SIEVERS, Judge.
Karla J. Shuck appeals from a decree entered by the district court for Adams County dissolving her 35-year marriage to Dale C. Shuck and awarding her alimony in the amount of $2,500 per month for not
We conclude that under the asset-based valuation method applied to three of the four Shuck business entities, it was an abuse of discretion to reduce the value of the businesses by a 40-percent "assumed" rate of built-in capital gains tax, because there was no evidence of an imminent sale of the businesses. As a result, we reverse that aspect of the trial court's valuation of the marital estate and modify the property division as outlined below. In all other aspects, we affirm the decision of the district court.
At the time of trial, Dale and Karla had been married for 35 years and were 60 and 56 years old, respectively. The couple met in Fairmont, Minnesota, during the summer of 1973 at their place of employment—Dale was an electrical engineer, and Karla worked for him. The two were married on June 15, 1974, in Minnesota. In 1975, Dale moved to Edgar, Nebraska, to serve as vice president of one of his family's companies, Shuck Drilling Co. (Shuck Drilling), a closely held "C" corporation incorporated by Dale's parents in 1956 and engaged in the business of drilling irrigation wells and selling irrigation equipment. Meanwhile, Karla remained in Minnesota to complete her bachelor's degree in nursing, which she received in 1975. After graduation, Karla joined Dale in Edgar, where housing and other benefits described below were provided for the couple by Shuck Drilling.
After moving to Edgar in 1975, Karla was employed part time at a hospital in Hastings, Nebraska, until she became pregnant with the couple's first child, who was born in 1977; a second child was born in 1979. Karla testified that she did some volunteer nursing between the births of the two children and "did work part-time on and off" after their second child was born, but that she and Dale agreed that her primary responsibility would be taking care of the children and the home. Karla testified that she handled 95 percent of the household duties whether she was working outside of the home or not.
In 1981, Dale and Karla moved to Hastings and bought a house in which Dale currently resides. From 1981 to 1988, Karla worked 25 to 30 hours per week at a Hastings family planning clinic, while Dale continued his work at Shuck Drilling in Edgar. In 1993, Karla also started a business as an independent consultant for a cosmetics company, which she quit a year or two before the parties' separation in 2006. Between 2003 and 2004, Karla also worked for a women's health care program at the Hastings YMCA, earning wages of $18 per hour.
Since 2006, and continuing to the time of trial in June 2009, Karla was working from 18 to 24 hours per week at the hospital in Hastings as a lifestyles management coach, earning $13.32 per hour. Karla testified that she also works on occasion as a registered nurse at the hospital, administering flu shots, earning $18.82 per hour. The trial court's decree provides that Karla
Dale, on the other hand, had quadruple bypass surgery in October 2005 and was diagnosed with lupus in 1996. Nevertheless, at the time of trial, Dale was working full time as the vice president of Shuck Drilling, as he had since 1975. Dale testified that the benefits he receives as a result of his position at Shuck Drilling include a vehicle, as well as fuel, maintenance, and insurance for the vehicle, several company credit cards, 3 percent of his annual salary contributed to his IRA, health insurance, disability insurance, and life insurance. Dale's gross earned income at Shuck Drilling in 2007 was $161,557, compared to Karla's total earnings of $21,210 in that same year. Dale testified that he is in charge of running Shuck Drilling and that his two brothers each run one of the other two family-owned businesses: Lazy T Milliron, Inc. (Lazy T), and Diamond Seven Corporation (Diamond Seven), which were both incorporated by Dale's parents in 1968. One of Dale's brothers runs Lazy T, an "S" corporation engaged primarily in the business of leasing farmland. Dale's other brother runs Diamond Seven, a "C" corporation chiefly involved in farming the land that it owns, as well as leasing and farming land owned by others. In addition, Dale was a partner in Quatros Hombres, also known as Cuatros Hombres Farms (CH Farms), a general partnership originally formed by Dale and his two brothers in 1972 which was mainly engaged in the business of farming others' land. We note that CH Farms merged into Diamond Seven in 1984.
Throughout the course of Dale and Karla's marriage, Dale's parents gave both parties shares of stock in the four Shuck family businesses. Karla testified at trial that if the court made an award in this case, she would prefer that any stock she owned be "set over" to Dale, because she was not aware of the daily operations of the businesses, she had no control over them, and "[t]he stock wouldn't be of value to [her]." The trial court's determination regarding the marital or nonmarital nature of each party's shares of stock is not in dispute and will be discussed in conjunction with the "Trial Court Decree" section below.
