In 926 North Ardmore Avenue LLC v. County of Los Angeles,1 the California Supreme Court concluded that, subject to certain limitations, California’s Documentary Transfer Tax Act (the California DTTA), applicable to direct sales of real estate, is also applicable to transfers of entity interests in entities holding real estate if those transfers result in a Proposition 13 “change in ownership” under Revenue and Taxation Code (R&TC) sections 64(c) or (d). In its 6-1 decision, the California Supreme Court reasoned that Proposition 13’s property tax “change in ownership rules are designed to identify precisely the types of indirect real property transfers that the Transfer Tax Act [(California DTTA)] is designed to tax.”2
(This article originally was published by Law360 on July 7, 2016.)
Rarely does a subject as mundane as a documentary transfer tax become worthy of its own article. However, the June 29, 2017, decision of the California Supreme Court in 926 North Ardmore Avenue LLC v. County of Los Angeles (Ardmore) is a worthy exception. Affirming the Court of Appeal, the California Supreme Court held in Ardmore that California’s documentary transfer tax may be imposed by localities on transfers of interests in legal entities holding title to real property when three criteria are met: (1) the legal entity interest transfer is memorialized in writing; (2) the transfer is made for consideration; and (3) the transfer constitutes a “change of ownership” in the legal entity within the meaning of “change of ownership” for property tax reassessment purposes as set forth in Cal. Rev. & Tax. Code § 64, subds. (c) or (d). Under the Ardmore holding, it is irrelevant whether the written instrument at issue memorializing the legal entity interest transfer is recorded or directly references the real property. Moving forward, every transaction involving a transfer of an interest in a legal entity holding title to real property in California is going to require thorough investigation and due diligence concerning the possible triggering of Ardmore documentary transfer tax imposition.
In 926 North Ardmore Avenue, LLC v. County of Los Angeles, the 2nd District Court of Appeal held that Proposition 13 changes in ownership prompted by transfers of legal entity interests should also be characterized as “realty sold,” resulting in the imposition of realty transfer taxes under the California Documentary Transfer Tax Act in cases even where no real property interests are transferred at all.