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State & Local Tax Bulletin (December 2014)

What Every Trusts and Estates
Attorney Should Know About
Changes in Ownership




By Matthew F. Burke, counsel in the Los Angeles office of Pillsbury Winthrop Shaw Pittman LLP. This outline was the basis of the authorís remarks at the Probate Section meeting of the San Fernando Valley Bar Association in Encino, California on December†9, 2014.

If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our December 2014 State & Local Tax Bulletin (a 337K pdf file), containing a printed version of this article and also available via ftp at:

    ftp.pmstax.com/state/bull1412.pdf.

This bulletin concerning state and local tax matters is part of the Tax Page, a World Wide Web demonstration project, no portion of which is intended and cannot be construed as legal or tax advice. Comments are welcome on the design or content of this material.

  1. 2014 Important Cases

    1. 926 North Ardmore Avenue, LLC v. County of Los Angeles, Los Angeles County Super. Ct. No. BC476670 (September 22, 2014).

      Court of Appeal held that documentary transfer tax applies to Prop 13 legal entity change in ownership under RTC § 64(d) (the original co-owner rule), even though no real property interests transferred.

    2. Ocean Avenue LLC v. County of Los Angeles (2014) 227 Cal.App.4th 344

      On June 3, 2014, the Court of Appeal held that even though 100 percent of the entity that owned the Fairmont Miramar Hotel in Santa Monica was sold, there was no reassessable change in majority ownership under RTC § 64(c)(1) because no single owner obtained, directly or indirectly, more than 50% of Ocean Avenue LLC, the owner of the fee interest in the hotel. Spousal interests are not attributed to one another under Rule 462.180, Example 7.

  2. Proposition 13 Change in Ownership Basics

    1. Proposition 13 (Prop 13) Added Article XIII A to the California Constitution

      1. Beginning in 1978, fixed every property's value to the value on the 1975 lien date (plus California CPI adjustments to 1978).

      2. Capped property taxes to 1% of the "full cash value," which is this 1978 established value, or the fair market value later when it changes ownership.

      3. 1978 value or value upon change in ownership = "original base year value."

      4. Restricted annual increases to base year value to an inflation factor not to ex eed 2% annually (set to CCPI).

      5. Original base year value factored with CCPI = "adjusted base year value."

      6. Prohibited reassessment of a new base year value except upon (a) a change in ownership or (b) completion of new construction.

      7. Prop 8 passed in November 1978 to guarantee reassessments in declining markets to the lower of fair market value or adjusted base year value.

    2. Three-Prong Statutory Definition of Change in Ownership – RTC § 60

      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.

    3. Statutory Examples of Changes in Ownership under Revenue and Taxation Code § 61

      1. Entering into, transfers of, or terminations of 35+ year leases (including options). (RTC § 61(c))

      2. Creations, transfers or terminations of certain JTs. (RTC § 61(e))

      3. Creations, transfers or terminations of certain TICs. (RTC § 61(f))

      4. Vesting of a remainder or reversion after end of life estate or other interest. (RTC § 61(g))

      5. Vesting in beneficiary when a revocable trust becomes irrevocable. (RTC § 61(h))

      6. Transfers between a legal entity and any other person. (RTC § 61(j))

    4. Statutory Examples of Exclusions from Change in Ownership under RTC § 62

      1. Transfers to and from certain trusts. (RTC § 62(d))

      2. Transfer reserving an estate for years/life estate in the transferor. (RTC § 62(e).

      3. Certain partitions of cotenancy. (RTC § 62(a)(1))

      4. Proportional ownership interest transfers to/from legal entity. (RTC § 62(a)(2))

      5. Transfers for the purpose of perfecting title. (RTC § 62(b))

      6. Creating, assigning, terminating or reconveying a security interest, and substitution of trustee under security instrument. (RTC § 62(c))

  3. Trusts

    1. Importance for Trusts and Trustees: Many of the Major Prop 13 Cases Involve Trust-Owned Property

    2. Revocable Trusts – Rule 462.160(b)(2)

      Transfer to a trust revocable by the trustor is not a change in ownership because present beneficial ownership remains with the trustor.

    3. Basic Statutory Rules for Transfers to and From Irrevocable Trusts under RTC §§ 61(h) and 62(d)

    4. Looking Through the Trust to Beneficial Owner

      The present beneficiary has the beneficial use of property in trust if the trust is irrevocable, and the trustor if the trust is revocable.