In order to determine the value of each of the family-owned businesses for purposes of the property division, the trial court appointed a property evaluator, Bryan Robertson, of a business valuation firm. In order for Robertson to complete his valuations, an additional expert was also court appointed to appraise the farmland and operational real estate associated with each business entity. And, a third appraiser was appointed by the trial court to assess the value of the companies' machinery. Robertson integrated these additional assessments into his valuation report, which is in evidence as exhibit 8. Robertson's report was the sole evidence offered at trial regarding the value of the four Shuck family businesses.
Robertson's report explains that his valuations applied the "fair market value
In order to determine the fair market values of the entities, Robertson considered each of three "widely recognized business valuation methodologies"—the asset-, market-, and income-based approaches. When asked during trial to explain the three methodologies in layman's terms, Robertson testified as follows:
Robertson explained that he is obliged to consider each of these three methodologies and that, in his opinion, after doing so, the market method, because of a lack of solid, comparable data, was not directly applicable to any of the four Shuck businesses. Robertson thus calculated values for each entity under the asset-based and income-based methods. Under the income-based method, he actually calculated two different values by utilizing two distinct approaches: (1) capitalized equity cash-flow and (2) discounted invested cashflow. Robertson selected between the figures he calculated under the asset-based and income-based methods in order to assign one final value to each entity that, in his opinion, was the most accurate representation of that entity's fair market value.
Robertson's report recites that, for the asset-based method, due to the lack of any indication that the companies or the companies' assets will be liquidated, he applied a "going concern premise of value." The report further states that, "for purposes of applying [this] methodology, the valuation must reflect a conclusion relative to the
Robertson testified at trial that the asset-based valuation method he employed "absolutely" contemplates the sale of the businesses. That a pending sale was a component of Robertson's asset valuation is readily evident from his lengthy report that is in our record. But, as will be discussed below, there was no evidence of the imminent sale of any of the Shuck family businesses or individual business assets—a fact of considerable import.
Nevertheless, Robertson applied a uniform combined 40-percent tax rate for purposes of quantifying the "built-in taxable gain adjustment" for the assets (assessed by the other two appraisers) of the "C" corporations (Diamond Seven and Shuck Drilling) and the "S" corporation (Lazy T). We read Robertson's term "built-in taxable gain adjustment" to be synonymous with a reduction for depreciation recapture or capital gains that would be realized upon the liquidation of the entity's assets. As for CH Farms, Robertson elected not to apply the adjustment for such taxes, because a willing purchaser would be permitted to "`step up'" the basis of the assets inside the partnership without tax, so long as the partnership made a timely election to do so.
With regard to the income-based approach, we begin by emphasizing that the only entity Robertson chose to value using this method is Shuck Drilling. For the other three entities, he utilized the values calculated exclusively under the asset-based method. Robertson's report states that under the income-based method, "the valuation must reflect a conclusion relative to the appropriateness of certain income tax adjustments. For example, the report must consider whether income taxes should be accrued with respect to the earnings and cash flow benefit streams." Indeed, Robertson elected to apply a "Tax Affect [sic] at Corporate Rates" to the "benefit streams" of Shuck Drilling. Without digressing further into the minutiae of Robertson's calculations under this methodology, we read his report to say that the income tax adjustment applied to the value of Shuck Drilling under this approach was with respect to the ordinary annual income tax that would be paid by the corporation in the normal course of business—a different situation than a liquidation of the business.
Moreover, after selecting a value for each entity from the two valuation methods just described, Robertson discounted the value of all four businesses for minority interest and lack of marketability. Robertson testified that a minority discount is a
With regard to the marketability adjustment, Robertson testified that marketability is the capacity to liquidate. In that regard, Robertson's report recites:
Robertson testified that he applied the 25-percent minority and 20-percent marketability adjustments fairly and objectively in this case to each of the four entities and, further, that such discounts are quantitatively appropriate. He also testified that his overall valuation results were consistent, independent, and well reasoned.
