California Supreme Court Decision Changes the World of Transfer Taxation | Pillsbury Winthrop Shaw Pittman LLP

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the Ardmore The case involved the transfer of approximately 90% of the partnership’s interest in BA Realty LLLP (BA Realty) to two trusts (45% each). This transfer resulted in a change in ownership of Proposition 13 (Section 64(d) of the R&TC) of the building owned by 926 North Ardmore Avenue LLC, an entity indirectly owned by BA Realty.3 The Los Angeles County Registrar-Recorder imposed a documentary transfer tax under California’s DTTA. While California’s DTTA applies to “real estate sold” for consideration, Los Angeles County asserted that the transfer of entity interests triggering a Proposition 13 change in ownership was sufficient evidence. of “real estate sold” to subject the entity’s real estate to transfer tax.

The taxpayer argued that the California DTTA only applied to direct sales of real estate and did not apply to transfers of interests in entities holding real estate. The taxpayer explained that California’s DTTA was based on the Federal Stamp Act, which had two distinct elements: one imposed a tax on written instruments conveying “land, buildings, or other real estate sold” for consideration (federal tax on real estate transfers) and the other imposed a tax on the transfer of company shares (Federal Entity Transfer Tax). Because the California Legislature passed a California DTTA that included only the federal real estate transfer tax (but not the federal entity transfer tax), the taxpayer argued that the California DTTA did not extend not to transfers of entity interests. 4 In support of the assertion that the California DTTA does not extend to entity transfers, the taxpayer cited United States vs. Seattle Bank, 321 U.S. 583 (1944). In this case, the United States Supreme Court upheld that the Federal Realty Transfer Tax did not apply to the real estate of a state bank merged with a federal bank, because the real estate transfer was made by amalgamation rather than by “transfer of deed or other instrument.”5

The California Supreme Court disagreed with the taxpayer.

The Court did not address the fact that the California legislature only enacted the Federal Realty Transfer Tax (but not the Federal Entity Transfer Tax). Instead, the Court held that the California DTTA must extend to entity transfers because it includes a provision (R&TC section 11925) that applies transfer tax to real property owned by a partnership when the partnership suffers a termination under Section 708 of the Tax Code due to certain transfers of interests in the partnership. Even though this article only applies to immovable property held by partnerships terminated by law, the existence of article 11925 of the R&TC led the Court to conclude that the right of transfer could be triggered by the transfer of interests in a legal person and was not limited to the direct transfer of immovable property.

The Court further stated that a closer reading of federal real estate transfer tax case law shows that transfer tax is applied whenever there is a “change in the beneficial ownership of a Property”. In support of its conclusion, the Court cited the 1935 First Circuit case of Carpenter vs. White (80 F.2d 145) where two separate companies sold their real estate to a third company in exchange for shares of the buyer rather than cash. The Court indicated that the application of transfer tax to a direct sale of real estate in exchange for equity consideration justified the extension of California’s DTTA to entity transfers.

Ultimately, the majority concluded that it was warranted to incorporate Proposition 13 of 1978 regarding change of ownership rules for entity transfers into California’s 1968 DTTA on real estate transfers because Proposition 13 was “designed to identify precisely the types of indirect transfers of immovable property that the Transfer Tax Act [(California DTTA)] is designed to tax.6 The Court explained,

the [Proposition 13] the Changes of Ownership provisions, including Section 64, subclauses (c) and (d), provide rules for distinguishing “true” changes of ownership” from “‘paper’ changes”, and they identify a subset of beneficial interest transfers that are large enough to approximate the new ownership, and therefore to warrant re-evaluation of the ownership. . . .[¶] Section 11911 permits the imposition of documentary transfer duty whenever a transfer of interest in a body corporate results in a change of ownership of real property within the meaning of section 64, subdivision (c) or (d), so long as there is a writing evidencing the sale of the property for consideration7.

In dissent, Judge Kruger noted the absence of any precedent to justify the application of California’s DTTA to “ordinary transfers of interests in legal entities that own real property”.8 Judge Kruger found that the existing California DTTA requires a direct transfer of real property to trigger the transfer tax. A direct transfer of real estate was the distinguishing factor between the U.S. Supreme Court’s decision Bank of Seattle whereas no transfer tax applied to a merger of two regulated banks and the 1935 First Circuit Carpenter case cited by the majority where transfer duty was imposed on the transfer of real estate from one company to another in exchange for newly issued shares.

