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IN THE COURT OF APPEALS OF IOWA No. 7-314 / 06-0319 Filed November 29, 2007

IN RE THE MARRIAGE OF LAURA LYNN BECKER AND FRED HAROLD BECKER Upon the Petition of LAURA LYNN BECKER, Petitioner-Appellant/Cross-Appellee, And Concerning FRED HAROLD BECKER, Respondent-Appellee/Cross-Appellant. ________________________________________________________________

Appeal from the Iowa District Court for Dubuque County, Alan L. Pearson, Judge.

Laura Becker appeals and Fred Becker cross-appeals from the economic provisions of a dissolution decree. AFFIRMED AS MODIFIED.

Alexander R. Rhoads of Babich, Goldman, Cashatt & Renzo, P.C., Des Moines, for appellant. Daniel L. Bray of Bray & Klockau, P.L.C., Iowa City, and Stephen Scott, Dubuque for appellee.

Heard by Huitink, P.J., and Zimmer and Vaitheswaran, JJ.

2 VAITHESWARAN, J. Laura Becker appealed and Fred Becker cross-appealed from the economic provisions of a dissolution decree. We filed an opinion on October 12, 2007, affirming the decree as modified. Fred Becker requested rehearing. He accepted our methodology for valuing his corporation but urged us to consider a revised valuation presented at trial. We granted his request for rehearing to consider this and other issues he raised. We now vacate our earlier opinion and substitute this opinion for it. I. Background Facts and Proceedings Laura and Fred married in 1983. When they met, Fred and his father were partners in a stone quarry business known as Becker & Becker Stone Co. Soon, Fred bought his father out of the business and the company came to be known as Becker & Becker Stone Co., Inc. In 2004, Laura petitioned to dissolve the marriage. The district court

awarded her $5000 per month in temporary spousal support and $7000 in temporary attorney fees. Prior to trial, Fred was sanctioned for his failure to comply with discovery and was ordered to pay $500 of Laura's attorney fees. The case proceeded to trial on financial issues. As part of the property distribution, the district court ordered Fred to pay Laura $1,203,759 within six months of the decree. The court also granted her $5000 per month in spousal support for a term of forty-eight months and $30,000 in attorney fees. Fred moved for enlarged findings and conclusions pursuant to Iowa Rule of Civil Procedure 1.904(2). The district court partially granted the motion,

removing a $132,000 note from the assets subject to distribution. This resulted

3 in a reduction of Laura's property settlement award to $1,137,759. The court also granted Fred a $7500 credit towards the $30,000 in attorney fees owed to Laura. Laura appealed and Fred cross-appealed. II. Property A. Valuation of Becker & Becker Stone Co., Inc. Laura contends the district court should have valued Becker & Becker Stone Co., Inc. at $5,704,240 rather than $3,100,000. She maintains (1) the court undervalued the un-quarried limestone, (2) the business valuation was based on incorrect tax assumptions and simple math errors, (3) the court should not have reduced the value for professional goodwill, and (4) the court improperly treated evidence regarding the $132,000 note. 1. Un-Quarried Limestone Fred individually owned two limestone quarries used in the operation of his business. For several years, Fred leased the quarries to his company and received royalty payments from the company. One of Laura's experts assigned a $2,000,000 value to these leasehold interests. The district court did not adopt this expert's valuation. Laura maintains the district court acted inequitably in failing "to assign any value to the leasehold interest owned by the parties individually for which the corporate entity pays a royalty each and every year." Fred counters that Laura's expert relied on speculative income, based his opinion on "a myriad of false assumptions," and did not consider "the value of substitution." We find it unnecessary to address Fred's criticisms of Laura's key expert, an expert whose opinion was not mentioned in the decree. Instead, we focus on

4 the opinion of Fred's expert, Shannon Shaw, whose testimony the district court found "persuasive." Shaw prepared a pre-trial report containing a $3,068,962 capitalization of earnings valuation for the corporation. See Northwest Inv. Corp. v. Wallace, ___ N.W.2d ___, ___ (Iowa 2007) ("Capitalization of earnings involves an estimation of the company's ongoing net earnings and a determination of the risks associated with generating those earnings (capitalization rate).") In a revised report, this figure was later reduced to $2,664,887. The district court did not adopt either of these figures, but instead relied on Shaw's trial testimony espousing a previously unarticulated "operating entity" valuation. Under this

approach, Shaw arrived at a final valuation of $3.1 million for the company and the quarries. Shaw reasoned as follows: If you hold the land outside of the operating entity, the correct way to value this would be to look at the operating entity's income stream, and if that income stream takes into account the economic reality of paying rents and/or paying royalties for the underlying product, which is the rock, then you should add back to your value of the operating entity the fair market value as appraised by a real estate appraiser to the total value. If, in fact, you combine the land inside the operating entity and there is no effect on the income stream now because you're not paying royalties, you're not paying rent, your ultimate income stream that you're valuing will go up accordingly and your ultimate value conclusion will go up accordingly, and -- -- that conclusion, since you have not taken into account the economic expense since they're combined now should -- that value conclusion would include not only the underlying real estate but also the value of the operations. This new valuation glossed over the fact that the land and buildings used in the business were not owned by the corporation but by Fred individually. For this

