Increased Value of a Business: Separate Property or Community Property?

Under Arizona law, when community assets benefit one spouse’s separate property, the community can obtain reimbursement in a divorce. Does the same rule apply when the community ends because of one spouse’s death? What is the measure of reimbursement? In Guthrie v. Guthrie 242 P.2d 549 (1952), the Arizona Supreme Court addressed these issues.

Facts of the Case

The Guthries married in 1942 and separated in 1945. Wife proceeded forward with a divorce in 1948. Before the marriage, husband became a partner in a mattress company with his father. He continued this during the marriage. The value of the business rose dramatically, but the court did not count this increase as community property. It only counted as community property the amount husband withdrew from the business; some $20,863.98.

The trial court awarded Wife half of this, minus the amount Husband gave her for living expenses during separation. It also subtracted from the Wife’s amount one-half of the community debt. Wife appealed, claiming that the entire increase in the value of the business was community property.

Separate Property Business Income

In Arizona, income from a business that is the separate property of one spouse can be community or separate property. If the profits result from the individual toil and application of the spouse, they are community property. If they are due to the inherent quality of the business, they remain separate.

Here, the Court of Appeals found ample evidence to support the trial court’s finding that they were separate. Husband did not direct the business, his father did. Husband only managed the office and drove the truck. He was a simple employee, not a manager whose talent and application caused the increase in value.

The Court found that the value of the business increased rapidly because of the war. The scarcity of materials meant that there was not much competition. This supported the trial court’s finding that the increase in the value of the business was Husband’s separate property.

Commingling of Funds

In Arizona, if separate property is commingled with community property, it becomes community property. Wife argued that commingling of funds transmuted Husband’s separate funds into community. The Court said that this rule only applies when the identity of the separate funds is lost.

Here, husband could trace and identify the separate funds.

Alimony and Attorney Fees

The Court declined to review the question of whether Wife’s $150 per month alimony was too low. It said that since the trial court heard the evidence, it was in a better position to evaluate it. Likewise, it did not alter the attorney fee award to Wife.

Wife claimed she was entitled to at least as much as husband spent in fees. But she did not present evidence of how much he paid in fees.