We summarize the ultimate valuations from Robertson's report, which were wholly adopted by the trial court in its dissolution decree, as follows:
Business Total Shares Shares Valuation Final Value Per Entity Shares Owned Owned Method Valuation Share of Outstanding by Karla by Dale Used ($) Stock ($) Shuck 150 6 25 Income- 4,424,000 17,697.51 based Drilling Lazy T 28,900 200 3,627 Asset- 5,671,000 117.73 based Diamond 22,070 0 6,206 Asset- 3,404,000 92.54 based Seven CH Farms 3 0 1 Asset- 399,000 79,869.60 based
In order to simplify matters for the reader, we emphasize that the only challenge raised by Karla to the data in our above table is that the final valuations include deductions by Robertson for lack of control, lack of marketability, and "embedded capital gains taxes." Because this is the fundamental posture of the appeal, we can focus on such deductions, without burying the reader in the extensive details of Robertson's valuations found in his nearly 200-page, single-spaced report—including footnotes and appendices.
Karla petitioned the district court for Adams County for dissolution of her marriage to Dale in a complaint filed on July
Neither party contests the amount or duration of Karla's alimony award on appeal, but the award is relevant for the property division made by the trial court.
The trial court found that Robertson's valuations of the Shuck family businesses were fair and reasonable and based on sound logic. The court thus used the valuations from Robertson's report in determining the property division, without deviation, and no other valuation evidence was offered. The trial court's findings with regard to the valuation of the Shuck family businesses and Dale's and Karla's individual shares of stock, as well as the marital-versus-nonmarital nature of the stock, are as follows:
At the time of trial, Dale owned 25 shares of Shuck Drilling stock, 14 of which he owned before marrying Karla and 11 of which were given to him during the marriage. Karla owned six shares of Shuck Drilling stock that were given to her during the marriage. The court thus ordered Dale's 25 shares of Shuck Drilling stock to be set aside as nonmarital property, and ordered Dale to purchase Karla's 6 nonmarital shares for $17,697.51 per share—the value calculated by Robertson—for a total amount of $106,185.
Next, the trial court discussed Dale's interest in CH Farms, a general partnership in which Dale and his two brothers each own a one-third interest. Although CH Farms merged with Diamond Seven on January 1, 1984, it still maintained some assets at the time of trial, which is why Robertson calculated the value of each share of CH Farms stock (under the asset-based approach) at $79,869.60. The court found that Dale acquired his interest in CH Farms before his marriage to Karla and that no marital funds were contributed to the partnership. Thus, the court set aside Dale's ownership interest in CH Farms as nonmarital property, a finding that Karla does not contest.
Dale received a total of 3,320 shares of Diamond Seven stock as a gift from his parents prior to marrying Karla. After their marriage, Dale's parents also gave Dale and Karla 500 shares apiece. Then, on December 12, 1976, Dale was given an additional 616 shares and Karla was given an additional 300 shares. The trial court additionally found that on August 25, 1983, Karla transferred her 800 shares to Dale, and those shares were thus set aside as nonmarital property, a result that Karla does not dispute.
On May 15, 1985, Dale's uncle sold 187 shares of Diamond Seven stock to Dale for $12,452.33, and Dale admitted that he used marital funds to make that purchase. The trial court thus found that 187 shares of Diamond Seven stock were a marital asset worth $17,305, as set forth in Robertson's report, and awarded them to Dale as marital
Dale owned 4,667 shares of Lazy T stock prior to marrying Karla. In 1978, Dale and Karla each received a gift from Dale's father of 200 shares of Lazy T stock. The court found that Karla's 200 nonmarital shares were worth $117.73 per share, as calculated by Robertson in his report. All of Dale's shares were found to be nonmarital because they were given to him before or during the marriage. Dale was thus ordered to purchase Karla's 200 Lazy T shares of stock for a total value of $23,546. Before proceeding further, we emphasize that in this appeal, there is no claim that the trial court incorrectly determined what was marital property and what was nonmarital property.
