Documentary Transfer Tax May Be Imposed When A Change of Ownership Occurs For Property Tax Purposes Due To A Transfer Of Ownership Interests In An Entity

October 13, 2014 | Bulletin No. 1149913.1

The Revenue and Taxation Code permits the imposition of a documentary transfer tax when there is "realty sold."  The Code also requires entities to report a "change in ownership" of legal entities.  In 926 North Ardmore Avenue, LLC v. County of Los Angeles (September 22, 2014, B248536) --- Cal.App. 4th ---- [2014 Daily Journal D.A.R. 13,093], the Court of Appeal held that "realty" was "sold" when a limited liability company reported a "change in ownership" if its parent partnership and the limited liability company owned real property.

Background

In April 2007, Gloria Averbrook was sole beneficiary of a family trust and four subtrusts that collectively owned an apartment building located at 926 North Ardmore Avenue (the “apartment building”). Gloria’s two sons, Bruce and Allen, were trustees of the trusts.

In August 2008, Bruce and Allen, acting in their capacities as trustees, established 926 North Ardmore LLC (“the LLC”) to hold the apartment building. The family trust conveyed the apartment building to the LLC and then transferred its interest in the LLC to a trust-owned partnership named BA Realty LLP (“the LLP"). Therefore, the apartment building was owned by the LLC and the LLC was owned by the LLP.

In December 2008, Gloria established irrevocable trusts for her two sons (the “Allen Trust” and the “Bruce Trust”). Through a series of transactions in December 2008 and January 2009, the family trusts and subtrusts sold approximately 90% of their ownership interest in the LLP to the Allen Trust and the Bruce Trust.

The LLC reported these transfers through a “statement of change in ownership of legal entities” pursuant to Revenue and Taxation Code (“RTC”) sections 480.1 and 480.2. These sections require individuals and entities to file such a statement with the Board of Equalization and county assessor. Pursuant to Senate Bill 816 (2009), the Los Angeles County Assessor shared the LLC’s statement with the Registrar-Recorder/County Clerk for the County of Los Angeles (“Recorder”).

In 2011, the Recorder sent a notice demanding the LLC pay a documentary transfer tax based on the value of the apartment building. The notice asserted the tax was due pursuant to RTC section 11911 and the Los Angeles County Code. The Recorder asserted that the “change in ownership” of the LLP created liability for the documentary transfer tax, as the LLP owned the LLC and the LLC owned the apartment building.

The LLC paid the tax demand of roughly $11,000 and filed a claim with the County seeking a refund. The LLC argued that the sale of the LLP did not support a documentary transfer tax because sale of a partnership such as the LLP does not constitute “realty sold” within the meaning of RTC section 11911 and the County Code. The LLC further argued that although RTC section 11925 permits the Recorder to impose a tax on transfers of controlling interests in partnerships that “hold realty,” that section was inapplicable because the LLP did not hold title to property; instead, it owned the LLC and the LLC held title to realty. The County rejected the LLC's refund claim.

The LLC filed a complaint in Superior Court. The Superior Court rejected the LLC’s claims. The LLC then filed an appeal.

The Decision

The Court of Appeal (“Court”) affirmed the Superior Court’s judgment and upheld the Recorder’s imposition of the documentary transfer tax. As background, the LLC filed a "change in ownership" of the LLP and RTC section 11911 permits the imposition of a documentary transfer tax when there is "realty sold." The Court interpreted the term “realty sold” within RTC 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 480.1 and 480.2; except in the case of a partnership that is not terminated by the transaction (see Section 11925).  Since the LLC held title to real property and the sale of the LLP constituted a “change of ownership” within the meaning of Sections 480.1 and 480.2, the Court found the Recorder’s documentary transfer tax valid and proper.

The Court further noted that the LLC’s interpretation of Sections 11911 and 11925 would permit property owners to avoid the transfer tax by conveying their real property to a wholly owned single entity LLC, and then by selling an LLC to a third party. The Court found that this conclusion was not supported by legislative history or the intent of the law.

What This Means To You

This decision clarifies that a change in ownership of an entity that owns another legal entity which holds real property constitutes a "change of ownership" of said real property, thus permitting the imposition of a documentary transfer tax under the Revenue and Taxation Code, with certain limited exceptions.  If you are a public agency, talk with an attorney to determine if a documentary tax should/may be imposed.  If you are a private party, talk with an attorney before executing any transfers of entity ownership to understand the possibility that your transaction might trigger the imposition of a documentary transfer tax.

Questions

If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Brett L. Price | 661.864.3800

Mona G. Ebrahimi, Maggie W. Stern or Anthony D. Bento | 916.321.4500