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Ownership Interest in Corporation Considered Marital Property
© 2005 National Legal Research Group, Inc.
MISSOURI: Tarneja v. Tarneja, 164 S.W.3d 555 (Mo. Ct. App. 2005).
The husband operated a radiology practice with another doctor, using a corporation to hold and manage his 50% share of the practice's net profits. Partway through trial, he conveyed the assets of the corporation to a new corporation owned equally by himself and his partner. The trial court properly held that 100% of the value of the corporation, as it existed before the transfer, was marital property. The trial court properly rejected the valuation testimony of the husband's expert, which was based upon the tax effect of the liquidation value. The trial court did not err by valuing a fluctuating investment account at its value partway through an eight-month trial, ignoring a $93,000 loss in value over the next four months, where the husband was not able to account for withdrawals or explain why the loss occurred.
The husband worked during the marriage as a radiologist. He owned a solo practice for some years, and then incorporated it as West Plains Imaging and Associates, Inc. (WPIA). WPIA prospered, and, due to an increasing workload, the husband brought into the practice a second radiologist, Dr. Armstrong. Pursuant to an oral agreement, the two doctors divided the net profits of their joint practice equally.
After the divorce was filed, the husband and Dr. Armstrong formed a new corporation, West Plains Imaging, L.L.C. (WPI). Each doctor owned 50% of WPI, and the husband transferred to WPI all of WPIA's assets. The agreement was not effective until July 1, 2003.
The case was tried over an eight-month period, consisting of two days in May 2003, two days in August 2003, and one day in January 2004. The case was not bifurcated, so the parties were not divorced until the final judgment was entered in June 2004. Thus, the formation of WPI became effective partway through the trial, and before the date of divorce.
The husband argued at trial that the radiology practice was owned equally by himself and Dr. Armstrong, so that WPIA and WPI were only 50% marital property. The trial court held that WPIA was 100% marital property, and the appellate court affirmed. The evidence showed that before WPI was formed, 50% of the practice's net profits went into WPIA, and 50% of the practice's net profits went to Dr. Armstrong. Thus, Dr. Armstrong owned no interest in WPIA:
[T]he record is clear that throughout that time Husband owned one hundred percent of WPIA, was the sole shareholder, was the sole owner of the corporation's assets, and was the sole manager of the corporation's funds. Armstrong was specifically classified as and treated as an independent contractor and he had his own, separate corporation through which his earnings were processed. Clearly, Armstrong had no ownership or corporate interest in WPIA.
2005 WL 1398900, at *5 (court's emphasis). In other words, WPIA was not the practice; it was a corporate vehicle used by the husband to hold and manage his share of the practice's profits. The assets used in the practice were admittedly held by WPIA, but nothing in the record suggested that Dr. Armstrong had an equal interest in the practice's assets; he had only a right under the oral agreement to an equal share of the practice's profits. The husband's voluntary decision to convey all of WPIA's assets to WPI, made during the pendency of the divorce proceedings and not effective until after the start of trial, could not deprive the marital estate of its interest in WPIA's assets. The trial court correctly held that WPIA, as it existed before the transfer to WPI, was entirely marital property.
The wife's expert valued WPIA in standard fashion by determining its fair market value. The husband's expert "noted that he did not perform an actual business valuation of either WPIA or WPI; instead he 'valued what the tax effect would be if the company were to be liquidated.'" Id. at *4. The trial court accepted the wife's expert's valuation, and the appellate court summarily affirmed. There is essentially uniform agreement that liquidation value is not the standard for value in a divorce case unless the practice is actually in the process of being liquidated. E.g., Shelby v. Shelby,130 S.W.3d 674 (Mo. Ct. App. 2004) (trial court properly held that valuation based upon liquidation value was not even admissible into evidence). See generally Brett R. Turner, Equitable Distribution of Property 7.03 (2d ed. 1994 & Supp. 2004). The tax effect of liquidation value is even weaker evidence of true value than liquidation value itself.
The parties also disputed the proper valuation of one of the practice's assets, an investment account with Salomon Smith Barney (SSB). The value of the account fluctuated significantly. In round numbers, the account balance was $496,000 at the beginning of 2003; $462,000 at the end of March 2003; and $494,000 at the end of July. By November of 2003, however, the most recent value stated in the record, the balance had dropped to $401,000. "Husband controlled the account at issue, but was unable to detail all of the various withdrawals from that particular account, and could not explain why the value of the account fluctuated between July of 2003 and November of 2003." 2005 WL 1398900, at *9 n.7.
The trial court accepted the wife's argument that the account should be valued at the July 2003 amount of roughly $494,000. The appellate court affirmed:
This is a matter of witness credibility and in such instances the trial court is free to believe or disbelieve the testimony of witnesses. [Citation omitted.] Given that this case was tried over a period of almost a year and there was conflicting evidence relating to the amount of money in the account, we cannot convict the trial court of error in choosing to utilize the July of 2003 account balance.
Id. at *6. Because the husband was not able to explain and justify the loss of $93,000 over a period of only four months, the trial court did not err by ignoring that loss for purposes of valuation.
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