926 North Ardmore Ave., LLC v. County of L.A. ( 2014 )

Filed 9/22/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
926 NORTH ARDMORE AVENUE, LLC, B248536
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC476670)
v.
COUNTY OF LOS ANGELES,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County, Rita
Miller, Judge. Affirmed.
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, LLLP1 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% of their partnership interests, 45% to each
of two trusts. Following the sale, the County of Los Angeles Registrar-Recorder sent a
notice demanding that Ardmore pay a documentary transfer tax (see Revenue and
Taxation Code, §§ 11911 et seq.) based on the value of the apartment building. The
notice asserted that the cumulative sale of more than 50% 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).
FACTUAL BACKGROUND
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
1
BA Realty is described in its operating agreement as a “limited liability limited
partnership.”
2
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 926 North Ardmore LLC (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, subd. (b); 26
C.F.R. § 301.7701-2, subd. (c)(2) [permitting single owner limited liability companies to
elect whether to be recognized or disregarded for tax purposes as an entity 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% to the
Survivor’s Trust; 24% to the Nonexempt Marital Trust, 10% to the Bypass Trust and 1%
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% 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% of their interests in BA Realty to Allen’s Trust and their remaining
50% interest to Bruce’s Trust. Following these sales, the Allen and Bruce Trusts each
held approximately 45% of the total interests in BA Realty.
Ardmore reported these sales to the State Board of Equalization through a
“statement of change in ownership of legal entities.” (See Rev. & Tax. Code, §§ 480.1 &
3
480.22 [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 section 64, subdivisions (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 . . .” The
recorder asserted that the “change in ownership” of the legal entity that controlled
Ardmore had “created a liability for the documentary transfer tax.”
2 Unless otherwise noted, all further statutory references are to the Revenue and
Taxation Code.
4
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% 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 liable company
that holds title to realty does not constitute “realty sold” within the meaning of section
11911 or 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 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
5
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 county 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 County
Recorder’s website:
“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 county 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
6
to provide the recorder to 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% 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.
DISCUSSION
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% 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
7
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%
interest in BA Realty to the Bruce and Allen Averbrook trusts constituted a “change of
ownership” of Ardmore’s real property under section 64, the transaction necessarily
qualified as a “sale” of realty within the meaning of section 11911.
The parties have not identified any disputed issue of material fact, but disagree on
the interpretation of the Documentary Transfer Tax Act. We therefore apply a de novo
standard of review. (See generally Shapiro v. Board of Directors (2005) 134 Cal. App. 4th
170, 178 [“We apply a de novo standard of review where, as here, our task consists of
applying a statute to underlying facts that are not in dispute.”].)
A. Summary of Statutes Governing the Documentary Transfer Tax and
“Changes of Ownership” in Legal Entities
1. History and summary of documentary transfer taxes on sales of realty
a. Prior federal documentary stamp taxes
Prior to 1968, federal law imposed documentary stamp taxes on (among other
things) transfers of capital stock and conveyances of land. Former section 29 U.S.C.
section 4321 imposed a tax on the “sale or transfer of shares or certificates of stock,”
which was defined to include “shares or certificates of profits or of interests in property
8
or accumulations.” (See former 29 U.S.C., § 4381, subd. (c).)3 Former section 29 U.S.C.
section 4361 imposed a separate tax on “each deed, instrument, or writing by which any
lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise
conveyed to, or vested in, the purchaser or purchasers. . .”
The federal stamp tax laws included a special provision for “changes in
partnerships,” which was set forth in former 29 U.S.C. section 4383. Subdivision (a) of
the statute provided that “[i]n the case of any share, certificate, right, or realty held by a
partnership, no tax shall be imposed under section 4321, . . . [or] 4361 by reason of any
transfer of an interest in the partnership” if the partnership was “continuing” within the
meaning of 29 U.S.C. section 708. Under section 4383, subdivision (b), a partnership
that “terminate[d]” within the meaning of 29 U.S.C. section 708 was to be treated as
“having transferred all shares, certificates and rights held by such partnerships at the time
of such termination” and “having executed an instrument whereby there was conveyed,
for fair market value . . . all realty held by the partnership of such termination.” (Former
29 U.S.C., § 4383, subds. (b)(1) & (2).) Section 708, entitled “Continuation of
partnership,” provides that a partnership is considered “as continuing if it is not
terminated.” Under section 708, subdivision (2)(B), “termination” occurs if “within a 12-
month period there is a sale or exchange of 50 percent or more of the total interest in
partnership capital and profits.”
3 Ardmore has filed a motion requesting that we take judicial notice of 79
documents, most of which are legislative materials related to the former federal stamp
tax, the state Documentary Transfer Tax Act and the County and City transfer taxes. We
take judicial notice of items 1-13 (text and legislative history of the former federal stamp
tax (former 26 U.S.C. §§ 4321 et seq.) and the Federal Excise Tax Reduction Act of
1954); items 17-18 (federal regulations implementing federal stamp tax act); items 23-28
(legislative history of the Documentary Tax Transfer Act, §§ 11911 et seq.); item 29
(legislative history of AB 1428 (Stats. 1999, c. 75 (A.B.1428), § 1)); and items 30-31
(legislative history of SB 816 (Stats. 2009, c. 622 (S.B. 816)). We deny Ardmore’s
request for judicial notice of the remaining documents because those materials are not
relevant to our disposition of this matter. (See Arce v. Kaiser Foundation Health Plan,
Inc. (2010) 181 Cal. App. 4th 471, 482 [court “may decline to take judicial notice of
matters that are not relevant to dispositive issues on appeal”].)
9
The federal documentary stamp taxes were repealed by the Excise Tax Reduction
Act of 1965, 26 U.S.C. §§ 4041 et seq. (1965). (See In re 995 Fifth Ave. Associates, L.P.
(2d Cir. 1992) 963 F.2d 503, 510, fn. 3; Texaco, Inc. v. U.S. (5th Cir. 1980) 624 F.2d 20,
21, fn. 2.) The repeal of the stamp tax on transfers of capital stock became effective on
January 1, 1966; the repeal of the stamp tax on the sale of realty became effective on
January 1, 1968.
b. The California Documentary Transfer Tax Act
In 1967, the California legislature enacted the “Documentary Transfer Tax Act,”
§§ 11901, et seq. (DTTA), which “replace[d] and was patterned after the [portion] of the
Federal Stamp Act [applying] to conveyances.” (Thrifty Corp. v. County of Los Angeles
(1989) 210 Cal. App. 3d 881, 884 (Thrifty).) The legislative history of the DTTA indicates
that the Act was intended to “authorize counties . . . to levy a tax upon the transfer of real
property.” (Legis. Analyst, analysis of Sen. Bill. No. 837 (1967 Reg. Sess.) May 9,
1967.)
