Opinion
NOT TO BE PUBLISHED
APPEALS from a judgment of the Superior Court of San Diego County, Ct. No. D458881, Jeffrey B. Barton, Judge.
IRION, J.
In this family law matter, Farideh Nasirpour contends that the family court erred in (1) apportioning the separate and community property interest in the value of the businesses operated by her former husband Zagrous Nasirpour; and (2) calculating Zagrous's income for the purpose of child and spousal support. Zagrous cross-appeals, contending that insufficient evidence supports the family court's characterization of one of the parties' Swiss bank accounts as community property. We conclude that the family court erred in apportioning the separate and community property interest in one of Zagrous's businesses, and we reject the remaining contentions. We therefore reverse the judgment and remand for further proceedings on the issue of apportionment.
As is the custom in family law cases, we will refer to the parties by their first names for the sake of clarity and intend no disrespect by doing so.
All statutory references herein are to the Family Code.
I
FACTUAL AND PROCEDURAL BACKGROUND
Zagrous and Farideh were married on April 9, 1982, and separated on November 6, 1999. One of the parties' children was still a minor at the time of the December 2008 trial on property and support issues.
At trial the parties entered into certain stipulations concerning legal and factual issues and attempted to identify for the family court those issues remaining for resolution. The parties also stipulated to the appointment of certified public accountant Tony Yip for the purposes of performing asset valuations and other financial calculations.
After trial, the family court issued tentative rulings on the issues delineated by the parties. Based on those tentative rulings and the parties' stipulations, the parties submitted proposed financial calculations to the court for incorporation into a statement of decision and sought clarification from the court on certain points relevant to the financial calculations. While this process was occurring, Farideh challenged several aspects of the family court's tentative rulings by filing a "Motion to Enter a Judgment Different Than Announced." The family court denied that motion without prejudice and directed Farideh to renew her arguments "in the Statement of Decision process, " which she did by filing objections. After considering the parties objections, the family court issued a statement of decision and entered judgment.
Zagrous operates two businesses: (1) Specialty Motor Cars (1970) Ltd. (hereafter SMC) — which is an auto dealership in Vancouver, Canada, that Zagrous acquired during the marriage in 1987 with separate property funds gifted from his father; and (2) SM Cars (USA) Ltd. dba Miramar Party Rentals (hereafter MPR), which is a party equipment rental business in San Diego County that SMC started in 1998 as a wholly owned subsidiary with USD 250, 000 of capital that SMC obtained by borrowing it from a bank. Each of the family court's rulings that Farideh challenges concern these businesses in some way. Specifically, Farideh takes issues with the family court's (1) apportionment of the separate property and community interest in SMC; (2) apportionment of the separate property and community interest in MPR; and (3) inclusion of only USD 5, 000 per month of retained earnings from SMC and MPR in determining Zagrous's income for the purpose of calculating child and spousal support.
Our discussion will reference both United States dollars and Canadian dollars. For the sake of clarity, instead of using the "$" symbol, we indicate United States dollars with the prefix "USD" and Canadian dollars with the prefix "CAD."
The sole issue raised by Zagrous's cross-appeal is whether, as the family court concluded, the funds in a specific Swiss bank account are community property rather than Zagrous's separate property.
II
DISCUSSION
A. The Family Court Abused Its Discretion in Conducting the Apportionment Analysis for SMC Because Zagrous's Separate Property Contribution to SMC Was CAD 50, 000, Not CAD 400, 000
We first address Farideh's challenge to the family court's apportionment of the separate property and community property interests in SMC. Apportionment is necessary because "where a [spouse] owns a separate property business and devotes his [or her] efforts to the enterprise, there must be an apportionment of the profits, " and "[t]he community is entitled to the increase in profits attributable to community endeavor." (In re Marriage of Dekker (1993) 17 Cal.App.4th 842, 851 (Dekker).) "[W]here more than minimal community effort combines with a separate capital investment to increase the value of the separate investment, the court must determine the amount of the increase attributable to the capital, and the amount attributable to community effort." (Id. at p. 852.)
As an initial matter, we note that the parties stipulated to several aspects of the apportionment analysis for SMC. First, the parties stipulated that SMC was a separate property business. Second, they stipulated to the method by which the family court should conduct the apportionment analysis. Specifically, with respect to the apportionment methodology for SMC, the parties specified that (1) from the date that SMC was acquired to the date of separation, the family court was to follow the approach first described in Pereira v. Pereira (1909) 156 Cal. 1, 7 (Pereira) for apportioning the profits that accrue for a spouse's separate property business due in part to the spouse's devotion of time and effort during the marriage; and (2) after the date of separation, the family court was to apply what the stipulation referred to as "reverse Pereira, " which is the approach described in In re Marriage of Imperato (1975) 45 Cal.App.3d 432, 436-437 (Imperato) for apportioning community assets that have increased in value after separation due to the efforts of the spouse involved in the business.
