On the California bar exam, there are two appellate decisions you need to be familiar with to discuss business valuations in a marital dissolution on a community property essay:
Pereira v. Pereira, 156 Cal. 1 (1909) and
Van Camp v. Van Camp, 53 Cal. App. 17 (1921).
The Pereira method is used primarily when the appreciation of value is directly related to the efforts, skill, and ability of the owner/operator. This method assumes that appreciation of value during the marriage is allocable to the community subject to a reasonable rate of return on the claimant’s separate interest.
Thus, under Pereira, the owner spouse's separate property equals the initial value of the business plus a fair rate of return multiplied by the number of years of married. A fair rate of return would be 10% per annum. The community property equals difference between the fair market value of the business at the time of trial and the separate property valuation.
The Van Camp method is used when the appreciation of value is due primarily to the business structure and outside market forces, rather than solely relying on the influence of the owner’s efforts. When this method is used, the owner/operator’s “reasonable compensation” is assessed to determine if the community was sufficiently compensated during the marriage.
UnderVan Camp, community property equals the reasonable salary of the managing spouse multiplied by the number of years of marriage minus any family expenses paid from the business earnings. The owner spouse's separate property equals the difference between the fair market value at the time of trial and the community property valuation.
Knowing which case to apply to a community property question is crucial to achieving a passing score. This is just one of those California distinctions you just have to learn.
On the February 2014 California Bar Exam, the second essay question concerned community property. Many examinees read the following and began a full-fledged discussion of Van Camp and Pereira, "In 2012, Wendy purchased a small office building where she established her own accounting practice. She paid for the building with funds saved from her earnings during her marriage and took title in her name alone." A brief discussion of Van Camp and Pereira would be fine but notice the words, "she paid for the building with funds saved from her earnings during her marriage." The accounting practice in this essay question is community property. Van Camp and Pereira were inapplicable to your answer.
The ability to spot red herrings on essays is a skill you want to master. Now that California has the same amount of essays (3) as Florida on their bar exam, the margin for error is decreasing. Your failure to account for even one red herring such as the Van Camp and Pereira trap from the February 2014 could mean the difference between passing and repeating the bar exam. Good luck with your studies!