California: Change in Ownership Occurred When Nature of Stock Ownership Changed

A California Court of Appeal recently addressed whether the transfer of real property between legal entities triggered a reassessment for property tax purposes. The taxpayer at issue was a Revocable Trust that owned all the voting stock in a corporation. The Trust and several other individuals also owned non-voting stock in the corporation. In the transaction at issue, the corporation transferred real property to the Trust. The Trust’s beneficiaries did not include the persons who owned the non-voting stock in the corporation.  Under California Proposition 13, property is generally assessed annually based on purchase price adjusted for inflation not to exceed two percent per year, unless there is a change in ownership (or new construction). A transfer of real property will generally trigger reassessment at the property’s fair market value. However, an exception to this rule provides that a change of ownership does not occur when there is a “transfer ... between legal entities ... that results solely in a change in the method of holding title to the real property and in which proportional ownership interests of the transferors and transferees, whether represented by stock, partnership interest, or otherwise, in each and every piece of real property transferred remain the same after the transfer." The Los Angeles County Assessor determined that a change of ownership had occurred when the property was transferred and reassessed the value of the property. The taxpayer appealed, arguing that the statutory “proportional interest” exception applied because its ownership interest in the corporation did not change as a result of the transfer. That is, the Trust owned 100 percent of the corporation’s voting stock before the transfer and 100 percent of the corporation’s voting stock afterward. The Board of Assessment Appeals reversed the assessment, agreeing with the taxpayer, and held that only the voting stock should be analyzed when determining whether the exception applied. After a trial court ruled in the Assessor’s favor, the Trust appealed.

At issue before the appellate court was whether the term “stock” as provided in the statutory exception referred to only voting stock or all classes of stock. If the definition of stock referred to all stock, then there would be a change in ownership, and thus a reassessment, because the individuals who owned non-voting stock before the transfer did not own any stock in the corporation after the transfer. The Trust argued that the term “stock” in the statute meant only “voting stock,” and the terms “stock” and “voting stock” appeared to be used interchangeably both in the tax code and a property tax rule promulgated by the California Board of Equalization. The court, rejecting this argument, determined that the legislature intended to use “stock” in a general nature and “voting stock” in a more specific manner. In the court’s view, the use of the terms demonstrated that the legislature knew to refer to “voting stock” when defining ownership interests and deliberately chose a different test for purposes of the change in ownership exception. The court also rejected the Trust’s argument that the term “stock” was ambiguous. The California tax code specifically identified various categories of stock, and by using “stock” in the statutory exception, all classes of stock were contemplated. The court also noted that the statutory exception must be read in light of section 60 of the tax code, which provided that “there is a change in ownership of real property when there is (1) a transfer of a present interest in real property, (2) including the beneficial use thereof, (3) the value of which is substantially equal to the value of the fee interest.” The court observed that after the transfer of the real property, the non-voting stockholders lost their previous economic interest in the real property. As such, a change of ownership had occurred. In a strongly worded dissent, Justice Baker said that in “resolving an issue of statewide importance,” the majority opinion authorizes the  reassessment of real property in a manner inconsistent with the legal view of the Board of Equalization — “the entity responsible…..for instructing county assessors on correct property tax assessment methods….The majority upends these reliance interests with unpredictable and, at least in some cases, unfair consequences.” For more information on Prang v. Luis A. Amen, please contact Gina Rodriquez at 916-551-3132.