The trial court's decree recites that "[t]he parties are worlds apart on the value of the marital estate"—Karla valued the estate at $2,767,893.27, and Dale valued it at $582,067. Because the majority of Dale's shares of stock in the Shuck family businesses were found to be gifts and thus not part of the marital estate, the court valued the marital estate at $590,629.44. The decree states that "[Karla], anticipating this [final valuation], argues that this is a perfect case for a Grace award." The court went on to compare the present facts to those in Grace v. Grace, 221 Neb. 695, 380 N.W.2d 280 (1986), and determined that what has come to be commonly referenced as a "Grace award" was not required. In so finding, the trial court's decree explains:
The trial court noted that even without a Grace award, Karla will be receiving property and cash worth $425,045.72, as well as alimony payments in the amount of $30,000 per year. Moreover, the trial court ordered Dale to pay all of Karla's attorney fees and most of her trial-related expenses. As a result, the court found that a Grace award was inappropriate in this case.
The trial court's final determination with regard to the property division was to award Karla a net marital estate of $273,511.45 and Dale a net marital estate of $317,117.99. The parties stipulated prior to trial that the IRA accounts in evidence as exhibits 126 and 127 are of equal value ($6,521.68) and that each party shall receive an account. The IRA accounts are not included in the above property division. In addition, the court ordered Dale to purchase Karla's non-marital shares of
Shuck Drilling: $106,185.00
Lazy T . . .: $ 23,546.00
Plus Equalization Payment: $ 21,803.27
___________
Total due [to Karla]: $151,534.27
Therefore, Karla's net marital estate plus the cash payment from Dale equals $425,045.72. Karla timely appeals.
Karla alleges, restated, that the trial court erred in (1) reducing the value of the four Shuck family businesses due to the expectancy of taxes, lack of control, and lack of marketability, because there was no evidence any of the businesses were going to be sold; (2) not requiring Dale to purchase Karla's interest in two of the family-owned businesses at their preadjustment value; and (3) failing to award Karla a Grace award.
The division of property is a matter entrusted to the discretion of the trial judge, which will be reviewed de novo on the record and will be affirmed in the absence of an abuse of discretion. Schuman v. Schuman, 265 Neb. 459, 658 N.W.2d 30 (2003).
As noted earlier, Robertson, a court-appointed expert, provided the only valuation evidence for the Shuck family businesses. Karla, however, disagrees with Robertson's reduction in those values that were wholly adopted by the trial court, by way of discounts for taxes, lack of control, and lack of marketability. Her argument is premised on the fact that there is no evidence the businesses are going to be sold. In support of her contention that the reduction for income taxes was improper, Karla cites Schuman, 265 Neb. at 465-66, 658 N.W.2d at 36-37, where the Supreme Court held:
With respect to her assertion that the lack of control and lack of marketability reductions were also improper without evidence of an imminent sale of the businesses, Karla's brief highlights the following language from Walker v. Walker, 9 Neb.App. 834, 849, 622 N.W.2d 410, 420 (2001):
We begin by discussing the reduction in the Shuck family business entities for expectancy of taxes. Significantly, there was no finding by the trial court, and no evidence in the record, that a sale of any of such entities was "reasonably certain to occur in the near future." See Schuman v. Schuman, 265 Neb. 459, 466, 658 N.W.2d 30, 36-37 (2003). Nonetheless, Robertson testified that sale is "absolutely" contemplated under his asset-based valuation method. When Dale was asked on direct examination whether he had any intention in his lifetime of actively selling his businesses, he testified that he would consider selling Shuck Drilling if he could find a buyer, but that "[i]t's just not the kind of business you can sell . . . ." When asked on cross-examination whether he planned on "selling anything" in Lazy T, Diamond Seven, Shuck Drilling, or CH Farms, Dale testified that he is "[n]ot planning on it."
Robertson's report states that income tax deductions were applied under both the asset-based and income-based methods. For the asset-based method, Robertson applied a uniform combined 40-percent "assumed" tax rate for purposes of quantifying the "built-in taxable gain adjustment," i.e., the depreciation recapture or capital gains to be recognized upon the sale of the assets of the entity, as described above. In his brief, Dale argues in support of the discount for capital gains:
Brief for appellee at 35. Even if it is theoretically true that a potential purchaser would consider "embedded" income tax consequences as a result of capital gains in arriving at a purchase price to offer for any of the businesses, discounting for such in the course of business valuation in the context of a marriage dissolution is appropriate only in limited circumstances, as we discuss shortly.
