodwill worth $97,598. Dr. Ford argues that his medical practice contains no goodwill, and therefore, the district court's valuation of his practice was erroneous. In essence, goodwill is a reputation that will probably generate future business. Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1, 3 (1983). Case law is divided as to whether professional goodwill exists in the case of individual practitioners such as Dr. Ford. [4] However, in Matter of Marriage of Fleege, 91 Wash.2d 324, 588 P.2d 1136, 1139 (1979), the Washington Supreme Court observed that in a divorce proceeding, the modern trend is to acknowledge the existence of goodwill in a professional practice, and to take such goodwill into account when valuing the practice as part of the marital property. In Dugan, 457 A.2d at 5, the New Jersey Supreme Court held that goodwill exists in personal service enterprises (such as a law or medical practice) as well as other businesses, and should be considered during the equitable distribution of property at divorce. Furthermore, in In re Marriage of Foster, 42 Cal. App.3d 577, 117 Cal. Rptr. 49, 52 (1974), the California court of appeal held that in a divorce case, courts should consider the goodwill found in a spouse's solo medical practice when distributing the community property. Accordingly, we hereby adopt the modern rule that would include a professional practice's goodwill as part of the community property estate subject to division at divorce. Dr. Ford argues that when determining the existence of goodwill in a professional practice, the only acceptable evidence of goodwill is the amount which another professional would pay for the goodwill in acquiring the practice. Hanson v. Hanson, 738 S.W.2d 429, 435 (Mo. 1987). Accordingly, he contends that a party can show the existence of goodwill only with evidence of a recent sale of a similarly situated professional practice or expert testimony as to the existence of goodwill in a similar practice in the relevant geographic setting. Id. In this case, the record contains no evidence of a recent sale of a similarly situated professional practice or testimony as to the value of goodwill in similar practices. Thus, Dr. Ford contends that the district court erred by using other evidence to ascertain the existence of goodwill in his practice. We disagree and decline to follow the Hanson rationale. Goodwill exists in a going professional practice, whether or not a sale is in the offing. Matter of Marriage of Fleege, 91 Wash.2d 324, 588 P.2d 1136, 1138 (1979). In the instant case, the district court heard evidence of Dr. Ford's ongoing medical practice. Although Dr. Ford testified that his practice was not salable, potential problems in selling the practice will not eliminate the goodwill which attaches to it, nor its value as an asset to be considered in equitable distribution. Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1, 6 (1983). Accordingly, the district court properly declined to follow the restrictive reasoning of Hanson and correctly found that goodwill existed in Dr. Ford's surgical practice. Alternatively, Dr. Ford testified that the majority of his private patients are referrals from his emergency room work rather than referrals from doctors or other patients as a result of his good reputation in the community. Thus, he argues that by its nature, his medical practice does not generate a significant amount of recurrent customer patronage, a primary component of goodwill. Therefore, he contends that the district court erred by finding that his medical practice has goodwill. This contention also lacks merit. At trial, Kenneth Fortney, a CPA called by Tomie Sue, testified as to the value of the goodwill in Dr. Ford's medical practice. Fortney utilized three methods to make his valuation, including the three months' gross receipt method whereby he calculated Dr. Ford's goodwill as the equivalent of three months' gross receipts of the medical practice. In its divorce decree, the district court accepted Mr. Fortney's three months' gross receipt valuation of $97,598 as the value of the goodwill in Dr. Ford's medical practice. In In re Marriage of Slater, 100 Cal. App.3d 241, 160 Cal. Rptr. 686, 689 (1979), the California court of appeal approved any legitimate method of valuation which measures the present value of goodwill by taking into account past earnings. Thus, the record and case authority support the district court's valuation of the goodwill in Dr. Ford's medical practice. Accordingly, the district court did not abuse its discretion when it held that of the $181,926 total value of Dr. Ford's practice, $97,598 was goodwill. Finally, Dr. Ford argues that, as a solo practitioner, any goodwill attaching to his medical practice is specifically dependent on his continued presence in the practice, and thus, not marketable. Taylor v. Taylor, 222 Neb. 721, 386 N.W.2d 851, 858-859 (1986). Dr. Ford claims that such goodwill cannot constitute community property subject to distribution at divorce. Id. Again, Dr. Ford's claim lacks merit. In Hurley v. Hurley, 94 N.M. 641, 615 P.2d 256, 259 (1980), the New Mexico Supreme Court held that at divorce, the dispositive question is not whether a doctor can sell his goodwill. Instead, a doctor's goodwill has value despite its immarketability. Id. As long as he maintains his practice, the physician will continue to receive a return on the goodwill associated with his name. Id. Under principles of community property law, a wife makes the same contribution to that goodwill as she does to any of her husband's earnings during marriage. Golden v. Golden, 270 Cal. App.2d 401, 75 Cal. Rptr. 735, 738 (1969). Accordingly, upon dissolution, she deserves compensation for that contribution. Id. Thus, in this case, for as long as he continues to practice medicine, Dr. Ford will continue to receive a benefit from the goodwill associated with his business. Accordingly, the district court correctly considered this goodwill to be part of the marital estate. Hurley, 615 P.2d at 259. In its divorce decree, the district court awarded the Scanlin note to Dr. Ford. At the time of trial, this $874,750 note receivable was assigned to the Valley Bank for the payment of an indebtedness. The note matured in January 1988. Kenneth Kenevan, a CPA testifying as an expert witness for Dr. Ford, opined that at maturity, the bearer of the note would incur a tax liability of $125,000. Dr. Ford argues that the district court erred by refusing to consider this future tax liability when it valued the Scanlin note for the purpose of dividing the community property. We agree. We noted previously that courts can consider potential tax liability when valuing marital assets if a taxable event has occurred as a result of the divorce or equitable distribution of property, or is certain to occur within a time frame so that the trial court may reasonably predict the tax liability. Hovis v. Hovis, 518 Pa. 137, 541 A.2d 1378, 1380-1381 (1988). In the instant case, testimony by Kenneth Kenevan indicated that the tax liability would accrue when the Scanlin note pays off in January 1988. Mr. Kenevan also observed at trial that [t]he tax liability already exists, and would follow the note regardless of who the holder was. Accordingly, the record indicates that a taxable event pertaining to the Scanlin note was certain to occur within a certain time frame (just over a year from the trial) so that the district court could have reasonably predicted Dr. Ford's tax liability. Trial courts should consider tax consequences of property distribution when proof exists that a taxable event has occurred during marriage or will occur in connection with the division of the community property. In re Marriage of Fonstein, 17 Cal.3d 738, 131 Cal. Rptr. 873, 879-880 n. 5, 552 P.2d 1169, 1175-1176 n. 5 (1976). In the instant case, as a result of the division of the community property, Dr. Ford incurred a substantial tax burden upon the maturation of the Scanlin note. Therefore, the district court erred when it refused to consider this liability in making its distribution of the Fords' marital estate. Hovis, 541 A.2d at 1380-1381. After careful review of the parties' other contentions, we find them to be without merit. Accordingly, we order: 1. That the order rescinding alimony and abrogating the attorney's fee be, and hereby is, vacated. 2. That alimony ordered in January 1987 be, and hereby is, reinstated, and Dr. Ford is directed to (a) pay all amounts in arrears after the order of rescission, and (b) continue payments ordered by the decree and judgment of January 1987. 3. That Dr. Ford pay the attorney fee in the amount of $25,000. 4. That Dr. Ford be given credit for tax liability on the Scanlin note, in accordance with testimony admitted at trial. Accordingly, we remand for proceedings consistent with this opinion.