## Facts

- Mary K. Nelson and Harold F. Nelson, Jr. dissolved their marriage in an interlocutory judgment entered by a California superior court.
- Harold received multiple employee stock-option grants through his employment with Ampex Corporation, later associated with Signal Companies, Inc.
- The trial court classified the options into three groups: (1) granted and exercisable before separation; (2) granted before separation but exercisable after separation; and (3) granted after separation.
- The court characterized group (1) options as community property, group (2) options as partly community and partly Harold’s separate property, and group (3) options as Harold’s separate property.
- The court treated the group (2) options as deferred compensation for services both rendered during marriage and to be rendered after separation, and apportioned them using a time-based fraction.
- The court also characterized a one-half interest in Maui real property and the parties’ Half Moon Bay residence as community property.
- A year-end bonus paid to Harold about six months after separation was characterized as his separate property.
- The trial court included a tax offset and reimbursement method to account for tax consequences associated with exercising stock options.
- Both spouses appealed portions of the property and related rulings; the appeal resulted in affirmance with a limited remand on appellate attorney’s fees.

## Issues

1. Whether employee stock options granted during marriage but not exercisable until after separation may be treated as partly community property.
2. What equitable apportionment method may be used to divide such “intermediate” options between community and separate interests.
3. Whether options granted after separation and a postseparation bonus were properly characterized as the employee spouse’s separate property.
4. Whether the trial court properly accounted for tax consequences from stock-option exercises through offsets and reimbursement.
5. Whether the matter required remand concerning attorney’s fees on appeal.

## Decision

- The Court of Appeal affirmed the trial court’s characterization and division of the three categories of stock options.
- The court upheld treating pre-separation, exercisable options as community property.
- The court upheld treating pre-separation grants that became exercisable after separation as partly community property, apportioned by an equitable time-rule formula.
- The court upheld treating postseparation option grants as Harold’s separate property.
- The court affirmed the characterization of the Maui property interest and the Half Moon Bay residence as community property.
- The court affirmed treating the year-end bonus paid after separation as Harold’s separate property.
- The court approved the tax offset and reimbursement mechanism addressing tax liabilities tied to option exercise.
- The court remanded solely for consideration of attorney’s fees on appeal; otherwise, it affirmed the interlocutory judgment.

## Legal Principles

- Employee stock options are a form of property that may be divided in marital dissolution and can include both community and separate components.
- Options granted during marriage but subject to postseparation vesting or exercisability may have a community interest to the extent they compensate marital-period services, even if contingent on continued employment.
- Courts may apportion “intermediate” options using an equitable time-rule approach; no single formula is mandatory, and trial courts have broad discretion to select a method suited to the circumstances.
- One permissible time-rule method measures the community fraction as: months from option grant to separation divided by months from grant to exercisability, applied to the shares covered by the option.
- Options and compensation tied to postseparation services may be characterized as the employee spouse’s separate property based on supported factual findings.
- Courts may structure tax-related offsets and reimbursements to allocate tax burdens consistently with the economic allocation of option benefits.

## Conclusion

The court affirmed that stock options are divisible property in dissolution and that options granted during marriage but becoming exercisable after separation may be apportioned between community and separate interests under an equitable time-rule method; it also approved tax-adjustment mechanisms linked to option exercise and remanded only to address attorney’s fees on appeal.


In re Marriage of Nelson, 177 Cal. App. 3d 150, 222 Cal. Rptr. 790 (Ct. App. 1986)