    5. Property Tax Rule 462.160 Basic Rules for Transfers Into and Out of Trusts

      1. "Into" - transfer by the trustor, or any other person, of real property into a trust is a change in ownership of such property at the time of the transfer - Rule 462.160(a).

      2. "Out of" - termination of a trust, or portion thereof, constitutes a change in ownership at the time of the termination of the trust - Rule 462.160(c).

      3. ** Exceptions consume the rules.

    6. Property Tax Rule 462.160 Exceptions to the "Into" Rule

      The following transfers INTO trusts do not result in a change in ownership:

      1. Revocable trusts

      2. Interspousal trusts

      3. Parent-child/grandparent-grandchild trusts (requirements satisfied)

      4. Proportional interest trusts

      5. Irrevocable trusts where the trustor is present beneficiary

      6. "Other trusts" – transfers from one trust to another and meets one of these exceptions

    7. Property Tax Rule 462.160 Exceptions to the "Out of" Rule

      The following transfers OUT OF trusts do not result in a change in ownership:

      1. Revocable trusts – back to the trustor

      2. Interspousal trusts

      3. Parent-child/grandparent-grandchild trusts (requirements satisfied) Proportional interest trusts

      4. "Other trusts" – transfers from one trust to another and meets one of these exceptions

      5. ** Prior change in ownership

    8. Property Tax Rule 462.160(d)(1) Prior Change in Ownership Rule

      1. There is no change in ownership if the property is being transferred out of a trust according to its terms to the person or entity who already had a present interest in the property (either use of or income from the property) while it was in the trust, either when the trust was created, when it became irrevocable, or at some other time.

      2. **You do not have a second change in ownership upon distribution to the current beneficiary.

      3. No place to claim this on Preliminary Change of Ownership Report. (Use "Other" on Part 2, Page 2 and cite to Rule 462.160(d)(1).)

      4. This is Allen v. Sutter (1983) 139 Cal.App.3d 887.

    9. Allen v. Sutter County Board of Equalization (1983) 139 Cal.App.2d 887

      1. Property was transferred to an irrevocable trust for the benefit of the trustor's four grandchildren in 1961–change in ownership then.

      2. Trust provided for distributions of income for a period.

      3. In 1978, the trustee transferred the property to all four grandchildren as tenants in common in accordance with the trust terms.

      4. Court of Appeal held: the termination of the trust did not result in a change in ownership because the change in ownership already occurred in 1961; the trustee only received legal title to the property in 1961 and the trustee merely transferred legal title to the beneficiaries in 1978. The grandchildren were the beneficial owners all along.

    10. Prior Change in Ownership Examples

      1. Example 1:

        A transfers property to a revocable trust, for the benefit of B (unrelated), which becomes irrevocable on A's death. A dies. The change in ownership is at A's death. If the property is ultimately distributed out of the trust to B one year later, that is not a second change in ownership. Rule 462.160(d)(1) applies because B obtained the present interest when the trust became irrevocable a year earlier, on A's death. (Rule 462.260(d)(1), Example 1.)

      2. Example 2:

        A transfers property into an irrevocable trust, which provides for income to C for C's life, then to D for five years, after which the property is to be distributed outright to D. The change in ownership from A to C occurs immediately. The change in ownership to D occurs on C's death. When the property is distributed to D five years after C's death, Rule 462.160(d)(1) applies. D already obtained a present interest "at some other time" upon C's death.

    11. Beneficiaries Change during Trust Term

      Rule 462.160(b) — although the exclusion from change in ownership may apply at the time of the initial transfer of property into trust, a change in ownership of trust property does occur to the extent that other persons become present beneficiaries of the trust unless otherwise excluded from change in ownership (i.e., the parent-child/grandparent-grandchild, or interspousal or registered domestic partner (RDP) exclusions apply) – even though there has not been a subsequent transfer of the property.

    12. Beneficiaries Change During Trust Term – Examples

      Example:

      X transfers property to an irrevocable trust that provides for all of the income to X's wife Y for five years, and then after that the income is to be split evenly between Y and her sister Z. At the time X transfers the property to the trust, there is no change in ownership because the interspousal exclusion applies. However, there is a 50 percent change in ownership of the property in five years at the time Z becomes a present beneficiary.

    13. Reilly v. City and County of San Francisco (2006) 142 Cal.App.4th 480

      1. Trustor died in 1966. Testamentary trust provided for net income to grandniece for life, then net income to the trustor's nephew for his life.

      2. Assessor claimed there was a change in ownership when nephew succeeded to the grandniece's income interest upon her death.

