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Not All Transfer Taxes Are Legal

From the time California’s documentary transfer tax was enacted in the 1960s until recently, local governments only levied the tax when a deed or other legal instrument was recorded by the county recorder’s office. That has changed for Los Angeles County, which is now sending letters demanding payment of transfer tax for company-owned properties that have transferred due to changes in company ownership.

The county’s demand letters threaten to “pursue all available legal remedies to collect the unpaid tax,” even though the county has never amended its ordinances to require payment of the transfer tax when there is a change in the ownership of a company that owns real property.

Los Angeles County’s letters have no legal support, for at least three reasons: First, neither California’s nor the county’s transfer tax laws apply to company ownership transfers. Second, the property tax reassessment laws do not govern transfer tax; and finally, the county’s attempts to collect transfer tax on changes in company ownership violate the California Constitution.

Transfer tax issues

The county’s efforts fail to meet the state’s five prerequisites for imposition of transfer tax: Those are (1) a grantor or legal entity making a transfer; (2) a deed, instrument, writing or other recorded document; (3) the deed grants, assigns, transfers or conveys title or equivalent; (4) the deed brings about a transfer of real property; and (5) there is a purchase of property by a purchaser.

When one company acquires another, the recorded title typically remains unchanged. In such a situation, there is no obligation to pay transfer tax because all of the conditions for imposing transfer tax are not met—no deeds are recorded conveying the real property to the company that acquired the property by acquiring the existing property owner.


Los Angeles’ reasons for expanding the transfer tax to legal entity changes in control are unknown. It is possible that the county’s actions rely upon change-in-ownership definitions included in older court decisions and apply those definitions to transfer tax situations. Reliance on those cases is misplaced, because imposition of transfer tax when there has been a change in control of a legal entity essentially ignores the most basic requirement of the transfer tax discussed above—the act of recording.

Conflicts with constitution

Proposition 218, a part of California’s constitution, provides that “[n]o local government may impose, extend, or increase any general tax unless and until that tax is submitted to the electorate and approved by a majority vote.” In effect, Proposition 218 mandates that any new tax, including an extension or new application of the transfer tax, be put to the voters.

Los Angeles County’s transfer tax does not provide for, and has not historically been applied to, changes in control of companies. The application of the transfer tax in such situations, as distinct from recorded conveyances of real property, would be a new tax imposed on previously untaxed transactions. Because the county’s existing ordinances do not include a tax on transfers of company interests, Proposition 218 prohibits imposing a transfer tax without express voter approval.

Nor can the county achieve the same result by simply adopting “underground regulations,” that is, administratively imposing the transfer tax without a change in law through unannounced changes to internal policies. Again, doing so violates Proposition 218 because it does not put this new tax to a vote of the electorate.

If Los Angeles County wants to collect transfer tax on company ownership transfers, the county is required to seek voter approval of that change. Voters in some Northern California jurisdictions have approved similar changes, including the City and County of San Francisco and the County of Alameda.

That opportunity has passed for Los Angeles County, however. Proposition 26, adopted in 2010, amended the California Constitution to prohibit the legislature from imposing “new ad valorem taxes on real property, or sales or transaction taxes on the sales of real property.” The county’s proposed expansion of the transfer tax to include corporate stock transfers would violate this restriction as well.

Reduced to its simplest terms, Los Angeles County seeks to collect transfer tax on changes in control of legal entities based on transfers of corporate stock and other legal entity ownership interests, without any law authorizing the imposition of such a tax. Apparently, the county expects property owners to pay the transfer tax without determining whether the tax is even valid.

Don’t fall for it.

Michael T. Lebeau and C. Stephen Davis focus on property and local tax matters at Cahill, Davis & O’Neall LLP, the California member of American Property Tax Counsel.

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