In applying the Pereira approach, the family court must "allocate a fair return to the separate property investment and allocate the balance of the increased value to community property as arising from community efforts." (Dekker, supra, 17 Cal.App.4th at pp. 852-853, italics added; see also Tassi v. Tassi (1958) 160 Cal.App.2d 680, 690 (Tassi) [under Pereira, the family court must "allow interest on the capital investment of the business, allocate such interest as separate property, and treat the balance as community earnings attributable to the efforts" of the spouse operating the business]; Beam v. Bank of America (1971) 6 Cal.3d 12, 19 (Beam) ["under the Pereira test, community income is defined as the amount by which the actual income of the separate estate exceeds the return which the initial capital investment could have been expected to earn absent the spouse's personal management"].) "[T]he Pereira formula attributes to separate property the amount invested plus a fair return. The balance is attributed to the community." (Dekker, at p. 854.) Under a reverse Pereira analysis, as stipulated by the parties, the family court utilizes the value of the community property interest in the business at the date of separation, as established by conducting the Pereira analysis, and affords the community a fair rate of return on that interest, and it allocates the balance of the value of the post-separation business to separate property. (Imperato, supra, 45 Cal.App.3d at p. 439 [under a reverse Pereira approach, the family court "would allocate a fair return of the increase to the community property and the excess would be [the business owner spouse's] separate property"].)
A competing approach to apportionment, which the parties did not elect, is described in Van Camp v. Van Camp (1921) 53 Cal.App. 17, 27-28.) "The Van Camp approach is to determine the reasonable value of the community's services, allocate that amount to community property and the balance to separate property." (Dekker, supra, 17 Cal.App.4th at p. 853.)
To conduct the Pereira analysis according to the parties' stipulation, three data points were necessary: (1) Zagrous's separate property investment in SMC; (2) the value of SMC at the date of separation; and (3) the fair rate of return on Zagrous's separate property investment in SMC. (Cf. In re Marriage of Denney (1981) 115 Cal.App.3d 543, 550 [in conducting an apportionment analysis, the family court has the burden of determining valuation of the separate business at the time of marriage and again at the time of separation]; Dekker, supra, 17 Cal.App.4th at p. 854 [approving trial court's Pereira analysis based on the initial value of spouse's stock, stock value at the time of trial, and a 10 percent annual return].) Here, there was no dispute about two of the three required items. The parties did not dispute — as established by Yip's report and a real estate appraisal — that SMC's value at the date of separation was CAD 2, 558, 000. Further, the parties stipulated that in conducting the Pereira analysis, a fair rate of return on Zagrous's separate property was 8.36 percent. The only disputed item left for the family court's resolution in connection with the Pereira analysis was Zagrous's separate property investment in SMC. The parties stipulated that "[t]he court will decide if the separate property interest is [CAD] 50, 000 or [CAD] 400, 000."
We have rounded the number. The parties have not challenged the valuation of SMC, and we express no view on whether the valuation was properly performed.
The parties also stipulated to a fair rate of return of 4.91 percent for the reverse Pereira analysis.
After trial, the family court determined that Zagrous's separate property investment in SMC was CAD 400, 000, and the parties conferred with Yip, who used that figure, along with the undisputed data points, to perform the calculations required by the Pereira and reverse Pereira approaches. Adopting Yip's calculations, the family court ruled that the community's interest in SMC under Pereira and reverse Pereira is CAD 2, 515, 333 or USD 2, 106, 340. As shown by Yip's calculations, as a result of the Pereira analysis, Zagrous was credited with a separate property interest in SMC through the date of separation of CAD 819, 003, consisting of his initial CAD 400, 000 investment, as determined by the family court, plus simple interest on that amount at 8.36 percent for 12.53 years, totaling CAD 419, 003.
For the currency conversion, the family court used a date-of-trial exchange rate of.8374 percent.
Throughout trial and in her subsequent challenges to the family court's tentative ruling and the proposed statement of decision, Farideh argued that for the purposes of a Pereira analysis Zagrous invested CAD 50, 000 in SMC, not CAD 400, 000. She continues to advance that argument on appeal, contending that the family court's Pereira analysis was flawed because it assumed that Zagrous made a CAD 400, 000 investment in SMC.
