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California Real Property Tax Issues with Estate Planning Transfers to Legal Entities and Making Gifts: Part I

By Dibby Allan Green, CLAS
and John W. Ambrecht


Originally published in Estate Planning, Trust & Probate News (now, California Trust & Estates Quarterly), published by the Estate Planning, Trust and Probate Section of the California State Bar, Part I: Vol. 13, No. 3 (Fall, 1993); Part II: Vol. 13, No. 4 (Winter, 1993). © Dibby Allan Green 1993, 2000.

Updated June, 2000.


When the estate planning practitioner advises a client to establish a family partnership or close corporation, contribute real property to such entity, and then make gifts of interest,[1] the practitioner need also inform the client of the real property tax consequences of this advice.

In some instances, anticipated estate tax savings may be eroded by the increase over time in real property taxes which will be incurred under the provisions of California's Proposition 13 and the legislation which has followed it. Alternatively, the practitioner may have a client who would rather forego a transaction in which the client has to pay the increase in property taxes now and instead leave the increased estate tax (and perhaps also increased property tax[2]) for the client's beneficiaries to pay later.

Although we have now passed the 15th anniversary of the adoption of Proposition 13 (adopted on June 7, 1978),[3] the various applications to an estate planning practice of Prop. 13 remain unknown to many. In addition, some areas of the law are unclear and there are few published works for these estate planning applications. The following discussion will relate pertinent provisions of the law and practical considerations in making transfers of real property for estate planning purposes, as follows:

Part I

I. "Change in Ownership" Defined
II. Contribution to Legal Entities
III. Ownership Change within Legal Entities (Gifts, Trusts, Estate Transfers)
A. Control of Entity
B. Transfer of Interest of "Original Co-Owner"
C. Reporting Changes in Ownership and Reassessment Statute of Limitations

Part II

IV. Planning Considerations
A. Risk of Finding a "Step Transaction"
B. Available Exclusions
C. Identifying the Transferor and Transferee
D. Date of Transfer
E. Other Planning Considerations for Transfers to Legal Entities
V. Checklist for Avoiding Reappraisal

 

I. "CHANGE IN OWNERSHIP" DEFINED

By way of review, Proposition 13, added Article XIIIA to the California Constitution, which Article (in its current, amended form) links the amount of real property taxes to the "full cash value" of the property, defined as "the county assessor's valuation of real property as shown on the 1975-76 tax bill under 'full cash value' or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment." Article XIIIA, § 2(a), emphasis added.

The Constitution does not define "change in ownership," and coming up with a definition was considered the "most complex area of law implementing Proposition 13."[4] It is defined in statutes and regulations.

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.

Revenue & Taxation Code (hereinafter cited as "R&TC") § 60, emphasis added. This three-fold test of R&TC § 60 is the test in determining whether a change in ownership occurs as courts have ruled that it overrides other provisions of the Code.[5] This was also the intent in creating a definition of "change in ownership" such that it would embody the basic characteristics of a change in a single test for any situation, foreseen and unforeseen,[6] and controlling in all cases where a more specific provision to the contrary was absent.[7] California Board of Equalization Property Tax Rule[8] (hereinafter cited as "Rule") 462(a)(2) adds to the definition:

Every transfer of property qualified as a "change in ownership" shall be so regarded whether the transfer is voluntary, involuntary, by operation of law, by grant, gift, devise, inheritance, trust, contract of sale, addition or deletion of an owner, property settlement . . ., or any other means. . . .

When a change in ownership occurs, the real property is to be reappraised as of the date of the change in ownership. Although theoretically a decline in value upon reappraisal is possible, inevitably, even in recessionary times, the county assessor's reappraisal of real property results in an increase in the appraised value ("full cash value") and therefore an increase in real property taxes.


