California Court of Appeals, Second District, Seventh Division
[REVIEW GRANTED BY CAL. SUPREME COURT]
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC476670, Rita Miller, Judge.
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[Copyrighted Material Omitted]
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Goodson Wachtel and Petrulis and Lemoine Skinner III, for Plaintiff and Appellant.
John F. Krattli, County Counsel and Albert Ramseyer, Principal Deputy County Counsel, for Defendant and Respondent.
BA Realty, LLLP owned 926 North Ardmore Avenue LLC (Ardmore), a single member entity established to hold and manage an apartment building. In 2008, the owners of BA Realty sold approximately 90 percent of their partnership interests, 45 percent to each of two trusts. Following the sale, the County of Los Angeles Registrar-Recorder /County Clerk sent a notice demanding that Ardmore pay a documentary transfer tax (see Rev. & Tax. Code, § 11911 et seq.) based on the value of the apartment building. The notice asserted that the cumulative sale of more than 50 percent of BA Realty (which owned Ardmore) qualified as a “change of ownership” of the apartment building, thereby triggering a documentary transfer tax.
Ardmore paid the demand and filed a tax refund action arguing that Revenue and Taxation Code section 11911 does not authorize a documentary transfer tax based on the change in ownership of a legal entity that owns the legal entity that holds title to realty. Following a bench trial, the court entered judgment in favor of the County. We affirm, concluding that section 11911 permits a documentary transfer tax when a transfer of interest in a legal entity results in a “change of ownership” within the meaning of Revenue and Taxation Code section 64, subdivision (c) or (d).
A. Summary of Events Preceding the County Recorder’s Tax Payment Demand
In 1972, Beryl and Gloria Averbrook established a family trust that owned, among other things, an apartment building located at 926 North Ardmore Avenue (the apartment building). The family trust provided that, upon the death of the first spouse, an administrative trust was to be established that would distribute the trust principal to the following subtrusts: the “Survivor’s Trust”, the “Bypass Trust”, the “Exempt Marital Trust” and the “Nonexempt Marital Trust.” The surviving spouse was to be the beneficiary of each of the subtrusts. Beryl died in April of 2007, leaving Gloria as the beneficiary of the family administrative trust (the family trust) and the subtrusts. Gloria designated her two sons, Bruce and Allen Averbrook, as successor trustees of the family trust.
In August of 2008, Bruce and Allen, acting in their capacity as trustees, established Ardmore to “acquire, hold, manage and dispose of” the apartment building. The family trust was named as the sole member of Ardmore, which elected to be disregarded as an entity separate from its owner for state and federal income tax purposes. (See generally Cal. Code Regs., tit. 18, §§ 23038(b)-1, subd. (a)(4), 23038(b)-2, subd. (a), 23038(b)-3, subds. (a), (b); 26 C.F.R. §§301.7701-2(c)(2), 301.7701-3(a) (2014) [permitting single owner limited liability companies to elect whether to be recognized or disregarded for tax purposes as entities separate from their owners].) The family trust later conveyed the apartment building to Ardmore, and then transferred its interest in Ardmore to a trust-owned partnership named BA Realty, LLLP.
In December of 2008, the family trust and its subtrusts entered into an agreement for the distribution of the family trust assets. Under the agreement, the family trust distributed its interest in BA Realty among the subtrusts as follows: 65 percent to the Survivor’s Trust; 24 percent to the Nonexempt Marital Trust, 10 percent to the Bypass Trust and 1 percent to the Exempt Marital Trust. The same day the distribution agreement was executed, Gloria established an irrevocable trust for her son Allen (Allen’s Trust) and a second irrevocable trust for her other son Bruce (Bruce’s Trust). In January of 2009, Gloria directed the Survivor’s Trust to distribute a 3.5 percent interest of BA Realty to each of her sons’ trusts. Shortly thereafter, the Survivor’s Trust and the two marital trusts each agreed to sell 50 percent of their interests in BA Realty to Allen’s Trust and their remaining 50 percent interest to Bruce’s Trust. Following these sales, the Allen and Bruce Trusts each held approximately 45 percent of the total interests in BA Realty.