We understand Robertson's report and trial testimony to say that the 40-percent "assumed" tax rate that he used under the asset-based valuation method contemplates depreciation recapture or capital gains "embedded" in the assets of each entity, which would be realized upon the sale of such assets. We agree that a purchaser of any or all of the Shuck family businesses would succeed to the Shuck family's basis in the entity's assets, and the purchaser would thereby have a potential future depreciation recapture or capital gains, which logically would affect what a purchaser would pay to acquire the business. However, these notions are relevant only in the context of this dissolution action in the two circumstances delineated
With respect to the income-based method of valuation, Robertson elected to apply a corporate rate of tax to the "benefit streams" (income) of Shuck Drilling. Under this method, the resulting reduction in value relates to the business' required payment of annual ordinary income taxes, not the built-in depreciation recapture or capital gains that would be realized and taxed upon the sale of the business' assets that we found to be an inappropriate valuation consideration above. Thus, the deduction for annual income taxes under the income-based method—applied only to the valuation of Shuck Drilling—was not a "tax consequence . . . of the sale of the business" and was proper. See Schuman, 265 Neb. at 465, 658 N.W.2d at 36.
We now address the additional reductions in the value of the Shuck business entities for lack of control and lack of marketability. We have quoted the portion of Walker v. Walker, 9 Neb.App. 834, 622 N.W.2d 410 (2001), that Karla relies on in arguing that such reductions were improper in this case. Although we found that the 25-percent discount applied by the trial court was incorrect in Walker, in that case, we were engaged in valuing the husband's nonmarital property for purposes of determining the extent of a Grace award. In this case, we are reviewing the district court's valuation of the marital estate, and the extent to which discounts are supportable in valuing family businesses—portions of which were marital property and portions of which were Dale's and Karla's separate nonmarital property. In addition to this distinction, in Walker, we "considered the evidence from the certified public accountants that a discount is appropriate in valuation"; however, "for purposes of the Grace award . . . we [did] not apply the 25-percent discount applied by the trial judge. Instead, we follow[ed] the teachings of Grace that minority ownership interest and lack of control [are] simply a consideration." 9 Neb.App. at 849, 622 N.W.2d at 420. Therefore, the holding of Walker is not that reductions for lack of control and marketability are always improper absent evidence of the imminent sale of a business, as Karla suggests. Rather, a court may use its discretion in considering such reductions in the context of determining whether to make a
Turning to the present facts, we find that the reduction for lack of control was acceptable in determining the fair market value of Dale's and Karla's ownership interests in the entities, because it is undisputed that neither is a majority shareholder in any of the Shuck family businesses. And, with regard to the lack of marketability adjustment, such was also appropriate in calculating fair market value, because the stock in each of the entities is not publicly traded and the other stock is held by other Shuck family members—making the stock less appealing to an outsider purchaser. As a result, Dale and Karla have severely limited ability to liquidate their shares—or to sell assets of the businesses.
Therefore, on our de novo review, we find that the 40-percent "assumed" income taxes deducted from the value of the entities under the asset-based method were an abuse of discretion by the trial court. However, under the income-based method, we find that the reduction in the to-be-capitalized income stream for annual ordinary income taxes was not speculative and thus correctly applied to the value of Shuck Drilling—because that entity was the only one for which the income-based valuation method was utilized. As for the reductions in the overall value of each entity for lack of control and lack of marketability, we find such adjustments were not an abuse of the trial court's discretion.
Next, Karla alleges that Dale should have been ordered to purchase her shares of stock in Shuck Drilling and Lazy T at their unadjusted values. As explained above, the trial court did not abuse its discretion in applying Robertson's income-based valuation of Shuck Drilling, which includes the discounts for lack of control and lack of marketability. With regard to the valuation of Lazy T, we find the trial court did abuse its discretion in making a reduction in value for tax liability for embedded depreciation recapture or capital gains. Thus, we reverse that portion of the trial court's ruling.
As a result, we find that Dale must purchase Karla's shares of stock in Lazy T, not at their unadjusted value, but, rather, at their value without the 40-percent income tax reduction. In order to determine the effect of such modification, we look to Robertson's report, exhibit 8, and add the "real and personal property adjustment" and "growing crops adjustment," described above, back into Lazy T's "balance sheet." After doing so, we find that Lazy T's total "indicated shareholder net equity" is $8,168,173, with each individual share of stock (after a discount for lack of control and lack of marketability) worth $169.60 (rounded). Karla's 200 shares of Lazy T stock, which the trial court ordered Dale to purchase for $23,546, are thus worth $33,920. As a result, Dale is ordered to purchase Karla's 200 shares of Lazy T stock for $33,920.