II. CONTRIBUTION TO LEGAL ENTITIES

1. What Is a Legal Entity? The term, "legal entity," is not specifically defined in either the Revenue & Taxation Code or the Board of Equalization Property Tax Rules, but in context, partnerships, corporations, and LLC's are always included in the provisions relating to "legal entities" (R&TC § 61(i), § 62(a)(2), § 64(a) and (c); Rule 462.180(a)). While provisions relating to trusts are set forth separately from provisions relating to legal entities in some instances[10] (such as at R&TC § 62(a)(2)) it would appear at first blush that trusts and "cotenancies" seem to be characterized as legal entities.[11] But the rest of the Code and Rules make it clear that other than certain business trusts, a trust is generally not considered a "legal entity." (This article does not discuss in detail the nuances pertaining to trust transfers.[12])

2. Transfers of Real Property to Legal Entities. Generally, any transfer of any interest in real property to a legal entity is a change in ownership of such real property transferred. R&TC § 61(i); Rule 462.180(a). The rationale was that a "separate entity" with an identity separate from its owners is created.[13] There are two exceptions: (a) transfers among an "affiliated group" of corporations (R&TC § 64(b); Rule 462,180(b)(1)), and (b) where all the previous owners' proportionate interests in each and every parcel of real property are preserved in the transaction such that the transfer is solely a change in the method of holding title where proportional ownership interests are retained (R&TC § 62(a)(2); Rule 462.180(b)(2)).[14] This discussion will focus on the second exemption which can frequently be made applicable when creating legal entities and conveying real property for estate planning purposes.

R&TC § 62(a)(2) (repeated in Rule 462.180(b)(2)) provides that a change in ownership shall not include:

Any transfer between an individual or individuals and a legal entity or between legal entities . . . which 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 property transferred, remain the same after the transfer. . . .

The emphasis here is that the proportional ownership interests must be exactly the same before and after the transfer in each and every parcel. This also means that to qualify, each person transferring property into the partnership must have the same proportionate interests in both capital and profits of the partnership.[15]

It is incorrect to assume that this means that as long as the same value of land was contributed by each partner to the partnership that the proportional interests remain the same, as what must remain the same is not value but ownership interests. Rule 462.180(b)(2) gives the following example:

Example 3: A transfers Whiteacre to Corporation X and B transfers Blackacre (equal in value to Whiteacre) to Corporation X. A and B each take back 50 percent of the stock. Change in ownership of 100 percent of both Whiteacre and Blackacre.

Similarly, if a partnership will be formed to own more than one parcel of real property, the proportionate ownership interest of each and every parcel must remain the same. For example, Mary and Joe each own 50% of property A, but Mary owns 25% and Joe owns 75% of property B. When a partnership is formed to hold properties A and B, a change in ownership causing reassessment will result as Mary will come to have a 37½% partnership interest, and therefore greater proportional interest in property B (37½% instead of 25%), and lesser proportional interest in property A (37½% instead of 50%). Similarly, Joe's partnership interest will be 62½%, so his ownership interest in both properties will come to be 62½% instead of the original 50% and 75%, respectively.

It will also not work for an individual to contribute 100% sole ownership interest in real property to a legal entity with the other partners to solely share in the increase in value after the contribution, or to solely share in the income from the property, because all partners have ownership interests in the property regardless of to whom income or reappraisal value increase is allocated. Board of Equalization Correspondence dated September 1, 1981 (#3801D).

What will be excluded from reappraisal, however, is a situation where Mary and Joe each own 50% in properties A, B, and C, and all three properties are contributed to the partnership in exchange for Mary and Joe each receiving a 50% partnership ownership interest. Their respective proportional interests in each parcel remain at 50% both before and after the transaction.

But, if the partnership agreement stated that although Mary and Joe each had a 50% partnership ownership interest, Joe was entitled to 75% of the profits in consideration of his services for managing to the partnership, and Mary to only 25% of the profits, then the proportional interest has become askewed once again because the legal entity transferee interest (the partnership interest) must be of both capital and profits. 100% reappraisal of all three properties upon contribution to the partnership would result.

Or, if the partnership agreement showed Mary and Joe as each having a 49% limited partnership interest in exchange for their real property partnership contribution, but Charlie was named general partner and given a 2% partnership interest (to satisfy Internal Revenue Service Regulations that a general partner have an ownership interest) in exchange for his services in managing the partnership property (or, say, in consideration of a cash contribution), this again makes the legal entity transferee (partnership) interest askew from the original 50 - 50 interest of Mary and Joe, and would result in reappraisal of 100% of all three properties.

Kern v. County of Imperial (1990) 226 Cal.App.3d 391, 401; 276 Cal.Rptr. 524, is the case which interprets the proportional interests requirements in order to obtain this exclusion. It was argued over an amendment to R&TC § 62(a) in 1982 which gives us the current text of the Code section. The legislative history of this amendment (AB 3382) states, "The proposal would . . . make technical changes to Section 62(a)(2) for the purpose of clarifying that the 'proportional interests' must remain the same in each and every piece of real property transferred."

