Court Opinion

ID: 9586603
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:13:16.223214+00
Date Added: 2024-06-11T17:32:44.894563
License: Public Domain

MILLER, Justice:
This is an appeal by Richie Calvin Tank-ersley, the plaintiff below, from a final divorce decree entered in the Circuit Court of Wyoming County. The defendant below is Debra Rosemary Tankersley. The central issue in this case is how to determine the value of a marital asset, a funeral home operated by a closely held corporation owned by Mr. Tankersley.
Mr. Tankersley contends that the trial court erred in deducting only one debt from the $325,000 market value of the business. *629This debt was for $170,000, which was the amount owed to the former owner of the funeral home. Mr. Tankersley argues that W.Va.Code, 48-2-32(d)(l) (1984), requires the court to determine the “net value” 1 of the marital property; thus, the court should have deducted all the debts of the corporation from its fair market value.2 Both parties acknowledge that the term “net value” is not defined within the statute. The question before us is to ascertain its meaning. The parties do not disagree that the funeral home is a marital asset. Moreover, there is no disagreement that the funeral home has a market value of $325,000.
While the accountants for both parties testified about the market value of the corporation,3 neither testified about its net value. In particular, neither accountant was asked whether his estimate of the market value of the corporation assumed that the purchaser would be responsible for the existing debts or whether the debts would have to be discharged by the seller.
We have historically defined the market value of an asset as set forth in Syllabus Point 3 of Estate of Aul v. Haden, 154 W.Va. 484, 177 S.E.2d 142 (1970):
“The market value is the price at which a willing seller will sell and a willing buyer will buy any property, real or personal.”4
See also Franklin v. Pence, 128 W.Va. 353, 36 S.E.2d 505 (1945); Baltimore & Ohio R.R. Co. v. Bonafield’s Heirs, 79 W.Va. 287, 90 S.E. 868 (1916). For purposes of equitable distribution, W.Va.Code, 48-2-32(d)(l), requires that a determination be made of “the net value of all marital property of the parties[.]”
The concept of “net value” is rather simple when a court is valuing a single asset which has a valid lien or encumbrance. In these situations, the net value equals the fair market value of the property less the amount of any lien or encumbrance. We alluded to this equation in Syllabus Point 3, in part, of LaRue v. LaRue, 172 W.Va. 158, 304 S.E.2d 312, 41 A.L.R.4th 445 (1983): “In computing the value of any net asset, the indebtedness owed against such asset should ordinarily be deducted from its fair market value.”5 This is also the general rule elsewhere — in computing the net value of an asset, the first step is to establish its market value and then deduct the amount of any valid lien or encumbrance on the property. E.g., Gravenstine v. Graven-*630stine, 58 Md.App. 158, 472 A.2d 1001 (1984); Balogh v. Balogh, 356 N.W.2d 307 (Minn.App.1984); Creon v. Creon, 195 Mont. 254, 635 P.2d 1308 (1981); Rider v. Rider, 141 A.D.2d 1004, 531 N.Y.S.2d 44 (1988); Alexander v. Alexander, 68 N.C.App. 548, 315 S.E.2d 772 (1984); Centazzo v. Centazzo, 509 A.2d 995 (R.I.1986), modified on other grounds, 556 A.2d 560 (R.I.1989); Trivett v. Trivett, 7 Va.App. 148, 371 S.E.2d 560 (1988).
However, valuing assets becomes more difficult when the asset is part of a more complex entity, such as an on-going business. Most courts also recognize that the valuation problems are more acute in closely held corporations, whose stock is not publicly traded. Courts have cautioned against inflexibility and have incorporated some or all of the factors utilized by the Internal Revenue Service in Revenue Ruling 59-60.6 See In Re Marriage of Suarez, 148 Ill.App.3d 849, 102 Ill.Dec. 85, 499 N.E.2d 642 (1986); In Re Marriage of Rossi, 113 Ill.App.3d 55, 68 Ill.Dec. 801, 446 N.E.2d 1198 (1983); In Re Marriage of Moffatt, 279 N.W.2d 15 (Iowa 1979); Kowalesky v. Kowalesky, 148 Mich.App. 151, 384 N.W.2d 112 (1986); Bowen v. Bowen, 96 N.J. 36, 473 A.2d 73, 56 A.L.R.4th 847 (1984); Amodio v. Amodio, 70 N.Y.2d 5, 516 N.Y.S.2d 923, 509 N.E.2d 936 (1987); Matter of Marriage of Webber, 99 Or.App. 703, 784 P.2d 111 (1989); Wallace v. Wallace, 733 S.W.2d 102 (Tenn.App.1987); Bosserman v. Bosserman, 9 Va.App. 1, 384 S.E.2d 104 (1989). See generally L. Golden, Equitable Distribution of Property § 7.08 (1983); 24 Am.Jur.2d Divorce & Separation § 947 (1983).