Several of the DTTA’s provisions are substantially similar to the portion of the
prior federal stamp tax on conveyances of real property on which it was modeled.
Section 11911, which is patterned after former 29 U.S.C. section 4361, provides: “The
board of supervisors of any county or city and county, by an ordinance adopted pursuant
to this part, may impose, on each deed, instrument, or writing by which any lands,
tenements, or other realty sold within the county shall be granted, assigned, transferred,
or otherwise conveyed to, or vested in, the purchaser or purchasers. . . .”
Sections 11921-11931 list numerous “exemptions” to the transfer tax, most of
which are patterned on similar exemptions that had appeared in the now-expired federal
stamp tax. Section 11925, patterned on former 29 U.S.C. section 4383, sets forth an
exemption for “any realty held by a partnership.” As originally enacted in 1967, the
section stated:
10
(a) In the case of any realty held by a partnership, no levy shall be imposed pursuant
to this part by reason of any transfer of an interest in the partnership, if both of the
following occur:
(1) The partnership is considered a continuing partnership within the
meaning of Section 708 of the Internal Revenue Code of 1986.
(2) The continuing partnership or other entity treated as a partnership
continues to hold the realty concerned.
(b) If there is a termination of any partnership within the meaning of Section 708 of
the Internal Revenue Code of 1986, for purposes of this part, the partnership or
other entity shall be treated as having executed an instrument whereby there was
conveyed, for fair market value . . . all realty held by the partnership.
Section 708 of the Internal Revenue Code has not been amended since the expiration of
the federal tax stamp. The section continues to define any partnership that has not
terminated as continuing, and defines termination to include a transfer of more than a
50% interest in the partnership’s capital and profits within a 12-month period.
In 1999, the California Legislature adopted AB 1428, which amended section
11925 in two ways. (Stats. 1999, c. 75 (A.B. 1428), § 1.) First, it expanded the
exemption’s application to partnerships and “other entit[ies] treated as a partnership for
federal income tax purposes.” Second, the Legislature added subdivision (d):
“No levy shall be imposed pursuant to this part by reason of any transfer between an
individual or individuals and a legal entity or between legal entities that results solely in a
change in the method of holding title to the realty and in which proportional ownership
interests in the realty, whether represented by stock, membership interest, partnership
interest, cotenancy interest, or otherwise, directly or indirectly, remain the same
immediately after the transfer.”
The Legislative Counsel’s Digest comments accompanying AB 1428 explained
that “Existing law authorizes counties and cities and counties to impose a documentary
transfer tax at a specified rate upon deeds, instruments, or other writings by which
specified property is transferred. Existing law exempts from the imposition of that tax,
11
for any realty held by a partnership, the transfer of an interest in a partnership under
specified conditions. [¶] This bill would additionally make that exemption applicable to
an entity treated as a partnership for federal income tax purposes. [¶] This bill would also
preclude the imposition of that tax by reason of any transfer between an individual or
individuals and a legal entity or between legal entities that results solely in a change in
the method of holding title to the realty and in which proportional ownership interests in
the realty . . . remain the same immediately after the transfer.” (Stats. 1999, c. 75
(A.B.1428), § 1.)
c. The County of Los Angeles and City of Los Angeles transfer tax
provisions
The County of Los Angeles and the City of Los Angeles have each adopted
ordinances imposing a documentary transfer tax authorized under section 11911. The
language of the ordinances are essentially identical to the provisions set forth in the
DTTA. For example, Los Angeles County Code (L.A.C.C.) section 4.60.020 imposes a
tax on “each deed, instrument, or writing by which any lands, tenements, or other realty
sold within the county shall be granted, assigned, transferred, or otherwise conveyed to,
or vested in, the purchaser or purchasers . . .” The County Code contains additional
sections that reflect each of the exemptions to the transfer tax described in the DTTA,
including the partnership provisions set forth in section 11925. Identical provisions
appear in the Los Angeles City Municipal Code, differing only in the amount of the tax
rate. (See L.A.M.C. §§ 21.9.2 [imposing tax]; 21.9.8 [partnership exemption].)
Under the County and City codes, the County Recorder is responsible for
administering the documentary transfer tax on behalf of the County and the City.
(L.A.C.C. § 4.60.110; L.A.M.C., § 21.9.9.)
2. Summary of California property tax provisions governing “change in
ownership” of legal entities
Under the California Constitution, real property is reappraised for property tax
purposes when purchased or when a “change in ownership” occurs. (See Cal. Const. art.
12
XIIIA, § 2(a).) The Revenue and Taxation Code sets forth detailed provisions describing
what type of transfers constitute a “change of ownership” that triggers reassessment.
(See §§ 60-69.5; Holland v. Assessment Appeals Bd. No. 1 (2014) 58 Cal. 4th 482, 485
[“The task of defining when there has been a change in ownership that triggers
reassessment has been left largely to the Legislature. [Citation.]”].) Under section 60,
the term “change of ownership” is generally defined to “mean[] 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.”
The tax code and the implementing regulations set forth numerous provisions
governing transfers of property involving legal entities. The implementing regulations
state that “[t]he transfer of any interest in real property to a corporation, partnership,
limited liability company, or other legal entity is a change in ownership of the real
property interest transferred.” (Cal. Code. Regs., tit. 18, § 462.180, subd. (a); see also
§ 61, subd. (j).) Section 62, subdivision (a)(2), however, excludes from the definition of
“change of ownership” any “[t]ransfers of . . . interests in legal entities between legal
entities or by an individual to a legal entity (or vice versa) which result solely in a change
in the method of holding title and in which proportional ownership interests of the
transferors and transferees . . . remain the same after the transfer.” (Cal. Code. Regs., tit.
18, § 462.180, subd. (d)(4); § 62, subd. (a)(2).) The implementing regulations describe
such transfers as “Excluded Proportional Interest Transfers.” (Cal. Code. Regs., tit. 18,
§ 462.180, subd. (d)(4).)
Section 64 describes when the transfer of interest in a legal entity qualifies as a
“change in ownership” of the entity’s real property. Subdivision (a) provides, in relevant
part: “Except as provided . . . in subdivisions (c) and (d) of this section, the purchase or
transfer of ownership interests in legal entities, such as corporate stock or partnership or
limited liability company interests, shall not be deemed to constitute a transfer of the real
property of the legal entity. . . .”