"We apply the abuse of discretion test to the court's application of Pereira." (Dekker, supra, 17 Cal.App.4th at p. 849.) To the extent findings of fact are challenged, we apply a substantial evidence standard of review. (Ibid.)
To evaluate Farideh's argument we begin with an examination of the relevant facts. According to the evidence at trial, Zagrous received CAD 400, 000 from his father as a gift in 1987. Using those funds, Zagrous paid CAD 50, 000 in 1987 to acquire 100 percent of SMC's stock, and thereby became SMC's sole owner and shareholder. The stock sale agreement recited that SMC sold the stock to Zagrous at its fair market value. At the same time, Zagrous used the remaining funds from his father's gift to make a shareholder loan to SMC in the amount of CAD 350, 000, which SMC used to pay a debt. In exchange for the loan to SMC, Zagrous received a CAD 350, 000 promissory note from SMC, which was payable on demand and accrued interest at the annual rate of 10 percent. According to Zagrous's testimony, SMC repaid the loan "within the next couple of years — two, three years." Zagrous claimed to have used the funds that he received in repayment of the loan to pay off the mortgage on the parties' residence in Vancouver, but he provided no documentation of that transaction.
As we will explain, because CAD 350, 000 of the CAD 400, 000 at issue was a loan, not a capital investment, the family court abused its discretion by determining that, for the purposes of a Pereira analysis, Zagrous invested CAD 400, 000 of his separate property in SMC. Pereira focuses on ensuring a fair return on a spouse's capital investment in a separate property business. (See Pereira, supra, 156 Cal. at p. 7 [separate property should have been credited for "the earnings properly allowable on account of the capital invested"]; Mueller v. Mueller (1956) 144 Cal.App.2d 245, 249 [apportionment based on profits attributable to " 'capital investment' "]; Tassi, supra, 160 Cal.App.2d at p. 690 [the Pereira approach allows interest "on the capital investment of the business"]; Beam, supra, 6 Cal.3d at p. 18 [apportionment analysis based on " 'capital investment in the separate property' "]; Dekker, supra, 17 Cal.App.4th at p. 852 [apportionment necessary when a spouse has made "a separate capital investment"]; In re Marriage of Koester (1999) 73 Cal.App.4th 1032, 1034 [Pereira provides for a "return on capital"].) A loan evidenced by a promissory note, however, is not the same as a capital investment in a business, because a loan confers no ownership interest in the business.
Despite the long line of cases applying the Pereira analysis over the course of a century, no authority exists for including a shareholder loan when apportioning the separate and community property interests in a separately owned business. Indeed, case law indicates the opposite approach should be applied. Significantly, in Dekker the wife invested USD 1, 000 in the business at issue, and also loaned the business USD 50, 000 for start-up costs, which was later repaid to her. (Dekker, supra, 17 Cal.App.4th at pp. 847-848.) The Pereira analysis in Dekker afforded the wife a fair rate of return on her USD 1, 000 capital investment, and did not treat her loan to the business as a separate property investment to be credited to her separate property with a fair rate of return. (Id. at p. 854.)
In this case, as in Dekker, there are good reasons to omit Zagrous's loan to SMC when conducting the Pereira analysis. First, the loan incorporates its own rate of return, at an annual rate of 10 percent. It would be inequitable to compensate Zagrous again under Pereira by giving him a return on the CAD 350, 000 loan he made to SMC. He already negotiated a rate of return for himself when entering into the promissory note. Second, SMC repaid the loan to Zagrous in two to three years. Zagrous should not receive the CAD 350, 000 twice — once as a repayment of the loan principal and once as a credit to his separate property in the Pereira analysis.
Zagrous argues that even though he received repayment of the CAD 350, 000 that he loaned to SMC, that amount should nevertheless be credited to his separate property because he used the CAD 350, 000 to pay off the mortgage on the parties' home in Vancouver. Zagrous raised this issue during trial by arguing that under section 2640, he was entitled to reimbursement for his separate property contribution of CAD 350, 000 to the acquisition of community real property. There is no support in the record for Zagrous's attempt to obtain reimbursement of the CAD 350, 000 pursuant to section 2640, because he admittedly failed to submit any evidence tracing his purported separate property contribution. (See In re Marriage of Braud (1996) 45 Cal.App.4th 797, 823 ["Separate property status cannot be established by mere oral testimony of intent or by records that simply total up all separate property funds available during the relevant period and all the separate expenditures during that period; such records do not adequately trace to the source of the purchase at the time it was made."].) As the family court noted with respect to Zagrous's similar argument that he was entitled to reimbursement under section 2640 for additional separate property funds that he contributed to the purchase of the parties' home in Vancouver, "[Zagrous] presented not one shred of documentation to confirm this separate property investment in the original marital home. As such, he fails to rebut the community property presumption and his claim is denied."