Admittedly, the foregoing cases were not concerned with an equitable distribution statute which uses the term “net value." We have found the phrase “net value” in the North Carolina equitable distribution statute, N.C.Gen.Stat. §50-20(c) (1987). As in our statute, the term is not defined therein.7 However, the North Carolina courts do not appear to have applied the statutory term “net value” to valuing the worth of a closely held corporation or business.
In Patton v. Patton, 78 N.C.App. 247, 255, 337 S.E.2d 607, 612 (1985), rev’d on other grounds, 318 N.C. 404, 348 S.E.2d 593 (1986), the court approved of a method of valuing a closely held corporation which considered “the capitalization of earnings of the company, ... [its] earning capacity ... as demonstrated in the last four-to-five year period of time, the present economic outlook for the business and the industry, the good will which has been accumulated to the business ..., and [its] financial position ... as demonstrated by its unaudited statements[.]” This methodology had been previously sanctioned by the North Carolina Court of Appeals in Phillips v. Phillips, 73 N.C.App. 68, 326 S.E.2d 57 (1985). Moreover, the court in Patton approved of several examples of evidence useful in valuing closely held corporations, which were identified in Phillips. These included: “gross sales, cost of goods sold, profit, operating , expenses, income, retained earnings.” 78 N.C.App. at 256, 337 S.E.2d at 612. See also Hartman v. Hartman, 82 N.C.App. 167, 346 S.E.2d 196 (1986), aff'd, 319 N.C. 396, 354 S.E.2d 239 (1987).
*631Indeed, in Draughon v. Draughon, 82 N.C.App. 738, 347 S.E.2d 871 (1986), review denied, 319 N.C. 103, 353 S.E.2d 107 (1987), the court rejected the trial court’s approach of valuing the business solely based on the net value of the tangible assets. Instead the Draughon court favored the capitalization of earnings method, which included considering a factor for good will.8 A review of these cases suggests that the North Carolina courts employ the same technique generally used by other jurisdictions in evaluating a closely held corporation.
The fair market value of a closely held corporation or other business is not necessarily equivalent to its “net value” under W.Va.Code, 48-2-32(d)(l). Under this provision, the net value of a closely held corporation or business equals the net amount realized by the owner should the corporation or business be sold for its fair market value. The pertinent inquiry that must be made is whether the owner-seller will be responsible for the debts of the corporation or business, assuming a sale for its market value.
Commonly, the purchase of a closely held corporation occurs in one of two ways. Where the purchaser acquires the stock of the corporation, he ordinarily acquires all of the corporation’s assets and liabilities.9 In this situation, the amount paid to the owner-seller for his stock ordinarily represents the net value of the business because the owner-seller is not obligated to pay off the corporate debts.
The second method of purchasing a corporation or business is where the buyer acquires its assets. Under this arrangement, the market value does not equal the net value because the owner-seller will ordinarily be responsible for some or all of the business’s debts or liabilities.10 Again, the pertinent inquiry is what is the net sum that will be realized by the owner of the business if it is sold for its fair market value. Unfortunately, the valuation experts did not make this analysis in this case.
The trial court found that the fair market value of $325,000 assumed that Mr. Tankersley would be obligated to pay the $170,000 debt to the former owner. However, there was no testimony on this point, nor was there any evidence as to whether the other debts of the funeral business would be Mr. Tankersley’s obligations if the business were sold at market value. Thus, we remand this case so the trial court can establish the net amount Mr. Tankersley would be expected to receive on a sale of the funeral business.
We, therefore, reverse the trial court’s judgment and remand this case for reconsideration in light of the principles expressed herein.
Reversed and remanded.