Ardmore reported these sales to the Board of Equalization through a “statement of change in ownership of legal entities.” (See Rev. & Tax. Code, §§ 480.1 & 480.2 [requiring individuals and entities to file a statement with the Board when a transfer of interests in a legal entity results in a “change of ownership” within the meaning of § 64, subd. (c) or (d)].) Ardmore’s statement asserted that the family trust’s initial distribution of BA Realty (which owned Ardmore) to the various subtrusts did not qualify as a “change of ownership” of Ardmore’s real property because Gloria remained the beneficial owner of the property through her status as beneficiary of the subtrusts. The statement further indicated, however, that the subtrusts (other than the Bypass Trust) had subsequently transferred one-half of their interests in BA Realty to each of Bruce’s trust and Allen’s trust. The statement did not take a position as to whether this subsequent transfer constituted a “change of ownership” under the relevant property tax provisions.
Based on the statement of change in ownership, the Office of the Assessor for the County of Los Angeles sent Ardmore a notice of supplemental property tax indicating there had been a “change in ownership” of Ardmore’s real property, thereby triggering a property tax reassessment. Ardmore paid the supplemental reassessment tax without objection.
B. The County Recorder’s Notice of Documentary Transfer Tax Assessment
In 2011, the Registrar-Recorder/County Clerk for the County of Los Angeles (the recorder) sent a notice demanding that Ardmore pay a documentary transfer tax based on the value of the apartment building. The notice asserted the tax was due pursuant to section 11911 and Los Angeles County Code section 4.60.020, which permit the imposition of a tax on “each deed, instrument or writing by which any lands, tenements or other realty sold within the county of Los Angeles shall be granted, assigned, transferred or otherwise conveyed to or vested in the purchaser or purchasers . . . ." (L.A. County Code, § 4.60.020.) The recorder asserted that the “change in ownership” of the legal entity that controlled Ardmore had “created a liability for the documentary transfer tax.”
Ardmore paid the tax demand (approximately $11,000) and filed a claim with the County seeking a refund. Ardmore argued the subtrusts’ sale of more than 50 percent of BA Realty did not support a documentary transfer tax assessment for two reasons. First, it asserted that the sale of a partnership that owns a single member limited liability company that holds title to realty does not constitute “realty sold” within the meaning of section 11911 or Los Angeles County Code section 4.60.020. Ardmore contended that although section 11925 permitted the recorder to impose a tax on transfers of controlling interests in partnerships that “hold realty, ” that section was inapplicable because BA Realty did not hold title to any realty; instead, it owned an LLC (limited liability company) that held title to realty.
As its second ground, Ardmore argued that the subtrusts’ sale of BA Realty to the Bruce and Allen trusts should not be categorized as a taxable transfer or sale. Ardmore contended that, under federal income tax rules, Gloria Averbrook was considered the owner of both of her sons’ irrevocable trusts because she had retained the right to reacquire any property within those trusts and replace it with property of equal value. Ardmore further asserted that, as a result, the subtrusts’ sale of a majority interest in BA Realty to the Allen and Bruce trusts was effectively a sale by Gloria to herself. The County rejected Ardmore’s refund claim.
C. Summary of Trial Court Proceedings
On January 10, 2012, Ardmore filed a complaint for a tax refund asserting that the recorder had an illegal policy of enforcing the documentary transfer tax on transfers of controlling interests in legal entities that either hold title to real property or own other legal entities that hold title to property. According to Ardmore, the Revenue and Taxation Code only permitted a transfer tax “on the sale of real property and not on the sale of legal entities, except for sales of interests in partnerships holding real property that result in the termination of the partnerships...” As in its claim for refund, Ardmore argued in the alternative that there had been no “sale” of a controlling interest in BA Realty because Gloria was treated as the legal owner of the subtrusts and the Bruce and Allen Trusts under applicable federal income tax provisions. Ardmore’s complaint also sought attorneys fees under Code of Civil Procedure section 1021.5, arguing that the action would result in the enforcement of an important public right and confer a significant benefit on the general public.