      3. Court of Appeal held:

        1. When a new lifetime income beneficiary succeeds another beneficiary, there is a change in ownership of the property. This is the case even though the interest is only the income interest and not the right to occupy the property.

        2. Because a change in ownership occurs upon the creation of a life estate in income from real property unless an exclusion applies, it follows that the termination of such a life estate followed by the creation of a new life estate in income from the property would also qualify as a change in ownership.

        3. "Are or become present beneficiaries of the trust" from Rule 462.160.

    14. Lifetime Right to Income is a Life Estate and Successor Income Beneficiary is a Remainderman

      1. Concept from Reilly is crucial to trust change in ownership analysis.

      2. A lifetime right to income distributions from trust property is the equivalent of a life estate in the property just like an estate in land for life is a life estate.

      3. When a lifetime right to income distributions terminates and a new beneficiary obtains their own lifetime right to income, there is a change in ownership.

      4. This new beneficiary's life estate is also the vesting of a remainder interest under the Civil Code (any interest following a life estate is a reversion or a remainder), which is a change in ownership under the general rule in RTC § 61(g).

    15. Life Estates Basic Rules under Property Tax Rule 462.060(a)

      1. Creation of a life estate is a change in ownership unless the instrument reserves the life estate in the transferor or the transferor's spouse, or unless the creation of the life estate qualifies for another exclusion. (Think original irrevocable trust transfer to beneficiary for life.)

      2. The termination of any life estate and vesting in remainderman is a change in ownership, unless the remainderman is the transferor, the transferor's spouse, or another exclusion applies. (Think successive beneficiaries in trust.)

      3. When life estate terminates upon the death of a life tenant, the grantor of the remainder interest is considered to be the transferor and not the life tenant. (This is key!)

      4. A transfer by a life tenant during his or her lifetime is a change in ownership, unless an exclusion applies. In this case, the transferor is considered to be the life tenant, not the original grantor. (Think beneficiary powers of appointment.)

      (** Estate for Years Basic Rules under Property Tax Rule 462.060(b) except substitute 35 years for "life estate" period)

    16. Boyfriend/Girlfriend and Children from Prior Relationship

      Don't give boyfriend/girlfriend a life estate with remainder to children–give an estate for years under 35 years instead and then have it go immediately to your children on boyfriend/girlfriend's death.

    17. Property Tax Rule 462.160(b)(1)(A) and Trust Sprinkle/Spray Rule

      1. When a trustee has a sprinkle power to distribute trust property or income from the property to a number of potential beneficiaries, unless all of the potential beneficiaries qualify for an exclusion from change in ownership at the time of the transfer (interspousal, RDP, parent-child, grandparent-grandchild), the property is subject to change in ownership because the trustee could potentially distribute the income or property to a non-excludable beneficiary.

      2. Example 2 from Rule 462.160:

        Husband transfers property to trust and gives Wife, the trustee, a sprinkle power for the benefit of herself, her two children, and her nephew. Change in ownership of all property transferred to the trust, because the sprinkle power could be exercised for the benefit of nephew for whom no exclusion is available.

        Fixes in drafting. ***

    18. Per Stirpes or Equal Distributions, No Sprinkle/Spray Provisions

      1. A per stirpes or equal distribution will not result in a 100% reassessment, just the amount allocated to the disqualified beneficiary. Only sprinkle/spray provisions cause 100% change in ownership.

        Example 3 from Rule 462.160:

        Husband transfers property to trust with income to be distributed to Wife, their two children, and Wife's nephew in equal shares, with Wife's share remaining at her death to be distributed to their children and the nephew in equal shares.

        Upon Husband's transfer of the property, there is a 25% change in ownership (assuming the parent-child exclusion applies) for the 25% allocation to the nephew.

        Upon Wife's death, there is a 8.33% change in ownership for the 1/3 of her 25% allocated to the nephew (assuming the parent-child exclusion applies).

  4. Major Exclusions

    1. Interspousal/RDP Exclusion - RTC §§ 63, 62(p), Rule 462.220

      The following interspousal/RDP transfers are not changes in ownership:

      1. Transfers in and out of trusts.

      2. Transfers that take effect on death.

      3. To current/former in connection with a property settlement agreement, decree of dissolution of marriage/partnership, or legal separation.

      4. Creation, transfer, or termination of any co-owner's interests.

      5. Distribution of a legal entity's property to a current or former in exchange for that person's interest in the entity, in connection with a property settlement agreement, decree of dissolution of marriage/partnership, or legal separation.

