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LLC v. County of Los Angeles

Supreme Court of California

June 29, 2017

926 NORTH ARDMORE AVENUE, LLC, Plaintiff and Appellant,
v.
COUNTY OF LOS ANGELES, Defendant and Respondent.

         Los Angeles County Superior County No. BC476670, Ct.App. 2/7 B248356, Rita J. Miller, Judge.

          FisherBroyles, Goodson Wachtel and Petrulis, Lemoine Skinner III; Gibson, Dunn & Crutcher, Daniel M. Kolkey, Julian W. Poon, Lauren M. Blas and Martie P. Kutscher for Plaintiff and Appellant.

          Pillsbury Winthrop Shaw Pittman, Kevin M. Fong, Jeffrey M. Vesely, Kerne H.O. Matsubara for Council on State Taxation as Amicus Curiae on behalf of Plaintiff and Appellant.

          Law Office of Peter Michaels and Peter Michaels for California Alliance of Taxpayer Advocates as Amicus Curiae on behalf of Plaintiff and Appellant.

          Arent Fox, Stephen G. Larson and Steven A. Haskins for California Society of Certified Public Accountants as Amicus Curiae on behalf of Plaintiff and Appellant.

          Ajalat, Polley, Ayoob & Matarese, Richard J. Ayoob, Christopher J. Matarese and Gregory R. Broege for Institute for Professionals in Taxation as Amicus Curiae on behalf of Plaintiff and Appellant.

          Greenberg Traurig, C. Stephen Davis, Cris K. O'Neall and Andrew W. Bodeau for California Taxpayers Association as Amicus Curiae on behalf of Plaintiff and Appellant.

          June Babiracki Barlow, Neil Kalin and Jenny Li for California Association of REALTORS as Amicus Curiae on behalf of Plaintiff and Appellant.

          John F. Krattli, County Counsel, Mary C. Wickham, Interim County Counsel, and Albert Ramseyer, Principal Deputy County Counsel, for Defendant and Respondent.

          Michael N. Feuer, City Attorney (Los Angeles), Beverly Cook, Assistant City Attorney, and Daniel, M. Whitley, Deputy City Attorney, for City of Los Angeles as Amicus Curiae on behalf of Defendant and Respondent.

          Arthur J. Wylene, County Counsel (Tehama) for County of Tehama and Jennifer A. Vise, Tehama County Clerk-Recorder as Amici Curiae on behalf of Defendant and Respondent.

          Donna R. Ziegler, County Counsel (Alameda) and Farand C. Kan, Deputy County Counsel, for County of Alameda as Amicus Curiae on behalf of Defendant and Respondent.

          Daniel C. Cederborg, County Counsel (Fresno) and Jane T. Smith, Deputy County Counsel, for County of Fresno as Amicus Curiae on behalf of Defendant and Respondent.

          Theresa A. Goldner, County Counsel (Kern) and Jerri S. Bradley, Deputy County Counsel, for County of Kern and Jon Lifquist, Kern County Assessor-Recorder as Amicus Curiae on behalf of Defendant and Respondent.

          Marshall S. Rudolph, County Counsel (Mono) and John-Carl Vallejo, Deputy County Counsel, for County of Mono as Amicus Curiae on behalf of Defendant and Respondent.

          Charles J. McKee, County Counsel (Monterey) and Jerrold A. Malkin, Deputy County Counsel, for County of Monterey and Stephen L. Vagnini, Monterey County Assessor-Clerk-Recorder as Amicus Curiae on behalf of Defendant and Respondent.

          Matthew W. Granger, County Counsel (San Benito) and Barbara J. Thompson, Deputy County Counsel, for County of San Benito and Joe Paul Gonzalez, San Benito County Clerk, Auditor & Recorder as Amicus Curiae on behalf of Defendant and Respondent.

          Gregory P. Priamos, County Counsel (Riverside) and Kristine Bell-Valdez, Deputy County Counsel, for County of Riverside and Peter Aldana, Riverside County Assessor as Amicus Curiae on behalf of Defendant and Respondent.

          Michael Ghizzoni, County Counsel (Santa Barbara) and Marie A. LaSala, Deputy County Counsel, for County of Santa Barbara and Joseph E. Holland, Santa Barbara County Assessor as Amicus Curiae on behalf of Defendant and Respondent.

          Brian Wirtz, County Counsel (Placer) for County of Placer and Jim McCauley, Placer County Clerk-Recorder-Registrar as Amici Curiae on behalf of Defendant and Respondent.

          Thomas E. Montgomery, County Counsel (San Diego) and Walter de Lorrell III, Deputy County Counsel, for County of San Diego and Ernest J. Dronenburg, Jr., County of San Diego Assessor/Recorder/County Clerk as Amici Curiae on behalf of Defendant and Respondent.

          John C. Beiers, County Counsel (San Mateo) and Rebecca M. Archer, Deputy County Counsel, for County of San Mateo as Amicus Curiae on behalf of Defendant and Respondent.

          John P. Doering, County Counsel (Stanislaus) and Deirdre McGrath, Deputy County Counsel, for County of Stanislaus as Amicus Curiae on behalf of Defendant and Respondent.

          Minh C. Tran, County Counsel (Napa) and Susan Altman, Deputy County Counsel, for County of Napa and John Tuteur, Napa County Assessor-Recorder-County Clerk as Amici Curiae on behalf of Defendant and Respondent.