Section 64, subdivision (c)(1) provides, in relevant part, that when a single person
or entity obtains a majority ownership interest in any partnership or limited liability
13
company through the purchase or transfer of partnership or limited liability company
interest, “including any purchase or transfer of 50 percent or less of the ownership
interest through which control or a majority ownership interest is obtained, the purchase
or transfer of . . . [that] interest shall be a change of ownership of the real property owned
by the . . . partnership [or] limited liability company . . . in which the controlling interest
is obtained.” The implementing regulations describe this as a change in “control” of the
legal entity. (Cal. Code. Regs., tit. 18, § 462.180, subd. (d)(1).)4
Section 64, subdivision (d) describes when the transfer of more than a 50%
interest in a legal entity that does not result in any single individual or entity obtaining
majority ownership nonetheless qualifies as a “change in ownership.” The subdivision
states, in part, that if property is transferred to a legal entity in a transaction “excluded
from change in ownership by [section 62, subdivision (a)(2)]”―i.e. “excluded
proportional interest transfers”―“the persons holding ownership interests in that legal
entity immediately after the transfer shall be considered the ‘original coowners.’”
Subdivision (d) further provides that if the original coowners subsequently transfer
“interests cumulatively representing more than 50 percent of the total interests in the
entity . . . in one or more transactions, a change in ownership of that real property owned
by the legal entity shall have occurred, and the property that was previously excluded
from change in ownership under the provisions [of section 62, subdivision (a)(2)] shall be
4 The implementing regulations provide the following example regarding the
application of section 64, subdivision (c): “A and B each own 50 percent of the stock of
Corporation X. Corporation X acquires White acre from Corporation Y, an unaffiliated
corporation in which neither A nor B has interests, and White acre is reappraised upon
acquisition. A transfers 30 percent of Corporation X’s stock to C, and B later transfers 25
percent of Corporation X’s stock to C. Upon C’s acquisition of 55 percent of Corporation
X’s stock, there is a change in control of Corporation X under Section 64(c) and a
reappraisal of White acre.” (Cal. Code. Regs., tit. 18, § 462.180, subd. (d).)
14
reappraised.”5 The implementing regulations describe this as the “Transfers of More
than 50 Percent” rule. (Cal. Code. Regs., tit. 18, § 462.180, subd. (d)(2).)6
Thus, section 64 describes two situations in which the purchase or transfer of
interests in legal entities is deemed to constitute a “change of ownership” of real property
owned by the legal entity or its sub-entity. First, a change of ownership is deemed to
occur under subdivision (c) when a single individual or entity obtains, in one or more
transactions, majority control of a legal entity that holds title to realty or owns separate
legal entities that hold title to realty. Second, under subdivision (d), a change of
ownership occurs when: (1) real property is transferred to a legal entity in an “excluded
proportional interest transfer” governed by subdivision 62, subdivision (a)(2); and (2) the
original coowners of the legal entity thereafter transfer more than 50% of the interests in
the legal entity in one or more subsequent transactions.
5
Subdivision (d) clarifies, however, that any transfer of ownership interests “that
results in a change in control” of a partnership or limited liability company “is subject to
reappraisal as provided in subdivision (c) rather than this subdivision.”
6
The implementing regulations provide the following example regarding the
application of section 64, subdivision (d): “A and B, hold equal interests as tenants in
common in Greenacre, a parcel of real property. A and B transfer Greenacre to
Corporation Y and in exchange A and B each receive 50 percent of the corporate stock.
No change in ownership pursuant to Section 62(a)(2). Pursuant to Section 64(d), A and
B become original coowners. A transfers 30 percent of Corporation Y’s stock to C (A’s
child), and B then transfers 25 percent of Corporation Y’s stock to D (B’s grandchild).
Change in ownership of Greenacre upon B’s transfer to D. . .” (Cal. Code. Regs., tit. 18,
§ 462.180, subd. (d).)
The regulations also contain an example highlighting relevant elements of section
64 subdivisions (c) and (d): “Spouses H and W acquire as community property from the
current owners, who are not original co-owners, 100% of the capital and profits interests
in an LLC which owns Blackacre. Each of H and W is treated as acquiring 50 percent of
the ownership interests as defined in subdivision (c) and Revenue and Taxation Code
Section 64(a). No change in control of the LLC; no change in ownership of Blackacre.”
(Cal. Code. Regs., tit. 18, § 462.180, subd. (d).)
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3. Statutory requirements regarding statements of change in ownership of
legal entities
Revenue and Taxation Code sections 480.1 and 480.2 require the filing of a
statement whenever there has been a change in ownership of a legal entity within the
meaning of section 64 subdivision (c) or (d). Section 480.1 states, in relevant part:
“Whenever there is a change in control of any [legal entity], as defined in subdivision (c)
of Section 64, a signed change in ownership statement . . . shall be filed by the person or
legal entity acquiring ownership control of the [legal entity] with the [State Board of
Equalization].” Section 480.2 similarly provides: “Whenever there is a change in
ownership of any [legal entity], as defined in subdivision (d) of Section 64, a signed
change in ownership statement . . . shall be filed by the [legal entity] with the [State
Board of Equalization].” Section 482 imposes a penalty for failure to file a statement
required under section 480.1 or 480.2 within 90 days of the change in control or
ownership.
If the Board of Equalization determines a change in control or ownership has
occurred, it disseminates the information to the county assessor to permit a reassessment
of the real property interests. According to the Board of Equalization, this information
sharing “is necessary because, ordinarily, transfers of ownership interests in legal entities
do not involve a recorded deed or other notice that would inform county assessors” that a
change in ownership has occurred. (See http://www.boe.ca.gov/proptaxes/leop.htm.7)
Prior to 2009, Revenue and Taxation Code sections 408 and 481 barred the
assessor from providing county recorders access to statements of change in ownership of
legal entities. Section 481 prohibited the assessor and the board from permitting
7 This statement appears on a section of the Board of Equalization’s website
discussing its “Legal Entity Ownership Program” (LEOP). We may take judicial notice
of the Board’s description of the LEOP set forth on its website. (See Evid. Code, § 452,
subd. (c); Shaw v. People ex rel. Chiang (2009) 175 Cal. App. 4th 577, 606, fn. 10 [taking
judicial notice of diagrams and definitions set forth on the “Department of
Transportation’s Web site” pursuant to Evid. Code, § 452, subds. (c) & (h)]; People v.
Kelly (2013) 215 Cal. App. 4th 297, 304, fn. 4. [permitting judicial notice of statements on
websites of state agencies pursuant to Evidence Code, § 452, subd. (c)].)
16
inspection of change in ownership statements “except as provided in section 408.”