The Kern case is instructive in that it involved several different owners with fractional interests. Kern involves transfers upon dissolution of a corporation and the principal is the same as transfers into a partnership for change in ownership purposes. In Kern, 16 individuals and an estate had corporate equity interests in each of 15 parcels of land. Upon dissolution and liquidation of the corporation, the shareholders were grouped into three groups and the parcels divided among the groups such that no two groups received an interest in the same parcel although the value of the properties was proportional. The stipulation of facts for trial included that the shareholders' proportional interest in the real estate remained the same after the transfer, and that each shareholder took an exact pro rata share of the assets available for distribution. The trial court found a change in ownership did occur upon this transfer and the appellate court affirmed, stating, "[I]t is clear that with respect to the title of the real property, the proportional interest of each shareholder in each of the 15 parcels of land changed with the . . . transfer." (Kern at p. 396.) Hence, the court did not look to the pro rata distribution of value, but actual ownership of each parcel of property.

3. Partnership Classes of Owners. Effective January 1, 1993, California Corporations Code § 15651 allows a person to be admitted to a limited partnership as a partner without any requirement of contribution or obligation to contribute in the future. In addition, new Corporations Code § 15645 (also effective January 1, 1993) allows a partnership agreement to provide for the creation of classes of general partners with respective rights, powers, and duties. Query: if there is a class of partners with no ownership interest in capital or profits, and the remaining partners contribute real property to the partnership retaining their proportional ownership interests, will the transfer be excluded from reassessment? We believe it stands to reason that it should.

This may be particularly applicable to the single client owner of real property where a limited partnership may make better tax- or business-planning than formation of a corporation. One possibility, therefore, is for the client to have a 1% general partnership interest plus a 99% limited partnership interest in exchange for contribution of real property, and have a second individual as a separate class of general partner with no ownership interest. These new Corporation Code provisions will therefore provide a workable solution for a single client to form a partnership and avoid reassessment for property tax purposes, and we did achieve this result with the Santa Barbara County Assessor in October, 1993.

4. Title to Partnership Property. Under Rule 462,180(e)(1) concerning partnerships, a change in ownership is deemed to have occurred when the real property is contributed to the partnership regardless of whether title to the property is held in the name of the partnership or in the name of a partner(s) without reference to the partnership (c.f., however, the presumption under Evidence Code section 662). Therefore, establishing a partnership but retaining title to the real property in one or more individual names will not relieve the client from reassessment.

5. Percentage Reappraised. If reassessment should occur, only the portion of interest in the real property which is transferred is reappraised; i.e., if the client conveys only a 75% interest in real property to the family partnership, only 75% of the property will be reappraised (unless another exclusion is available). R&TC § 65.1(a). On the other hand, the full interest conveyed will be reappraised under this analysis of contribution to a legal entity even if an original owner were to retain a 99% ownership interest in the legal entity. R&TC § 61(i); Rule 462.180(b)(2) Example 2.


III. OWNERSHIP CHANGE WITHIN LEGAL ENTITIES (GIFTS, TRUSTS, ESTATE TRANSFERS)

Generally, change in ownership interests of legal entities do not result in a change in ownership of the real property owned by the legal entity. R&TC § 64(a); Rule 462.180(c). If it did, every time corporate stock was bought and sold reappraisal would be required -- perhaps daily for some publicly traded corporations.

As to all legal entities, however, there are two events applicable to the estate planning practice (the third event relates to housing cooperatives) which will trigger reappraisal:

(a) When a person or other legal entity obtains direct or indirect ownership or control of more than 50% of ownership interest in a legal entity (R&TC § 64(c); Rule 462.180(d)(1)), originally termed an "ultimate control" rationale[16]; and

(b) When property transferred to the legal entity that had been excluded at the time of transfer under the proportionte ownership interest exclusion, and the "original co-owners" subsequently transfer in one or more transactions more than 50% of the ownership interests (R&TC § 64(d); Rule 462.180(d)(2)).


