Lawyer’s Assets May Be Marital Property But Professional Goodwill is Separate Property

Bloggers observe: Smith is one other essential, if not iconic case, household unit legal professionals and enterprise valuation specialists ought to know well.

Smith v. Smith, 709 S.W.second 588 (Tenn. Ct. App. 1985)

Angelyn Jenkins Smith and Ewing Smith had been married in 1952.  Mr. Smith was an lawyer and was first licensed in 1956.  He was a 30% associate within the Murfreesboro regulation agency through which his father had earlier been a associate.  For the 5 years previous to the events’ divorce, Mr. Smith’s revenue had averaged roughly $96,000 per yr.

Mrs. Smith had a level in accounting, however was neither a public accountant nor an authorized public accountant.  For a number of years previous to the divorce, she had labored part-time as an accountant, and her revenue for the 5 years previous to the divorce averaged roughly $8700 per yr.

Mr. Smith’s interest in his regulation apply was not talked about within the trial court docket’s remaining decree.  (The decree additionally failed to say a constructing owned by Mr. Smith collectively together with his sisters, though Mrs. Smith didn’t object to this exclusion.  The Court of Appeals surmised that the events thought of it separate property, for the reason that interest got here from Mr. Smith’s father.)

Mrs. Smith appealed, and contended that the regulation apply ought to have been thought of a part of the marital property.  The Court of Appeals agreed, and famous {that a} occupation can, certainly, be marital property, and may have been so treated on this case.  The Court of Appeals famous that sure belongings needs to be included within the valuation of the agency.  For instance, physical belongings similar to furnishings, constructing, and library have a particular worth.  Similarly, accounts receivable have a worth which needs to be included.  The Court of Appeals additionally needed to choose the tougher challenge of whether or not the agency’s skilled goodwill might be thought of as a part of the worth of the marital property.

In the case of a regulation agency or different skilled enterprise, the Court of Appeals held that the goodwill shouldn’t be thought of as a part of the marital property.  This is as a result of it’s indistinguishable from the long run working for capability of the skilled.  It quantities to popularity, which can’t be bought.  The solely means that popularity or goodwill might be monetized is sooner or later ongoing wage of the actual skilled.

The solely proof of the worth of the agency (ignoring its goodwill) was an estimate that Mr. Smith’s share of the accounts receivable had been value $10,000.  In addition, Mr. Smith had asserted that he had been taking roughly $8,000 per thirty days out of the apply, however that this quantity can be smaller for the reason that companions had been altering the strategy of computing the share.

The Court of Appeals held that one of the simplest ways to take the regulation agency’s worth under consideration can be to award Mrs. Smith a portion of the revenue for a restricted time.  On these details, the Court of Appeals held that she needs to be awarded an extra $1,000 per thirty days for 2 years.

Mrs. Smith did apparently current some knowledgeable testament at trial as to the worth of the regulation apply.  The Court of Appeals famous that the trial court docket refused to permit knowledgeable charges for this testament.  However, the opinion is silent as to the character of this testament or the title of any knowledgeable witness.

This publish is a part of a sequence, Appreciation of Separate Property: The Forensic Accountant’s Full Employment Act.

To be taught extra, go to When Professionals Divorce in Tennessee: Valuing Professional Practices.