Segregating Separate Property From Community Property

In Arizona, an increase in the value of separate property during a marriage can be either separate or community property. Arizona court’s generally treat it as community property to the extent it is attributable to a spouse’s efforts. Any increase due to the inherent value of the property remains separate property.

In Nace v. Nace 448 P.2d 76 (1968), the Arizona Supreme Court addressed this issue. A husband appealed the Court of Appeals’ ruling that the increase of his separate holdings during marriage were community property.

Facts of the Case

Mr. Nace and Mrs. Nace married in 1956. Wife filed for dissolution in 1963. She asked for a property division, alimony and child support. The trial court awarded her the family home, $1,500 a month alimony and $400 a month child support. It also identified $112,000 as her separate property and awarded her $60,000 of the community property.

It then ordered husband to pay property taxes on the house plus medical expenses for the child in the amount of $500 per year. Wife appealed.

The Court of Appeals changed the award. It gave wife the family home plus $500,000 as her share of community property. From this, it subtracted the home value–$111,950—leaving $388,050, with interest. From this, husband appealed.

The Arizona Supreme Court reevaluated the property division.

Husband’s Separate Holdings

For decades before the marriage, Mr. Nace managed his family’s chain of motion picture theaters, the “Nace Circuit”. The trial court determined that his properties were worth $470,207 at the time of the marriage. Two years after the marriage, Mr. Nace inherited property valued at $1,135,959.

Husband presented substantial evidence of his financial affairs at trial, including checks and accounts. He called the account relating to his financial enterprises his “regular” account. He called the community property account his “special” account and he deposited his salary into it.

On one occasion though, he deposited $230,000 from his regular account into his special account.

Determination of Community Property

In Arizona, the court determines the separate or community characteristic of property by its status at the time of the marriage. During a marriage, property keeps its status as separate or community as long as it can continue to be segregated.

Arizona courts presume the property a couple buys during marriage to be community property. The Supreme Court said that to determine community property, they must first determine what is separate property. It reviewed the trial court’s determination of separate property, saying it would not disturb it absent an abuse of discretion.

The trial court found that Mr. Nace held separate property in the amount of $470,207 at the time of the marriage. He then inherited $1,135,959 for a total of $1,606,166. The court valued this separate property at $2,703,834 at the time of divorce.

The trial court found that husband’s separate property increased in value during the marriage by over $1 million. It could not determine what portion of the increase to attribute to his business judgment and management. Nor could it determine what part to attribute to the inherent nature of the business or property. Therefore, under Arizona law, it found all the increase to be community property.

The Supreme Court disagreed. It evaluated husband’s salary and found it to be a fair estimation of the value of a skilled manager. It found that he kept the books scrupulously. Other than the $230,000 he transferred to the community account, husband kept all other business money separate. Therefore, the court ruled that everything in the regular account was Mr. Naces’s separate property.

The Court then said that all of the money in the special account was community property. It also treated the $230,000 deposit to that account as community property. When it added this amount to the value of the marital home, community property totaled $341,950.

Wife’s share would normally be half of this ($170, 975). The Court found the trial court’s division of property to be an equitable split. The value of the house plus the $60,000 of community property totaled more than that amount.

It also noted the generous alimony and child support the trial court awarded. It noted the property taxes and the medical bills provisions. It determined that the trial court awarded Wife a fair share of the property.

Disposition

The Arizona Supreme Court amended the trial court’s decision to make the property taxes part of the alimony. Otherwise, it upheld that decision and vacated the Court of Appeals’ decision.