Arbuckle v. Arbuckle

COURT OF APPEALS OF VIRGINIA

Present: Judges Benton, Willis and Overton
Argued at Alexandria, Virginia

NORMA JEAN ARBUCKLE

v. Record No. 1546-95-4 OPINION BY
JUDGE JERE M. H. WILLIS, JR.
GARY R. ARBUCKLE APRIL 30, 1996

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Thomas S. Kenny, Judge
James A. Watson, II (Surovell, Jackson,
Colten & Dugan, P.C., on briefs), for
appellant.

James Ray Cottrell (Gannon, Cottrell & Ward,
P.C., on brief), for appellee.

On appeal from a final decree of equitable distribution,

Norma Jean Arbuckle contends that the trial court erred (1) in

discounting the value of Gary R. Arbuckle's dental practice by

estimated capital gains taxes on a hypothetical sale, and (2) in

not similarly discounting the value of the oil stock allotted to

her. Dr. Arbuckle has moved that this appeal be dismissed for

lack of merit. That motion is denied. We reverse the judgment

of the trial court.

Dr. and Mrs. Arbuckle were married in January, 1958. They

have three children, all of whom are now emancipated. The

parties separated in April 1993, after thirty-five years of

marriage. A final decree of divorce was entered on April 14,

1995. Due to an impending sale of the marital residence and the

parties' inability to agree on the terms of a property division,
the proceedings were bifurcated. An equitable distribution and

spousal support decree was entered on June 22, 1995, nunc pro

tunc April 14, 1995. In that decree, the trial court found that

there was "an equal marital partnership, and accordingly, the

assets should be divided equally." The decree provided Mrs.

Arbuckle a monetary award to "equalize the division of marital

assets." The trial court allotted to Dr. Arbuckle his dental

practice and to Mrs. Arbuckle shares of oil stock titled in her

name. The trial court reduced its valuation of the dental

practice by the amount of capital gain tax liability that would

have accrued had the practice then been sold. It made no similar

adjustment to its valuation of the oil company stock. The effect

of the dental practice valuation adjustment was to reduce the

amount of Mrs. Arbuckle's monetary award.
"Fashioning an equitable distribution award lies within the

sound discretion of the trial judge and that award will not be

set aside unless it is plainly wrong or without evidence to

support it." Srinivasan v. Srinivasan, 10 Va. App. 728, 732, 396

S.E.2d 675, 678 (1990).
There are three stages to making an equitable
distribution of property. The court first
must classify the property as either separate
or marital. The court then must assign a
value to the property based upon evidence
presented by both parties. Finally, the
court distributes the property to the
parties, taking into consideration the
factors presented in Code § 20-107.3(E).

Marion v. Marion, 11 Va. App. 659, 665, 401 S.E.2d 432, 436

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(1991).

The trial court found that Dr. Arbuckle's dental practice

was a marital asset. Both Dr. Arbuckle and Mrs. Arbuckle

presented expert testimony on the value of the practice. The

trial court considered the experts' valuations, weighed the bases

for their opinions, and considered their relative experience in

transactions involving the sale of similar professional

practices. It determined that the value of the practice was

$281,000. The record supports this determination.
The trial court considered the factors set forth in Code

§ 20-107.3(E) and found that the marital assets should be

distributed equally. However, the court also found that

§ 20-107.3(E)(10) required it to consider the putative tax

treatment of Dr. Arbuckle's dental practice in making a fair and

equitable award. The court acknowledged that Dr. Arbuckle had no

intention of selling his practice and that consideration of

potential capital gain taxes indulged a "legal fiction."

Nonetheless, the trial court reduced the value of the practice by

the amount of taxes that it calculated would be incurred if the

practice were sold on the date of the hearing. Thus, the court

reduced the value of the practice by 33.7%, leaving a net value

of $186,303.

Mrs. Arbuckle contends that the trial court erred in

considering tax consequences of a hypothetical sale of the dental

practice in determining its value. She argues that this

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consideration is too speculative to bear on the present value of

the practice. Alternatively, she argues that if the court acted

properly in considering the tax consequences of a hypothetical

sale of the dental practice, that same analysis should apply in

the court's valuation of the oil stock allocated to her. She

argues that the trial court erred in treating the two items of

property differently.

The trial court erred in considering the tax consequences of

a hypothetical sale when valuing the dental practice. Dr.

Arbuckle did not intend to sell his dental practice. No evidence

established that a sale would occur in the near future.

Accepting, for the sake of argument, that such a sale might occur

in the future, the record did not permit the trial court to

determine the value that would then be involved, what Dr.

Arbuckle's financial circumstances would be, or what rules of

taxation would then apply. Thus, the tax consequences of a

hypothetical sale were too speculative to be considered by the

trial court in determining the present value of Dr. Arbuckle's

dental practice. For the same reason, the trial court did not

err in declining to discount the value of stock allotted to Mrs.

Arbuckle.
Citing Barnes v. Barnes, 16 Va. App. 98, 428 S.E.2d 294

(1993), Dr. Arbuckle argues that this Court has approved

consideration of the tax consequences attributable to a potential

future sale in the fashioning of an equitable distribution award.

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We perceive no disagreement between the holding in Barnes and

our decision in this case. Indeed, Code § 20-107.3(E)(9) directs

consideration of the tax consequences to each party in the

fashioning of an equitable distribution scheme and award.

However, Barnes did not address the specific issue raised in this

appeal.

In Barnes, the jointly owned marital home was allotted to

the husband. The parties' marital property was appraised at its

then value. In applying the factors of Code § 20-107.3(E), the

trial court noted that should the husband at some time sell the

home, he would be liable for any resulting capital gain tax.

Applying all the statutory equitable factors, the trial court

determined that the wife should receive 35% of the total value of

the marital property. Affirming the judgment of the trial court,

we said:
[T]he trial judge, by noting that the husband
would bear the responsibility of the capital
gains tax, did no more than recognize what
the Internal Revenue Code would require of
the husband should he later sell the
property.

Id. at 106, 428 S.E.2d at 300. The trial court did not employ

hypothetical tax consequences in determining the value of the

home. It merely recognized that the transfer of the jointly

owned property to the husband shifted to the husband a potential

tax liability flowing from the wife's present ownership interest,

and utilized that information in determining "[t]he amount of any

division or transfer of jointly owned marital property, and the

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amount of any monetary award, the apportionment of marital debts,

and the method of payment" as required by Code § 20-107.3(E).

Every capital asset has a value basis and, thus, a potential

liability for capital gain tax upon sale. That potential

liability is a proper consideration in the determination of a

property division and an award, if it is not speculative.

However, by basing its appraisal of the dental practice on

potential liability resulting from a hypothetical sale, the trial

court constructed an appraisal that was not based on the present

fair market value of the property, and in doing so erred.
The judgment of the trial court is reversed and this case is

remanded for further proceedings consistent with this opinion.

Reversed and remanded.

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