By Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA
Allen Johnson (petitioner) and Jessica Johnson (respondent) were married for 18 years. Prior to their marriage, Allen had invested in 16 properties. His life task was to buy properties and then remodel, rent and hold, or sell them. I served as the forensic accountant for Allen.
The complex matter of this case centered on the questions of apportionment. Should these properties be considered completely separate, or ought a portion belong to the community? How should we determine apportionment? Would it be necessary to go to trial, or potentially could the parties agree on an equitable settlement?
The Van Camp Method
One method of resolving apportionment in this case could have been the use of the Van Camp method (Forensic Accounting Today, Issue 53: https://anfusocpa.com/wp-content/uploads/newsletters/Newsletter-53.pdf). Van Camp would have enabled us to treat the pooled property holdings as a business that rents, sells, and owns properties. However, the question then would have become whether The Community was compensated properly for Allen’s work efforts during the marriage. The trial position we initially settled on was to use Van Camp because we proved how much money Allen pulled in from the separate property that benefited the community. However, our position changed as I delved deeper into the accounting-related facts of the case.
Allen owned an LLC that paid for the properties he possessed. We traced how much money he removed from the LLC that he placed in their living expense account. I stated that whatever he put in the joint account was community. My opinion was going to be that the amount of money in his separate property account that held the properties that went to the community account was equal to or greater than what he would have been compensated if he were working for someone who managed the properties. Therefore, under Van Camp, we could hold the position that all of the properties would remain separate. However, we realized Jessica would contest this. The case would go to trial and, in the end, Allen would have to give up some money, as well as likely pay significant legal and accounting fees.
Allen certainly believed all of the properties were his separate property. However, he was physically spending his marital time renovating, collecting rent for some properties, and selling the remainder. It took some effort on my part to educate Allen enough for him to comprehend and accept that at least a small portion of the property belonged to the community and would likely be ruled as such by the court.
The other side was trying to calculate real property apportionment using Moore/Marsden and other real property apportionment formulae. They were attempting to approach each property as a separate acquisition, which did have merit. However, they were not considering the disadvantages of using this approach. I explained to the respondent’s team that pursuing this method would have consumed an enormous amount of accounting hours to perform extensive tracings and calculations. Thus, it was obvious to me that using the Van Camp method, in which all of the properties would remain as separate property, would have lead to a trial that would cost several times greater than the cost of a settlement.
Allen had separate property capital. However, he was also working and sold pieces of property long after they married. These properties started out as separate property but had a small community interest percentage. He then purchased additional properties with the money from the sales.
We would have had to trace every down payment to uncover what percentage of the sources of these properties were community or separate. Then we would have needed to calculate the apportionment of each property. Additionally, for the rental properties, we would have had to allocate the rent, another time-consuming undertaking.
The Capital Labor Apportionment Model
The solution Allen’s attorney and I decided on would be the one most equitable for both parties given the circumstances of this case — the Capital Labor Apportionment Model (CLAM). Since the properties fell within one LLC, we could then base the apportionment on the services he performed and provide the credit toward the community. In essence, we were considering his real estate endeavors as a holding company — a property management company similar to a Merrill Lynch account that was comprised of several different mutual funds, in which each mutual fund held hundreds of stocks all coming under the umbrella of one account. By repurposing the mutual-fund model, we were able to pursue the calculations using CLAM. The percentage of community property using CLAM came to 21 percent.
The amount of money Allen pooled over the 18 years of marriage was more than what he would have been compensated if he was just employed and was not the owner of the property management company. Via CLAM, the community received a considerable amount of money. This enabled the parties to agree on a settlement. Since the fees were so much lower than had their case gone to trial, both parties accepted the outcome.
Binding Settlement Agreement Highlights
• Jessica Johnson would receive the entire proceeds from the sale of their family home in Anaheim Hills for $1.7 million for equalization and spousal support.
• Allen Johnson would receive all business interests along with any and all underlying associated business real property, and other assets related to any and all business interests in petitioner’s name including, but not limited to, the 16 properties under his LLC.
• Allen Johnson would receive all disclosed bank and brokerage accounts in petitioner’s name.
• Allen Johnson would be responsible for any and all debt in petitioner’s name.
• The assets of the real property awarded to Allen Johnson at the time of the execution of the binding agreement was $6.1 million.