Marriage of Bookout, In re

• Citation: 833 P.2d 800
• Decision Date: 19 December 1991
• Docket Number: No. 90CA1636,90CA1636
• Parties: In re the MARRIAGE OF Deanne M. BOOKOUT, Appellee and Cross-Appellant, and David B. Bookout, Appellant and Cross-Appellee. . III
• Court: Colorado Court of Appeals

Page 800

833 P.2d 800

In re the MARRIAGE OF Deanne M. BOOKOUT, Appellee and Cross-Appellant and David B. Bookout, Appellant and Cross-Appellee.

No. 90CA1636.

Colorado Court of Appeals Div. III.

Dec. 19, 1991.

Rehearing Denied Feb. 13, 1992.

Certiorari Granted Aug. 17, 1992.

Cross-Petition for Certiorari Denied

(Wife) Aug. 17, 1992.

Frey, Lach & Michaels, P.C., Susan M. Lach, Fort Collins, for appellee and cross-appellant.

Litvak and Litvak, P.C., Ronald D. Litvak, Timothy R. Mehrtens, Denver, for appellant and cross-appellee.

Opinion by Judge NEY.

In this dissolution of marriage action, David B. Bookout (husband) appeals and Deanne M. Bookout (wife) cross-appeals the permanent orders relative to maintenance, distribution of property, child support, and attorney fees and costs. We affirm in part, reverse in part, and remand for further proceedings.

Husband and wife were married for approximately fourteen years. Three children were born of the marriage. Husband is a physical therapist who has established a full-time private practice with ten employees. Wife is a high-school graduate and was employed as a secretary until the parties' first child was born. She recently became employed as an interior designer with a monthly gross income of $1,000.

Experts for each party testified as to the value of husband's practice. While each utilized a capitalization method, their opinions ranged from $294,000 to $745,000. Wife's expert based her opinion of $745,000 primarily upon the income earned in 1988 because she felt that it reflected the great growth in the business over the last few years. However, she also indicated that the value of the business using a five-year weighted average income would be $595,000. Husband's expert used the same general approach; however, he valued the practice at $294,000 because he considered it to be much riskier because of competition and the referral nature of the business.

The trial court found that wife's expert's reasoning was more thought out and planned and, given the history of the practice demonstrating that husband was well able to secure and maintain a comfortable niche in the industry, it rejected the 100% capitalization rate used by the husband's expert. However, the court also found that the income earned by the business in 1988 was distorted to a certain extent because of various factors and, therefore, concluded that valuing the business using a five-year weighted average was more appropriate. Thus, the court determined that the practice was worth $595,000.

In concluding that an equitable division of property was appropriate, the trial court observed that husband's practice comprised over one-half of the marital property and that liquidation of most of the assets might entail substantial tax consequences. Therefore, it entered an award which, in addition to the specific assets awarded to wife, required husband to pay to wife the sum of $150,000. The court ordered that this sum be paid over a period of 15 years, with husband paying $10,000 of the principal yearly, together with interest on the unpaid balance, commencing August 1, 1991. In addition, the court awarded wife an additional sum of $10,000 to assist her in paying income taxes, attorney fees, and expert witness fees which it found amounted to $15,000.

The court further observed that wife had furnished a financial affidavit showing monthly living expenses of $9,120, and that this "statement was backed up by [her] accounting, which covered approximately 19 months" representing the period immediately prior to separation. Nevertheless, the court found that, "given the parties history and the income available to both parties," wife's reasonable needs were approximately $6,000 per month. After considering the size of the marital estate awarded to wife, her monthly living expenses the tax consequences of the temporary orders for family support, and the fact that interest on the $150,000 cash distribution would not be payable for one year, the court awarded wife temporary maintenance of $1,000 per month, payable until August 1991.

The court commented that the determination of child support presented a difficult problem because the combined income of the parties exceeded the maximum shown on the child support guidelines by over $7,000. After finding wife's income to be $2,150 per month (which included $1,000 maintenance or interest from investments) and husband's income to be $15,250 per month, the court concluded that wife contributes approximately 13% of the parties' combined income of $17,191, and husband contributes 87%.

