Apportioning the Increased Value of a Separate Property Business During Marriage

In a California divorce, the community property 1 of the spouses is divided evenly between them. Any separate property 2 is confirmed to the appropriate spouse. However, should a spouses bring a separate property business into the marriage, and then continue to contribute community labor and funds to the business during the marriage, the community is entitled to share in the increased value of the business upon divorce.

The California Supreme Court has stated that the community must receive a fair share of that which is derived from community effort, noting that a spouse’s skill, efforts, and industry constitute community property. 3 The fact that a reasonable salary was paid to the community for efforts during the marriage does not preclude apportionment of the increase in value of the business. 4 The courts have developed two methods for allocating earnings and profits between separate and community property known as the Pereira formula 5 and the Van Camp formula 6 . A court has discretion to decide which formula to apply in order to achieve substantial justice between the parties.

Courts generally apply a Pereira analysis when the increase in value of the separate property business during marriage resulted primarily from community labor rather than the capital itself/outside market forces. In applying this analysis, the court first determines the value of the business at the time of marriage. The court will then add a reasonable rate of return to that value at marriage, and the sum constitutes the business owner spouse’s separate property. Any excess value is community property.

Conversely, when the nature of the business itself/outside market constitute the primarily reasons for the increased value of the business, courts will generally apply the Van Camp formula. In applying this analysis, the court will assign a market salary for the community labor that was contributed to the business. Any amounts paid for community expenses are deducted from the salary amount. The resulting amount is community property.

1 Family Code section 760 provides: “Except as otherwise provided by statute, all
property, real or personal, wherever situated, acquired by a married person during the
marriage while domiciled in this state is community property.”
2 Pursuant to Family Code section 770, subdivision (a), separate property of a married
person includes: (1) All property owned by the person before marriage; (2) All property
acquired by the person after marriage by gift, bequest, devise, or descent; and (3) The
rents, issues, and profits of the property described in this section.
3 Beam vs. Bank of America (1971) 6 Cal.3d 12.
4 In re Marriage of Dekker (1993) 17 Cal.App.4th 842, 852.
5 Pereira v. Pereira (1909) 156 Cal. 1.
6 Van Camp v. Van Camp (1921) 53 Cal.App. 17.
Pereira Van Camp