. The full text of W.Va.Code, 48-2-32(d)(l) (1984), is:
“After considering the factors set forth in subsection (c) of this section, the court shall:
“(1) Determine the net value of all marital property of the parties as of the date of the commencement of the action or as of such later date determined by the court to be more appropriate for attaining an equitable result[.]” (Emphasis added).

. The December 31, 1986 balance sheet of the corporation indicated that the total assets of the business were $312,708.63 and the total liabilities, including the amount owed to the former owner, were $254,205.92. Assets of the business include cash, accounts receivable, inventory, property, and equipment. Current liabilities of the business include automobile loans, accounts payable, federal and state income taxes, sales tax, and social security tax.

. The closely held funeral home corporation was acquired by Mr. Tankersley on January 1, 1985, for $325,000. Billy Arthur Black, the accountant for the corporation, testified on behalf of Mr. Tankersley. Mr. Black testified that if the corporation was sold at the time of the hearing, it would still have a fair market value of approximately $325,000.
Ross Dionne, a certified public accountant, testified on behalf of Mrs. Tankersley. He estimated that the market value of the corporation was between $310,477 and $380,300. Mr. Dionne’s testimony was based upon data from the corporation's tax returns and financial statements. In arriving at his estimate, Mr. Dionne used a variety of valuation techniques: (1) adjusted net assets; (2) capitalization of earnings; (3) dividend-paying capacity; (4) excess earnings — return on net assets; (5) excess earnings — return on sales; (6) discounted cash flow; (7) discounted future earnings; (8) combination method; and (9) industry association method.

. In Estate of Aul, 154 W.Va. at 489, 177 S.E.2d at 145, this Court used the phrase "when neither is under compulsion." When both the buyer and the seller are willing parties to the transaction, the parties are not acting under compulsion.

. LaRue was decided before our legislature enacted the equitable distribution statute. See generally W.Va.Code, 48-2-32.

. Revenue Ruling 59-60, 1959-1 C.B. 237, 238, sets forth eight factors which should be analyzed in valuing the stock of a closely held corporation for federal gift and estate taxes:
"(a) The nature of the business and the history of the enterprise from its inception.
“(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
"(c) The book value of the stock and the financial condition of the business.
“(d) The earning capacity of the company.
"(e) The dividend-paying capacity.
"(f) Whether or not the enterprise has goodwill or other intangible value.
"(g) Sales of the stock and the size of the block of stock to be valued.
“(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.”

. In Alexander v. Alexander, 68 N.C.App. 548, 550-51, 315 S.E.2d 772, 775 (1984), the court, when valuing a family home with a mortgage, stated: “We give the term ‘net value’ its ordinary and commonly understood interpretation: i.e., market value, if any, less the amount of any encumbrance serving to offset or reduce market value."

.The court’s summary of the valuation of the business in Draughon, 82 N.C.App. at 741, 347 S.E.2d at 873, was:
‘In the present case, defendant’s evidence tends to show that plaintiffs business had goodwill and that the value of the business, including its goodwill, was $61,500.00. This valuation was prepared by an accounting firm using a capitalization of earnings method. Plaintiffs evidence as to the value of his business consisted of his testimony regarding the history of the business and the condition and value of the tangible assets at the date of separation. From this evidence the trial court concluded that the net value of the business equaled the net value of the business’s tangible assets. However, we are unable to determine from the court’s findings what method it used in determining that the business had no goodwill and whether their determination was based on a sound method of valuation. We must remand this cause for further findings as to the value of plaintiff’s business.”

. 1 J. Herez & C. Bailer, Business Acquisitions § 5.201(b) (2d ed. 1981).

. 1 J. Herez & C. Bailer, supra note 9, § 5.202(b).