      6. Legal entity transfers even if change in control under RTC § 64(c)(1) or change in ownership under RTC § 64(d).

    2. Disproportionate Transfer to Legal Entity and Interspousal/RDP Exclusion

      1. Spouse owning 100% of property transfers it to an LLC owned 50/50 with other spouse is a change in ownership as a disproportionate transfer to a legal entity and interspousal exclusion is unavailable.

      2. Fix by first giving other spouse a 50% interest, or putting 100% into entity then transferring 50% of entity. (See Annotations 220.0274 (March 27, 1987) (property owned 100% by husband, transferred to entity owned 50/50), 220.0278 (May 14, 1993) (community property transferred to legal entity owned 100% by wife).)

    3. Parent-Child Exclusion (Proposition 58) – applies to transfers occurring on or after November 6, 1986 – see BOE Letter to Assessors No. 2008/018

      1. Real property between parents and children (both directions).

      2. No legal entity interests.

      3. Owned by transferor – no after acquired property.

    4. Parent-Child Exclusion – Qualifying Property

      1. Unlimited principal residences.

      2. $1 million "other property".

    5. Parent-Child Exclusion — $1 Million Limit

      1. $1 million "other property" – full cash value meaning assessed value.

      2. Applies separately to each eligible transferor with respect to all transfers to eligible transferees on or after November 6, 1986, other than the principal residence.

      3. Applies to first $1 million of full cash value of a non-principal residence. "Full cash value" is the adjusted base year value, not the current fair market value at time of transfer.

      4. When an eligible transferor transfers multiple properties and the full cash values cumulatively exceed the $1 million limit, it is the BOE's position that the first properties transferred shall receive the $1 million exclusion.

      5. If multiple properties are transferred on the same day (such as at death), the transferees must decide which properties are to receive the $1 million exclusion.

      6. If there are two transferors, they can combine their $1 million exclusions to property jointly sold or transferred.

    6. Grandparent-Grandchild Exclusion (Proposition 193) – applies to transfers occurring on or after March 27, 1996

      1. Purpose: to allow transfers to grandchildren where parents have predeceased the grandparent.

      2. Exclusion only applies to the extent the deceased parent's $1 million exclusion was not fully used.

      3. Grandparents can transfer principal residence only if child never received one from parents.

      4. If the grandchild has already received a principal residence that was eligible for the exclusion (even if a claim was not filed for the residence), then the value of any principal residence received from a grandparent will be considered "other real property" subject to the $1 million limitation.

      5. Middle generation must all be deceased. Requirement that all of the parents of that grandchild who qualify as the children of the grandparents are deceased, except that a son or daughter-in-law that is a stepparent to the grandchild need not be deceased. (RTC § 63.1(a)(3)(A).) Normally, a son- or daughter-in-law qualifies as a child under RTC § 63.1(c)(3)(C). That relationship continues until terminated by divorce, or if terminated by death, until the remarriage of the surviving son- or daughter-in-law.

    7. Parent-Child, Grandparent-Grandchild Exclusion Statute of Limitations and Claim Filing (Trustee)

      1. For full (retroactive) relief from date of transfer, must file claim:

        1. RTC § 63.1(e)(1)(A): For parent-child transfers before 9/30/90, within 3 years after the transfer.

        2. RTC § 63.1(e)(1)(B): For parent-child transfers on or after 9/30/90, and grandparent-grandchild on or after 3/27/96, within 3 years after the transfer or before transfer to a third party (parent or child of transferor is not a third party, see (e)(4)).

        3. RTC § 63.1(e)(1)(C): If deadline in (A) or (B) has passed, a claim is always timely if filed within 6 months of the date of mailing of a notice of supplemental or escape assessment as a result of that transfer.

      2. Otherwise, if all of the above deadlines have passed, prospective relief is available only under RTC § 63.1(e)(2) for untimely claims filed after January 1, 1998.

    8. Non-Pro Rata Distributions and Parent-Child/Grandparent-Grandchild Exclusion

      When property is left to multiple children/grandchildren by trust or will and executor or trustee has power to distribute assets non-pro rata basis.

      1. Sufficient assets to equalize: Non-issue.

      2. Insufficient assets to equalize: trustee may encumber the real property with a loan and equalize the value of the other beneficiaries' interests in the trust assets by distributing to them the cash loan proceeds and transfer to child will qualify for exclusion so long as value does not exceed interest in total trust estate. Loan may not be made by any of the children receiving property.

      3. Form over substance.

      4. See LTA 2008/018, Q&A 36; Annotations 650.0235-625.0235.025. Note in particular Annotation 625.0235.025 and option given to child.