Section 408 subdivision (a) generally prohibited the assessor from permitting inspection
of any records in his or her possession that are not otherwise required to be made public
by law. Although section 408, subdivision (b) required the assessor to provide access to
“all records in his or her office” to certain categories of government entities (law
enforcement, grand juries, etc.), county recorders were not included.
In 2009, the Legislature adopted SB 816, which made several amendments to
section 408 and the statement of change in ownership reporting requirements set forth in
sections 480.1, 480.2 and 482. (Stats. 2009, c. 622 (S.B. 816).) First, SB 816 amended
section 408, subdivision (b) by requiring the assessor to provide access to his or her
record to “the county recorder when conducting an investigation to determine whether a
documentary transfer tax is imposed.” Second, SB 816 shortened the time period for
filing statements of change in ownership of legal entities from 90 days to 45 days. Third,
the bill amended the penalty provisions for failing to file the statement set forth in section
482. Prior to the amendment, the penalty could only be applied if the person or entity
failed to respond to a written request for the statement from the Board of Equalization. In
addition, the penalty was automatically extinguished if the person or entity filed a change
in ownership statement within 60 days of receiving notification that a penalty had been
assessed. SB 816 amended section 482 by removing the “extinguishment” provision and
making the penalty applicable if the statement was not filed within 45 days of the change
in ownership or control. Thus, SB 816 made two general changes to the law: (1) it
provided county recorders access to assessors’ records, including statements of change in
control and ownership of legal entities, and (2) it shortened the time to file statements of
change in control or ownership of a legal entity and imposed an automatic penalty if the
statement was not filed within 45 days of the change of control or ownership.8
8 In 2011, sections 480.1, 480.2 and 482 were amended again to make the penalty
applicable if the statement of change in control of ownership of a legal entity was not
filed within 90 days of the change in ownership. (See Stats. 2011, c. 708 (S.B. 507).)
17
The Senate Revenue and Taxation Committee’s analysis of SB 816 provided the
following explanation for the legislation: “The Documentary Transfer Tax . . . allows
cities and counties to enact taxes on documents that serve to transfer real property. . . . SB
816 provides a firmer deadline to file change of ownership statements and removes a
sixty day grace period, thereby encouraging taxpayers to file the legally required forms,
which may or may not trigger the [documentary transfer tax]. Additionally, by providing
access to assessor information, SB 816 will help recorders determine whether the
[documentary transfer tax] applies to certain changes of ownership.” The analysis further
provided that the committee believed SB 816 would “result in some increased revenue
for local agencies as a result of increased [Documentary Transfer Tax] collections . . .”
(Senate Rev. and Tax. Comm., summary of Sen. Bill No. 816 (Reg. Session 2009-2010.)
April 22, 2009, pp. 3-4.)
Two years after SB 816 was passed, the Legislature adopted AB 563, which added
section 408.4 (Stats. 2011, c. 320 (A.B. 563), § 1.) Section 408.4 requires the assessor to
“permit access to all records in his or her office to designated employees of a city’s
finance office when conducting an investigation to determine whether a documentary
transfer tax should be imposed for an unrecorded change in control or ownership of
property.” An analysis of AB 563 prepared by the Senate Rule Committee explained:
“Two years ago, the Legislature required the assessor to disclose information . . . and
permit access to all records to the County Recorder when conducting an investigation to
determine whether the documentary transfer tax is due. The City of Los Angeles wants
the Assessor to share this information with city financial officials to help assess the
[documentary transfer tax].” (Sen. Rules Com, Sen. Floor Analyses, 3d reading analysis
of Assem. Bill. No. 563 (2011-2012 Reg. Sess.) August 29, 2011, pp. 2-3.)
B. The DTTA Authorizes a Transfer Tax When There Has Been a “Change in
Ownership” of a Legal Entity, Subject to the Limitations Set Forth in Section
11925
Using the above statutory framework as our guide, we must assess whether the
sale of more than a 50% interest in a partnership that owns a single-entity limited liability
18
company that holds title to realty constitutes “realty sold” within the meaning of section
11911.9 Ardmore argues that section 11911 does not permit a tax under such
circumstance because: (1) the transaction would not have been subject to taxation under
the now-expired federal stamp tax (see former 26 U.S.C. section 4861) that served as the
model for the DTTA; and (2) section 11925 of the DTTA, which applies when there is a
transfer of more than 50% of a partnership that holds title to realty within a 12-month
period, sets forth the only circumstance under which a transfer in interests of a legal
entity constitutes a taxable event. Ardmore further contends that section 11925 does not
apply to the transaction here because BA Realty did not “hold” title to realty; rather it
owned a legal entity that held title to realty.
The recorder, however, argues we should adopt a broader interpretation of section
11911. Specifically, the recorder contends we should follow prior case law that has
interpreted the term “realty sold” in section 11911 to have the same meaning as the
phrase “change of ownership” as used in the property tax provisions. The recorder
asserts that because the transfer of a 90% interest in BA Realty qualified as a “change of
ownership” of the property held by Ardmore under section 64, the transfer necessarily
qualified as the “sale” of realty within the meaning of section 11911.
1. Summary of decisions defining the term “realty sold” to have the
same meaning as “change of ownership”
Several prior decisions have looked to the definitions of “change of ownership” set
forth in the property tax provisions to aid in the interpretation of section 11911. In
Thrifty, supra, 210 Cal. App. 3d 881, the County of Los Angeles imposed a documentary
transfer tax on a parcel of land that was leased to a corporation for 20 years with an
option to extend the lease for an additional 10 years. The trial court ruled section 11911
did not apply “‘to the recordation of leases or leasehold interests.’” (Id. at p. 883.) The
9 The parties do not dispute that if section 11911 permits the imposition of a transfer
tax under such circumstances, the tax is also permissible under the County and City
transfer tax ordinances, which incorporate language that is essentially identical to section
11911.
19
“issue presented [on appeal was] when, if ever, can a leasehold interest in real property
constitute ‘realty sold’ for purposes of triggering taxation under Revenue and Taxation
Code section 11911.” (Id. at p. 883.)
The court began its analysis by examining the legislative history of the statute,
which indicated “the Legislature . . . intended to generally place leases outside of the
scope of section 11911.” (Thrifty, supra, 210 Cal.App.3d at p. 883.) The court further
found, however, that interpretations of the former federal stamp tax on which section
11911 was patterned made clear that “a lease was subject to a [federal] transfer tax when
it was of sufficient duration to approximate an interest such as an estate in fee simple or a
life estate.” (Id. at p. 885)
The court next considered whether, under California law, the specific lease at issue
(a 20-year lease with a 10 year renewal option) was “of sufficient longevity . . . to
approximate an “‘ownership’ right rather than a mere ‘temporary right of possession.’”
