Five years after John Lafkas and Jean Doane married, and long before their divorce, he added her to his interest in a real estate business, Smile Enterprises. Jean isn’t smiling anymore.
The couple divorced a few years later and the company became the center of a dispute over defining community property in the Los Angeles-based Second District Court of Appeals.
The appeals court ruled last week that when John added his wife’s name as a partner in his business for a tax deferral he did not convert his separate property to community property in the marriage.
Jean argued that the partnership interest was community property because property acquired during marriage in joint form is presumed to be community property.
The appeals court disagreed. When a spouse changes the form of a separate property, to a joint title, there must be documentation of an express intent to convert it to community property, the court said.
“Our construction of the statutory scheme avoids the absurd consequence of treating Smile Enterprises as separate property if Lafkas and Doane remained married but community property if the separated or the marriage was dissolved,” wrote Justice Sandy Kriegler.
With some exceptions, community property is any asset acquired or transferred during marriage. It will generally be equally divided in a divorce. Separate property is usually property acquired by one party before marriage, or is a gift or inheritance during the marriage. So long as it is never transferred to community property it will usually remain the sole property of the owner during a divorce.
Five years into the Lafkas’ marriage, when Smile would net $500,000-600,000, John asked Jean to participate in an Internal Revenue Code Section 1031 tax-deferred exchange of one of the business’ real properties.
During the transfer they signed a “Modification and Extension of General Partnership Agreement.” It named “John and Jean Lafkas, as partners in his share of the business. Smile also recorded a “statement of partnership,” naming the couple.
When John and Jean later divorced, the trial court ruled that the modification agreement was tantamount to new partnership agreement, which had thus transmuted Smile from John’s separate property into community property when signed.
Citing a policy to “prevent abuses and unpredictability,” Kriegler, said, “We decline to interpret the statutory scheme in a manner resulting in different characterizations of the ownership of property based upon the fortuities of death, dissolution, or separation.”
Kriegler found that the modification agreement did not qualify as a valid transmutation of the property because it lacked an express statement showing John’s intent to turn it into a community interest.
Jean argued that she become a Smile partner because it needed her salary to qualify for property loans.
The part of the trial court judgment dividing the one-third interest in Smile between the couple was reversed. The appellate court also reversed the trial court’s order requiring John to pay Jean’s attorney’s fees. The fee issue went back to the lower court.
Justice Kriegler was joined by Presiding Justice Paul Turner and Justice Richard M. Mosk.
Case: Marriage of Lafkas, No. B243635.