## Facts

- Husband owned and operated a sole-proprietorship business before marriage.
- At the parties’ 1986 marriage, the business was valued at approximately $337,500.
- During marriage, the business was incorporated, but no stock certificates were issued showing any transfer of ownership to the community.
- At dissolution, the business was valued at approximately $622,000.
- Husband presented evidence supporting a reasonable rate-of-return approach on his separate-property capital (e.g., 10%) to identify separate-property value attributable to capital and a return, with any remaining increase attributed to community effort.
- The trial court treated incorporation as a community “acquisition” of the business and applied Family Code § 2640, awarding Husband reimbursement of $337,500 without any return, and treating the remaining value as community property.

## Issues

1. Whether incorporation during marriage of a premarital, spouse-operated business constitutes a community “acquisition” governed by Family Code § 2640 reimbursement rules.
2. Whether the increase in value of such a business must instead be apportioned between separate and community interests under Pereira-type principles that account for both separate capital and community labor.

## Decision

- The Court of Appeal reversed the judgment to the extent it applied Family Code § 2640 to the business.
- The court held that § 2640 did not govern characterization or allocation of value for a premarital business merely incorporated during marriage.
- The court remanded for apportionment under Pereira-type analysis, separating reasonable return on separate capital (separate property) from growth attributable to community efforts (community property).

## Legal Principles

- Family Code § 2640 provides dollar-for-dollar reimbursement (without interest or return) for separate-property contributions to the acquisition of community property, but it is not a general valuation rule for spouse-operated businesses.
- A business owned by one spouse before marriage remains separate property absent a transmutation or other legally effective transfer; a change in business form (e.g., incorporation) alone does not establish a community acquisition when ownership is not transferred.
- For a spouse-operated business with separate-property capital and community labor during marriage, courts must apportion value increases by distinguishing a reasonable return on separate capital (separate) from appreciation attributable to marital efforts (community) under Pereira-type principles.

## Conclusion

A premarital business does not become a community acquisition under Family Code § 2640 simply because it is incorporated during marriage; instead, the business’s increased value must be apportioned between separate and community property by allowing a reasonable return on the separate-property investment and allocating remaining growth to community effort.


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