(Thrifty, supra, 210 Cal.App.3d at p. 885.) According to the court, “[t]he Legislature
ha[d] . . . provided . . . guidance in making this determination. Revenue and Taxation
Code section 61 . . . defines ‘change in ownership’ for property tax purposes in part as
‘[t]he creation of a leasehold interest in taxable real property for a term of 35 years or
more (including renewal options).’ [Citation.]” (Ibid.) The court explained that
“[w]hile the Document Transfer Tax Act does not define ‘realty sold’ that phrase is
sufficiently similar to the phrase ‘change in ownership’ contained in the same code and
governing an analogous subject, to warrant that each phrase be defined to have the same
meaning.” (Ibid.)
In reaching its holding, the court rejected the County’s assertion that, under the
federal test, there was a “question of fact whether a lease of a shorter duration then that
specified in section 61 approximates an interest in fee.” (Thrifty, supra, 210 Cal.App.3d
at p. 886.) The court explained: “The determination of what the Legislature intended
when it employed the term ‘realty sold’ in section 11911 is a question of law. Since we
conclude that the Legislature intended [the term ‘realty sold’ in section 11911] to be
defined consistently with the phrase ‘change of ownership’ in section 61, as a matter of
20
law Thrifty’s 20-year lease with an option to renew for 10 years was not of sufficient
longevity to constitute ‘realty sold’ under section 11911.”
Later, in McDonald’s Corporation v. Board of Supervisors (1998) 63 Cal. App. 4th
612 (McDonald’s), a different appellate district considered whether an amendment to a
lease that resulted in a remaining term of less than 35 years, but a total leasehold period
of more than 35 years, was subject to the transfer tax. The court agreed with “Thrifty’s
h[olding] that the phrase ‘realty sold,’ left undefined in the Document Transfer Tax Act
was ‘sufficiently similar to the phrase “change in ownership” . . . to warrant that each
phrase be defined to have the same meaning.’ [Citation.]” (Id. at p. 616.) The court then
analyzed various state regulations and opinion letters that had found a lease amendment
resulting in a remaining term of less than 35 years did not constitute a “change of
ownership” under the property tax provisions. The court concluded that because the
amended lease did not qualify as a “change of ownership,” there was no basis to impose a
documentary transfer tax.
A year after McDonald’s was decided, the Office of the Attorney General issued
an opinion letter analyzing whether “a transfer of real property from a parent corporation
to its wholly-owned subsidiary corporation constitutes ‘realty sold’ for purposes of
section 11911.” (82 Ops. Cal. Atty. Gen. 56 (March 26, 1999).)10 The Attorney General
noted that although “[t]he statute itself does not define the term,” Thrifty and McDonald’s
had each “concluded that the term ‘realty sold’ as used in section 11911 should be
construed to mean ‘change in ownership’ as the latter term has been defined by the
Legislature for purposes of real property taxation.”
The Attorney General adopted the same analysis, concluding that the transfer tax
was inapplicable because there was no “change of ownership” within the meaning of the
property tax laws: “Following . . . the judicial construction of the term ‘realty sold’ to
10
The opinion letter was issued before the Legislature amended section 11925 to add
subdivision (d), which clarified that the transfer tax was inapplicable to any transfer
between legal entities “that results solely in a change in the method of holding title to the
realty and in which proportional ownership interests in the realty . . . remain the same
immediately after the transfer.”
21
mean ‘change in ownership,’ we find that a transfer of real property from a parent
corporation to a wholly-owned subsidiary corporation does not constitute a ‘change in
ownership.’ (§[] 62, subd. (a)(2); [Citations.].) Even though a corporation has a legal
status distinct from its officers and shareholders [citations], the transfer of real property
from a parent corporation to a wholly-owned subsidiary corporation is not considered a
transfer of control for purposes of a ‘change in ownership’ and hence cannot be so
considered for purposes of the Act as ‘realty sold.’”
2. The term “realty sold” includes “changes of ownership” within the
meaning of Revenue and Taxation Code section 64, subdivisions (c) and
(d)
We agree with Thrifty and McDonald’s conclusion that where, as here, the DTTA
does not directly address whether a particular type of transaction qualifies as “realty sold”
within the meaning of section 11911, courts may look to the definitions of “change
in ownership” set forth in the property tax provisions. As explained in Thrifty,
under principles of statutory construction, similar terms used “in the same code and
governing . . . analogous subject[s]” should generally “be defined consistently” unless
“countervailing indications require otherwise.” (Thrifty, supra, 210 Cal.App.3d at p. 886;
see also 9 Witkin, Summary 10th (2005) Tax, § 320, p. 462 [“Although [§] 11911 does
not define ‘realty sold,’ that phrase is sufficiently similar to the phrase ‘change in
ownership,’ used in the Revenue Code and governing the analogous subject of property
taxation, to warrant that each phrase be defined to have the same meaning”].)
The legislative history of the DTTA and the overall structure of the Revenue and
Taxation Code support Thrifty’s conclusion that section 11911 is generally intended to
permit a transfer tax when there has been a “change of ownership” in the property.
Section 60 defines “change in ownership” to “mean[] 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.” (Emphasis added). Although section 11911 refers
to the “sale” of realty, the legislative history indicates the documentary transfer tax was
intended to apply to any instrument reflecting a sale resulting in the “transfer” of real
22
property. The Legislative Analyst’s original analysis of the DTTA states that the Act
would “authorize counties through enactment of an appropriate ordinance . . . to levy a
tax upon the transfer of real property.” (Legis. Analyst, analysis of Sen. Bill. No. 837
(1967 Reg. Sess.) May 9, 1967.) A Legislative Counsel opinion letter reported that the
act would “authorize counties and cities to impose a tax on documents evidencing a
transfer of real property.” (Opinion of Legislative Counsel on Senate Bill No. 837
(August 1, 1967.) Numerous other materials in the legislative history, including the
Governor’s “bill memorandum,” a letter from the DTTA’s author to the Governor and
an analysis by the Department of Finance, contain virtually identical language,
each referring to the DTTA as authorizing a “tax on the transfer of real property.”
(See Vernon L. Sturgeon, bill memorandum to Governor Reagan re Assem. Bill No.
837 (1967 Reg. Sess.) Aug. 18, 1967; Letter dated August 7, 1967 from Senator
Stephen P. Teale to Governor Ronald Regan re Sen. Bill No. 837; Dept. of Finance Bill
Analysis, Sen. Bill No. 837 (1967 Reg. Sess.) as amended July 31, 1967.)