And, because 187 shares of Diamond Seven stock were deemed marital property by the trial court and assigned to Dale in the property division, it is necessary for us to revalue those shares after taking out the improper reduction for embedded income tax. We find that the overall value of Diamond Seven without the improper tax deduction is $5,411,688—each individual share of Diamond Seven stock is thus worth $147.12 (rounded). As a result, Dale and Karla's 187 marital shares are worth a total of $27,511.44, not $17,305, as determined by Robertson and adopted and used by the trial court. The difference
Karla's final assignment of error is that the trial court should have awarded her a Grace award as first set out in Grace v. Grace, 221 Neb. 695, 380 N.W.2d 280 (1986). We discussed the concept of a Grace award at length in our decision in Walker v. Walker, 9 Neb.App. 834, 622 N.W.2d 410 (2001). In Walker, we described a Grace award as "a device to fairly and reasonably divide marital estates where the prime asset in contention is one spouse's gifted or inherited stock or property in a family agriculture organization." 9 Neb.App. at 843, 622 N.W.2d at 417. However, to the extent that our Walker decision implies that Grace awards are limited to property division in dissolution cases involving only agricultural entities, we clarify that Grace awards are not strictly limited to agriculture situations, although such would be the most common. In that vein, in Medlock v. Medlock, 263 Neb. 666, 679, 642 N.W.2d 113, 125-26 (2002), the Supreme Court used the following description of its decision in Grace, supra: "[W]e ordered a cash award as compensation for the inadequacy of the marital estate." And, in Charron v. Charron, 16 Neb.App. 724, 730, 751 N.W.2d 645, 650 (2008), we further explained:
Here, the trial court found considerable factual dissimilarities from Grace, supra, and Walker, supra, and thus denied Karla's call for a Grace award. The court's decree recites:
We review the trial court's denial of a Grace award de novo on the record for an abuse of discretion. In doing so, we note that the purpose of property division is to equitably distribute the marital assets between
We find that this case is distinguishable from Grace v. Grace, 221 Neb. 695, 380 N.W.2d 280 (1986), and its progeny in the sense that the parties here have a substantial net marital estate valued by the trial court at $590,629.44. The court equally divided the marital estate; awarded Karla alimony in the amount of $30,000 annually for no more than 9 years, potentially resulting in an additional $270,000 to Karla; plus, awarded her all her attorney fees and most of her expenses. In addition, the court ordered Dale to purchase Karla's shares of stock in Shuck Drilling and Lazy T, resulting in another payment of roughly $130,000 to Karla—which we have increased to $140,105. The overriding concern is whether said division is fair and reasonable. See Charron v. Charron, 16 Neb.App. 724, 751 N.W.2d 645 (2008). On de novo review, we find that the trial court's division, as we have modified it, is fair and reasonable, and thus the trial court did not abuse its discretion in declining to make a Grace award to Karla.
After revaluing Karla's 200 nonmarital shares of Lazy T stock and the 187 marital shares of Diamond Seven stock, Karla's award is increased and Dale is required to pay her the following amounts:
Shuck Drilling: $106,185
Lazy T: 33,920
Plus equalization payment: 26,906
_________
Total due to Karla: $167,011
In sum, the increase in the total amount due to Karla from Dale is $15,476.73. Even without this increase, we do not see this as an appropriate case for a Grace award due to the parties' substantial marital estate. Our recalculation of the marital estate at $600,835.88 and the resulting increase in Karla's property settlement only solidify our position that a Grace award is not warranted. This assignment of error is thus without merit.
Finding merit to the portion of Karla's assignment of error regarding a reduction in the value of the Shuck business entities for embedded income tax liability under the asset-based valuation method despite a complete lack of evidence such assets or entities would be sold in the near future, we reverse that aspect of the district court's decision. As a result, the property settlement between the parties shall be modified in accordance with the findings fully detailed above, and we remand the cause to the district court to make such modification in the decree. In all other respects, we affirm the decision of the district court.
AFFIRMED IN PART, AND IN PART REVERSED AND REMANDED WITH DIRECTIONS.
