Opinion
Raised herein is the following tax issue; Is there a Proposition 13 change in ownership of property held by a limited liability company when all of its membership interests are sold but no one person or entity obtains, directly or indirectly, more than a 50 percent interest in the
Ocean Avenue requests attorney fees on appeal pursuant to Revenue and Taxation Code section 5152. 1 That matter is remanded to the trial court and deferred pending our resolution of the County’s currently stayed appeal in which it challenges the trial court’s award of section 5152 attorney fees below.
FACTS
Since 1999, the Fairmont Miramar Hotel (Hotel) has been owned by Ocean Avenue, an entity formed by Hotel Equity Fund VH, L.P. (Equity Fund). In March 2006, the Hotel was put up for sale. On July 7, 2006, Ocean Avenue entered into a contract (Initial Contract) to sell the Hotel to 101 Wilshire, LLC. 2 On September 6, 2006, the parties signed a document in which they terminated the Initial Contract and related escrow. The same day, Equity Fund sold 100 percent of its membership/ownership interest in Ocean Avenue as follows; The Susan Lieberman Dell Separate Property Trust acquired a 49 percent interest; MSD Portfolio, L.P.—Investments (MSD Portfolio) acquired a 42.5 percent interest; and Miramar Hotel Investor, LLC (Hotel Investor LLC), acquired an 8.5 percent interest.
Michael Dell directly owns 99 percent of MSD Portfolio. The other 1 percent is owned by MSD Capital. Because Michael Dell owns 99 percent of MSD Capital, he directly or indirectly owns 99.9 percent of MSD Portfolio. 3 There is no dispute that Michael Dell effectively owns 42.5 percent of Ocean Avenue through MSD Portfolio.
Melissa Sexton (Sexton), a staff member who worked for the Assessor, investigated and then analyzed whether the Hotel should be reassessed on the theory that one person had acquired more than a 50 percent ownership interest in Ocean Avenue such that there was a change in ownership for purposes of Proposition 13, the relevant tax statutes (§§ 60, 64), 5 and the relevant tax rules (Cal. Code Regs., tit. 18, § 462.180). Using a multiply-through test, she concluded that Michael Dell had only a 47.82 percent interest, and no one had an interest that exceeded 50 percent. 6 Nonetheless, the Assessor reassessed the Hotel.
Ocean Avenue appealed to the Los Angeles County Assessment Appeals Board (Board). The Board concluded there was a change of ownership based on any of the following theories; Equity Fund transferred all of its ownership rights in the Hotel; the Initial Contract between Equity Fund and 101 Wilshire, LLC, was enforceable, so the Hotel transferred on July 7, 2006, by equitable conversion; or, Michael Dell controlled more than 50 percent of the capital invested in the purchase, plus he had a right to profits, including a preferred rate of return. The Board upheld the reassessment, noting that the “revision of the original transaction . . . was only for the purpose of avoiding
Subsequently, Ocean Avenue filed a complaint for a tax refund of $314,680.95 and alleged, inter alia, that because there had been no change in the Hotel’s ownership, the Hotel could not lawfully be reassessed. The trial court entered a judgment in favor of Ocean Avenue.
This timely appeal followed.
After the trial, Ocean Avenue filed a motion for attorney fees pursuant to section 5152. Under that statute, a prevailing taxpayer can recover attorney fees if an assessor, believing a tax law is unconstitutional, acted contrary to the tax law without first seeking declaratory relief. The trial court noted that the “gist of [the County’s] position, both before the Board and in the court trial, was that the court should not apply Section 64[, subdivision] (a) because the scenario it protects—that seized upon by the Dells—is ‘too good to be true.’ ” To support this finding, the trial court quoted numerous statements by County witnesses. Then the trial court stated: “In short, [the County] advanced the Constitution and the ‘too good to be true’ doctrine as an alternative to following the plain language of the statute. While [the County] does not expressly charge that the statute and the rule are unconstitutional or invalid, its position is transparent. [The County] would not have urged the court to disregard the statute if it did not believe it was unconstitutional or otherwise invalid. Accordingly, [the County] was required to bring a declaratory relief action, not merely tax [Ocean Avenue] and force it to file suit. Because [the County] did not do so, [Ocean Avenue] is entitled to its attorney’s fees under [section 5152].”
The trial court granted Ocean Avenue $252,118.75 in attorney fees. The County appealed. That attorney fees appeal is stayed until we render an opinion resolving the appeal from the judgment.
STANDARD OF REVIEW
“The issue of whether, based on a set of undisputed facts, there has been a change in ownership for purposes of property tax assessment ‘is a question of law subject to this court’s independent de novo judicial review.’ [Citation.]”
(Fashion Valley Mall, LLC
v.