The legislative history of subsequent bills amending or affecting the documentary
transfer tax provisions similarly indicate the tax is intended to apply to sales resulting in
the “transfer” of realty. For example, the Legislative Counsel’s Digest comments
accompanying the 1999 amendments to the DTTA (which added § 11925, subd. (d) and
expanded the exemption to entities treated as partnerships for purposes of federal income
tax) state that the DTTA “authorizes counties and cities to impose a documentary transfer
tax at a specified rate upon deeds, instruments, or other writings by which specified
property is transferred.” (Stats. 1999, c. 75 (A.B.1428), § 1.) Similar statements appear
in the Legislative Counsel’s Digest comments accompanying SB 816, which amended
section 408 to provide county recorders access to the assessor’s records when conducting
an investigation to determine whether to impose a transfer tax (Stats. 2009, c. 622 (S.B.
816) [DTTA “authorizes . . . city and county to impose a tax upon specified instruments
that transfer specified interests in real property”]), and in the Assembly floor analysis of
AB 563 (Assem. Rev. and Tax. Com., Assem. Conc. Amends. To Assem. Bill No. 563,
(2011-2012 Reg. Sess.) as amended August 29, 2011, p. 2 [DTTA “allows cities and
23
counties to enact, by ordinance, taxes on documents that serve to transfer real property’]),
which extended similar access to city employees. The fact that the Legislature has
defined the term “change of ownership” to generally mean “a transfer of a present interest
in real property,” and has repeatedly referred to section 11911 as authorizing a tax on
sales resulting in “transfers of real property” supports Thrifty’s conclusion that the term
“realty sold” should, in the absence of countervailing indications, be construed to have
the same meaning as “change in ownership.”
Thrifty’s holding is also supported by recent changes in the law that suggest the
Legislature endorses the view that a transfer tax may be imposed when there is a “change
in ownership” of a legal entity under section 64, subdivisions (c) or (d). As discussed
above, in 2011, the Legislature adopted AB 563, which required the assessor to provide
information to city officials conducting an investigation to determine “whether a
documentary transfer tax should be imposed for an unrecorded change in control or
ownership of property.” (§ 408.4.) The phrase “unrecorded change in control or
ownership” mirrors the language the Legislature has used to describe the two forms of
“change in ownership” of legal entities set forth in section 64, subdivision (c)–“change in
control” of a legal entity (see § 480.1)―and section 64, subdivision (d)―“change in
ownership” of a legal entity (see § 480.2). The Assembly floor analysis of AB 563
confirms that the bill was intended to enable “cities [investigating the imposition of the
DTTA] to identify change of ownership legal entity transfers and other real property
transfers that may not be currently captured.” (Assem. Rev. and Tax. Com., Assem.
Conc. Amends. To Assem. Bill No. 563, (2011-2012 Reg. Sess.) as amended August 29,
2011, p. 2.)
Two years earlier, the Legislature made a similar change to section 408, requiring
that the assessor provide information to any county recorder investigating “whether a
documentary transfer tax is [to be] imposed.” Although the amendment to section 408
did not specifically refer to investigations regarding “change in control or ownership” of
legal entities, the amendment was included in a bill (SB 816) that shortened the period for
filing “statements of change in control or ownership of legal entities” and strengthened
24
the penalty provisions for failing to file such statements. Moreover, the legislative
history of SB 816 indicates the amendment to section 408 was intended to enable county
recorders to determine whether the transfer tax was applicable as the result of a “change[]
of ownership.” The language in the text and history of both SB 816 and AB 563 contain
persuasive evidence that the Legislature intended to provide local officials the ability to
impose the documentary transfer tax where an unrecorded transfer of interests in a legal
entity has resulted in a “change in ownership” within the meaning of section 64,
subdivisions (c) and (d).
We also find it instructive that the Legislature has taken no action in response to
multiple court decisions and several local county ordinances that have specifically
interpreted the DTTA to permit a transfer tax when a “change in ownership” has
occurred. Although Thrifty was decided more than 25 years ago and McDonald’s was
decided more than 15 years ago, we are not aware of any subsequent conduct by the
Legislature suggesting disapproval of those holdings. (Cf. People v. Nasalga (1996) 12
Cal. 4th 784, 792 [refusing to overturn 31-year old decision, noting that “the Legislature
ha[d] taken no action, as it easily could have done, to abrogate [the holding]”].)
Moreover, after Thrifty and McDonalds were decided, several counties announced
that they would begin enforcing the transfer tax based on “changes in ownership” of legal
entities. Los Angeles County announced its intent to enforce the tax under such
circumstances through a statement published on its website in or around 2010. Before
Los Angeles made this announcement, at least two other counties had already amended
their local transfer tax ordinances to define “realty sold” to include any change in
ownership of a legal entity within the meaning of section 64, subdivision (c) or (d). The
County of Santa Clara adopted such an amendment in 2007 (see County of Santa Clara
Code, § A30-39.6 [documentary transfer tax is imposed when a “change of ownership”
occurs under the circumstances set forth in section 64, subdivision (c) or (d)]; San
Francisco adopted a similar amendment through a ballot initiative approved by voters in
2008. (See City and County of San Francisco Business and Tax Regulations Code, Art.
12-C, § 1114 [“‘realty sold’ includes any acquisition or transfer of ownership interests in
25
a legal entity that would be a change of ownership of the entity’s real property under
California Revenue & Taxation Code § 64”].) Thus, for approximately five years, three
of the largest counties in the state have been imposing the transfer tax based on the
definitions of “change in ownership” set forth in section 64. The Legislature, in turn, has
responded to these ordinances by passing multiple laws that are specifically designed to
help counties determine when legal entity transfers have resulted in a “change in
ownership.” (See §§ 408, 408.4.)
3. Ardmore has failed to demonstrate section 11911 does not permit a
transfer tax based on changes in ownership
Ardmore disagrees with our interpretation of section 11911, arguing that there are
two reasons we should not consider the “change of ownership” definitions set forth in
section 64 when construing the term “realty sold.”
First, it contends that when interpreting section 11911, we should look solely to
federal administrative regulations and decisions interpreting former 26 U.S.C section
4361, which imposed a federal stamp tax on conveyances of realty. Ardmore argues that
because section 11911 was patterned on section 4361, we must look only to federal law
to aid our interpretation. It further asserts there is no federal authority suggesting that
former section 4361 was meant to apply to transfers of interests in corporate entities
holding title to realty, other than transfers in partnerships that resulted in their
termination.
