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 owned.
“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 trusts.
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.