A. Control of Entity

R&TC § 64(c)(1) provides:

When a corporation, partnership, limited liability company, other legal entity or any other person, obtains control through direct or indirect ownership or control of more than 50 percent of the voting stock of any corporation, or obtain a majority ownership interest in any partnership, limited liability company, or other legal entity through the purchase or transfer of corporate stock, partnership, partnership, limited liability company interest, or ownership interests in other legal entities, including any purchase or transfer of 50 percent or less of the ownership interest through which control or a majority ownership interest is obrained, the purchase or transfer of that stock or other interest shall be a change of ownership of the real property owned by the corporation, partnership, lmitd liability company, or other legal entity in which the controlling interest is obtained.

Regarding corporations, Rule 462.180(b)(1) excludes from constituting a change in ownership the obtaining of more than 50% of the voting stock of a corporation where the acquiring entity is a corporation which is a member of an affiliated group of corporations, as defined.

Rule 462.180 revised effective April 8, 1999, gives several helpful examples.

1. Gifts. In an estate planning practice, the kind event resulting in a transfer of control, thus causing reassessment for property tax purposes, may occur where client owners of stock or partnership interests make gifts in which an owner will then come to own a more than 50% total ownership interest (i.e., a majority interest, not just an even 50%; cf. Rule 462.180(d)(1)) of the total stock or partnership interest.

2. Death. A transfer of control will also occur upon the death of a majority owner.

3. Partnership. Where there is a partnership, if the written partnership agreement does not provide that the partnership shall continue upon the withdrawal, death, or incapacity of a general partner,[17] Board of Equalization Correspondence dated April 7, 1980, indicates the Board considers both a general partnership and a limited partnership to be dissolved as there is a dissolution of the old partnership and a creation of a new entity causing a change in ownership.[18] However, a limited partner's interest is assignable without affecting the status of the partnership and therefore transfer of a limited partnership interest generally will not create a change in ownership[19] unless, of course, the transfer constitutes a transfer of control or a majority interest in the partnership.

This points to the importance of being sure that all partnerships which are owners of real property have written partnership agreements with provisions that the partnership shall continue upon a change in a general partner. This includes not only a partnership agreement created for the client, but also partnership agreements for every partnership interest which may be contributed to a new legal entity created for the client.

4. Contributions of Majority Interests to New Entities. A transfer of control could also occur if a client were to contribute a majority ownership interest in a legal entity in a transaction where another owner (by the ownership structure of the new entity) would gain a majority interest. For example, if Mother owns 100% of the stock of ABC Corporation valued at $100,000, and contributed the stock to a partnership where Daughter's partnership contribution is $300,000 worth of assets, Daughter has gained a majority interest in ABC Corporation stock as Daughter has a 75% partnership interest and Mother only a 25% partnership interest.

5. Parent Company Transfers. A change in control in more than one legal entity may occur simultaneously where the ownership of one entity changes and that entity owns a majority interest in one or more other entities. Title Insurance and Trust Co. v. County of Riverside (1989) 48 Cal. 3d 84, 255 Cal. Rptr. 670, 767 P.2d 1148, held that R&TC § 64(c) applies to subsidiary corporations notwithstanding that the term "subsidiary" is not expressly used in the statute. The decision also held that a change in ownership for purposes of the statute is equivalent to a change in control, whether direct or indirect. Thus, the property owned by the subsidiary corporation was subject to reassessment since, by obtaining control of the subsidiary's parent corporation, the acquiring corporation obtained indirect control of the subsidiary, and consequently effected a change in ownership of its real property.[20]

For an example in an estate planning context, Husband and Wife own all the stock of their closely held corporation (which operates the family ranch), and an asset of that corporation is a 60% interest in a partnership (which owns the ranch property). Husband and Wife pass away and Niece and Nephew become sole owners of the corporate stock. Not only has there been a change in ownership as to any real property which may be owned by the corporation, but there is also been a change in ownership as to the ranch property owned by the partnership because the corporation owned the majority interest in the partnership. 100% reappraisal of the real property results.

6. Family Ownership Interests. The question of family and spousal ownership are of particular concern in an estate planning context. The holding of Rain Bird Sprinkler Mfg. Corp. v. Franchise Tax Board (1991) 229 Cal. App. 3d 784, 280 Cal. Rptr. 326 (modified 91 Daily Journal D.A.R. 6058, Ct. App. May 21, 1991), raises the possibility that transfer of control under R&TC § 64(c) may occur where a family aggregate more than 50% of the voting stock and act in concert to acquire or control a legal entity even though one individual does not own more than 50% interest.

