One important issue that often comes up in divorce concerns is whether the community has an interest in a spouse’s separate property business.
“The community” refers to the property acquired by a couple during marriage in California. California is a community property state. This means that all property acquired during marriage will be community property, with few exceptions, and each spouse will have a one-half interest in the property. This general rule can be broken by “tracing” the funds used to purchase the property to a separate property asset.
One example is where husband purchases a home during the marriage with funds that came from his residence prior to marriage. He would have a separate property interest in the newly acquired real property because of the use of his separate property funds.
Separate property includes property acquired prior to marriage, after permanent separation, through inheritance, or by gift. Typically, income from separate property is separate, but the fruits of the community’s expenditures of time, talent, and labor are community property.
Where community efforts increase the value of a separate property business, it becomes necessary to measure the separate contributions that increase in value. According to the law, if more than minimal community effort is contributed to a separate property business during marriage, then the property must be allocated to reflect these contributions. The community is entitled to the increase in profits which arose as a result of their efforts. Courts must give profits based from the community effort to the community, and profits from the separate income are given to separate property. In re Marriage of Dekker (1993) 17 Cal.App.4th 842, 850-852.
Following this law, California courts have developed two approaches to allocating business profits. Under the Pereira approach, community income is defined as the amount of income that exceeds what the expected returned investment was without the spouse’s personal management. Beam v. Bank of America (1971) 490 P. 2d 257. Under the Van Camp approach, the community is given a share of the increased value equal to the fair value of the community services minus amounts withdrawn to meet family expenses. The court will apply the formula that best meets the character and nature of the separate property business and the main factor contributing to its increase in value.
Once a California court measures the amount of community income, it deducts the community living expenses to determine the balance of the community property. The community portion is significantly less when the Van Camp formula is applied.
The non-owner spouse typically argues in favor of Pereira, claiming that the growth and expansion of the separate property business of the owner-spouse during the course of marriage was due to his or her effort, skill, talent, and community labor. On the other hand, the owner-spouse will argue in favor of Van Camp, claiming that the growth of business was principally due to external factors. Although the application of either rule would vary depending on the circumstances of each case, it is a logical conclusion that Pereira will be used where the business is labor intensive and/or requires special talent of the owner. Van Camp will be most effective where the growth is due to changes in population, economy, and trend.
Disclaimer: Nothing in this blog should be considered legal advice. Without considering the particular facts of your case, attorneys with Pocklington Law are unable to offer advice as it relates to a person’s particular case. If you wish for our office to consider taking your case or to offer legal advice, please contact our office to schedule an appointment by calling (925) 295-7348.