      5. How to finance?

  5. The Transferor Concept

    1. Issue – as properties are transferred among family members, in and out of trusts, and during the term of a trust, at issue is whether a particular exclusion from change in ownership.

      1. Whether a transfer qualifies for an available exclusion depends on the relationship between the transferor and transferee.

      2. Back to life estate and estate for years rules.

      3. Do not confuse the beneficial owner with the transferor.

      4. When a remainder interests vests upon the termination of a life estate, it is the original grantor of the life estate that is the transferor to the remainderman, NOT the life tenant.

      5. Life tenant is the beneficial owner during his or her lifetime, but is not the transferor to the remainderman.

      6. Thus, whether an exclusion applies depends upon the relationship between the original grantor and the remainderman, NOT the life tenant and remainderman.

      7. Exception: general power of appointment.

    2. Example:

      X transfers property to his girlfriend Y, for her life, then to his son Z from a previous relationship. A change in ownership occurred, and Y is the beneficial owner of the property for property tax purposes. When Y dies, Z obtains the property. The transferor of the remainder interest to Z is his dad, X, even though Y was the beneficial owner. Y was not the transferor of the remainder interest to Z, and if she had been, the transfer would not have qualified for the parent-child exclusion because Y is not Z's mother and X and Y are not married.

    3. Example:

      M transfers property to her son N, for his life, then to N's daughter O, for her life. M has created a life estate in N, followed by a life estate/remainder interest in O. When N dies, the transfer to O is from O's grandmother, M. The parent-child exclusion does not apply because the transfer is not from N to O. The grandparent-grandchild exclusion may apply if all of the requirements of RTC § 63.1(a)(3) are satisfied (principally that N did not fully exhaust his $1 million exclusion, and that O's mother be deceased at the time of N's death).

    4. Exception – General Power of Appointment

      If the lifetime income beneficiary has a general power of appointment, then that beneficiary is the transferor to any successor beneficiaries. A limited power of appointment does not make them transferor.

    5. Parent-Child Exclusion and A/B Trusts

      1. The decedent is the transferor of all of the property in the bypass trust. The survivor only has a life estate. When the survivor passes, and interests vest in the children, use the decedent's $1 million exclusion.

      2. The survivor is the transferor of all of the property in the survivor's trusts, so upon the death of the survivor, use the survivor's $1 million exclusion on this property.

      3. Marital trust – depends on who owned the property when transferred into the trust.

  6. Other Issues

    1. Disclaimers

      1. Annotation 625.0081 (May 23, 1989):

        If disclaimer satisfies the Probate Code, interest passes as though disclaimant had predeceased the creator of the interest.

      2. Annotation 625.0082 (October 1, 2004):

        Disclaimer cannot be paid for.

    2. Rescissions – Board of Equalization View vs. Assessors' Views

      Annotation 220.0594 (May 31, 2007):

      Civil Code section 1688 et seq. provides for rescission of contracts, including contracts for the transfer of real property. Rescission must be evidenced by a written notice of rescission signed by the parties to the contract, which should be provided to the assessor. A rescission deed should also be recorded with the county recorder's office. (Note: This annotation was deleted in December 2012 because it contained inaccurate change in ownership analysis, but this annotation language states the rules on the rescission issue perfectly. Even though it was "deleted", it still shows up on a search of the BOE website, so it is accessible. See also Annotations 220.0595-220.0600.) (Annotation said a reconveyance of title can be recorded – don't do this!)

    3. Filing Requirements under RTC §§ 480 et seq.

      1. Same rules for transfers of real property interests among individuals apply to transfers of real property interests and changes in ownership under RTC § 61(j) involving legal entities.

      2. RTC § 480(a) – file COS – non-death

      3. RTC § 480(b) – file COS – death

      4. RTC § 480(d) – may be attached to or accompany deed filed for recording

      5. RTC § 480(e) – if CIO document is recorded, COS must be filed with at same time, but recording still good without it

      6. RTC § 480(e) – within 90 days of CIO if not

      7. RTC § 482(a) – penalty

      8. RTC § 480.3 – Preliminary Change of Ownership Report (PCOR)

    4. Statute of Limitations on Escape Assessments under Revenue and Taxation Code § 532

      Changes in ownership on non-legal entity transactions (i.e., deed transfers or other changes in ownership reportable to the county):

      1. Generally 4 years statute of limitations if recorded.

      2. 8 years if fraud penalty is applied.

      3. 8 years if "unrecorded change in ownership" – meaning a deed or other document evidencing a change in ownership was not filed with the recorder at the time the event took place.

