Family Code §770 states that when a spouse owns a business at the date of marriage (or acquires one during marriage by gift or inheritance), the business is presumed to be separate property. Family Code §760 states that property created by the personal efforts of a spouse during marriage are community property. Therefore, during a marriage, a spouse may perform personal efforts in the operation of a separate property business which may increase the value of that business. Because of the aforementioned code sections, a community property interest may be created in a separate property business. Apportionment is one process of determining the community property interest in a separate property business.
Prior to marriage, Frank Pereira owned a very profitable saloon and cigar business. His original investment in this business was $15,500. The trial court awarded Agnes Pereira 3/5ths of the increase in the value of the business after marriage. Frank appealed and the Supreme Court reversed the trial court’s decision, holding that Frank was entitled to a return on his separate property capital prior to the community property interest being calculated.
The majority of the income generated by the business was due to the personal character, reputation, ability and capacity of Frank Pereira. This portion of the income was undoubtedly community property. However, without the separate property capital, Frank could not have carried on the business. In the absence of circumstances showing a different result, it is to be presumed that some of the profits were due to the separate property capital invested. There was no evidence to show that all of the profits were due to Frank’s efforts alone. The most likely portion of the capital to the income should have been determined from all the facts and evidence in front of the court in the case. Because the business was profitable, that portion would amount to at least the usual interest on a long-term investment well secured.
- Step 1: Determine the value at the date of marriage (if acquired during marriage by gift or with separate property funds, determine the value at the time of acquisition).
- Step 2: Determine the value at the date of separation or at an alternative valuation date if applicable.
- Step 3: Apply a rate of return to the investment of the separate property at the date of marriage or other applicable date. This rate of return should be at least the usual interest on a long-term investment well secured.
- Step 4: Calculate the community interest by subtracting from Step 2 the sum of Steps 1 and 3.