In Rain Bird, the sole issue on appeal was whether majority ownership of corporations can be held by a family rather than by a single individual or entity to satisfy the "unity of ownership" test (one of the three tests for determining whether a group of business entities may be taxed by the FTB as a "unitary business," the context of the this case). Under the facts of Rain Bird , the court found that more than 50% of the stock was owned "by the same persons acting in concert." The significant facts included ownership by mother and children after death of the founder [husband/father] of the business, written stock purchase agreements, and all owners acting by consensus.

The court cited Hugo Neu-Proler Internat. Sales Corp. v. Franchise Tax Board (1987) 195 Cal. App. 3d 326, 332, 240 Cal. Rptr. 635 (stating it was the only previously published case interpreting § 25105), where the court had held § 25105 had applied to business partners operating under a written partnership agreement. The Rain Bird court agreed with this decision and stated, "It is the reality of control, not its form or mode, that should be determinative" (229 Cal. App. 3d at 790, 280 Cal. Rptr. at 365). Further:

Nothing in the language of former section 25105 (now incorporated in section 64(c)) requires that ownership be held by a single individual or entity to meet the unity of ownership test. Nor does anything in the language of the statute preclude the ownership test from being met where the ownership is held by the members of a closely related group.

(229 Cal. App. 3d at 791, 280 Cal. Rptr. at 366.) Finally, the court not only determined that the facts of Rain Bird showed one business enterprise, but that if it disallowed a unity of ownership it could result in unequal treatment to family businesses.

If the founder of a multicorporation unitary business has one heir, the unitary nature of the business will continue with the succeeding generation. However, if the founder has more than one heir, the family business would lose its unitary nature when the founder dies if we adopt the administrative rule [Board of Equalization's opinions that unity of ownership does not exist with more than one individual].

In family businesses, therefore, one must look at the facts of the business relationship to determine whether the "reality of control" exists as discussed in Rain Bird (and Hugo Neu-Proler if it is an other closely related group such as partners). (One might also inquire as to whether the clients' businesses are taxed by the Franchise Tax Board as a unitary business.)

A related holding pertaining to unrelated business interests (not family members) was found in Twentieth Century Fox Film Corp. v. County of Los Angeles (1990) 223 Cal. App. 3d 1158, 273 Cal. Rptr. 76. A corporation was specially created for the purpose of acquiring another corporation, and no one owner had a greater than 50% ownership interest. Nevertheless, after the acquisition, a change in ownership was deemed to have occurred as to all real property owned by the acquired corporation as the court looked through the titleholder (i.e., the several shareholders) to the entity ultimately responsible. The court did not accept arguments that the "ultimate control" theory required looking through the corporate entity to the individual shareholders.

Pending SB 413 referred to above, also includes a new subparagraph (2) to R&TC §64(c) that a change of ownership will be deemed to have occurred when in a single transfer a majority of the stock or other ownership interests of a legal entity is transferred to one or more purchasers, to apply to transfers completed on or after January 1, 1993. "Single transfer" will exclude bankruptcy reorganization, but will include a gift, single sales or contracts, and separate transfers done for the primary purpose of avoiding property tax consequences of a single transfer.

7. Spousal Ownership Interests. In regards to ownership by husband and wife, Board of Equalization Letter to Assessors No. 85/33, dated March 5, 1985, indicates that the Board considers spouses who own property as joint tenants or as community property to be separate individuals, each owning a 50% interest in the interest in question. Therefore, the fact of their marriage is not used to find that one spouse has directly or indirectly acquired more than a 50% interest in a legal entity. If the spouses together obtain 100% interest in a legal entity each individual has acquired a 50% interest and no one individual has obtained a majority interest and there is no change in ownership. Presumably, however, if other factors of control were present, such as were present in the Rain Bird case, a change in ownership might be found.

8. Ambiguities. When published in 1993, this particle pointed to several ambiguities, the most difficult of of which have now been clarified with the revised Rule 462.180.

9. 100% Reassessment. Transfers under this transfer-of-control provision (R&TC § 64(c); Rule 462(d)(1)) result in reassessment of 100% of the subject real property. Therefore, in the example where only a 60% interest in the partnership had changed by transfer of control of the corporation which owned the 60% interest, nevertheless 100% of the ranch property owned by the partnership will be reappraised, not 60% as percentage of partnership interest owned by the controlling corporation.