    5. Trustee Liability?

  7. Leases

    1. Property Tax Rule 462.100(a) Changes in Ownership:

      1. Creation of a lease for a term of 35 years or longer;

      2. Termination of a lease which had an original term of 35 years or longer;

      3. Transfer, sublease or assignment of a lessee's interest with a remaining term of 35 years or longer; and

      4. Transfer of lessor's interest subject to a lease with remaining term shorter than 35 years.

    2. Property Tax Rule 462.100(b) Excluded Transactions

      1. Creation of a lease for a term shorter than 35 years;

      2. Termination of a lease which had an original term shorter than 35 years;

      3. Transfer, sublease or assignment of a lessee's interest with a remaining term of shorter than 35 years (regardless of the original term of the lease); and

      4. Transfer of lessor's interest subject to a lease with remaining term 35 years or longer, whether to the lessee or another party.

    3. Property Tax Owner

      1. Generally, when there has been a change in ownership, the lessee is deemed the "property tax owner" of the property during the term of the lease, and therefore these properties will be reassessed under the legal entity rules if there has been a change in ownership or change in control of the lessee under RTC §§ 64(c)(1) or (d).

      2. If there has not been a change in ownership, it is the lessor who is the property tax owner, and the same result if there is a change in control or change in ownership of the lessor.

      Lease Extensions – Annotation 220.0357 (May 27, 2009)

    4. Lease Terminations and Mergers – Annotation 220.0326.005 (Dec. 21, 2009)

  8. Transfers of Real Property to/from a Legal Entity

    1. Change in Ownership Rule under RTC § 61(j)

    2. Exclusion from Change in Ownership Rule under Revenue and Taxation Code § 62(a)(2)

    3. Measuring Proportionality – Corporations vs. Partnerships and LLCs

      1. For corporations – measured by voting stock

      2. For partnerships and LLCs – measured by capital and profits interests

    4. Penner v. County of Santa Barbara (1995) 37 Cal.App.4th 1672

      1. Mother's transfer of property 100% in fee by herself to a family partnership in which she and her children were partners is a change in ownership under RTC § 61(j).

      2. Parent-child exclusion did not apply.

      3. The court of appeals acknowledged that if the multiple steps had been taken, the parent-child exclusion and then the proportional ownership interest transfer exclusion under RTC § 62(a)(2) would have applied. However, the step transaction doctrine allows the assessor to ignore certain steps that are taken, but does not allow a taxpayer to invent steps that never existed.

    5. Munkdale v. Giannini (1995) 35 Cal.App.4th 1104

      Transfer of different properties out of a partnership to different partners when dissolving the partnership is a change in ownership under RTC § 61(i) (the predecessor subdivision to (j)).

    6. Benson v. Marin County Assessment Appeals Board, Court of Appeals (September 26, 2013)

      Severing a joint tenancy by creating a tenancy in common after one creating other than original transferor status is a change in ownership of the portion transferred to the other than original transferor. Can't use proportional exclusion because of prior grant of exclusion when created the joint tenancy.

  9. Transfers of Legal Entity Interests

    1. Legal Entity Interest Transfers – Basic Outline

      First, transfers of legal entity interests are not a transfer of the real property of the entity under RTC § 64(a), unless either of the following applies:

      1. There is a change in control under RTC § 64(c)(1)

        However, even if there is a change in control, (i) the proportional ownership interest transfer exclusion under Rule 462.180(d)(4) may apply, (ii) the interspousal or RDP exclusion may apply (RTC §§ 62(p), 63, Rule 462.220); or (iii) the transaction may qualify as reorganization among affiliated corporations under RTC § 64(b).

      2. There is a change in ownership under RTC § 64(d)

        Even if there is a change in ownership under RTC § 64(d), the counting and cumulating might be excluded under Rule 462.180(d)(2) as proportional, or between spouses or RDPs.

    2. Basic Rule Under RTC § 64(a)

      1. RTC § 64(a): Transfer of legal entity interests is not a transfer of the entity's real property.

    3. Changes in Control and Majority Ownership under RTC § 64(c)(1)

      RTC § 64(c)(1): When anyone obtains (a) control through direct or indirect ownership or control of more than 50 percent of the voting stock of any corporation, or obtains (b) a majority ownership interest in any partnership or limited liability company, there is a change in ownership of the real property owned by the corporation, partnership, limited liability company, or other legal entity in which the controlling interest is obtained.