Although the dissent acknowledges that there may be a superficial appeal for uniform application of California’s DTTA and property tax laws, the dissent rejected this extension of the transfer tax because “it finds no support in the language of [California] DTTA. . . or in the over 150 year history of the Documentary Transfer Tax.9 Similarly, Judge Kruger noted that there was no evidence that the California legislature had taken any action to incorporate the 1978 Proposition 13 statutory provisions into the California DTTA:

[t]hese two laws were enacted at different times and for different purposes. . . . These statutory regimes also relate to distinct types of taxes: whereas the documentary transfer tax is an excise tax on the privilege to sell real estate interests – and is only imposed when this right is exercised – property taxes are taxed on the property itself, and on a recurring basis.

the [California] The DTTA does not purport to incorporate property tax laws enacted subsequently, and the property tax laws do not purport to alter the [California] DTTA. And the differences between the two legislative regimes clearly show that the rules applicable in one context cannot be imported wholesale into the other.ten

Judge Kruger concluded that it is for the California legislature, not the courts, to decide whether the California DTTA should be extended to entity interest transfers.

The expansion of the majority of the [California] The DTTA may or may not be a good idea, but it goes far beyond the language and historical practice of the law. I would leave it to the legislature to determine the circumstances in which a transfer of an entity’s interest should result in a deemed sale of the entity’s real property, and how to calculate the tax due in those circumstances.11

The California Supreme Court’s decision will undoubtedly be the source of future litigation. While counties and cities will likely seek transfer fees on Proposition 13 ownership changes under section 64(c) or (d) of the R&TC, it remains unclear exactly what new transfer fees will be due. due to these changes in ownership of the Proposal Entity 13. Will the transfer tax be imposed on the buyers and sellers of the interests of the transferred entity, or will it be imposed on the entity itself as the current owner of the building? When a Proposition 13 event is triggered by the transfer of only part of an entity (for example, a 45% owner increasing its interest to 55% “controlling”), will the transfer tax be applied to the total value of the property owned by the entity, or only to the property attributable to the interests of the transferred entity? Given that the Court relied on a California provision of the DTTA limited to interests in partnerships (R&TC section 11925), does the decision extend to transfers of shares of the company? Given the finding of the Court that the merger of companies in Bank of Seattle was not substantially a sale of real estate subject to transfer duties, will transfer duties be due on business acquisitions involving only a limited number of real estate assets?


1 California Supreme Court No. S222329 filed June 29, 2017.

2 Ardmore Slip Op. at 20.

3 Under Section 64(d) of the R&TC, if there has been a cumulative transfer of more than 50% of the interest in an entity by one of the “initial joint owners” of the entity, there is a reassessable change in ownership of the entity’s assets. property that was previously excluded from reassessment under R&TC 62(a)(2) (original co-ownership rule). BA Realty’s partnership interests were subject to the R&TC Section 64(d) initial co-ownership rule because the holders of the 926 North Ardmore Avenue, LLC interests had previously contributed those interests to BA Realty in part of a proportional interest transfer that was excluded from the revaluation. under section 62(a)(2) of the R&TC.

4 Unlike Los Angeles, which adopted California’s DTTA verbatim (including only the federal real estate transfer tax), several other California counties and cities have amended their transfer tax ordinances in recent years with the apparent intent of imposing a transfer tax when there has been a transfer of ownership. entity interests that result in a change in ownership of Proposition 13 (for exampleSanta Clara County Documentary Transfer Tax Ordinance §§ A30-32 and A30-44 (effective 2007), City and County of San Francisco Real Property Transfer Tax Ordinance § 1114(b) (effective 2008), City of Oakland Real Property Transfer Tax Ordinance § 4.20.030 (effective since 2009), Documentary Transfer Tax Chapter of the County of Napa § 3.24.020 (effective since 2011), Documentary Transfer Tax of the County of Monterey § 5.32.020 (in force since 2012)).

5 The taxpayer also explained that the statutory structure for ownership changes in Proposition 13 was adopted in 1978 and could not provide guidance to the California DTTA, which was adopted ten years earlier in 1968.

6 Ardmore Slip Op. at 20.

7 Identifier. (quotes omitted).

8 Ardmore Slip Op. Dissidence at 2.

9 ID. at 1-2.

ten ID. at 9-10 (quotes omitted).

11 ID. at 13.

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