We disagree with Ardmore’s assertion that our interpretation of section 11911 is
dependent only on federal laws that expired over 45 years ago. The state DTTA includes
no language requiring that it be construed in the same manner as the federal statute it was
designed to replace. Prior cases analyzing the meaning of section 11911 demonstrate that
although federal interpretations of former section 4361 may aid in construing the DTTA
under some circumstances, we are not bound by these federal interpretations. People ex
rel. Dept. of Public Works v. Santa Clara County (1969) 275 Cal. App. 2d 372 (Santa
Clara County), which was decided shortly after the DTTA was adopted, is instructive. In
26
Santa Clara County, the court considered whether “transfers of realty effected by a court
order issued pursuant to an eminent domain judgment involve[d] a sale within the
meaning of [section 11911].” (Id. at p. 376.) The court noted that the DTTA was
patterned on the “similar federal [stamp] tax” and that “the federal government [had]
never applied the tax to conveyances by condemnation.” (Id. at p. 374, fn. 3.) The court
nonetheless concluded the tax did apply, citing (among other things) prior California
decisions characterizing “a transfer of property by eminent domain [a]s a ‘sale” (id. at
p. 376) and the absence of any statutory language exempting condemnation orders from
the transfer tax.
Similarly, in Thrifty, the court did consider whether the prior federal stamp tax
was applicable to leasehold interests. However, the court ultimately rejected the federal
rule used to determine what type of leasehold interests qualified for a transfer tax.
Instead, the court looked to state property tax law to make that determination, holding
that “the Legislature intended [the term “realty sold” in section 11911] to be defined
consistently with the phrase ‘change of ownership’ in section 61,” which required a lease
term of 35 years or more. Santa Clara County and Thrifty illustrate that although the
prior federal interpretations of the long expired stamp tax may prove helpful in assessing
the meaning of the DTTA, federal law does not dictate the meaning of the DTTA.
There are multiple reasons why federal interpretations of former 26 U.S.C. section
4361 are of limited utility in assessing the specific issue in this case, which involves the
transfer of a partnership that owned a single-entity limited liability corporation that held
title to an apartment building. First, the former federal tax stamp scheme applied to
multiple categories of transfers: transfers of interests in capital stock (which extended to
interests in capital profits, property and accumulations) were taxed under one provision
(former section 4321), while conveyances of realty were separately taxed under a
separate provision (former section 4361). It is therefore understandable that the
conveyance tax set forth in former section 4361 would not apply to the type of
transaction at issue here because, as Ardmore explains in its brief, application of the
federal tax under such circumstances would presumably result in double taxation: one set
27
of stamp taxes for the transfer of interests in the legal entities themselves and a second
stamp tax for the realty held by the lower-tier entity. California, however, has not
adopted a separate documentary tax on instruments or writings transferring interests in
the profits or accumulations of legal entities. Thus, under the state DTTA, applying the
transfer tax to the transaction here would result in only one transfer tax.
The former federal stamp tax is also of limited utility in addressing the specific
transaction before us because limited liability companies did not exist in California until
1994, which is almost 30 years after the federal stamp tax expired. (City of Los Angeles
v. Furman Selz Capital Management, L.L.C. (2004) 121 Cal. App. 4th 505, 513
[describing history of LLCs in California].) ““A limited liability company is a hybrid
business entity that combines aspects of both a partnership and a corporation. . . . It is
formed under the Corporations Code and . . . provides members with limited liability to
the same extent enjoyed by corporate shareholders, yet allows members to actively
participate in management and control.” (Ibid.) Depending on the elections made by the
LLC and the number of its members, the company may be treated for state and federal
income tax purposes as either a corporation, partnership or as a disregarded entity. (See
id. at pp. 513-514; 26 C.F.R. § 301.7701-3.) Given that single-entity LLC’s such as
Ardmore (whose sole purpose is to hold realty) did not exist when the federal stamp tax
was in effect, we find prior interpretations of the federal stamp tax to be of limited use
here.
Finally, as discussed at length above, since the DTTA was adopted in 1967, there
have been changes in California law suggesting the Legislature endorses the view that
section 11911 permits counties and cities to impose a documentary tax on transfers of
interests in legal entities that result in a “change of ownership” within the meaning of
section 64. Most notably, the Legislature has required the assessor to provide county and
city recorders information regarding changes in ownership of legal entities for the express
purpose of determining the applicability of the transfer tax. We should not ignore these
changes in the law merely because section 11911 was initially patterned on a federal
statute that was never tested against facts similar to those presented here.
28
Ardmore next contends that we should interpret section 11925 as setting forth the
sole legal authority for a transfer tax based on transfers of interests in a legal entity. In
sum, section 11925 provides that the tax may not be applied to transfers of interests in
partnerships or entities treated as partnerships for federal income tax purposes
(collectively partnership entities) that hold realty unless the transfer results in the
termination of the partnership entity within the meaning of 26 U.S.C. section 708.
Section 708, in turn, provides that a partnership is treated as terminated if more than 50%
of “the total interest in partnership capital and profits” is transferred within a 12-month
period.11 Ardmore argues that because the Legislature has adopted a specific provision
explaining that the transfer tax may be applied to transfers of certain types of legal
entities (partnerships entities that own realty) under some circumstances (transfers that
result in the partnership entity’s termination), we should assume it did not intend the tax
to apply transfers of interests of any other form of legal entity that might hold realty, such
as a single member, disregarded LLC.
Ardmore overlooks the fact that section 11925 is an exemption to the transfer tax
authorized under section 11911. Section 11925 effectively provides that a transfer of
interests in a partnership holding title to realty does not constitute “realty sold” under
section 11911 unless the special conditions set forth in the exemption are satisfied (i.e.,
termination within the meaning of section 708). The Legislature has not provided an
exemption for transfers of interests in any other type of entities that hold realty. We must
therefore assume transfers of interests in non-partnership entities that hold title to realty
(including single-member, disregarded LLCs) are taxable if the transfer results in the
“sale” of realty within the meaning of section 11911. (See Bearden v. U.S. Borax, Inc.
(2006) 138 Cal. App. 4th 429, 437 [“Under the maxim of statutory construction, expressio
unius est exclusio alterius, if exemptions are specified in a statute, we may not imply
additional exemptions unless there is a clear legislative intent to the contrary.
11 Ardmore has taken the position that section 11925 was inapplicable to BA Realty
LLLP, because, although a partnership, LLLP did not “hold realty”; instead, it owned an
LLC that held realty.
29
[Citations.]”].) As discussed above, we interpret the term “realty sold” within section
11911 to generally apply when a transfer of interest in a legal entity results in a “change
of ownership” within the meaning of sections 64 (c) and (d). Section 11925 merely
clarifies that this general rule is inapplicable when a partnership entity holds title to the
realty; under such circumstances, a transfer tax is only appropriate if the transfer results
in the termination of the partnership entity within the meaning of 26 U.S.C. section
11925.
