Even though property acquired during marriage is presumed to be community property, for property tax change in ownership purposes the Los Angeles County Property Tax Assessor’s Office believes otherwise. Fortunately, the Assessment Appeals Board strongly disagreed with the Assessor.
Spouses domiciled in California and owning California real property as community property, either directly or indirectly through an entity, have a reasonable expectation that the property tax consequences arising from their dealings with that property will be governed by their status as spouses and their rights and obligations flowing from that status as set forth in the California Family Code. So too would their tax professionals.
Those expectations are reinforced by and confirmed in the Assessor’s Handbook on changes in ownership and in the Board of Equalization Letter to Assessors No. 220.0043 (August 4, 2006).
In contradiction of this guidance, the Assessor asserted in a case involving one of our clients that a conveyance of real property from a general partnership of which the two husbands alone were named as the general partners (50% each) to a limited liability company of which both husbands and their wives were named as the members (50% to one couple and 50% to the second couple) was a change in ownership, and not a proportional interest change, thereby causing a property tax reassessment which resulted in a more than doubling of the property’s property tax burden forever.
Relying on a 2008 California Appellate Court case which has nothing to with property taxes (In re Marriage of Brooks & Robinson), the Assessor believes that the title presumption in Evidence Code Section 662 trumps the statutory scheme concerning community property and its transmutation or conversion into separate property laid out in the Family Code. The case relied on by the Assessor dealt with a bona fide purchaser for value without knowledge of the existence of a community estate. The Appellate Court used the title presumption of the Evidence Code that allows such third parties to rely on the state of title to determine the beneficial ownership of property – namely, that record title controls the determination of beneficial ownership – and thereby protected the third party purchaser who paid fair value and without knowledge of the community estate interest in the property purchased. The Assessor believes it too is a third party entitled to rely on the record or stated title of an asset to determine the property tax consequences flowing from that, even though the Assessor did not purchase anything and no case exists to support the Assessor’s view. Taking this logic to its ultimate conclusion, the Assessor believes it can show up on your door step one day with a Supplemental Tax Bill and thereby convert community property into separate property just because the couple received and complied with the unfortunate advice to take title to an ownership interest in an entity in the name of just one of them rather than the names of both of them or by one of them with a statement that it is held as community property – a very common occurrence when dealing with the record ownership of partnership interests in partnerships, membership interests in limited liability companies or stock in a corporation.
The Assessor continues to embrace this view based on its reliance on the Brooks & Robinson case notwithstanding the fact that in 2014 the California Supreme Court (In re Marriage of Valli ) strongly distinguished Brooks & Robinson stating that:
“We need not and do not decide here whether Evidence Code Section 662’s form of title presumption ever applies in marital dissolution proceedings. Assuming for the sake of argument that the title presumption may sometimes apply, it does not apply when it conflicts with the transmutation statutes.”
The Assessor views Valli narrowly – it only applies when the transmutation statutes are at play. While not referenced in the Assessor’s appellate brief, the Board of Equalization issued Letter to Assessors No. 220.0044 (October 27, 2010) evidencing the Board’s complete and whole-hearted endorsement of In re Marriage of Brooks & Robinson and its application of the title presumption to property tax cases and the status of the Assessor as a third party for property tax purposes. Sadly, the Board of Equalization did not retract this LTA after the 2014 California Supreme Court decision. It is still a part of the Board of Equalization’s online Annotations and capable of wreaking havoc on property taxpayers.
Fortunately, the Assessment Appeals Board strongly disagreed with the Assessor. The Board stated that the Assessor’s contention that it is a third party “strains credibility”. The Board also concluded that Valli overruled the aspects of Brooks & Robinson relied on by the Assessor. According to the Board,
“Thus, Valli establishes that property acquired during marriage is community property unless (a) the requirements of transmutation are met and (b) Evidence Code section 662’s title presumption is protecting purchasers who need to be relying on stability of title.”
The Board concluded its decision by stating that the reassessment of our client’s property was “illegal and improper” and should be reversed.
The moral of this sad tale is that the Assessor should abide by the Supreme Court decision in Valli and the unambiguous positions stated in its Handbook. The 2010 LTA should be withdrawn and the 2006 LTA affirmed. And property owners should seek and comply with the advice of counsel to avoid these problems to begin with. Despite the strong rebuke handed the Assessor by the Appeals Board, our clients cannot seek to recover any of their attorneys’ fees since the case was resolved favorably at the administrative level. While the fees are deductible for income tax purposes, our clients are still net out of pocket a fair amount of money. As the old adage (or more accurately the old Fram auto oil filter commercial) goes: You can pay me now or pay me later. You are better off with good advice upfront designed to avoid an adverse administrative determination by the Assessor, rather than good advocacy later to defeat such an adverse determination.
If you were unfortunately ever the victim of such an “illegal and improper” reassessment by the Assessor, you should seek a refund for the last four years of increased property tax payments.