B. Transfer of Interest of "Original Co-Owners"

In structuring a transaction where a client establishes a legal entity (such as a partnership) and then makes gifts of interest in the legal entity (such as to obtain valuation discounts after death, to use the annual gift tax exclusion, or to pay gift tax on appreciating assets now rather than estate tax later) the second means of triggering reappraisal will come into play more often. It also will apply where the family establishes a legal entity and then one of the family members dies.

R&TC § 64(d) provides:

If property is transferred on or after March 1, 1975, to a legal entity in a transaction excluded from change in ownership by [§ 62(a)(2) where proportional ownership interests remain the same], then the persons holding ownership interests in such legal entity immediately after the transfer shall be considered the "original coowners." Whenever shares or other ownership interests representing cumulatively more than 50 percent of the total interests in the entity are transferred by any of the original coowners in one or more transactions, a change in ownership of that real property owned by the legal entity shall have occurred, and the property that was previously excluded from change in ownership under the provisions of [§62(a)(2)] shall be reappraised. The date of reappraisal shall be the date of the transfer of the ownership interest representing individually or cumulatively more than 50 percent of the interests in the entity. . . .

Rule 462.180(d)(2)repeats much of this language.

To emphasize, this provision only applies to the individuals who are the original transferors of real property to a legal entity where that contribution of real property was made on or after March 1, 1975, and was previously excluded from reassessment under R&TC § 62(a)(2).

An estate planning example of this R&TC § 64(d) rule is the following. Husband and wife (the "original co-owners") established the family partnership and the first year made gifts of 20% partnership interests to their grandchildren. No change in ownership as the 20% transfer does not represent more than a 50% ownership interest change. The second year another 20% is given to the grandchildren; still no change in ownership. The third year only 10% is given away. Although the cumulative ownership changes equal 50%, it is still not a change in a majority interest as more than 50% has not been given away. The fourth year another 10% is given away and a change in ownership will have occurred as now 60% cumulatively has been given away. 100% of the real property owned by the entity will now be reassessed.

1. What Is Included in the Cumulative Count? Rule 462.180(d)(2) has now been clarified to state that interspousal transfers excluded under section 63, transfers to qualifying trusts under section 62(d), and proportional transfers excluded under section 62(a)(2) of the Revenue and Taxation Code areall excluded in this cumulative county.

2. Portion Reappraised. The updated Rule has now also clarified that teappraisal under this R&TC §64(d) provision does result in reappraisal of 100% of the property owned by the entity.


C. Reporting Changes in Ownership and Reassessment Statute of Limitations

1. Recorded Instrument. When a change in ownership occurs through a recorded instrument, the Preliminary Change of Ownership Report form is to be filed with the recorder at the time of recordation (R&TC §§ 480(e) and 480.3), or there is a $20 penalty (R&TC § 480.3(b)). However, a separate P.C.O.R. form is not required from an intermediate transferee, defined as "any transferee who is acting as both a transferee and the transferor of the same property as part of a series of simultaneous transfers which affect that property and who records the transfer document and any other recorded documents related to the transfer in consecutive order at one time" (R&TC § 480.3(f)).

The recorder forwards the P.C.O.R. form along with a copy of the instruments recorded to the assessor (R&TC § 480(f)). If not filed at the time of recording the instruments, the form must be filed with the county assessor no later than 45 days from the date the change in ownership occurs (R&TC § 480(e)). (The forms are interchangeable among the counties so that one county's form can be filed in another.)

2. Decedent's Estate. In the case of a decedent's probate estate, the personal representative is to file the Change of Ownership Statement - Death of Real Property Owner with the county recorder or assessor in each county where the decedent owned real property at the time the inventory and appraisal is filed with the court (R&TC § 480(b)).

3. Legal Entities. Changes in ownership or control of legal entities are to be reported to the State Board of Equalization in Sacramento (R&TC §§ 480.1 and 480.2). Forwarding a copy to the local assessor is also reasonable. The "Statement of Change in Control and Ownership of Legal Entities Questionnaire" (Form PT-100-B) may be obtained from the Assessment Standards Division, LEOPS Section, (916) 445-4982. The form is to be filed no later than 45 days from the date the change in ownership or control of the legal entity occurs, and there is a penalty for failure to timely file (R&TC §§ 480.1(b), 480.2(b), and 482). Additionally, pursuant to R&TC § 64(e),[25] California income tax returns for partnerships, corporations, and banks contain a question concerning change in ownership and control of the entity (currently item Q to form 565), and if this question is answered yes, the Franchise Tax Board is to furnish the entity's name to the State Board of Equalization, who then sends the above statement to the entity for completion. (SB 413 referred to above, however, would eliminate this question from the tax returns.)