The court then noted that the child support computed by application of the guidelines was a regressive percentage of combined gross income. Nevertheless, after finding that the net child care costs were $450 per month, it concluded that at 15% of the parties' gross income, the recommended basic child support obligation would be $2,728.75, and at 19%, it would be $3,233 per month. Then, based on the premise that wife's reasonable needs were $6,000 and that husband had the ability to assist in meeting those needs, the court summarily concluded that the amount of $4,000 per month was appropriate child support to be paid by husband.

I.

In challenging the court's valuation of his practice by means of capitalizing his yearly earnings, husband first contends that the trial court erred in accepting the opinion of wife's expert as to his market salary. He argues that the use of a $70,000 annual income figure is not supported by sufficient evidence in the record and is inconsistent with other findings made by the court, specifically the court's finding that his income was over $15,000 per month for child support purposes. We disagree.

One appropriate method to determine the value of goodwill of a professional practice is accomplished by fixing the amount by which the salary level of the owner exceeds that which would have been earned as an employee by a person with similar qualifications of education, experience, and capability. If the owner's actual average income exceeds the total of the employee norm and a return on the investment in the physical assets of the business, the excess would be the basis for evaluating goodwill and is subject to a capitalization factor. Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1 (1983).

These excess earnings represent the earnings which a business can produce over a period of time if it is operated by a disinterested manager whose aim is to maximize profits. They are computed by taking earnings from the last five to ten years, adjusting them for unreasonable salaries and perquisites, and then averaging them.

Appraisers try to determine reasonable salaries in a given industry by utilizing salary studies from trade journals or government agencies. Walzer & Gabrielson, Valuation of Stock in Closely Held Corporations at the Time of Marriage Dissolution, 1 J.Am.Acad. Matrimonial Law 1 at 4 (1985). Such salaries are designated the market salaries and form the base line from which the value of goodwill is determined.

Here, wife's expert determined that husband's market salary was $70,000 per year based upon a 1986 survey of salaries prepared by the American Physical Therapy Association. According to that study, a full-time salaried male therapist with over nine years experience as a physical therapist had a 1986 mean gross income of $43,262. In contrast, a full-time self-employed male therapist with the same length of experience was making $101,876. Wife's expert utilized the income figure for the salaried individual, added $15,000 to cover the managerial responsibilities which she felt husband would be capable of, and increased this sum by eight percent per year to reflect the increase in salaries from 1986 to 1988.

Husband contends that the expert failed to interpret properly the survey because he argues that the correct salary upon which to compute excess earnings should be that of a self-employed individual. We are not persuaded.

The weight to be accorded to the valuation techniques of an expert is for the trial court's determination, depending upon the court's assessment of the reliability of the data in a particular case. See CRE 703; Stone v. Caroselli, 653 P.2d 754 (Colo.App.1982).

As wife's expert explained, the difference between the level of salary earned by a self-employed individual and a salaried person is primarily the build-up of goodwill in the practice. In many cases, a closely held business may pay salaries to its owners that are higher than would ordinarily be justified by the duties that they perform. R. Miles, Basic Business Appraisal 119 (1984).

Furthermore, wife's expert indicated that she had not relied upon husband's deposition testimony, which she was informed of prior to the hearing. Nevertheless, husband's testimony that he could earn $60,000 to $70,000 at the upper range in a physician-owned practice, together with the reasonable inferences which can be made from such testimony, supports the market salary upon which the accepted business valuation was based.

Lastly, inasmuch as the finding of income for child support purposes is mandated by statutory provisions and is not a hypothetical figure, as is the market salary, see Valuation of Stock, supra, at 8, we find no internal inconsistency in the court's order. Indeed, the determination of business income for purposes directly relating to the operation of the business may differ from the level of gross income that is determined to be appropriate to satisfy a child support obligation. Report of the Colorado Commission on Child Support (1985).

Furthermore, we note that husband has not asserted that the trial court erred in determining his income under the child support guidelines.

II.

Next, husband notes that, in capitalizing excess income, his future income stream is valued and divided as property. Therefore, he argues that basing an order of maintenance and child support upon the...