    4. Clarifying Language for Changes in Control and Majority Ownership under Property Tax Rule 462.180(d)(1)

      The following transfers constitute changes in ownership, except as provided in (d)(4) which is an exclusion from change in ownership:

      1. Control. When any corporation, partnership, limited liability company, Massachusetts business trust or similar trust, other legal entity or any person:

        1. obtains through a reorganization or any transfer, direct or indirect ownership or control of more than 50 percent of the voting stock in any corporation which is not a member of the same affiliated group of corporations as described in (b)(1), or

        2. obtains through multi-tiering, reorganization, or any transfer direct or indirect ownership of more than 50 percent of the total interest in partnership or LLC capital and more than 50 percent of the total interest in partnership or LLC profits, or

        3. obtains through any transfer direct or indirect ownership of more than 50 percent of the total ownership interest in any other legal entity.

    5. Measuring Ownership for Partnership and LLCs

      1. For partnerships and limited liability companies, RTC § 64(c)(1) and Rule 462.180(d)(1) both require measuring direct or indirect ownership of capital and profits interests. Therefore, a majority ownership interest for purposes of these provisions means directly or indirectly owning more than 50% of both the capital and profits in the entity.

      2. "Control" in any managerial sense is disregarded.

    6. Measuring Ownership or Control for Corporations

      1. Two separate and distinct ways in which a corporation may undergo a change in control: another obtaining more than 50% ownership of its voting stock, or another obtaining more than 50% control of its voting stock. A transfer may satisfy either test. (See Annotation 220.0120 for control through voting proxies.)

      2. "We have never interpreted this language as extending the "control" standard to partnerships." (Back-up letter to Annotation 220.0769 (December 11, 1991).)

    7. Proportional Changes in Control

      Rule 462.180(d)(4):

      When a transfer of legal entity interests has resulted in a change in control under RTC § 64(c)(1), but the proportional ownership interests in each piece of property represented by the interests transferred remain the same after the transfer, this is the exclusion to use.

    8. Proportional Changes in Control – Examples 9 and 10 in Property Tax Rule 462.180

    9. Change in Control or Majority Ownership and Property Interests Held

      1. Form BOE-100-B instructions state that the "interests in real property" that undergo a change in ownership when there is a change in control under RTC § 64(c)(1), include:

        1. Land, improvements (i.e., buildings and structures), or fixtures OWNED;

        2. Land, improvements (i.e., buildings and structures), or fixtures HELD UNDER LEASE from a private owner if the remaining term of the lease, including written renewal options, exceeds 35 years;

        3. Land, improvements (i.e., buildings and structures), or fixtures HELD UNDER LEASE from a public owner (i.e., any agency of local, state, or federal government) for any term; or

        4. Mineral rights, including working interest in oil, gas and geothermal steam-producing properties owned or held on lease for any term, whether in production or not.

    10. Changes in Ownership under RTC § 64(d) (Original Co-Owner Rule)

      1. RTC § 64(d) is the second exception to the general rule under RTC§ 64(a). It applies only if an entity ever had property transferred to it in a transfer excluded under the proportional ownership interest transfer exclusion of RTC § 62(a)(2). If property is transferred on or after March 1, 1975 to an entity under RTC § 62(a)(2) (proportional exclusion), then the holders of the interests in the entity become original co-owners. Thereafter, whenever the original co-owners have cumulatively transferred over 50% of their interests, the property previously transferred has a change in ownership.

    11. Original Co-Owner Counting and Cumulating Exceptions

      1. Don't count and cumulate:

        1. Interspousal transfers qualifying under RTC § 63 (and RDP transfers under RTC § 62(p)) (see also Rule 462.220).

        2. Transfers into certain qualifying trusts under RTC § 62(d) (revocable, or where trustor or trustor's spouse is present beneficiary).

        3. Proportional interest transfers.

      2. Do count and cumulate parent-child and grandparent-grandchild transfers, transfers between original co-owners (unless otherwise excluded), and all other unrelated party transfers.

    12. Original Co-Owner Counting and Cumulating Rules

      1. After an excluded transfer that isn't counted, the transferee takes the interest as an original co-owner.

      2. After a transfer is counted and cumulated, the transferee is not an original co-owner with respect to that interest so a transfer by the transferee is not counted.

    13. Ocean Avenue LLC v. County of Los Angeles (2014) 227 Cal.App.4th 344

    14. Change in Ownership under RTC § 64(c)(1) vs. 64(d)

      1. RTC § 64(d) states:

        If a transaction results in a change in control under § 64(c)(1) and (d), then § 64(c)(1) rules and all of the property is reassessed, not just that would be reassessed under § 64(d).