County of San Diego
(2009)
I. Proposition 13; Binding Regulations.
Proposition 13, adopted by California voters in 1978, added article XIIIA to our state Constitution and “limited the rate at which real property in this state may be taxed and the extent to which the assessed value of real property may be increased. As [provided], real property may be taxed at no more than 1 percent of its ‘full cash value,’ with ‘full cash value’ defined to mean either the assessed value of that property in the 1975-1976 tax year or the property’s value at the time of a subsequent ‘change in ownership,’ subject to an adjustment for inflation. [Citation.] Thus, real property generally is taxed based on its value at the time of acquisition, not its current value. The task of defining when there has been a change in ownership that triggers reassessment has been left largely to the Legislature. [Citation.]”
(Holland v. Assessment Appeals Bd. No. 1
(2014)
The state Board of Equalization has promulgated administrative regulations interpreting the change in ownership statutes. “Local assessors must follow these regulations.”
(Industrial Indemnity Co. v. City and County of San Francisco
(1990)
II. The Applicable Property Tax Rule.
Generally, the purchase of an ownership interest in a legal entity is not a change in ownership of the real property held by that entity. (Cal. Code Regs., tit. 18,' § 462.180, subd. (c).) But there are exceptions. One provides that there is a change of ownership in real property owned by a limited liability company “[w]hen any corporation, partnership, limited liability company, Massachusetts business trust or similar trust, other legal entity or any person: [][]... [][] (B) obtains through multi-tiering, reorganization, or any transfer direct or indirect ownership of more than 50 percent of the total interest in [the limited liability company’s] capital and more than 50 percent of the total interest in [its] profits.” (Cal. Code Regs., tit. 18, § 462.180, subd. (d)(1)(B).)
III. The Change in Ownership Theory.
The County contends that there was a change in ownership of the Hotel. As discussed below, we disagree.
According to the County, it “should be undisputed that Michael S. Dell has a majority interest in the capital of Ocean Avenue LLC.” As indicated by the numbers relied upon by the County, this argument fails. According to the County, Michael Dell owns 99.99 percent of the capital of MSD Portfolio, which owns 42.5 percent of Ocean Avenue. He owns 93.3333 percent of Blue Fin and Michelangelo, and those two entities, collectively, own 73.065 percent of Hotel Investor, which owns 8.5 percent of Ocean Avenue. The flaw in the County’s argument is that it never does the math. The multiply-through test reveals the following: Michael Dell’s capital interest in Ocean Avenue through MSD Portfolio is 42.49575 percent, which is the sum of 0.9999 x 42.5. His interest in Ocean Avenue through Hotel Investor is derived by multiplying 0.933333 by 73.065, the sum of which is 68.194, and then by multiplying 0.68194 by 8.5, to reach 5.79649 percent. When 42.49575 percent is added to 5.79649 percent, the total is 48.29224 percent. 7
In a convoluted argument, the County argues that Michael Dell controls a majority of the capital and profits of Blue Fin and Michelangelo, and that this somehow results in a majority interest in Ocean Avenue. But even supposing Michael Dell owned 100 percent of Blue Fin and Michelangelo, it would not
IV. The Substance Over Form Theory.
The County next argues that we should apply the substance over form doctrine set forth by the United States Supreme Court for analyzing federal tax issues
(Frank Lyon Co.
v.
United States
(1978)
V. The Equitable Conversion Theory.
In the County’s view, the Hotel changed ownership on July 7, 2006, under section 60, the day the Initial Contract was signed, based on equitable conversion. As we discuss below, this argument misses the mark.
“An unconditional contract for the sale of land, of which specific performance would be decreed, grants the purchaser equitable title, and equity considers him the owner. [Citations.]”
(Parr-Richmond Industrial Corp.
v.
Boyd
(1954)
Here, there was no equitable conversion because the contractual terms were never satisfied, and the parties demonstrated an intention contrary to equitable conversion when they terminated the Initial Contract.
On July 7, 2006, any interest obtained by 101 Wilshire, LLC, was contingent because the sale contained conditions precedent, such as payment of the purchase price. Also, 101 Wilshire, LLC, was not obligated to purchase the Hotel unless Ocean Avenue delivered various documents, books and records, keys and other items. The
Reilly
court explained that “the ‘present interest’ requirement [was] an attempt to avoid treating contingent . . . transfers as changes in ownership . . . .”
(Reilly, supra,
Nor was there a transfer of beneficial use because, under the Initial Contract, Ocean Avenue was entitled to all revenue and responsible for all expenses pertaining to the Hotel until the date of closing. As explained by
Reilly,
“The receipt of income generated by property qualifies as a ‘beneficial use’ of the property . . . .”
