PALO ALTO, CA—The American Revolutionary war motto of “no taxation without representation” was first popularized, not by the drama of the Boston Tea Party, but after the British passed the humdrum Stamp Act of 1765. So says Jubin Meraj and Michael Polentz of Manatt Phelps & Phillips LLP, located in the Palo Alto, CA office. The partner and co-chair of the real estate and land use practice group at the firm say that “The Stamp Act imposed a tax on legal documents (among other printed material), such as land deeds. The colonists hated it to no end (mainly because they had no say in passing the tax and no benefit from it, thus the slogan) and the seeds of revolutionary discontent were planted.”

In the exclusive commentary below, the authors take a closer look at the question before the high court. The views expressed below are the author's own.

Today sales of real property in California are subject to a documentary transfer tax (DTT) that resembles the stamp duty of yore in that it is imposed on any “writing” by which “realty sold” is transferred to a buyer. This year the California Supreme Court will rule on whether Los Angeles County exceeded its authority by imposing the DTT on certain transfers that the legislature arguably never intended to tax.

The question before the high court – what is “realty sold”? The sale of fee title to real property from one party to another unrelated party certainly counts. What about transferring interests in a partnership that owns the fee title? The partnership scenario is addressed by statue. Specifically, the rule is that the DTT applies if the transfer results in a sale of 50% or more of the total interest in partnership capital and profits within 12 months (the “708 rule”). But, what if we add one more layer? What happens if the sale is of interests in a partnership that wholly owns a limited liability company that, in turn, holds the fee title?

The Supreme Court will opine on these facts in 926 N. Ardmore Avenue, LLC v. County of Los Angeles. The case involves a family trust that owned 100% of the partnership interests in a limited partnership, BA Realty, which, in turn, owns 926 N. Ardmore Avenue, LLC (Ardmore), the fee owner of an apartment building in Los Angeles. The trust, beneficially owned by the family matriarch, transferred 90% of its ownership of BA Realty to two separate trusts benefiting her sons. Ardmore reported this transfer to the State Board of Equalization in a “statement of change in ownership of legal entities” as required under California law. The BOE determined that a reassessment was triggered for property tax purposes. In response, the County Registrar/Recorder demanded that Ardmore also pay the DTT based on the value of the building, on the theory that a change of ownership for property tax purposes (which specifically includes transfers of majority interest in upper-tier entities) counts as a transfer of realty for DTT purposes. Ardmore paid under protest and then sued the County, losing both at the trial and appellate court levels.

California's highest court granted review of this decision because important legal issues were left unresolved by the lower courts. The appellate court's ruling relies heavily on two prior cases that looked to the property tax law's definition of “change in ownership” when the DTT statute was not clear. However, both those cases involved long-term leases, arguably distinguishable from the facts presented in the 926 N. Ardmore Avenue, LLC case. The lower court also did not sufficiently address the question of what guidance the 708 rule provides in determining whether the legislature intended to tax higher-tier transfers. Finally, the lower court also failed to consider whether the State Assembly's refusal to approve separate legislation in 2014 that would have expressly granted the right to apply the DTT to higher-tier transfers should provide guidance through legislative intent.

The outcome of the 926 N. Ardmore Avenue, LLC case will be impactful due to several counties in California having already adopted the practice of seeking to collect DTT if an indirect change of ownership occurs for property reassessment purposes. This trend posed only a theoretical concern until recently because county assessors historically was not allowed to provide county recorders with access to statements of change in ownership. In 2009, the law changed and assessors are now mandated to disclose the same. If the Supreme Court overturns the lower court's ruling, counties will likely have no choice but to stop pursuing the DTT for indirect transfers. If the ruling is upheld, we can expect more counties to follow the lead of Los Angeles. Stay tuned!

In the exclusive commentary below, the authors take a closer look at the question before the high court. The views expressed below are the author's own.

Instant Insights /

CA Supreme Court at Transfer Tax Crossroads

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