By Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA
Ron’s Corner
In Issues 85 and 86 of Forensic Accounting Today, I delved into the process of selecting a fully qualified financial professional for a collaborative divorce. In most cases, achieving the most equitable outcome necessitates the expertise of a CPA who has undergone comprehensive training and gained proficiency in several specialized areas of accounting. This level of expertise demands a comprehensive understanding and application of knowledge and skills, which I explored in Issues 85 and 86.
Furthermore, I began to discuss the specific areas of expertise required by the CPA in most collaborative cases. In Issue 85, I focused on business valuation and determining reasonable compensation. In Issue 86, I focused on determining gross cash flow available for support, determining marital standard of living, apportionment, and California Family Code Section 2640. I complete the expertise that the financial professional should possess in this issue with an overview of Moore/Marsden and tracing.
To download a copy of the previous newsletters, go to https://anfusocpa.com/forensic-accounting-newsletters. If you have any questions regarding these topics, please do not hesitate to reach out to me.
Moore/Marsden Calculations
(And Watts Charges as an example)
California law employs a formula known as Moore/Marsden for apportioning community property equitable interest in a separate property residence at the conclusion of a marriage. This calculation accommodates the growth of the marital community’s value, which would otherwise be considered separate property. A Moore/Marsden calculation determines the community property interest in a spouse’s separate property asset, typically real estate. These calculations are derived by determining the principal amount paid during the marriage divided by the purchase price. This percentage is then applied to any appreciation in the property’s value at the current date. It is not uncommon for a financial professional or even a court to err in the application of a Moore/Marsden calculation. Therefore, it is crucial to engage a forensic accountant with extensive experience in cases involving Moore/Marsden calculations. This is exemplified in the following scenario.
In the case of Jodie Mohler vs. Greg Mohler (https://anfusocpa.com/wp-content/uploads/newsletters/Newsletter-56.pdf), Jodie’s attorney argued that the court should consider the principal pay down from the date of marriage to the date of trial as community property for Greg’s purchase before their marriage. The trial court erred by accepting this argument even though I testified that the payments from earnings post-separation were from my client’s separate property.
Due to my testimony disputing this assertion, the Appellate Court found that the trial court was incorrect in using the Moore/Marsden calculation to increase the community’s beneficial ownership due to payments made from Greg’s separate property beyond the date of separation. Moore/Marsden is based on the concept that community property is being invested in separate property by creating it. Therefore, during the marriage, only the portion of community assets used to pay off loan principal was relevant in establishing the community interest in the property.
A secondary issue the appellate panel addressed dealt with whether or not Watts Charges should be applied on a pro tanto basis (In re the Marriage of Watts (1985) 171 Cal.App.3d 366, 373-374). Watts Charges are applied when one spouse uses community assets after separation. This could be living in the family home, using the party’s shared vehicle, or credit card spending. Since the Mohler case had a community property equitable interest in Greg’s separate property, as a case of first impression, the panel opined that perhaps this should be addressed.
In the case of Mohler, Watts’ Charges were considered because Greg continued to reside in their previously shared home after their separation for approximately seven years.
Tracing
Tracing typically becomes an issue when community and separate property funds are commingled in the same account(s) with community property, and then an asset is purchased with funds from that account. The mere commingling of separate property moneys in a community bank account does not destroy the separate property character of the funds, provided they can be adequately traced.
A spouse may protect the character of his or her separate property by refraining from commingling it. However, if the spouse chooses to commingle the property, they assume the responsibility of maintaining adequate records. The documentation must be sufficient to establish either the direct tracing or the balance of community income and expenditures at the time an asset is acquired with commingled property.
Property acquired by purchase during a marriage is presumed to be community property (Family Code §760), and the burden falls on the spouse asserting its separate character to overcome the presumption. Mason v. Mason (1960) 186 Cal.App.2d 209, 212; Estate of Niccolls, (1912) 164 Cal. 368; Thomasset v. Thomasset, (1953) 122 Cal.App.2d 116.
Nevertheless, some couples acquire separate or mixed assets over time. If there is a dispute regarding whether a property or properties are separate property, the situation necessitates the obligation to validate separate property claims. This is a challenging task, but with the appropriate information, it can be accomplished.
When there is a disputed asset or assets, direct tracing can be employed if the withdrawal from the commingled account used to acquire the disputed assets can be traced to a specific separate property deposit or deposits into an account. This requires expertise in tracing by a forensic accountant who has received adequate training and experience in tracing. For direct tracing to be used:
1. The tracing spouse must have specific records. In re Marriage of Marsden (1982) 130 Cal.App.3d 426;
2. The specific records establish that on the date that the separate expenditure was made, there were separate funds available in the account to make the purchase. In re Marriage of Higinbotham (1988) 203 Cal.App.3d 322; and
3. The tracing spouse had the intent to utilize the separate funds to make the purchase. Estate of Murphy (1976) 15 Cal.3d 907, 918; In re Marriage of Frick (1986) 181 Cal. App.3d 997, 1010-1011, 226 Cal.Rptr. 766.