5 reason, we are not persuaded by Shaw's "operating entity" approach to valuation espoused at trial or the district court's adoption of that approach. In reaching this conclusion, we acknowledge that the district court found "Shaw's investigation and evaluation to be the most thorough and his testimony to be the most well-documented." We also recognize that, although our review is de novo, we are to defer to the district court when valuations are accompanied by such supporting credibility findings. In re Marriage of Vieth, 591 N.W.2d 639, 640 (Iowa Ct. App. 1999). Given this standard, we return to Shaw's written reports. Shaw's original and revised reports recognized that the quarries "are owned outside of the Company." The original report also explained the effect of this outside ownership. First, Shaw noted that "[t]he Company pays a royalty fee each year for the depletion of the quarries." Second, he noted that because "[t]he land and the building the company operates out of are owned personally by Fred Becker," the company had rent expenses. Finally, according to Shaw,

Fred's ownership of the quarries and buildings resulted in the following tax allowance to Fred: Mr. Becker owns the land personally and takes a depletion deduction on his personal income tax return at an amount that is allowed by the Federal government. The Company pays Mr. Becker an amount to reimburse him for the depletion allowance. At some point in the future, the land will be depleted and Mr. Becker will have to purchase a new parcel of land. In his reports, therefore, Shaw considered and accounted for the fact that the corporation did not own the quarries and buildings used in the business. Shaw proceeded to value the company using both an asset approach and a capitalization of earnings approach. Under the asset approach, Shaw excluded

6 the quarry values because they were "outside of the Company." In his original report, he arrived at an adjusted net book value of $2,553,814 on a control, marketable basis. Under the earnings approach, Shaw examined five years of statements recording the company's adjusted earnings. The statements

revealed that the corporation regularly and consistently made payments to Fred based on his ownership of the land and buildings. These expenses reduced corporate earnings. Shaw factored the reduced earnings into his original

valuation figure of $3,068,962. Shaw next compared his valuation under the asset approach with the valuation under the capitalization of earnings approach. He selected the figure obtained under the capitalization of earnings approach over the net book value of $2,553,814 because, in his view, "the capitalization of earnings method captures the intangible value present in the Company." His original report contained the following conclusion: The marketable value of the subject shares of Becker & Becker Stone Company was $3,068,962. A discount for lack of marketability of 10 percent is appropriate in this case, and when applied to the marketable value above, results in a fair market value of approximately $2,912,000. The $3,068,962 valuation figure Shaw obtained before application of the pre-marketability discount was consistent with the district court's concern that the business be valued "as a functioning whole." As Shaw noted, this was in fact a "going-concern" value. The figure was also consistent with the court's determination that there was "no basis for an assumption that the business will be sold." The record supports this determination and calls into question Shaw's use of a marketability

7 discount. In reaching this conclusion, we have considered and found

unpersuasive Fred's present arguments to the contrary. Although we are not persuaded that Shaw's marketability discount was supported by the evidence, we believe his original $3,068,962 was supported by the evidence. That, however, was not Shaw's final valuation figure. At trial, Shaw presented a revised report that reduced the valuation of the corporate stock from $3,068,962 to $2,664,887. This reduced valuation was

based on a shareholder distribution of $800,000 authorized by the district court prior to trial and divided evenly between the parties. Shaw testified that the effect of this distribution was to decrease the cash and equity of the corporation. In a belated response to Fred's request for rehearing, Laura does not take issue with the methodology used by Shaw to arrive at this reduced figure or to the figure itself. Instead, she argues that we should use the higher valuation figure of $3,068,962 to account for what she believes was the previously unaccounted for value of the buildings and land from which the business operates. However, as discussed below, the buildings and land were valued in connection with the appraisal of one of the quarries. unpersuaded by this argument. Considering the district court's credibility finding in favor of Shaw and the evidentiary corroboration of Shaw's capitalization of earnings valuation, see Vieth, 591 N.W.2d at 640, we conclude the appropriate valuation for the stock of Becker & Becker Stone Co., Inc. was $2,664,887, the value after distribution of the $800,000 in shareholder equity. As the stock was owned entirely by Fred, this figure would be listed as an asset to Fred. Therefore, we are

8 This brings us back to Laura's contention that the district court did not consider the value of the leasehold interests in the quarries. As explained,

Shaw's written valuations accounted for the royalty payments to Fred. What remained was the value of the quarries and associated buildings. One of Fred's experts valued one quarry at $470,000 and the other at $110,000. The $470,000 valuation figure included the value of buildings on that quarry site. As the

quarries and buildings were assets of Fred, the quarry and building values should have been added to Fred's asset total. We turn to the question of how these additional assets should be distributed. Iowa is an equitable distribution state. In re Marriage of Keener, 728 N.W.2d 188, 193 (Iowa 2007). The district court stated, "[i]n this case, a fair distribution is one that is more or less equal." We agree with this assessment. The marriage lasted twenty years. See Iowa Code

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