We therefore conclude that the family court abused its discretion by conducting the Pereira analysis using the amount of CAD 400, 000 as Zagrous's separate property investment in SMC. The Pereira analysis should have been conducted with CAD 50, 000 as Zagrous's separate property investment in SMC. We will therefore reverse the judgment and remand this matter to allow the family court to apportion the community and separate property interest in SMC based on a corrected Pereira and reverse Pereira analysis.
B. Farideh's Challenge to the Family Court's Apportionment Analysis for MPR Lacks Merit
We next consider Farideh's challenge to the family court's apportionment of the community and separate property interest in MPR.
The parties' stipulation during trial with respect to the apportionment of MPR left more issues for the family court to resolve than did their stipulation concerning SMC. The parties did not stipulate to the characterization of MPR and did not stipulate to which method (e.g., Pereira, Van Camp, or some other method) the family court should use for the apportionment analysis. The parties' stipulation stated that "[t]he court will decide the characterization of [MPR, ]" and also provided that "[i]f [MPR] is found to be community property it will have a date of separation value of [USD] 316, 400.00 and a date of trial value of [USD] 900, 000 including land."
The family court concluded that MPR should be characterized as separate property, as it is a wholly owned subsidiary of a stipulated separate property business — SMC. With respect to the method of apportioning MPR, the family court directed the parties to conduct a Pereira and reverse Pereira analysis, and it stated that the analysis should use a date-of-separation value for MPR of USD 316, 400. Adopting the Pereira and reverse Pereira calculations for MPR conducted by Yip, the family court ruled that the community interest in MPR is USD 77, 254.
In setting forth their proposed Pereira calculations for MPR (based on the family court's direction that such an analysis should be performed), both parties used the amount of USD 250, 000 as the initial separate property interest in MPR. Yip, in turn, used that figure in his analysis. On appeal, Farideh does not challenge the assumption that, if a Pereira analysis is to be performed, the amount USD 250, 000 is the proper figure to use for Zagrous's initial separate property interest, and we express no view on that issue.
Farideh's asserts two challenges to the family court's ruling. First, she argues that because SMC capitalized MPR by using funds from a loan for which Zagrous acted as a personal guarantor, the family court should not have characterized MPR as a separate property business. Second, she contends that instead of ordering the parties to perform a Pereira analysis for MPR, the family court should have apportioned MPR using the results of the Pereira analysis conducted for its parent company, SMC, by giving the community the same percentage of MPR as it received in SMC. We consider these arguments in turn.
1. The Loan Proceeds That SMC Used to Capitalize MPR Did Not Make MPR a Community Property Business
To evaluate Farideh's argument that MPR should have been characterized as a community property business, we apply a substantial evidence standard of review. (Dekker, supra, 17 Cal.App.4th at p. 849 ["Appellate review of a trial court's finding that a particular item is separate or community property is limited to a determination of whether any substantial evidence supports the finding."].)
We first focus on the relevant facts. The undisputed evidence at trial was that MPR is a wholly owned subsidiary of SMC. Accordingly, MPR is not owned by Zagrous, but by SMC. As Zagrous testified, MPR was initially capitalized through loan proceeds that SMC obtained on its line of credit. At trial, the only documentary evidence of this loan to SMC was an offer of credit letter from Hongkong Bank of Canada in October 1998 authorizing a USD 250, 000 loan from the bank to SMC to provide working capital for MPR. The offer of credit letter identifies SMC as the borrower and Zagrous as "the Personal Guarantor." The security for the loan was SMC's real property. Zagrous agreed to and accepted the offer letter both in his capacity as principal of SMC and as guarantor.
We note that the loan documents are not in the record.
Farideh argues that because Zagrous was the personal guarantor for Hongkong Bank of Canada's loan to SMC, which SMC used to capitalize MPR, MPR should be characterized as community property. In support of her argument, Farideh cites case law establishing that "[t]he character of property acquired upon credit during marriage is determined according to the intent of the lender to rely upon the separate property of the purchaser or upon a community asset." (In re Marriage of Aufmuth (1979) 89 Cal.App.3d 446, 455.) Under this rule, "[l]oan proceeds acquired during marriage are presumptively community property; however, this presumption may be overcome by showing the lender intended to rely solely upon a spouse's separate property and did in fact do so." (In re Marriage of Grinius (1985) 166 Cal.App.3d 1179, 1187 (Grinius).) Farideh argues that because the loan from Hongkong Bank of Canada was obtained partly based on Zagrous's personal guarantee, rather than solely on the security provided by SMC's separate property real estate, the loan proceeds, and by extension MPR itself, are community property. As we will explain, this argument lacks merit.
