The Pereira Rule

Apportionment of Separate Property Business Profits

Summary of the Concept

The Pereira rule is a foundational legal doctrine in California family law, used during divorce proceedings to determine how to divide the increased value of a business that one spouse owned as Separate Property (SP) before the marriage, but which grew significantly during the marriage.

It operates on the principle that the community estate (CP) is entitled to the profits derived from the managing spouse’s personal **skill, efforts, and industry** during the marriage. The formula credits the initial Separate Property investment with only a reasonable rate of return, and the remaining, larger portion of the growth is allocated to the community estate.

Citation and Context

The rule derives its name from the published California Supreme Court decision: Pereira v. Pereira (1909) 156 Cal. 1, 103 P. 488

The Pereira rule is the original and favored method when the primary driver of business appreciation is the spouse’s labor. It is the opposite of the Van Camp rule, which credits capital. Courts apply Pereira when the increase in value is primarily due to **personal services** rather than **valuable capital** or market forces.

Explanation of Application

When Applied: The Pereira method is typically used for professional practices (e.g., medical, dental, legal, or accounting firms) or small, labor-intensive businesses where the owner’s personal reputation, skills, or efforts are the main factor for success and growth.
Separate Property Return: The Separate Property is credited with a fair, conservative rate of return on the initial investment (often 7% to 10% simple annual interest, though courts are not bound to a fixed rate). This return is the Separate Property share.
Community Compensation: Any appreciation or profit in excess of this calculated fair return is attributed to the community estate, reflecting the spouse’s personal efforts during the marriage.

The Pereira Formula

The Community Property Share (CP) is calculated as follows:

SP Return = (Initial SP Value) x (Reasonable Rate of Return per Year) x (Years of Marriage)

CP Value = (Current Business Value) – (Initial SP Value + SP Return)

Result: The remainder of the total increase in value is classified as Community Property (CP), available for equal division upon divorce.

Practical Example

Scenario: A Wife (W) owned a small accounting firm valued at $100,000 before marriage (SP). During the 10-year marriage, W worked full-time, building the firm’s reputation and client base, and the firm is now valued at $700,000.

Court’s Reasoning: The appreciation of $600,000 is primarily due to W’s personal efforts, so the Pereira rule applies.
Calculation: Using a reasonable 8% simple annual rate on the initial $100,000 SP investment:
SP Return = $100,000 x 0.08 x 10 years = $80,000.
Apportionment: The total SP share is the initial $100,000 + $80,000 return = $180,000. The remaining growth ($700,000 – $180,000 = $520,000) is confirmed as Community Property.

Published California Cases Citing Pereira

The Pereira rule is often used interchangeably with the Van Camp rule, with the court selecting the method that is most equitable to compensate the community estate.

Beam v. Bank of America (1971) 6 Cal. 3d 12, 17:
This landmark case confirmed that courts must choose between Pereira (favoring community efforts) and Van Camp (favoring separate capital) based on whether the spouse’s labor or the separate property capital was the chief contributing factor to the income.
In re Marriage of Dekker (1993) 17 Cal. App. 4th 842:
The court applied the Pereira formula to find a community interest in a corporation formed during the marriage because the increased value was primarily due to the husband’s effort, expertise, and contacts (labor), not passive return on the wife’s separate capital.