Ron J. Anfuso, CPA/ABV, An Accountancy Corporation, was retained by a Family Law attorney on behalf of Jonathan Brown to perform accounting services. Our efforts included, but were not limited to (a) tracing the source, to separate or community property, of funds used to purchase a condominium in South Africa, and to determine the community property pro tanto interest, if any, in the South African property, (b) tracing the source, to separate or community property, of funds used to pay off loans secured by real property, (c) tracing the source, to separate or community property, of funds in various bank or investment accounts of the parties, (d) appraising the value of Respondent’s business interest, and (e) accounting for the parties’ expenditure of community and separate property funds after separation (post-separation accounting).
Jonathan and Joyce Brown were married on February 2, 1988 and separated on July 30, 2011. At the time of the marriage, Jonathan, Petitioner, was 41. Joyce, Respondent, was 29. Jonathan is an internationally known photographer whose work appears in numerous magazines, and Joyce is a graphic designer.
At the time of marriage, Petitioner had substantial assets. He had two real properties, one in South Africa (valued at $190,000) and the other in Brentwood, CA (valued at $675,000). The latter was gifted to Petitioner by his parents in 1985. Jonathan also had several bank and investment accounts. We determined the approximate value of his total assets as of February 2, 1988, including real estate, to be $1,150,000. At the time of separation, the real property value of the South Africa condo was $1,300,000 and the house in Brentwood was valued at $2,200,000.
The property in South Africa was acquired prior to marriage and partially financed. In May 1994, the mortgage loan was completely paid off. The property was consistently rented out to tenants.
To determine the separate character of the property in South Africa, we performed a detailed tracing of the transactions to the property from the date of marriage through May 31, 1994. Based on our tracing, we determined that, with two exceptions, there were sufficient funds in the South African Trust account to pay all expenses associated with the ownership of the South African property. This included payment of the principal on the mortgage. As a result, during the marriage, two payments came from the bank in the United States.
These payments came from two sources. The first was established by Petitioner solely for the purpose of holding interest from mutual funds (Account 1).
The second checking account was opened by Petitioner in January 1988, prior to their marriage, with separate funds of $50,000. This account continued to be used as a primary operating account by Petitioner after their marriage (Account 2).
The tracing we conducted on both accounts demonstrated the separate character of the transactions. Despite incomplete records of transactions, we were able to reconstruct bank activity during the relevant time period based on the available evidence, which included tax returns, Form 1099-MISC, 1099-INT, deposit slips, transaction receipts, incoming wire advices, checks, check registers, loan documents, amortization schedules, and records of photography sales.
In addition, certain assumptions were required. These included:
- All the income generated during the marriage and related expenses were deposited and withdrawn from Account 2
- Sale of photographic works prior to marriage was characterized as separate property
- Transfers from other accounts were characterized as either separate or community property, depending on the character of source account
- Income for which we found no records providing the character one way or the other was characterized as community property
- Investments were allocated as separate property based on Petitioner’s position that he intended all the mutual funds investments and income from there was and remained his separate property
Our Tracing Strategy
We performed two methods of tracing, which we believed would strengthen the likelihood of the court ruling in favor of the most positive outcome for our client. If our primary methodology was not to be adopted, however, an alternative calculation that reflected the minimum separate property that should be allocated to Petitioner would, in all likelihood, be accepted. As the court accepted our primary methodology, the South African property was awarded to the Petitioner free and clear with the fair market value of $1,300,000.
The House in Brentwood
The Brentwood property was gifted to Jonathan (Petitioner) prior to marriage. The property was free and clear. Soon after the parties were married in 1989, the property was transmuted to community property, and Jonathan and Joyce took out a $250,000 loan to remodel the property. Subsequently, the property was refinanced several times. We analyzed the loan history and subsequent refinances, and traced the mortgage payments. It appeared that Petitioner consistently paid all of the mortgage payments during the period from 1989 through 2007, when the mortgage was paid off. From 1989 through 2002, mortgage payments were made through a Petitioner’s primary operating account. This account was commingled. However, based on our detailed tracing of this account related to the South African property through 1994, we established the separate character of the principal payment of $50,000 that was paid down during the first refinance of the Brentwood property. From 2003 until the mortgage was paid off in 2007, payments were made through an account which we completely traced and proved to be a separate property of the Petitioner (Account 1, mentioned in Part 1). Therefore, the principal balance as of 2003 in the amount of $84,000 is another reimbursement to Petitioner under Family Code §2640. As the court accepted our primary tracing methodology related to the South African property, it agreed that the Petitioner was entitled to a reimbursement under Family Code §2640 of the following amounts:
- The value of the property as of the date of transmutation in 1989 ($675,000).
- The paying down of the principal balance in the amount of $50,000 during the first refinance.
- The paying down of the principal balance in the amount of $84,000 for the period 2003 through 2007.
Based on our analysis, total reimbursement to Petitioner under Family Code §2640 amounted to $809,000, plus his 50% share of the remaining community equity in the house of $695,500 ($2,200,000 – $809,000 = 1,391,000/2=$695,000) resulted in total Petitioner’s interest in the Brentwood house of $1,504,500. As these two real properties were the most substantial assets in the case, the Petitioner was satisfied to recover $2.8M from them.