The case law that Farideh relies on proceeds from the basic presumption that "[p]roperty bought during marriage by either spouse is rebuttably presumed to be community property." (Grinius, supra, 166 Cal.App.3d at p. 1185, italics added; see § 760 [in general "all property... acquired by a married person during the marriage while domiciled in this state is community property" (italics added)].) As discussed in the applicable case law, that presumption may be rebutted when the property was bought on credit and the lender intended to rely on one spouse's separate property in extending the credit. (Grinius, at pp. 1186-1187; Gudelj v. Gudelj (1953) 41 Cal.2d 202, 210 ["In the absence of evidence tending to prove that the seller primarily relied upon the purchaser's separate property in extending credit, the trial court must find in accordance with the presumption."].)
The cases cited by Farideh do not apply because Zagrous did not become an owner of MPR and did not himself obtain the loan proceeds used to capitalize MPR. Instead, SMC was the borrower for the loan, and SMC capitalized MPR, becoming its sole owner. Because Zagrous obtained neither the loan proceeds, nor ownership in MPR, no presumption arises that MPR or the loan proceeds are community property. Accordingly, it is not necessary to consider the case law that Farideh cites to determine whether Zagrous has rebutted a community property presumption. The presumption never arose in the first place.
As the parties stipulated, SMC is a separate property business, and MPR is a wholly owned subsidiary of SMC. Therefore, substantial evidence supports the family court's conclusion that SMC's wholly owned subsidiary is also a separate property business, regardless of the fact that Zagrous personally guaranteed the loan that SMC used to capitalize MPR.
2. The Family Court Did Not Abuse Its Discretion in Electing to Apply a Pereira Analysis to Apportion MPR
In her second challenge to the family court's apportionment of MPR, Farideh contends that the court should have chosen the apportionment method she proposed rather than directing the parties to conduct a Pereira and reverse Pereira analysis.
The family court has wide discretion in determining the methodology to apply when apportioning the community property and separate property interests in a separate property business operated by a spouse during marriage. As we have described, the Pereira and Van Camp approaches are two options. (Dekker, supra, 17 Cal.App.4th at pp. 852-853.) "These formulas, however, are not exclusively applied." (Id. at p. 852, fn. 14.) " 'In making such apportionment between separate and community property our courts have developed no precise criterion or fixed standard, but have endeavored to adopt that yardstick which is most appropriate and equitable in a particular situation....' " (Beam, supra, 6 Cal.3d at p. 18.) The court "may select whichever formula will achieve substantial justice between the parties." (Dekker, at p. 853.) We therefore apply an abuse of discretion standard when reviewing whether the family court erred in choosing the Pereira method of apportionment. (Id. at p. 849.)
Presenting the same argument she made in the family court, Farideh contends that instead of applying the Pereira approach, the family court should have apportioned the value of MPR by using percentages obtained as a result of the separate Pereira analysis conducted for SMC. According to Farideh, assuming an initial CAD 350, 000 separate property interest in SMC, "the community percentage in SMC would be 90%. The same 90% would be applied to MPR. The result would be a community interest in MPR of [USD] 284, 760 (using the court's date of separation value of [USD] 316, 400)." Put simply, Farideh proposes that the community interest in MPR at the date of separation be calculated by determining the community interest in SMC at the date of separation and giving the community the same percentage interest in MPR at that date as it had in SMC at that date.
In her trial brief, Farideh argued that "for example, if the community has a ninety-four percent (94%) interest in the value of [SMC] under the theory of Pereira as of the date of separation, then the community should also have a 94% interest in [MPR]."
Farideh does not specify how she would apportion the community and separate property interest in MPR for the period between the date of separation and the date of trial.
The family court was within its discretion to decide that this approach would not result in an equitable apportionment. The task before the family court in apportioning MPR at the date of separation was to determine what portion of the growth in the value of MPR from its inception in late 1998 to the date of separation approximately a year later was attributable to the separate property investment of SMC in MPR, and which portion was attributable to community effort. Significantly, MPR and SMC were capitalized with different amounts of separate property funds, and community efforts were devoted to them for different periods of time. To apply the same apportionment percentage to different corporate entities with different initial separate property capital contributions and different corporate life spans during which the community efforts could affect the growth of the corporate entities is not sound analysis. Therefore, the family court did not abuse its discretion in directing the parties to apply a Pereira and reverse Pereira analysis to MPR instead of the approach suggested by Farideh.
