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California Supreme Court:
S.C. Clarifies ‘Change in Ownership’ Under Proposition 13
Evans Says Proportional Ownership in Real Property Owned by Entity Is Determined by Beneficial Interest
By Kimber Cooley, Staff Writer
The California Supreme Court held yesterday that the transfer by a corporation of real property—in the form two supermarkets—to a revocable trust which held 98.2 percent of the company’s stock and all of its voting stock constituted a change in ownership of the property, triggering a reassessment and taxation consequences under Proposition 13.
The high court determined that the proportional ownership of the real property before and after the transfer was different, as the beneficial interest of individual non-voting shareholders was eliminated upon the transfer, and the Revenue and Taxation Code requires the court to consider the ownership of corporate stock generally and not limit its analysis to ownership of voting stock alone.
Justice Kelli Evans wrote the opinion for a unanimous court affirming a judgment of this district’s Court of Appeal which, in turn, agreed with Los Angeles Superior Court Judge James Chalfant that reassessment of the property was appropriate.
Reassessment Triggered
Challenging the reassessment of the properties were the trustees of the Amen Family 1990 Revocable Trust, the sole beneficiaries of which were Louis and Dolores Amen.
The real property at issue consists of two Los Angeles supermarkets operating as “Super A Foods.” In December 2014, Super A Food, Inc., a corporation, transferred the properties to the Amen Trust.
At the time of the transfer, the corporation had two classes of stock, voting common stock and non-voting common stock.
The sole difference between the rights possessed by the holders of the different classes of stock was that control over corporate governance was granted exclusively to holders of voting stock.
The Amen Trust was the majority owner of the corporation’s stock, including 100 percent of the voting stock. The remaining 5.2 percent of the corporation’s stock was owned by other members of the Amen family and one long-time employee of the company.
Prang’s Determination
Los Angeles County Assessor Jeffrey Prang determined that the transfer of the properties from the corporation to the trust constituted a change in ownership and conducted a reassessment of the properties, doubling their assessed value from $5,140,120 to $10,280,000.
The Los Angeles County Assessment Appeals Board reversed Prang’s decision, asserting, without supporting authority, that “the beneficial interest in [corporate] real property is ultimately held by the persons who control the corporation through its voting stock.”
Prang filed a petition for writ of mandate which was granted by Chalfant who issued an order directing the board to vacate its decision.
Constitution Amended
Evans explained that Proposition 13, adopted in 1978, amended the California Constitution to add Article XIII A, which strictly limits increases in the assessed value of real property—and the ad valorem tax on such property—unless the property undergoes a “change in ownership.”
The jurist pointed out that “[b]ecause Proposition 13 did not define ‘change in ownership,’ it fell to the Legislature to do so” and, in response, the Legislature adopted Revenue and Taxation Code §60 which provides:
“A ‘change in ownership’ means a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest.”
Evans said that in order to aid in the implementation of §60, the Legislature adopted “section 61, setting forth types of common transfers that do result in a change in ownership, and section 62, setting forth types of transfers that do not result in a change in ownership.”
Sec. 61 provides, in pertinent part, that “[e]xcept as otherwise provided in Section 62, change in ownership, as defined in Section 60, includes, but is not limited to...[t]he transfer of any interest in real property between a corporation, partnership, or other legal entity and a shareholder, partner, or any other person.”
Evans noted that “[t]he parties do not dispute that the transfer of the properties from the corporation to the trust must be deemed a change in ownership under section 60 and section 61…unless it qualifies for exclusion under section 62, subdivision (a)(2).” The section provides:
“Any transfer between an individual or individuals and a legal entity or between legal entities, such as a cotenancy to a partnership, a partnership to a corporation, or a trust to a cotenancy, 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.”
Beneficial Ownership Interests
Evans said that §62(a)(2) “is intended to exclude transfers that constitute merely a change in the form of holding title” and “[a] principal requirement of the exclusion set forth in section 62(a)(2) is that the proportional ‘ownership interests’ remain the same before and after transfer of the real property.”
However, the justice said that “[t]hough it is clear that section 62(a)(2) refers to ownership interests in real property, there is a further analytical inquiry we must engage with: how are those ownership interests represented” when the owner is an entity rather than an individual.
She opined:
“In this case…100 percent of the direct ownership interests in the properties transferred from the corporation to the trust….[W]ith respect to entities, we must look, not to the transfer of direct ownership interests, but to the transfer of beneficial ownership interests to assess proportionality. Although a corporation has full direct ownership of its property, its shareholders will have partial, proportional beneficial ownership interests therein.”
Finding the interpretation to be consistent with the language of §62(a)(2), she said:
“A transfer results ‘solely’ in a change in the method of holding title if ownership of the property does not change beyond a change in the identity of the titleholder(s). That condition is satisfied, when two entities are involved, if the proportional beneficial ownership interests of the owners of the entities remain the same, or, when individuals and an entity are involved, the proportional direct ownership interests of the individuals are identical to their proportional beneficial ownership interests as owners of the entity.”
The jurist declared:
“We conclude the language of section 62(a)(2) indicates that: the statute concerns ownership interests in real property; for legal entities, those ownership interests are the beneficial ownership interests that those who own the entity have in its real property; and for a corporation, those beneficial ownership interests are measured by corporate stock generally.”
Interplay Between Sections
She rejected the argument by the trustees that that §62(a)(2) must be interpreted in conjunction with §64, which provides that a change in ownership interests in a legal entity does not cause a change in ownership interests in the entity’s real property, absent delineated exceptions.
One such exception is in subsection (c) which provides that a change in ownership of a corporation’s real property occurs when there is change in the “control” of the corporation, which is determined by ownership of a majority of its voting stock.
The trustees argued that the §§62 and 64 must be read together such that the proportionality analysis under §62(a)(2) will only take into account the ownership of voting stock.
Evans rejected this interpretation, noting that the ownership interests to which §62(a)(2) refers are interests in the real property transferred, while the ownership interests at issue in §64 are interests in legal entities themselves. She declined to insert language from one statute into the other as “[t]he trustees point to nothing in the language of section 62(a)(2) or its legislative history that suggests that the Legislature intended the term ‘stock’ to refer only to voting stock.”
She reasoned:
“[T]he statute must be interpreted to refer to proportional ownership interests in the transferred real property, rather than in any entities involved in the transfer. This is the construction dictated by the express language of section 62(a)(2), which requires that the ‘proportional ownership interests...in each and every piece of real property transferred’ remain the same.”
Evans added that “[i]f ‘proportional ownership interests’ referred to interests in an entity, it could not be applied to a transfer involving individuals; there would be no entity in which their ownership interests could be measured.”
Uniform Application
She was unpersuaded by the trustees’ argument that the high court’s interpretation of §62(a)(2) undermines uniformity in the administration of property tax assessment practices throughout the state, saying:
“Although the trustees suggest that the Los Angeles County Assessor is an outlier in its application of section 62(a)(2), we note that the California State Association of Counties and the California Assessors Association…have filed an amicus curiae brief in support of the assessor here. They note that ‘there is no information in the record or known to amici to suggest that the Assessor is an outlier in his interpretation of the statute or that other counties are applying the law differently.’”
She also rejected the assertion that the court’s decision was not giving “proper deference” to the State Board’s implementation of the regulation, pointing out that “an agency’s interpretation is one of several tools available to the court” in exercising its responsibility to interpret a statute.
The case is Prang v. Los Angeles County Assessment Appeals Board (Amen), 2024 S.O.S. 1708.
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