At trial, an employee of the recorder testified that, in 2010, the County of Los Angeles had started assessing a documentary transfer tax whenever a legal entity had undergone a change of ownership within the meaning of state property tax law. The witness confirmed that this policy was set forth in a statement published on the recorder's Web site:
“NOTICE - COLLECTION OF DOCUMENTARY TRANSFER TAX FOR LEGAL ENTITY CHANGES IN OWNERSHIP
The Los Angeles County Registrar-Recorder/County Clerk (‘RRCC’) began enforcing collection of Documentary Transfer Tax (‘DTT’) on legal entity transfers where no document is recorded, but which resulted in a greater than 50% interest in control of the legal entity being transferred. The collection is made pursuant to Chapter 4.60 of the Los Angeles County Code, and California Revenue and Taxation Code (‘RTC’) sections 11911 and 11925, and is consistent with case law which defines ‘realty sold’ as having the same meaning as changes in ownership for property tax purposes in RTC section 64(c)(1). In addition, effective January 1, 2010, RTC section 408 was amended to allow recorders to obtain information pertaining to these transfers from the Assessor. As a result, in an effort to collect the tax, the RRCC will continue to identify, and send notices for, properties where a change of ownership occurred which transferred a greater than 50% controlling interest in the legal entity thereby creating a liability for the DTT.”
The witness explained that, prior to 2010, the recorder had no way to enforce the documentary transfer tax against transfers of interests in legal entities that resulted in a “change of ownership” of real property. The witness
explained that although taxpayers were required to file a statement of change in ownership of a legal entity to the Board of Equalization and the assessor (see §§480.1, 480.2), the prior version of the tax code had prohibited the assessor from “shar[ing these statements] with the Registrar Recorder.” The witness further explained that the law was changed in 2009 to provide the recorder with access to information regarding changes in ownership of legal entities. According to the witness, since the change in law had gone into effect, the recorder had been sending a documentary transfer tax demand whenever the assessor notified it there had been a transfer of interest in a legal entity that resulted in a “change of ownership.”
At the conclusion of the trial, the court issued a written order in favor of the County. The court ruled that, under the Revenue and Taxation Code, the transfer of more than a 50 percent interest in a partnership permitted the recorder to “collect a documentary transfer tax on real property owned by a ‘lower tier entity’ of [the] partnership.... [Therefore, ] a documentary transfer tax could be collected, even though the apartment building... was owned by [the] ‘lower tier entity’ [Ardmore] rather than the partnership [BA Realty] itself.”
The court further ruled that “even if Ardmore had prevailed” on the merits, the court would not have awarded attorneys fees under Code of Civil Procedure section 1021.5 The court explained that the trial evidence showed the “transaction [at issue] was unique. Plaintiff did not point to a single transaction like it in which the County had collected documentary transfer tax on the real property of a ‘lower-tier’ entity’ wholly-owned and controlled by an ‘upper-tier entity, ’ based on a change of ownership of this kind.” The court further explained that “if the County’s decision ultimately is held to have been erroneous, the decision was reached through reasonable analysis of an issue of first impression in connection with an extremely complex transaction... This level of error, if any, should not result in the taxpayers of the County underwriting plaintiff’s substantial attorneys fees.” On March 8, 2013, the court entered a judgment of dismissal.
The issue presented in this appeal is whether the recorder was permitted to impose a documentary transfer tax based on the transfer of more than 50 percent of the interest in a partnership that was the sole member of an LLC that held title to realty. Ardmore argues that a documentary tax may only be applied to “realty sold, ” which does not generally include sales or transfers of legal entities that either hold title to realty or own separate legal entities that hold title to realty. According to Ardmore, section 11925 describes the only situation in which the transfer of interest in a legal entity may trigger a
documentary tax, which is limited to sales or transfers of partnerships that directly hold title to realty. Ardmore contends section 11925 does not apply to this transaction.
The County, however, argues we should follow prior decisions that have construed the term “realty sold” in section 11911 to have the same meaning as the term “change of ownership” set forth in the property tax provisions. The County asserts that, based on these authorities, the documentary tax may be applied whenever there is a “change of ownership” in a legal entity within the meaning of section 64, subdivisions (c) and (d). It further asserts that because Ardmore has admitted the subtrusts’ sale of more than a 50 percent interest in BA Realty to the Bruce and Allen Averbrook trusts constituted a “change of ...