Perhaps Farideh's focus on SMC and MPR as a single "enterprise" could have been incorporated into an apportionment analysis by applying a single Pereira calculation to the combined corporate group, under which the date-of-separation valuations of MPR and SMC would be combined, and the amount of CAD 50, 000 would be used as the initial separate property contribution for the entire enterprise. We note, however, that Farideh has never argued for that approach in either the family court or on appeal. We therefore need not, and do not, consider whether such an approach would have resulted in an equitable apportionment.
C. The Family Court Did Not Err in Determining the Income Available for Child Support
We next consider Farideh's contention that the family court erred in determining the amount of Zagrous's income for the purposes of calculating child support. We apply an abuse of discretion standard of review. (In re Marriage of Cheriton (2001) 92 Cal.App.4th 269, 282.)
To calculate child support under the statutory guidelines, a court is required to determine the parent's monthly disposable income. (§ 4055.) The parent's monthly disposable income, in turn, is derived from annual gross income as defined in the Family Code. (§ 4058; County of Placer v. Andrade (1997) 55 Cal.App.4th 1393, 1395-1396 ["The court must calculate the 'annual gross income' of the parent.... From this is derived the parent's monthly net disposable income." (fn. omitted)].) "The guideline amount of child support, which is calculated by applying a mathematical formula to the parents' incomes, is presumptively correct." (In re Marriage of Williams (2007) 150 Cal.App.4th 1221, 1237.)
Here, the family court relied on the available evidence to determine that Zagrous's monthly income from SMC and MPR was USD 20, 000, in the form of salary and benefits. The family court also noted that according to the evidence, SMC "averaged around [USD] 200, 000.00 in retained earnings annually" which it did not distribute to Zagrous, but held as corporate assets. Farideh advocated that all of SMC's retained earnings should be included in Zagrous's income available for child support. The family court rejected that argument, but it did include a monthly amount of USD 5, 000 of " 'other non-taxable' retained earnings of [SMC]" in its calculation of Zagrous's gross income, for a total monthly gross income from SMC and MPR of USD 25, 000. On appeal, Farideh argues that the family court should have included the full amount of SMC's retained earnings when determining Zagrous's income (which on a monthly basis would be approximately USD 16, 000), rather than including only USD 5, 000 per month.
As the family court explained, due to the fact that Zagrous did not provide complete up-to-date financial information, it relied on Yip's two-year old income analysis together with Zagrous's income and expense declaration and his 2007 United States tax return to determine Zagrous's current income available for support. As the family court acknowledged, due to the lack of documentation, it was faced with "less than ideal circumstances" for determining Zagrous's income.
As relevant here, for purposes of child support, the Family Code broadly defines annual gross income as "income from whatever source derived" (§ 4058, subd. (a)), including "[i]ncome such as commissions, salaries, royalties, wages, bonuses, rents, dividends, pensions, interest, trust income, annuities, workers' compensation benefits, unemployment insurance benefits, disability insurance benefits, social security benefits, and spousal support..." (§ 4058, subd. (a)(1)), and "[i]ncome from the proprietorship of a business, such as gross receipts from the business reduced by expenditures required for the operation of the business" (§ 4058, subd. (a)(2)).
No California case law discusses whether the court has discretion to include the retained earnings of a closely held corporation when determining a parent's gross income. However, case law from other jurisdictions permits such a practice. (See Morgan, Corporate or Partnership "Retained Earnings" as Income Under Child Support Guidelines, 14 No. 11 Div. Lit. 205 (Nov. 2002); Morgan, Update: Retained Earnings as Income for Purposes of Child Support, 17 No. 3 Div. Lit. 49 (March 2005); J.S. v. C.C. (Mass. 2009) 912 N.E.2d 933, 942; Zold v. Zold (Fla. 2005) 911 So.2d 1222, 1233 (Zold); Taylor v. Fezell (Tenn. 2005) 158 S.W.3d 352, 358 (Taylor); In re Marriage of Brand (Kan. 2002) 44 P.3d 321, 330; Ochs v. Nelson (S.D. 1995) 538 N.W.2d 527, 529 (Ochs).) As Zagrous has not challenged the family court's decision to include some of SMC's retained earnings in calculating his income for child support purposes, we assume for the purpose of our analysis — without deciding the issue — that California law permits a court to include a closely held corporation's retained earnings in a parent's income for purposes of child support. The question, therefore, is whether the family court abused its discretion in selecting the amount of retained income to include in Zagrous's income.
