The Court of Appeal in Orange County Ruled that a Change in the Form or Size of a Separate Property Business During Marriage Does Not Change its Character from Separate to Community Property

In Koester, prior to marriage, husband owned a sole proprietorship. Three years after marriage, husband incorporated the business. At the divorce trial, wife’s Orange County divorce lawyer argued that the community “acquired” the business as a community asset, subject to a reimbursement to husband for his initial investment, when husband incorporated the sole proprietorship. The divorce court agreed with wife’s Orange County divorce lawyer. Husband’s divorce lawyer appealed.

The Court of Appeal agreed with Husband’s Orange County divorce attorney and reversed and held the mere incorporation of a business during marriage does not change the character from separate property to community property. The Court of Appeal deftly stated that, “one might say that something was ‘acquired’ during the marriage, but only by ignoring the reality of what was really happening, i.e., that a separate property asset was merely changing its legal form. To say … that an asset was ‘acquired’ by the community because some aspect of corporate formation took place during the marriage is to elevate semantics over substance.”

In re Marriage of Koester (1999) 73 Cal. App. 4th 1032