The Board or the local assessor "may inspect all records and documents of a corporation, partnership or legal entity" to ascertain whether a change in ownership or control has occurred (R&TC §§ 480.1(e) and 480.2(e)).

4. Signature. At one time an agent, such as the attorney or legal assistant, could sign these various Change of Ownership forms, but they can do so no longer. The forms are to be signed by the transferee or an officer of the transferee and "shall not be signed by an agent acting for a transferee" (R&TC § 480.3(a), cf. §§ 480(h), 480.1(c), and 480.2(c)).

5. Statute of Limitations for Reassessment. Effective September 14, 1992, AB 3280 (Ch. 663) introduced a statute of limitations whereby no supplemental assessment will be valid unless placed on the supplemental roll within specified years after the July 1st of the assessment year [which year now commences on January 1st] in which the change in ownership occurred. R&TC § 75.11(d) now provides three categories:

(1) A four-year statute generally;

(2) A six-year statute if the change in ownership is based on fraud; and

(3) An eight-year statute if the "change in ownership or change in control was unrecorded and a change in ownership statement required by Section 480, 480.1, or 480.2 was not filed."

A similar four-year statute is provided at R&TC § 532 where there is an "escape assessment" (six years for fraud).[26]

A presentation by the Chief of Ownership, Exemptions, and Mapping of the Los Angeles County Assessor's Office[27] indicated that some local assessors are interpreting the provisions of R&TC § 75.11(d) to mean that the four-year statute of limitations applies only to (a) all instances where the change in ownership occurred by means of a recorded instrument, and (b) where a change in ownership occurred without a recorded instrument (such as change in control or ownership of a legal entity) and a change in ownership statement was timely filed (that is, filed within 45 days of the change in control or ownership). Therefore, except for instances of fraud, an eight-year statute of limitations will apply whenever the change of ownership statement is not filed within 45 days of the date of the change.

Perhaps the best practice, therefore, is that the change of ownership statement be signed by the transferee at the same time the documents pertaining to the transaction are signed, and that such change of ownership statement be immediately filed, and in no event later than 45 days.

Query, however, the above presentation also stated that the change of ownership statement in the case of a decedent's probate estate must be filed within 45 days of the date of death (cf. R&TC § 480(b)), stating that the personal representative was to file the inventory and appraisement within that period of time anyway. However, this is not correct as Probate Code § 8800(b) requires the inventory and appraisement to be filed four months from the date letters are first issued to a general personal representative. One would therefore think compliance with Probate Code § 8800 would be "timely" filing for R&TC § 75.11(d) purposes.

Additionally, R&TC § 480(b) does not specify that the change of ownership statement is to be filed by the time the inventory is due, but at the time the inventory "is filed" with the court. If an inventory of subject real property is filed with the court a year after death and the change of ownership statement is filed with the assessor at that time, is it a timely filing of the change of ownership statement under R&TC § 480(b)? What if decedent's ownership of the property was not discovered by the personal representative until 11 months after death? Perhaps, the only present guarantee of a four-year statute of limitations is to file the Change of Ownership Statement - Death of Real Property Owner within 45 days of the date of death, but good arguments may be raised for having "timely" filed the statement beyond the 45-day period.

Go to Part II


Notes

[1] See Estate Planning, Trust & Probate News, Vol. 13, No. 1, Spring 1993, "Family Limited Partnerships: A Client Primer," by J. Scott Cummins and John W. Ambrecht, with contribution by Dibby Allan Green, CLA.

[2] There is a "change in ownership" at the date of death of a real property owner as title to property will transfer to another. See R&TC § 61; Rules 462(a)(2), 462(b)(1), 462(c)(1), 462(d)(1), 462(i)(2)(B), and 462(i)(3); cf. California Constitution, Art. XIIIA, § 2(a). However, the transfer may be excluded when the transferee is a spouse, parent, child, or original joint-tenant transferor of decedent transferor. See California Constitution, Art. XIIIA, § 2(g) and (h); R&TC §§ 62, 63, 63.1, and 65; Rules 462(b)(2)(D) and (E), 462(c)(2), 462(i)(2)(D), and 462(l).