          Bruce Goldstein, County Counsel (Sonoma) and Linda Schiltgen, Deputy County Counsel, for County of Sonoma and William F. Rousseau, Sonoma County Clerk-Recorder-Assessor as Amici Curiae on behalf of Defendant and Respondent.

          Corrigan, J.

         Here we consider whether the County of Los Angeles can impose a documentary transfer tax on a written instrument that transfers beneficial ownership of real property from one person to two others. We hold that the tax may be imposed if the document reflects a sale: that is, an actual transfer of legal beneficial ownership made for consideration.

         Facts and Procedure

         A. Transactions Involving the Building

         This case arises from a series of transactions among trusts maintained for the benefit of Averbook family members. Beryl and Gloria Averbook owned an apartment building at 926 North Ardmore Avenue in Los Angeles (the Building). In 1972, they established a family trust and transferred the Building into it. Beryl died in 2007. After his death, the family trust's assets, including the Building, were transferred to an administrative trust maintained for Gloria's benefit. Bruce and Allen Averbook, Gloria's sons, were named successor trustees.

         In their roles as successor trustees, Bruce and Allen formed two entities: 926 North Ardmore Avenue, LLC (LLC), a single-member limited liability company established to acquire and hold the Building; and BA Realty, LLLP (BA Realty), a partnership. The administrative trust was the sole member of LLC. It also held a 99 percent partnership interest in BA Realty.[1]

         Between August and December 2008, the administrative trust engaged in the following transactions. First, it conveyed the Building by grant deed to LLC. Second, it transferred its membership interest in LLC to BA Realty. Third, it divided its 99 percent interest in BA Realty and distributed it to four subtrusts also maintained for Gloria's benefit. The survivor's trust received 64.66 percent; the nonexempt marital trust 23.86 percent; the exempt marital trust 0.67 percent; and the bypass trust 9.81 percent.

         The net result of these transactions did not alter one central reality. When Beryl and Gloria transferred the Building from themselves personally into the family trust, they retained a beneficial interest. The trust became the legal owner, but it was obligated to hold and manage the Building for their benefit. After Beryl's death, Gloria held the sole beneficial interest. The subsequent transactions described in the preceding paragraph moved the Building's legal ownership among the various entities. But Gloria's beneficial interest remained unchanged.

         In January 2009, a different kind of transaction triggered imposition of the documentary transfer tax. The survivor's trust, the nonexempt marital trust, and the marital trust transferred all of their interests in BA Realty to two trusts maintained for Allen and Bruce. Allen and Bruce were each the sole beneficiary of their named trust. (These trusts will be referred to as the Allen and Bruce Trusts.) As a result, Allen and Bruce each acquired a beneficial interest in the Building they had not held before.

         The 2009 transfers were effectuated by written instruments, including six limited partner transfer and substitution agreements. The transaction did not involve the execution of a deed or other instrument transferring title to the Building. The agreements did not mention the Building or its location, nor were they recorded. After the transfers, the Allen and Bruce Trusts each held a 44.595 percent partnership interest in BA Realty, which was the sole member of LLC.[2] LLC, in turn, held legal title to the Building. In consideration for the transferred interests, the Allen and Bruce Trusts executed promissory notes to Gloria's three subtrusts. The amount paid by the Allen and Bruce Trusts was based on an appraisal of the assets of BA Realty, including the Building.

         B. Change in Ownership and Property Tax Assessment

         As required by Revenue and Taxation Code[3] section 480.2, subdivision (a), LLC filed a statement with the state Board of Equalization describing these transfers.[4] Based on that statement, the Los Angeles County Assessor (Assessor) determined the January 2009 transfers of BA Realty resulted in a change in ownership of the Building under section 64, subdivision (d). The Assessor issued a supplemental property tax assessment to LLC. This assessment was paid and is not disputed here. Whether a change in ownership occurred, however, is integral to the determination whether the documentary transfer tax applies.

         Under California's property tax laws, a “change in ownership” of real property occurs when there is “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.” (§ 60.) Section 60 plays a central role in the state's property tax scheme: A change in ownership triggers reappraisal and reassessment for property tax purposes. (Cal. Const., art. XIII A, § 2; 1 Ehrman & Flavin, Taxing Cal. Property (4th ed. 2008) Proposition 13, § 2.6, p. 2-20.)

         Generally, the transfer of an interest in a legal entity does not result in a change in ownership of the entity's real property. (§ 64, subd. (a); see also 1 Ehrman & Flavin, supra, § 2.15, p. 2-40.) This rule has two major exceptions.[5] Relevant here, there is a change in ownership of all real property owned by a legal entity when (1) the property was previously transferred to that entity, but that transfer was deemed not to be a change in ownership under section 62, subdivision (a), [6] and (2) shares or interests representing more than 50 percent of the total interests in the entity are subsequently “transferred by any of the original coowners in one or more transactions.” (§ 64, subd. (d).)

         That is what happened here. The transfer of the Building, in August 2008, from the administrative trust to LLC, was not a change in ownership under section 62, subdivision (a), because it resulted in a change in the method of holding title without changing the beneficial ownership of the Building. The transfer of LLC, in August 2008, from the administrative trust to BA Realty, was not a change in ownership under section 64, subdivision (a), because Gloria remained the beneficial owner of the Building. The transfer of interests in BA Realty, in December 2008, from the administrative trust to Gloria's four subtrusts, was not a change in ownership under section 64, subdivision (a), because Gloria still remained the Building's beneficial owner. But the transfer of interests in BA Realty, in January 2009, from Gloria's subtrusts to the Allen and Bruce Trusts, was a change in ownership under section 64, subdivision (d), ...


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