      2. Thereafter, there are no original co-owners.

    15. Indirect Ownership for Changes in Control or Majority Ownership

      1. Count indirect ownership of corporate voting stock and partnership and LLC capital and profits proportionately.

      2. In addition, for corporations only and the "control" test, majority control of voting stock (over 50%) of a corporation that itself is in control of another corporation (over 50%) results in indirect control of the lower tier corporation.

      3. This would have been legislated in AB 2372.

      4. Court of Appeal affirmed this view in Ocean Avenue LLC v. County of Los Angeles (2014) 227 Cal.App.4th 344.

      5. But Annotation 220.0111 (January 22, 1999).

  10. Reporting Requirements

    1. Reporting Requirements under RTC §§ 480.1 and 480.2

      1. The person or entity that obtained control or majority ownership must file a Form BOE-100-B, with the Board's LEOP group within 90 days from the date of change in control.

      2. The legal entity whose ownership interests were transferred must file a Form BOE-100-B with LEOP within 90 days from the date of change in ownership.

    2. Penalties for Failure to File Timely under RTC § 482

      If a person fails to file a Form BOE-100-B within the 90 days from the date of the transaction, "a penalty of 10 percent of the taxes applicable to the new base year value reflecting the change in control or change in ownership of the real property owned by the corporation, partnership, or legal entity, or 10 percent of the current year's taxes on that property if no change in control or change in ownership occurred, shall be added by the county assessor to the assessment made on the roll."

    3. Date of Death Reporting

      1. If death triggers the change in control or majority ownership, the 90 days still applies.

      2. If trustee is not sure whether there will be a change in control or majority ownership because unsure of distributions, must still report timely.

      3. Annotation 565.0020 (September 10, 2010):

        If legal entity ownership interests are transferred due to a death but it will not be known within 90 days of the date of death whether a change in control or ownership will occur because the allocation of interests to the beneficiaries is not determined, the change in control and ownership statement should still be filed with as much information as is known to avoid the penalty. The form should then be supplemented once a change in control or ownership determination is made.

    4. Statute of Limitations on Escape Assessments under Revenue and Taxation Code § 532

      Changes in ownership on legal entity transactions reportable on BOE-100-B have an unlimited statute of limitations (at least to 2001 when the law was changed to make it unlimited).

  11. Trust Issues and Legal Entities

    1. Sprinkle Powers and Legal Entities

      1. Rule 462.160(b)(1)(A) has a sprinkle rule that assumes income is paid to a non-qualified beneficiary if they are in the pool of potential beneficiaries.

      2. No such rule for legal entity interests.

      3. RTC § 64(c)(1), regarding changes in control, requires a person actually obtain ownership. It looks at what a person receives. A transfer of interest with a sprinkle power, no one actually obtains anything until actual distribution of interests.

      4. RTC § 64(d) only requires the original co-owners to transfer their interests. It looks at what the transferor got rid of.

    2. Changes in Control and Majority Ownership in Trust

      1. A single beneficiary has the right to the income from a majority of the shares of voting stock or partnership/LLC capital and profits.

      2. Can occur with successive beneficiaries.

    3. Change in Ownership and Original Co-Owner Interests in Trust

      1. If trustee transfers property to a legal entity, the current beneficiaries are the original co-owners.

      2. What about with sprinkle beneficiaries? All are collectively the original co-owners?

    4. Trustee Liability?

  12. Parent-Child Exclusion and the Uncodified Language of Legislative Intent

    1. Exact Language

      Specifically, transfers of real property from a corporation, partnership, trust, or other legal entity to an eligible transferor or transferors, where the latter are the sole owner or owners of the entity or are the sole beneficial owner or owners of the property, shall be fully recognized and shall not be ignored or given less than full recognition under a substance-over-form or step-transaction doctrine, where the sole purpose of the transfer is to permit an immediate retransfer from an eligible transferor or transferors to an eligible transferee or transferees which qualifies for the exclusion from change in ownership provided by Section 63.1. Further, transfers of real property between eligible transferors and eligible transferees shall also be fully recognized when the transfers are immediately followed by a transfer from the eligible transferee or eligible transferees to a corporation, partnership, trust, or other legal entity where the transferee or transferees are the sole owner or owners of the entity or are the sole beneficial owner or owners of the property, if the transfer between eligible transferors and eligible transferees satisfies the requirements of Section 63.1.

    2. "Sole" Requirement - why is this language here?

    3. $1 Million Limit

    4. Assessor Staff and BOE Views


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