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Phelps v. Orange County Assessment Appeals Board No. 1

August 16, 2010

JAMES S. PHELPS, AS TRUSTEE, ETC., PLAINTIFF AND APPELLANT,
v.
ORANGE COUNTY ASSESSMENT APPEALS BOARD NO. 1, DEFENDANT AND RESPONDENT;
WEBSTER J. GUILLORY, AS ASSESSOR, ETC., REAL PARTY IN INTEREST AND RESPONDENT.



Appeal from a judgment of the Superior Court of Orange County, Geoffrey T. Glass, Judge. Affirmed. (Super. Ct. No. 07CC09169).

The opinion of the court was delivered by: Aronson, J.

On transfer from Supreme Court foll. grant of review and vacation of prior opinion

CERTIFIED FOR PUBLICATION

OPINION

Plaintiff James S. Phelps, as trustee of the John Wilson Phelps Trust (trust), challenges the action of respondent Webster J. Guillory, Orange County Assessor (Assessor), in reassessing a shopping center complex (property) held by the trust upon the death of Wilson W. Phelps (Wilson), an income beneficiary of the trust, and the decision of respondent Orange County Assessment Appeals Board No. 1 (appeals board) to uphold the reassessment. Plaintiff contends the transfer of Wilson's interest as an income beneficiary to his four children did not qualify as a change of ownership under Revenue and Taxation Code section 60.*fn1

For a change of ownership to occur under section 60, there must be "a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest." Plaintiff contends the trust's income beneficiaries do not have a present interest in the improvements on the property because the improvements were constructed and are owned by the property's lessee and sublessees. Plaintiff also contends the income beneficiaries do not have the beneficial use of the property because they do not hold legal title. Finally, plaintiff contends that the beneficiaries' interest in the income flowing from the property is not substantially equal to the value of a fee interest because a lifetime income interest is inherently inferior to a fee.

This case returns to us after the California Supreme Court transferred it with directions to vacate our previous decision in this matter and reconsider the cause in light of Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298 (Steinhart). We concluded in our previous opinion the trial court properly denied plaintiff's writ petition seeking to overturn the board's decision and the reassessment. We explained the income beneficiaries had a present interest in the improvements because these improvements constituted part of the property and the lease required the lessee to surrender the improvements to the lessor in good condition at the close of the lease. We also concluded the beneficiaries have the beneficial use of the property because they receive income from it; the law does not require legal title to be held by those who are entitled to the beneficial use of a property. Finally, we noted a lifetime beneficiary receiving the rental value of a parcel of real property is considered under the law to be receiving value substantially equal to the value of the fee interest. After considering Steinhart, we find no basis to overturn the trial court's decision and therefore affirm the judgment denying plaintiff's writ petition.

I. FACTUAL AND PROCEDURAL BACKGROUND

The trustor, John Wilson Phelps, created the trust as part of his will in 1945, which became irrevocable upon his death in 1947. The trust held real estate from which it derived income, and distributed the income to its beneficiaries. The trust instrument directed the trust to hold the property in trust during the lifetimes of Adele N. Phelps, Wilson, Arthur D. Phelps, Adele Phelps Spellacy, and the trustor's grandchildren living at the time of his death. The trust is scheduled to terminate on the death of the last survivor of the trustor's children and grandchildren living when the trustor died. Thereafter, the trust corpus will be distributed to the trustor's then living issue on the principle of representation.

Among the trust's income producing assets are parcels of real property in Fullerton now used as a shopping center. The trustees executed a lease of the property in 1964 to Montgomery Ward & Co. The lease required the lessee to construct improvements on the unimproved land subject to the lessor's approval. The lessee agreed to surrender the improvements in good condition to the trust at the termination of the lease.

After Montgomery Ward & Co. went bankrupt, Target Corporation (Target) became the current lessee of the property. When Target took over, it spent approximately $7 million to renovate the main store on the property. Both Montgomery Ward and Target subleased portions of the property (retail and restaurant pads) to others who constructed improvements for retail and restaurant use. These improvements were constructed by the sublessees at their own expense and are owned by the lessee or sublessees for the duration of the lease. At the conclusion of the lease, these improvements are surrendered to the trust.

Upon the trustor's death, trust provisions directed the trustees to divide the trust's income among the trustor's widow and his three children. The trust provided that if any of the trustor's children died before the termination of the trust, their issue would take per stirpes. If any of the trustor's children died without issue, the decedent's share of the trust's net income was to be divided among the other children.

As of January 2002, the trust had three trustees, Wilson, John W. Phelps II, and James S. Phelps, who collectively held legal title to the trust's assets. Wilson held a one-third interest as an income beneficiary. Wilson died in April 2002. Under the trust document, Wilson's interest in the net income of the trust was transferred to his four children, each of whom then became entitled to receive 1/12 of the trust's net income.

The assessor concluded the transfer of Wilson's interest to his four surviving children was a change in ownership under section 60 and reassessed their share of the property. The assessor appraised the entire property at $27,740,000 for the 2002 tax year, with the land valued at $14,740,000, and the improvements valued at $13 million. Target paid all of the assessed real property taxes and the trust subsequently filed an application to challenge the assessments with the appeals board. After a hearing, the appeals board upheld the assessor's position as to the parcel involved in this appeal.*fn2 The trust filed its verified petition for writ of mandate in the superior court, seeking to set aside the board's findings. After a hearing, the trial court denied the petition, concluding the transfer on Wilson's death constituted a change in ownership under section 60, entitling the Assessor to reassess the property.

II. STANDARD OF REVIEW

"The interpretation and application of section 60 is a question of law. We review de novo a determination that an assessable change in ownership occurred under section 60." (Reilly v. City and County of San Francisco (2006) 142 Cal.App.4th 480, 487 (Reilly).)

III. DISCUSSION

A. Wilson Held a Present Interest in the Property's Improvements, Which Passed to the ...


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