Opinion ID: 2379514
Heading Depth: 1
Heading Rank: 2

Heading: Gross Operating Profit Capitalization

Text: As previously noted, the range of proofs was extreme indeed, going from $70,000 to $338,000. Yet, each of the experts was soft at the margins of his opinion. The husband's expert agreed that he would not recommend that his client sell his share for the figure of $70,000 since the client was gainfully employed in the business and it had an intrinsically higher value for him. Conversely, the wife's expert conceded that there was a wide range of values and in his redirect examination suggested that his bottom line figure was $180,000. There was also evidence that in a recent financial statement the husband himself had fixed the value of his interest in Polycel at $132,000 and the husband's accountant had fixed the buy-sell value at $92,000. Expert opinion testimony of an accountant is not significantly different from any other form of expert testimony: Under Rule 56(2)(b), expert testimony is admissible only if the expert has sufficient expertise to offer the intended testimony and the testimony itself is sufficiently reliable. State v. Cavallo, 88 N.J. 508, 516 (1982) (emphasis added). In Cavallo, we stressed that reliability is critical in determining the admissibility of expert scientific evidence. Reliability can be established by showing general acceptance in the scientific community through proofs of expert testimony, scientific and legal writings, or judicial opinions. Cavallo, 88 N.J. at 521. Those principles applicable to scientific testimony can be helpful here in evaluating expert opinion testimony as to value. Plaintiff's accountant based his high figure of $338,000 upon the application of an earnings capitalization rate of five to the net profit of the company. While earnings capitalization is one factor in valuation, compare Rev.Rul. 59-60, at § 4.01(d), § 4.02(d), and § 6, plaintiff's accountant could offer no basis in generally accepted accounting principles for his capitalization rate of five as applied to the net profit from sales figures. It was simply his opinion, from experience, [j]ust historical in other businesses that I have dealt with. The range of rates was anywhere from five to twelve, according to plaintiff's accountant. He chose the low end of the range to reflect defendant's minority interest in Polycel, but offered no external proof to justify his choice. In Dugan, we rejected the use of a capitalization rate of five times earnings in the context of that one-person professional services corporation: No evidence supported capitalization at that figure. 92 N.J. at 443. We hold that a court should not base an opinion on theories of value that lack support in the record, demonstrated market reliability, or general acceptance. The experience of our Tax Court in the area of valuing real estate properties is illustrative. In Glen Wall Assoc. v. Wall Tp., 6 N.J. Tax 24 (1983), the court emphasized that the real estate market, not the unsupported opinions of experts, is the evidence upon which a court can establish value. The taxpayer's witness testified that a 10% capitalization rate was appropriate, based on certain indicators in the financial market. He admitted, however, that the number was `basically a judgment call.' Id. at 30. The court found: Such evidence does not establish to the satisfaction of this Court a capitalization rate to be used in determining real estate value. The best evidence of such a capitalization rate is to be obtained from the real estate market, and the rates used by the witness were not related by him to the real estate market.         The mere qualifying of a witness as an expert does not permit him to give unsupported opinions. The witness' expertise qualifies him to take facts and to conclude from those facts an opinion relevant to the issue before the court which a nonexpert, with the same data, could not do. The evidence, data and the totality of the facts on the basis of which the opinion is arrived at must be made known to the court so that it may evaluate the validity of the opinion and conclude what weight, if any, is to be given to that opinion. [ Id. at 31-33 (footnote omitted, emphasis in original).] See also Buckelew v. Grossbard, 87 N.J. 512, 524 (1981) (net opinion rule establishes that an expert's bare conclusions, unsupported by factual evidence, is inadmissible); Highview Estates v. Borough of Englewood Cliffs, 6 N.J. Tax 194, 214 (1983) (while Evidence Rule 56 has eased the expert's testimonial burden it has not eliminated the need for the expert to base his opinion on facts made known to the court.). The sources of an expert's testimony must be relevant as well as reliable. The parties must present evidence that has demonstrated market reliability ( e.g., data of comparable corporations that are publicly traded) or is otherwise generally accepted as reliable by experts or by courts ( e.g., relevant appraisal manuals, authoritative industry guides, or factual foundations in the record before the court).