To summarize, under the DTTA, a documentary tax may be applied to transfers of
interests in legal entities pursuant to section 11911 if the transfer results in a “change of
ownership” under section 64, subdivision (c) or (d). However, where title to realty is
held by a partnership entity, a transfer of interest in the partnership entity is taxable only
if the transfer results in termination within the meaning of section 708, which generally
applies when more than 50% of the partnership entity’s interests are transferred within a
12-month period.
We do not suggest that Ardmore’s interpretation of the DTTA is unreasonable,
recognizing that the Act is not a model of clarity. During the 45 years since it was
passed, extensive statutory changes governing the formation of legal entities and property
taxation have arguably made the task of interpretation even more difficult. As with any
statute, however, our ultimate goal in interpreting the DTTA is to “‘ascertain the intent of
the Legislature so as to effectuate the purpose of the law.’ [Citation.]” (California
Teachers Assn. v. Governing Bd. of Rialto Unified School Dist. (1997) 14 Cal. 4th 627,
632.) “When statutory language permits more than one reasonable interpretation, ‘“we
‘must select the construction that comports most closely with the apparent intent of the
Legislature, with a view to promoting rather than defeating the general purpose of the
statute, and avoid an interpretation that would lead to absurd consequences.’”’
[Citation.]” (Rea v. Blue Shield of California (2014) 226 Cal. App. 4th 1209, 1225.) In
this case, the history of the DTTA and the overall structure of the Revenue and Taxation
Codes indicate the Legislature generally intended the documentary tax to apply when
there has been a sale, memorialized in writing, that results in a transfer of realty.
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Interpreting the term “realty sold” to include the “change of ownership” provisions
applicable to legal entities promotes this purpose by capturing most forms of legal entity
transfers that result in a change in the beneficial ownership of the property.
Ardmore’s proposed interpretation would, however, work at cross purposes,
effectively permitting property owners to avoid the transfer tax by conveying their real
property to a wholly owned, single entity LLC established for the sole purpose of holding
the property, and then selling the LLC (rather than the property) to a third party.
Although Ardmore has thoroughly briefed this case, it has never identified any policy
reason that would support imposition of a transfer tax when realty is transferred through a
direct sale, but not when realty is transferred through the sale of an LLC established
solely to hold the realty. We believe the Legislature has signaled―both through the acts
it has taken and the acts it has not―that the transfer tax should be interpreted to apply
under both circumstances, and in any other circumstance where a transfer in legal entity
interests results in a change of ownership within the meaning section 64, subject to the
express limitations set forth in section 11925.
C. Application of the DTTA to the Current Transaction
We conclude the County was permitted to impose a transfer tax under the
circumstances presented here. The parties do not dispute that several subtrusts
collectively owned BA Realty (a partnership), which was the sole member of Ardmore (a
disregarded limited liability company) that held title to an apartment building. The
subtrusts then sold an approximate 45% interest in BA Realty to the Bruce Trust (the
beneficiary of which was Bruce Averbrook) and sold an approximate separate 45%
interest to the Allen Trust (the beneficiary of which was Allen Averbrook).
As Ardmore has argued throughout these proceedings, under these circumstances,
the exemption set forth in section 11925 was inapplicable because BA Realty did not
hold title to the realty; instead, it owned Ardmore, which held title to the realty.12 We
12 In its appellate brief, Ardmore argues that if we conclude the transaction is
governed by section 11925 of the DTTA, the transfer tax is inapplicable because the
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therefore must determine whether the transaction resulted in a change of ownership of
Ardmore’s realty under section 64 subdivision (c) or (d).
Section 64 subdivision (c) is inapplicable. Although the subtrusts sold
approximately 90% of BA Realty to the Bruce and Allen Trusts, the transfer did not
result in any single individual or entity holding more than a 50% interest in the
partnership or in Ardmore. After the transaction, the Bruce and Allen Trusts each owned
an approximate 45% interest in both entities and the Bypass Trust retained an
approximate 10% interest in both entities. (See generally Ocean Avenue LLC v. County
of Los Angeles (2014) 227 Cal. App. 4th 344 [section 64, subdivision (c) applies only if
the transfer results in a single individual or entity obtaining more than a 50% interest in
the entity].)
However, as Ardmore admits in its appellate brief (and previously admitted in
discovery responses), the transaction did qualify as a “change of ownership” of
Ardmore’s realty under section 64, subdivision (d). The “statement of change in control
and ownership of a legal entity” that Ardmore filed with the Board of Equalization
indicates that the subtrusts were the “original coowners” of BA Realty within the
meaning of section 64, subdivision (d).13 The subtrusts then collectively sold more than a
subtrusts’ sale to the Bruce and Allen Averbrook did not technically result in a
“termination” of BA Realty within the meaning of section 708. In sum, Ardmore
contends that, under federal income tax law, Gloria was treated as the owner of the Bruce
and Allen Trusts because she retained the authority to withdraw any property from those
trusts and replace it with other property of equal value. Ardmore further asserts that
because Gloria was treated as the federal income tax owner of the subtrusts and both of
hers sons trusts, the sale of BA Realty from the subtrusts to her subtrusts was essentially
a sale to herself, and therefore not a termination within the meaning of section 708. We
need not address this argument because, as explained above, we agree with Ardmore’s
argument that section 11925 is not applicable to this transaction. It is therefore
immaterial whether a termination of the partnership occurred within the meaning of
section 708.
13 The statement of change in ownership indicates the subtrusts became “original
coowners” of BA Realty through a series of excluded “proportional interest transfers”
(see Cal. Code. Regs., tit. 18, § 462.180, subd. (d)(4)) governed by section 62,
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50% interest in BA Realty to the Allen and Bruce Trusts, triggering a change in
ownership under subdivision (d). We therefore conclude that the County was permitted
to impose a transfer tax and affirm the trial court’s judgment.
DISPOSITION
The judgment is affirmed. Respondent shall recover its costs on appeal.
ZELON, J.
We concur:
PRELUSS, P. J.
WOODS, J.
subdivision (a)(2). The family trust (of which Gloria was the beneficiary) initially owned
BA Realty, Ardmore and the apartment building. The family trust conveyed the
apartment building to Ardmore, and then transferred Ardmore to BA Realty. Both of
these transactions fell within section 62, subdivision (a)(2) because Gloria, as the
beneficiary of the family trust, remained the beneficial owner of 100% of the apartment
building. The family trust later distributed its interest in BA Realty among the subtrusts.
This transaction also fell within section 62, subdivision (a) because Gloria was the
beneficiary of the family trust and each of the subtrusts. As a result of the latter
transaction, the subtrusts were treated as “original coowners” of BA Realty.
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