In Re Marriage of Nelson

Citations: 177 Cal. App. 3d 150; 222 Cal. Rptr. 790; 1986 Cal. App. LEXIS 2536Docket: A021066

Court: California Court of Appeal; February 4, 1986; California; State Appellate Court

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In the case of In re the Marriage of Mary K. and Harold F. Nelson, Jr., the California Court of Appeals addressed the dissolution of marriage and the distribution of property, particularly focusing on stock options held by Harold. The trial court categorized the stock options into three groups: (1) options that were granted and exercisable before separation, deemed wholly community property; (2) options granted before separation but not exercisable until after, characterized as partly community and partly Harold's separate property; and (3) options granted after separation, classified as wholly separate property. 

Additionally, the court ruled that a one-half interest in a real estate parcel in Maui and the couple's house in Half Moon Bay were community property, while a bonus Harold received post-separation was deemed his separate property. Harold challenged the trial court's classification of the intermediate options, arguing that they lacked any community aspect and were akin to future earnings rather than marital property. However, the appellate court upheld the trial court’s decision, affirming its broad discretion in equitably allocating property interests, including stock options granted before separation but exercisable afterward. The court recognized that such options are considered a form of property, even if contingent or non-vested.

Mary contends that the apportionment formula established in In re Marriage of Hug should apply to her case regarding intermediate stock options. In Hug, the community portion was calculated using a fraction based on the period from the start of employment to separation, compared to the period from the grant of options to their exercisability. The trial court, however, used a different formula, calculating from the date of grant to separation, which Mary argues is inequitable. The document asserts that Hug allows for trial courts to exercise discretion in formulating equitable apportionment methods tailored to individual case circumstances. The trial court's formula is deemed appropriate and potentially superior under the case's specific facts.

Regarding taxation, the trial court recognized that gains from option exercises are subject to ordinary income tax. It ordered a 20 percent tax rate reduction on the community property's valuation and granted Harold half of this adjusted value. Should Harold incur a tax burden exceeding this rate, he would be credited accordingly, while he would reimburse Mary if his tax liability is less than the assessed rate. Harold argues for a 55 percent offset instead, citing his tax bracket, but the case law does not support this. Courts are required to consider tax implications only when there is a proven immediate liability arising from the asset division. In this instance, any tax liability is contingent on Harold's choices regarding option exercises, which he is not compelled to undertake immediately.

The trial court is not required to consider potential tax consequences following the division of community property, as established in *Weinberg v. Weinberg*. However, it was not in error to grant Harold a credit for possible tax liabilities and to set up a mechanism for future credits. According to Civil Code section 4800, community assets should be divided equally upon marriage dissolution, taking economic circumstances into account for equitable distribution. In this case, the nonassignable stock options were awarded solely to Harold, with the tax reimbursement formula serving as a substitute for a more equitable asset division.

Mary argues that Harold's post-separation stock options and bonus should be classified as community property based on *In re Marriage of Brown* and *In re Marriage of Judd*. The trial court confirmed that stock options not granted prior to separation remain Harold's separate property and rejected Mary's claim regarding the $9,000 bonus, asserting it did not constitute community property as it was paid for services rendered after separation.

The trial court recognized that contractual rights accrued during marriage are partially community assets, but it determined the post-separation stock options and bonus had not accrued to Harold before separation. Evidence supported this conclusion: Harold was granted the 1,750 options shortly after separation, and the bonus was not guaranteed, being awarded at the discretion of the company each year, as Harold himself testified. Thus, the trial court's findings align with the substantial evidence rule.

Testimony revealed that some employees who received bonuses in 1980 received lesser amounts or none in 1981, leading the trial court to conclude that Ampex employees had only an expectancy of a bonus dependent on continued employment. Consequently, the court classified the 1,750 stock options granted on October 29, 1980, and the $9,000 bonus paid in May 1981 as Harold's separate property. The case is remanded to the trial court to determine the appropriateness of awarding attorney's fees and costs on appeal, while the interlocutory judgment is affirmed in all other respects. The opinion notes that during the divorce proceedings, Ampex Corporation merged into Signal Companies, Inc., converting stock options accordingly. It differentiates between Ampex options and those in a prior case (Hug), emphasizing that the focus should be on the period from each grant to separation rather than the employee's entire tenure. Harold's argument regarding reimbursement and potential fluctuations in option value is deemed speculative and contradictory to his main argument. Parts of the opinion are not certified for publication.