One operative definition of a "closely held corporation" is "a corporation which has few shareholders and whose shares are not generally traded in the securities market." (In re Marriage of Hewitson (1983) 142 Cal.App.3d 874, 881, fn. 2.)
Most of the case law concerning retained earnings used in calculating income for the purpose of child support concerns retained income in an S corporation, in which the corporation's income passes through that corporate entity to the individual shareholders in proportion to their respective stock ownership, and the shareholders pay taxes on their apportioned shares of the corporation's earnings, regardless of the actual sums distributed to them by the corporation. (See Taylor, supra, 158 S.W.3d at pp. 355-356.) However, some cases impute retained earnings as income in the context of other types of closely held corporations. (See, e.g., Ochs, supra, 538 N.W.2d 527, 528-529 [a portion of the retained earnings in a closely held C corporation included in husband's earnings for child support purposes].) Here, according to expert testimony at trial, it appears that under Canadian law SMC is analogous to a C corporation to the extent that its earnings are taxed at the corporate level rather than being passed through and taxed to the individual shareholders.
As the better-reasoned of the relevant out-of-state authority explains, "a determination whether and to what extent the undistributed earnings... should be deemed available income to meet a child support obligation must be made based on the particular circumstances presented in each case. Such a fact-based inquiry is necessary to balance, inter alia, the considerations that a well-managed corporation may be required to retain a portion of its earnings to maintain corporate operations and survive fluctuations in income, but corporate structures should not be used to shield available income that could and should serve as available sources of child support funds." (J.S. v. C.C., supra, 912 N.E.2d at p. 942.) The court should focus on whether the retained earnings were "properly retained for corporate purposes rather than impermissibly retained to avoid... child support... obligations by reducing the shareholder-spouse's amount of available income" (Zold, supra, 911 So.2d at p. 1233) and whether the "retained earnings are excessive or... the income is actually being manipulated." (Taylor, supra, 158 S.W.3d at p. 358.)
Here, the family court focused on these specific considerations in determining how much of SMC's retained earnings to include in Zagrous's income. Zagrous testified that SMC retained its earnings rather than distributing them because the auto sales business is "very volatile" and it would be irresponsible for him to drain cash from the company and face the risk of having to lay off employees in a bad economy. The family court found that "to not leave significant retained earnings in the company, particularly in these economic times, would jeopardize the business and not allow them to survive the bad years, " and "it appears to be a reasonable and necessary business practice" to leave some of the retained earnings in SMC. In support of this finding, the family court specifically cited (1) Zagrous's testimony as to reasons for SMC's business practices; (2) the financial information showing that SMC had consistently retained earnings over the years; and (3) the fact that "Yip never indicated these retained earnings were a sham." Because the family court properly focused on the evidence to conclude that prudent business practice required SMC to retain some of its earnings, the family court was within its discretion to include only USD 5, 000 per month of SMC's retained earnings in Zagrous's income for child support purposes.
D. The Family Court Did Not Abuse Its Discretion with Respect to the Spousal Support Award
In an argument closely related to her challenge to the child support award, Farideh contends that the family court erred in including only USD 5, 000 per month of SMC's retained earnings when calculating Zagrous's income for the purpose of spousal support.
Zagrous's income was relevant to the spousal support order, as the statutory factors set forth in section 4320 to be considered in awarding spousal support include "[t]he ability of the supporting party to pay spousal support, taking into account the supporting party's earning capacity, earned and unearned income, assets, and standard of living." (§ 4320, subd. (c).)
"As a general rule, we review spousal support orders under the deferential abuse of discretion standard." (In re Marriage of Blazer (2009) 176 Cal.App.4th 1438, 1443 (Blazer).) "In awarding spousal support, the court must consider the mandatory guidelines of section 4320.... Once the court does so, the ultimate decision as to amount and duration of spousal support rests within its broad discretion and will not be reversed on appeal absent an abuse of that discretion.... 'Because trial courts have such broad discretion, appellate courts must act with cautious judicial restraint in reviewing these orders.' " (In re Marriage of Kerr (1999) 77 Cal.App.4th 87, 93, fn. & citation omitted.)