(Reilly, supra,
Finally, the County adverts to no evidence that the value of what 101 Wilshire, LLC, received on July 7, 2006, was substantially equal to the value of the fee interest. In particular, the County fails to point to any testimony or documents in which 101 Wilshire, LLC’s contingent interest was assigned a value and found to substantially compare to the value of a fee interest.
VI. The Constitutional Theory.
The County argues that Proposition 13 should control our analysis, not the Revenue and Taxation Code or the tax rules in the regulations. Further, it
VII. Attorney Fees.
Section 5152 provides in part: “In an action in which the recovery of taxes is allowed by the court, if the court finds that the void assessment or void portion of the assessment was made in violation of a specific provision of the Constitution of the State of California, of this division, or of a rule or regulation of the board, and the assessor should have followed the procedures set forth in Section 538 in lieu of making the assessment, the plaintiff shall be entitled to reasonable attorneys’ fees as costs in addition to the other allowable costs.” Before awarding attorney fees, a trial court must make a factual finding that a flawed assessment was based on the Assessor’s belief that a tax law was unconstitutional rather than a misunderstanding of the law.
(Phillips Petroleum Co.
v.
County of Lake
(1993)
Ocean Avenue requests attorney fees on appeal because the Assessor failed to comply with section 538 before reassessing the Hotel. We conclude that this matter must be deferred until after we decide the County’s related appeal challenging the award of section 5152 attorney fees below.
We affirm the judgment. Regarding Ocean Avenue’s request for section 5152 attorney fees on appeal, that matter is remanded to the trial court and deferred pending our resolution of the County’s appeal of the award of section 5152 attorney fees below. Ocean Avenue is entitled to its costs on appeal.
Boren, R J., and Ferns, J., * concurred.
A petition for a rehearing was denied June 24, 2014, and the opinion was modified to read as printed above. Appellant’s petition for review by the Supreme Court was denied September 10, 2014, S219743.
Notes
All further statutory references are to the Revenue and Taxation Code unless otherwise indicated.
The County maintains that 101 Wilshire, LLC, was formed by MSD Capital LP (MSD Capital).
According to Ocean Avenue, Susan Lieberman Dell owns 0.000001 percent of MSD Portfolio.
The attorney for MSD Capital testified regarding his understanding of how Michelangelo’s net income would be distributed under its operating agreement. He said that capital investments would receive a preferred rate of return (1 to 1.5 percent interest on capital). Next, net income would be used to pay back investors for their capital contributions. Then, and only then, would the net income be split two-thirds for Fuhrman and one-third for MSD Capital. We presume that Blue Fin was set up in the same manner.
Section 60 provides that 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.” Under section 64, subdivision (a), however, the transfer of interests in legal entities, such as limited liability companies, “shall not be deemed to constitute a transfer of the real property of the legal entity.” Section 64, subdivision (c) creates an exception to subdivision (a) when one person or entity obtains a majority interest in the legal entity which owns real property. In that situation, there is a change in ownership. Section 64, subdivisions (a) and (c) are implemented by the corresponding tax rules in the California Code of Regulations. (Cal. Code Regs., tit. 18, § 462.180, subds. (c) & (d)(1)(B).)
Testimony from Sexton suggested that a second staff member also concluded that no one acquired more than a 50 percent interest.
Our calculations are similar to the calculations on the worksheets done by Sexton and another member of the Assessor’s staff. One worksheet containing rounded off numbers showed that because MSD Portfolio owned 42.5 percent of Ocean Avenue, and because Michael Dell owned 99 percent of MSD Portfolio, the formula for Michael Dell’s interest in Ocean Avenue through MSD Portfolio was this: 0.99 x 42.5 = 42.08. Multiplying Michael Dell’s interest through Michelangelo and Blue Fin, and then through Hotel Investor, the worksheet concluded that his interest was 5.736 percent. The worksheet added the sum of 42.08 percent and 5.736 percent to establish that Michael Dell’s interest in Ocean Avenue was 47.82 percent. Another worksheet, which contained more decimal fractions, concluded that Michael Dell’s direct and indirect interest in Ocean Avenue was 48.19068 percent.
In relevant part, section 538, subdivision (a) provides: “If the assessor believes that a specific provision of the Constitution of the State of California, of this division, or of a rule or regulation of the [state Board of Equalization] is unconstitutional or invalid, and as a result thereof concludes that property should be assessed in a manner contrary to such provision, . . . the assessor shall, in lieu of making such an assessment, bring an action for declaratory relief against the board under Section 1060 of the Code of Civil Procedure.” In addition, the California Constitution, article III, section 3.5 provides, in relevant part: “An administrative agency, including an administrative agency created by the Constitution or an initiative statute, has no power: [f] (a) To declare a statute unenforceable, or refuse to enforce a statute, on the basis of it being unconstitutional unless an appellate court has made a determination that such statute is unconstitutional; [][] (b) To declare a statute unconstitutional.”
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.