On June 6, 1975 the parties to this action were granted a dual judgment of divorce on the grounds of plaintiff's cruelty and adultery, and defendant's cruelty, after a trial which commenced on April 8, 1975 and concluded on April 24, 1975, consuming ten full days of trial.
Both parties appealed to the Appellate Division, with the result that the provisions of that judgment relating to custody, counsel fees and equitable distribution of the defendant's business interest were reversed and remanded for
further proceedings consistent with the Appellate Division decision. Lavene v. Lavene , 148 N.J. Super. 267, 278 (App. Div. 1977), certif. den. 75 N.J. 28 (1977). The Appellate Division reviewed all other issues raised by the parties on appeal and found no error therein.
[The court reviewed the facts at length and the applicable law, and determined that it would be in the best interest of the young daughter of the marriage to be continued in the custody of defendant father.]
II. Equitable Distribution
The Appellate Division also remanded for further factual findings with respect to the value of defendant's interest in Energy Storage Corporation, hereinafter ESC. ESC is a closely held corporation of which defendant is the president, and of which he is owner of 42.8% of outstanding stock.
The Appellate Division had found error in the determination made at the original hearing of this matter that the value of defendant's interest in the corporation was offset by the amount of the corporate loans he had guaranteed and that therefore the interest did not constitute a distributable asset.
A closely held corporation has been defined as a corporation in which the stock is held in a few hands, or in a few families, and wherein it is not at all, or only rarely, dealt in by buying and selling. Kascle, "Valuation of Closely Held Corporation," 43 TAXES -- The Tax Magazine , 454 (July 1965).
The valuation of the stock of a closely held corporation calls for attempt to fix a fair market value for the stock -- that is, the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts. It is
assumed that the hypothetical buyer and seller are able, as well as willing, to trade and to be informed about the property and the market for such property.
Determination of the fair market value of an interest in a close corporation has always presented difficulties. This is because
As a result, the valuation of the stock of a closely held corporation requires an entirely different approach than the valuation of any other asset. The valuation process has been described as a "matter of judgment and opinion rather than mathematics." Banks, "Present Value and the Close Corporation", 49 TAXES -- The Tax Magazine , 33, 35 (January 1971). Each case presents a unique factual question, the solution to which is not within the ambit of any exact science. The reasonableness of any valuation depends upon the judgment and experience of the appraiser and the completeness of the information upon which his conclusions are based. Lawinger, "Appraising Closely-Held Stock -- Valuation Methods and Concepts," 110 Trusts and Estates 816 (October 1971).
Revenue Ruling 59-60, C.B. 1959-1, 237 sets forth the proper approach to use in the valuation of closely held corporate stocks for estate and gift tax purposes. The approach, methods and factors set forth therein are equally applicable here. The factors which Revenue Ruling 59-60 sets forth as being fundamental and as requiring careful analysis in each case are:
(1) the nature of the business and the history of the enterprise from its inception; (2) the economic outlook in general and the condition and outlook of the specific industry in particular; (3) the book value of the stock and the financial condition of the business; (4) the earning capacity of the company; (5) the dividend-paying capacity; (6) whether or not the enterprise has goodwill or other intangible value; (7) sales of the stock and the size of the block of stock to be valued; and (8) the market price of stocks of corporations engaged in the same or similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.
The above is not an all-inclusive list and there is no formula for determination of their interaction. It should be stressed that no one factor or factors can be considered in a vacuum, but rather consideration must be given to the relationship of all relevant factors on the basis of informed judgment and common sense.
An examination by an appraiser of each factor listed in Revenue Ruling 59-60 would require the gathering of certain data. An analysis of the type of information that would be sought with respect to each factor would be as follows:
(1) Nature and History of the Enterprise.
Consideration of this factor would highlight operating and financial information, product or service changes, and growth or the lack thereof and other facts needed to form an opinion of the degree of risk involved in the business.
What are the current and prospective economic conditions as of the date of the appraisal, both in the national economy and in the industry with which the corporation is allied. Is the corporation competitive with, is it successful, when compared with other corporations in the same industry? Revenue Ruling 59-60, supra.
Revenue Ruling 59-60 notes that the fair market value of specific shares of stock will vary according to the degree of optimism or pessimism with which the investing public regards the future at the required date of appraisal. Highly uncertain future prospects of a company will have a definite effect on the value of the stock of that company. The effect
on the value of stock as a result of loss of the manager of a "one man" business is ...