When a couple in Arizona decides to divorce, the division of business interests can quickly become one of the most contentious parts of the process. Unlike other marital assets, a business, especially one that remains operational during the divorce, raises tough questions about ownership, control, and future profits.
Arizona’s community property laws presume that most property acquired during a marriage, including business income, is jointly owned. But things can get complicated when the business produces ongoing income or profit during the divorce process, especially if only one spouse is actively involved in running it.
Here’s what this article will cover:
- Arizona’s Community Property Laws and Business Ownership
- What Happens to Business Profits After Filing for Divorce?
- Toil and Effort vs. Passive Income: Why It Matters
- Burden of Proof for Claiming Separate Business Income
- How the Court Divides Business Assets in Arizona
- Contact a Family Law Attorney From the Law Offices of Daniel Hutto
This article explains how Arizona law treats business income earned during a divorce, the role of a spouse’s “toil and labor,” and how courts determine whether distributions are community or separate property. We will also examine the Arizona Court of Appeals’ ruling in Rueschenberg v. Rueschenberg, a key case for anyone facing the division of business assets during a divorce.
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Arizona’s Community Property Laws and Business Ownership
Arizona is a community property state. That means any asset acquired during the marriage, including business interests, is presumed to belong equally to both spouses under ARS 25-211. If a couple started or acquired a business during the marriage, it’s typically treated as community property, regardless of which spouse’s name is on the paperwork.
That also includes business income and distributions. However, if a business was owned by one spouse before the marriage, or if it was gifted or inherited, it may be considered separate property. Even then, if the business increases in value during the marriage, particularly through the active efforts of one or both spouses, that increased value may be partially community property.
Key Point: The court looks at how the business was acquired, how it was managed, and how any profits were generated. Business records, ownership documents, and compensation structures will all play a role in this analysis.
What Happens to Business Profits After Filing for Divorce?
A common assumption is that filing for divorce draws a clean line between marital and separate property. But Arizona law doesn’t work that way. Under A.R.S. § 25-213(B), the character of community property remains intact even after a petition for dissolution is filed.
That means business income earned after the divorce is filed may still be subject to division if it’s tied to community-owned assets.
This issue came to the forefront in Rueschenberg v. Rueschenberg, where the Arizona Court of Appeals addressed how to classify business distributions made between the filing of the divorce petition and the final decree. The husband in that case claimed all post-petition business distributions were his separate property because they were compensation for his labor. The court disagreed.
In that case, both businesses were acquired during the marriage and had operating agreements stating distributions would be made proportionally to ownership interest. The court held that distributions during the divorce were still presumptively community property unless the spouse receiving them could prove otherwise by clear and convincing evidence.
This is important because even if a business is operated primarily by one spouse, the other spouse still retains an ownership interest until a final order changes that status.
Toil and Effort vs. Passive Income: Why It Matters
Arizona courts distinguish between two sources of income when dividing business profits:
- Income from a spouse’s personal services (toil and labor)
- Income that results from the business’s inherent value or passive operations
This distinction is critical. Income derived from personal efforts after the divorce petition is typically treated as that spouse’s separate property. In contrast, income resulting from the business’s existing value or capital is still considered community property until the divorce is finalized.
In Rueschenberg, the husband claimed that the income he received beyond his $250,000 base salary should be treated as his own because it came from his “toil and labor.”
But the court emphasized that simply labeling income as a “distribution” or restructuring compensation isn’t enough.
The court scrutinized whether those distributions truly represented extra labor or whether they were simply profits from a business that was still jointly owned. Because the husband failed to prove by clear and convincing evidence that the additional income was solely the result of his own efforts, the court ruled that the income was still community property.
This ruling echoes the principles set forth in earlier cases such as Brebaugh v. Deane, where courts have made it clear that any property or income acquired during marriage is presumed community property unless there is compelling evidence to the contrary.
Burden of Proof for Claiming Separate Business Income
Arizona law imposes a high evidentiary burden when one spouse claims that certain profits should be classified as their own separate property. The spouse asserting that position must prove it by clear and convincing evidence, a standard that is higher than the usual “preponderance of the evidence.”
In Rueschenberg, the Arizona Court of Appeals reversed the trial court’s decision because it failed to require the husband to meet this standard. The record showed the husband received substantial distributions from two companies after filing for divorce, but the court didn’t examine whether those distributions exceeded what would reasonably be considered fair compensation for his labor.
The justices remanded the case, directing the trial court to determine:
- What portion of the distributions reflected compensation for personal services (and were therefore separate)
- What portion resulted from the inherent value of the businesses (and were therefore community property)
Takeaway: If you’re a business owner going through a divorce, it’s not enough to restructure your compensation or reclassify income. The court will look beyond the labels and examine the true nature and source of the money.
How the Court Divides Business Assets in Arizona
When dividing business interests, Arizona courts focus on two questions:
- Is the business or its increased value during the marriage community property?
- Are any profits received after the divorce filing derived from personal labor or passive ownership?
To answer these, the court may rely on:
- Expert testimony on business valuation
- Tax records and CPA reports
- Operating agreements and ownership documents
- The timing and nature of income distributions
In the Rueschenberg case, the court criticized the trial court for not adequately analyzing these factors. It specifically noted the absence of evidence showing what amount would reasonably compensate the husband for his efforts and how much of the income exceeded that amount.
Ultimately, the court concluded that:
- Business distributions made during the divorce process remain presumptively community property
- A spouse seeking to classify those distributions as separate property must provide detailed, credible evidence
The decision also reinforced the rule that any post-petition income from community assets is subject to equitable division, unless and until the court says otherwise.
Contact a Family Law Attorney From the Law Offices of Daniel Hutto
Dividing business profits during a divorce in Arizona is rarely straightforward, especially when one spouse actively works in the business and the other does not. Courts will evaluate whether income came from active efforts or the underlying value of a shared asset, and they will hold the party claiming separate ownership to a high standard.
At the Law Offices of Daniel Hutto, our legal team understands the complex interplay between community property rules and business valuation. Whether you’re a business owner or the spouse of one, we can help protect your rights and ensure a fair outcome.
Daniel Hutto brings extensive experience handling complex family law cases involving business divisions, high net-worth estates, and self-employed spouses. His background as both a former prosecutor and private litigator gives him the skills to advocate assertively and effectively in Arizona’s family courts.
We offer free one-on-one consultations to discuss your case, your goals, and your legal options. Call us today at 602 536-7878 or visit our Contact Form to schedule your consultation.