[3] The constitutionality of Proposition 13 has been upheld in Nordlinger v. Hahn (1992) 505 U. S. ____, 112 S. Ct. 2326, 120 L.Ed. 2d 1; and Amador Valley Joint Union High School Dist. v. State Bd. of Equalization (1978) 22 Cal. 3d 208, 149 Ca. Rptr. 239.

[4] Property Tax Assessment: An Analysis of the Provisions of Legislation Enacted in 1979 which Provide an On-Going System of Property Tax Assessment under Proposition 13, Assembly Revenue and Taxation Committee, October 29, 1979, Assembly Publication #748, p. 18.

[5] Shuwa Investments Corporation v. County of Los Angeles (1991) 1 Cal. App. 4th 1635, 2 Cal. Rptr. 2d 783; Pacific Southwest Realty Company v. County of Los Angeles (1991) 1 Cal. 4th 155; 2 Cal. Rptr. 2d 536, 820 P. 2d 1046.

[6] Report of the Task Force on Property Tax Administration, Assembly Revenue and Taxation Committee, January 22, 1979, Assembly Publication #723, page 38.

[7] Property Tax Assessment, supra, p. 19.

[8] The State Board of Equalization Property Tax Rules are also located at 18 California Code of Regulations section 462. These rules have the force of law.

[9] SB 469 to establish the "California Limited Liability Company Act" was introduced by Senator Beverly on February 25, 1993, and anticipates a two-year track.

[10] R&TC §§ 61(g) and 62(d); Rule 462(i).

[11] R&TC § 62(a)(2) provides "[a]ny 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, . . . ."

[12] See further discussion concerning transfers to or from trusts in Crawford, et a., 1 California Taxes 2nd (CEB) §§ 1.60-1.65.

[13] Property Tax Assessment, supra, p. 27.

[14] See also 4 California Taxation 2nd, Matthew Bender, § 88.161, p. VI-1025.

[15] See also 1 California Taxes 2nd, CEB (1992), § 1.66, pages 64-65.

[16] Property Tax Assessment, supra, p. 27.

[17] See California Corporations Code § 15031 for general partnerships, and §§ 15520 and 15520.5 for limited partnerships; also IRS Regulation § 301.7701-2(b) amended May 13, 1993, T.D. 8475.

[18] However, a mere-change-in-form exemption under R&TC § 62(a)(2) may apply and avoid reappraisal.

[19] California Corporations Code § 15519 provides that a limited partner's interest is assignable without affecting the status of the partnership.

[20] Other cases involving corporate mergers are: Save-on Drugs, Inc. v. County of Orange (1987) 190 Cal. App. 3d 1611, 236 Cal. Rptr. 100; Pueblos del Rio South v. City of San Diego (1989) 209 Cal. App. 3d 893, 257 Cal. Rptr. 578; Kraft, Inc. v. County of Orange (1990) 219 Cal. App. 3d 1104, 268 Cal. Rptr. 643; Twentieth Century Fox Film Corp. v. County of Los Angeles (1990) 223 Cal. App. 3d 1158.

[21] While R&TC §64(c) was enacted in 1979 (Ch. 242; AB 1488), subparagraph (d) was not enacted until the following year (CH. 1349, Stats. 1980; AB 2777).

[22] Pursuant to our telephone conversation with Mr. Richard Ochsner, Assistant Chief Counsel, Legal Division, State Board of Equalization, on June 7, 1993.

[23] See note above re conversation with Mr. Ochsner; also per conversation with Mr. Max Goodrich, Chief, Ownership, Exemptions and Mapping with Los Angeles County Assessor's Office, panelist on "A Workshop on Property and Franchise Tax Controversies in the 90s -- Advice from the Experts," presented by the State and Local Tax Committee of the State Bar of California Taxation Section in Los Angeles on June 12, 1993.

[24] Correspondence dated January 8, 1993; Memorandum dated January 26, 1993.

[25] Pending SB 413 would also modify R&TC §64(e) and R&TC § 480.1.

[26] See also Blackwell Homes v. County of Santa Clara 226 Cal. App. 3d 1009 which interprets this statute, as well as Section 3 of AB 3280, 1992 Chapter 663.

[27] Per Mr. Max Goodrich, see note above.


The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained herein.

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