"The spousal support statute does not define income. 'There are no statutes that address the computation of income for the purpose of determining spousal support.' " (Blazer, supra, 176 Cal.App.4th at p. 1445.) Guidance is provided by case law, however, and as Farideh acknowledges, Blazer is the applicable authority. Blazer held that, as a matter of law, a family court has the discretion, when calculating income for the purpose of spousal support, to exclude the earnings of a spouse's closely held company that are reinvested in the company rather than distributed as income. (Id. at p. 1448.) Applying this legal principle to the case before it, Blazer specifically examined whether substantial evidence supported the family court's finding that the reinvestment of the income was a reasonable business decision, and affirmed the family court's decision after finding evidentiary support. (Id. at pp. 1447-1448.) Relying on Blazer, Farideh argues that, in this case, substantial evidence does not support a finding that it was a reasonable business decision for SMC to retain earnings rather than to distribute them, and the family court therefore should have used all of SMC's retained earnings in calculating Zagrous's income for purposes of spousal support.
We reject Farideh's argument. Substantial evidence supports a finding that it was prudent for SMC to retain at least some of its earnings rather than distributing them to shareholders. Specifically, as we have explained, Zagrous testified that the auto sales business is "very volatile, " and the business would be put at risk in a bad economy if it distributed all of its cash. That evidence is sufficient to support the family court's decision to limit the amount of retained earnings that it included in Zagrous's income for purposes of spousal support. "Since the court's determination on this point enjoys substantial evidentiary support, there is no abuse of discretion." (Blazer, supra, 176 Cal.App.4th at p. 1447.)
E. Substantial Evidence Supports the Family Court's Finding Characterizing One of the Swiss Bank Accounts as Community Property
The final issue is whether, as Zagrous contends in his cross-appeal, the family court erred in finding that one of the parties' Swiss bank accounts was community property rather than Zagrous's separate property.
The characterization of two different Credit Suisse accounts, opened during the marriage, were at issue during trial. Zagrous claimed that both accounts were funded with gifts or an inheritance from his father, and thus both were his separate property. The family court found that the account ending in 675 was Zagrous's separate property, but the account ending in 327 was community property. Zagrous challenges the family court's findings with respect to the account ending in 327. We review the family court's finding to determine whether it is supported by substantial evidence. (Dekker, supra, 17 Cal.App.4th at p. 849.)
We first consider the relevant evidence. Farideh testified that in late 1995 Zagrous told her that he was going to establish a Swiss bank account for her. Specifically, she recounted a conversation in which Zagrous told her that instead of buying her an expensive bracelet, he decided to set up an account in Switzerland for her. An account statement from the relevant Credit Suisse account was entered into evidence, showing an account established in 1995 in the name of "Mrs Zagrous Nasirpour."
During his testimony, Zagrous denied any conversation with Farideh about a bracelet or informing her that he had opened a Swiss bank account for her. According to Zagrous, the funds in the Credit Suisse account originated with his parents. Zagrous also claimed that he did not know about the "Mrs" on the account statement, and he attempted to introduce into evidence a letter from Credit Suisse in 2008 apologizing for "erroneously addressing you letters and statements in the name of 'Mrs' Zagrous Nasirpour." Due to discovery sanctions in place against Zagrous, the family court ruled that it would not allow the letter into evidence, but marked it for identification purposes. Zagrous does not challenge that evidentiary ruling. One of the financial experts testified that in reviewing the statements for the relevant Swiss bank account, he noticed that the account was transferred to Zagrous's name in December 2000, which was after the date of separation.
In its statement of decision, the family court found that the account ending in 327 was community property, rather than Zagrous's separate property. "The Court finds that the most likely scenario presented by the evidence submitted is that the money deposited into the 327 account at Credit Suisse was intended to be community property either by [Zagrous's father] or by [Zagrous] himself, or both. There was no evidence to support a 'mistake' by the Swiss bank and for the 'mistake' to go on for years only to be noticed after the date of separation defies belief. Thus, the Court finds the Credit Suisse accounting, ending in 327 to be community property."
The family court's finding finds substantial support in the record. Farideh's testimony that Zagrous told her he was opening an account for her, together with the account statement addressed to "Mrs Zagrous Nasirpour, " support a finding that Zagrous intended the community to have ownership of the account ending with 327. Zagrous's appellate argument focuses on the 2008 letter from Credit Suisse referring to its purported error in addressing the account statements to "Mrs Zagrous Nasirpour, " but that letter was not entered into evidence, and thus we do not consider it on appeal when assessing the sufficiency of the evidence.
DISPOSITION
We reverse the portion of the judgment apportioning separate and community property in Specialty Motor Cars (1970) Ltd., and we remand for further proceedings consistent with this opinion. In all other respects the judgment is affirmed. Farideh is to recover her costs on appeal.
WE CONCUR: HUFFMAN, Acting P. J.McDONALD, J.