SAN FRANCISCO — The California Supreme Court of California this
summer will review a 2014 decision by the Court of Appeal for the 2nd
District to determine whether local governments can impose a
documentary transfer tax on a “legal entity that indirectly owns
real estate within the state.”
According to an article
on jdsupra.com, the decision comes from the case 926 North Ardmore
Avenue LLC vs. County of Los Angeles, which deemed that an “ownership
change of an entity that indirectly owns real property through
another entity is considered a change of ownership,” even though
the underlying real property tax is not transferred. This results in
a documentary transfer tax being implemented.
The decision by the Supreme Court will decide if local governments
can enforce a documentary transfer tax when real estate is indirectly
“Historically, California municipalities have not enforced or
passed legislation that would levy on the conveyance of indirect
ownership of realty — e.g. through ownership of an entity which
holds title to the property,” Taylor Thornburgh, an associate with
Holland & Knight LLP, told the Northern California Record.
“The California Court of Appeal decision determined that any
'change of ownership,' even if the entity indirectly owns the
property, would trigger the requirement that the entity pay a
documentary transfer tax on the transaction.”
In Ardmore, an apartment building located in Los Angeles was owned
by Beryl and Gloria Averbrook, who established a living trust in
1972. An administrative trust was established after Beryl passed away
in 2007. This, in turn, dispersed the trust principal to four
subtrusts: a survivor’s trust, the exempt marital trust, the
nonexempt marital trust and the bypass trust. Gloria Averbrook was
the sole beneficiary of the administrative trust and the four other
Per the case,
“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 percent to the Survivor’s
Trust; 24 percent to the Nonexempt Marital Trust, 10 percent to the
Bypass Trust and one percent 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 percent 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 percent of their interests in BA Realty to
Allen’s Trust and their remaining 50 percent interest to Bruce’s
Trust. Following these sales, the Allen and Bruce Trusts each held
approximately 45 percent of the total interests in BA Realty.”
The Los Angeles County registrar-recorder/county clerk declared
that these transfers were entitled to a documentary transfer tax. The
Superior Court of Los Angeles and the appellate court agreed.
“This decision enables cities or counties to potentially apply
this documentary transfer tax assessment retroactively where an
entity has previously filed a statement of change in ownership,”
Thornburgh said. “If the California Supreme Court upholds this
decision, entities that indirectly own or owned real estate may be
assessed a transfer tax where a statement of change in ownership was
filed at some point in the past.”
The courts maintain
that the terms “realty sold” and “change of ownership” are
one in the same and a documentary transfer tax must be implemented.
However, the California Supreme Court will have the final word.
“The practical implication of this decision is that any entity
which directly or indirectly owns real estate could potentially be
subject to a documentary transfer tax if the entity undergoes a
change in ownership,” Thornburgh said.