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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