California’s Proposition 13 limits increases in the assessed value of real property – and therefore in the taxes levied on that property – unless there is a “change in ownership” of the property.
But if the only change is in the form of ownership of the property, as from a partnership or corporation to a trust, with the beneficial ownership interests remaining unchanged, there is no reassessment. See Cal. Rev. and Tax Code Section 62(a)(2).
However, the issue presented by a recent case decided by the California Court of Appeal (Prang v Amen) had a wrinkle that ultimately led the court to find the Los Angeles Assessor's office could reassess two properties transferred from a corporation to a trust.
Louis and Dolores Amen owned 92.8% of the outstanding stock of Super A Foods, a corporation, which owned two real properties. A few individual shareholders – family members and a longtime employee – held a small percentage the remainder of the corporation's stock, and all of their shares were nonvoting stock.
Louis and Dolores owned 100% of the corporation's voting stock, meaning that they had exclusive control of shareholder decisions, such as electing the board of directors. In 1990, Louis and Dolores Amen, whose family founded Super A Foods, established a revocable trust and transferred their shares to the trust.
In 2014, Super A Foods transferred ownership of two Super A Foods supermarket properties to the trust. The transfer of the stores to the trust eliminated any interests the handful of individual shareholders held in the stores.
The trustees argued that the transfer resulted in no change in ownership of the real property, because the trust already held all the corporation’s voting stock, and thus the trust had “control” of the corporation (and the stores it owned) before and after the transfer.
They pointed out that Section 64 of the State Tax Code defines a change in corporate control as a change in the ownership of a majority of a corporation’s voting stock.
Los Angeles County Assessor Jeffrey Prang disagreed, arguing that Section 62 of the Tax Code measures “ownership interest in real property” transferred to or from a corporation by all the corporation’s stock, not just its voting stock.
By that criterion, the assessor said, a change in ownership had occurred when the stores were transferred to the trust, thus making the real property subject to reappraisal. His office reassessed the properties, doubling their assessed value from $5.1 million to $10.3 million.
The family presented the matter to the Los Angeles County Appeals Board. They argued that two sections of the California tax code must be read in combination: Section 62, which talks about the effects of changes in ownership as “represented by stock,” and Section 64, which discusses changes in control of a corporation as determined by ownership of a majority of “voting stock.”
The Board agreed with the trustees and reversed the assessor’s decision. It said that “the beneficial interest in [corporate] real property is ultimately held by the persons who control the corporation through its voting stock.”
Looking only at the corporation’s voting stock, the Board determined that the proportional ownership interests in the Super A Foods properties were the same before and after the transfer because they remained with the trust.
Prang asked the Los Angeles Superior Court to review the Appeals Board’s decision. The court did so and ordered the Board to reverse its decision. The trustees of Amen Trust then appealed.
A majority of the appellate justices affirmed the lower court’s ruling. It said that contrary to the argument made by the trustees, Section 62 is not ambiguous if read separately from Section 64.
Similarly, the majority said, there is no reason that Sections 62 and 64 must be read together because the two sections address different kinds of transactions. Section 62 concerns the transfer of interests in real property, while Section 64 concerns the transfer of interests in a legal entity (such as a corporation or partnership.)
By Rachelle H. Cohen