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Office of Small & Disadvantaged Business Utilization

Community Property Brief

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Issue:  How do Veterans in community property states demonstrate ownership and control?

Definition

Community Property:  All property or income acquired by either spouse during marriage is considered equally owned by both spouses.

The Regulation – 38 CFR § 74.3

  • Community property laws given effect.  In determining ownership interests when an owner resides in any of the community property States or territories of the United States, the Center for Verification and Evaluation (CVE) considers applicable State community property laws.  If only one spouse claims Veteran status, that spouse’s ownership interest will be considered unconditionally held only to the extent it is vested by the community property laws.

What This Means

  • Community Property States include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Puerto Rico is a Community Property Territory.
    • State statutes generally state that property brought into the marriage is exempt from community property laws. If a Veteran owned the company prior to being married, the Veteran owner should consult the state statute to verify whether he or she is exempt. The state statute will determine exemption."
  • If a Veteran owner resides in any of the community property states or territories and is married, the Veteran is presumed to only own an undivided half, (i.e., 50%), of the property acquired during the marriage. The Veteran can submit evidence that this is not the case, (i.e., the property is legally treated as separate property).
  • For example, Veteran John Smith owns 100% of Example, LLC, is married to a non-Veteran, and lives in Arizona. According to state community property law, he would only be regarded as holding an undivided 50% interest in Example, LLC, and, therefore, would not meet the ownership requirements of 38 CFR § 74.3.What Veteran John Smith could do in order to meet the ownership requirements is provide CVE with documentation proving that he owns his interest in Example, LLC as his sole and separate property (for example, by having his spouse provide a notarized letter disclaiming her interest in the community property) or showing that his interest in Example, LLC is not subject to the community property laws for another reason (for example, it was acquired prior to marriage, or his spouse disclaims ownership interest in accordance with state law).
  • Hypothetically, if Veteran John Smith and his spouse execute a document that confirms that Veteran Smith owns 1% of Example, LLC as his sole and separate property, the Veteran would only be recognized as having a 50.5% interest in the concern for community property purposes. Specifically, Veteran Smith acquires 1% as sole and separate property by agreement between Veteran Smith and his spouse, leaving a 99% interest that is subject to State community property law. The remaining 99% interest is divided by two, creating a 49.5% community property interest held by Veteran Smith and his spouse. After adding Veteran Smith’s 1% sole and separate property interest to his 49.5% community property interest, Veteran Smith’s total interest held in Example, LLC for purposes of determining ownership equals 50.5%. To solve this issue, Veteran Smith would have to acquire at least a 2% interest in Example, LLC as his sole and separate property. With a 2% ownership interest held by Veteran Smith as his sole and separate property, there remains a 98% interest subject to State community property laws. The remaining 98% interest is divided by two, creating a 49% community property interest held by Veteran Smith and his spouse. After adding Veteran Smith’s 2% sole and separate property interest to his 49% community property interest, Veteran Smith’s total interest held in Example, LLC for purposes of determining ownership equals 51%. In the case of multiple Veteran owners, ownership percentages are combined to determine eligibility. Example: In the case of two Veteran owners residing in a community property state, one being single, and the other married, where each owns 50% of the applicant, the single Veteran’s ownership interest will remain at 50%, whereas the married Veteran’s ownership interest will be at 25%, totaling 75% Veteran ownership for purposes of verification.
  • Excerpts from Current Denial Letters

  • The VA Form 0877 Verification Application you submitted lists you, the service-disabled Veteran, as 51% owner of XXX, Inc. Your business is in the state of Arizona. Arizona is a community property state. This means that property owned by one spouse in a marriage is jointly the property of both spouses. 38 CFR § 74.3(f) states that, “[i]n determining ownership interests when an owner resides in any of the community property States or territories of the United States, CVE considers applicable State community property laws. If only one spouse claims Veteran status, that spouse’s ownership interest will be considered unconditionally held only to the extent it is vested by the community property laws.” This would mean that you and your spouse each own an undivided 50% interest in the company. You have not provided sufficient evidence to support that the ownership interest in the applicant is sole and separate property or equals at least 51%. Therefore, CVE is unable to conclude that you meet the 51% ownership requirement of 38 CFR § 74.3.
  • In response to a document request from the CVE examiner you stated that your business is a sole proprietorship. The VA Form 0877 Verification Application you submitted lists you as 51% owner. A sole proprietor owns 100% of a sole proprietorship. Your supplied tax documents list you as the proprietor of the business. California is a community property state. These laws make it so that property owned by one spouse in a marriage is jointly the property of both spouses. 38 CFR § 74.3(f) states that, “[i]n determining ownership interests when an owner resides in any of the community property States or territories of the United States, CVE considers applicable State community property laws. If only one spouse claims Veteran status, that spouse’s ownership interest will be considered unconditionally held only to the extent it is vested by the community property laws.” This means that you and your spouse each own an undivided 50% interest in the company. While both of you are Veterans, only you are a service-disabled Veteran. Therefore, CVE is unable to conclude that you meet the 51% ownership requirement of 38 CFR § 74.3 for purposes of determining whether your business qualifies as a service-disabled Veteran-owned small business.

 

    *For Informational Purposes Only*

    This information has been provided by CVE for general informational purposes and should not be construed as providing legal advice.  You should contact your attorney to obtain advice with respect to any particular issue or problem.  In addition, CVE makes no representation as to the accuracy or whether the above information is currently up-to-date.  All applicants must read the applicable regulations and determine how best to meet these requirements.  The Verification Assistance Briefs do not constitute legal notice or replace the regulations.

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