Kern v. County of Imperial

Citations: 226 Cal. App. 3d 391; 276 Cal. Rptr. 524; 91 Cal. Daily Op. Serv. 23; 90 Daily Journal DAR 14445; 1990 Cal. App. LEXIS 1333Docket: D010523

Court: California Court of Appeal; December 19, 1990; California; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

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Stewart Kern and 14 co-plaintiffs appeal a judgment favoring Imperial County regarding their request for a refund of property taxes paid on real estate transferred from Sweetwater Feeders, Inc. to its shareholders. The central issue is whether this transfer constituted a "change of ownership" under Proposition 13, necessitating a property reassessment.

In 1947, Kern and partners formed a partnership that was incorporated in 1963. Following the deaths of two original partners, a 1977 agreement outlined the distribution of the corporation's assets upon Kern's retirement or death. In 1982, Kern retired, prompting inquiries about the tax implications of transferring property to the shareholders. The county's chief appraiser confirmed that the transfer would trigger reassessment under relevant regulations. 

On October 1, 1982, the real property was distributed according to the 1977 agreement, with shareholders receiving specific parcels. They paid property taxes based on the reassessed values for the following years and later sought refunds, which were denied by the Imperial County Board of Supervisors in January 1986. The shareholders filed a complaint in March 1986.

The trial court ruled that the transfer was a change of ownership, thereby requiring reassessment under Revenue and Taxation Code section 62 and Proposition 13. The court noted that despite the transfer, the shareholders' proportional interests in the real estate did not change, and each received an equal share of the distributed assets.

Proposition 13 does not define 'change of ownership,' but sections 60 and 62 provide relevant guidelines. Section 60 defines 'change of ownership' as a transfer of a present interest in real property that equates in value to the fee interest. Section 62 outlines exclusions from this definition, specifically allowing transfers between co-owners that do not alter their proportional interests, such as changes in title holding methods. Kern and other shareholders argue that the trial court misinterpreted section 62 as it stood in 1982. However, the court finds that the October 1982 transfer involved a change in the title of real property, thus not qualifying for the section 62 exemption. Prior to the transfer, 16 individuals had corporate equity interests in 15 parcels. Post-transfer, the ownership structure altered, with groups of owners holding interests in different parcels, leading to changes in their proportional interests. Consequently, the transfer was deemed a 'change of ownership.' Supporting this interpretation, Government Code section 15606 mandates the State Board of Equalization to regulate assessment practices, which include reappraising property upon a change of ownership, as detailed in title 18, California Code of Regulations, section 462. This regulation confirms that any transfer meeting the criteria of a 'change in ownership' necessitates reappraisal, regardless of the transfer's nature. The change in ownership definition encompasses various transfer methods, excluding only name changes that do not affect beneficial use rights.

Transfers of property to and by legal entities are generally considered a change in ownership, unless specific exclusions apply. Notably, transfers between separate legal entities or from individuals to a legal entity (or vice versa) that only change the method of holding title, while maintaining proportional ownership interests, do not constitute a change in ownership. The owners of interests in the transferee legal entity are termed 'original co-owners' for future ownership transfer assessments. For example, if Corporation X, owned equally by A and B, transfers properties to both shareholders, this results in a change of ownership for both properties. The regulation is supported by interpretations from relevant administrative agencies, which carry substantial weight unless proven erroneous. Kern argues against this interpretation by asserting that the transfer does not fall under the exclusionary provisions of the 1982 amendment to section 62, which was intended to clarify that certain transfers do not count as changes in ownership. Kern contends that the amendment should not apply retroactively, thereby suggesting that the law prior to the amendment excluded the transfer in question from a change in ownership classification.

Kern argues that the 1982 legislation represents a substantive change in law due to three factors: (1) alterations in statutory language, (2) lack of declaratory intent within the amendment, and (3) absence of retroactive provisions. Kern interprets the new phrase 'in that real property' in subdivision (a)(1) as limiting partitions to un-subdivided properties and believes that 'in each and every piece of real property transferred' in subdivision (a)(2) imposes a requirement for transferees to hold undivided interests in each property. However, the court disagrees, asserting that the language changes serve to clarify existing law, particularly regarding 'proportional interests.' The court references Mudd v. McColgan, affirming that administrative interpretations and legislative definitions consistent with them are valid indicators of legislative intent. It emphasizes the importance of discerning legislative intent to fulfill the law's purpose, as outlined in Cossack v. City of Los Angeles. The court acknowledges that while significant language changes typically suggest an intention to alter meaning, they may also reflect a desire to clarify the law when contextual factors are considered. Legislative history supports this view; Assembly Bill No. 3382, which amended section 62, was characterized by the State Board of Equalization as a 'housekeeping bill' aimed at correcting technical inconsistencies and ambiguities in property taxation laws. The bill was designed to clarify ownership changes involving legal entities, highlighting its intent to address existing ambiguities rather than enact substantive changes.

Section 62 (a) is proposed to be amended to distinguish transfers between co-owners during property partitions and changes in title methods as separate from transfers involving legal entities. Specifically, technical amendments to Section 62 (a)(2) will ensure that 'proportional interests' in each real property remain unchanged through transfers. For example, if Corporation A owns Blackacre and Whiteacre with equal value, and its shareholders X and Y each hold 50%, upon dissolution, they would receive a 1/2 undivided interest in both properties without change in proportional ownership, thus exempting this transfer under the new provision. Conversely, transferring Blackacre to X and Whiteacre to Y would not be exempt, as it alters the proportional ownership.

The sponsor's intent was to clarify existing law, particularly regarding transfers relevant to the current lawsuit, with their statements considered authoritative in interpreting the legislation. Legislative history reveals no disputes regarding the board’s analysis, implying acceptance by the Legislature of this interpretation. Therefore, it is concluded that the intent behind Assembly Bill No. 3382 was to clarify Section 62 rather than effect substantive change, despite the absence of an explicit declaration within the legislation itself. Kern's argument regarding the lack of a retroactive provision is deemed irrelevant, as the legislation’s purpose was clarification, not alteration of the law. The court affirmed the judgment with concurrence from Kremer, P.J., and Froehlich, J. 

Note: The opinion is certified for publication, excluding part III. Additionally, Proposition 13, added to the California Constitution in 1978, sets a maximum ad valorem tax of 1% on real property based on its assessed value.

Statutory references pertain to the Revenue and Taxation Code unless stated otherwise. In 1978, the California Legislature established definitions for 'change of ownership' under section 110.6 to implement property tax limitations from article XIII A of the California Constitution. Section 110.6 was repealed on July 1, 1979, and new provisions defining 'change of ownership' became effective on July 10, 1979. Kern's argument suggesting that a regulation enacted shortly before a transfer did not reflect existing law is unconvincing; the regulation was active as of October 1, 1982. The ownership interests of shareholders changed after the transfer, violating section 62, subdivision (a)(2). Kern contends that the original Assembly Bill No. 3194 included a clause for retrospective effect, later removed in amendments to Assembly Bill No. 3382, and notes that similar legislation following Proposition 13 typically included retrospective provisions. The court, despite Kern's objections, takes judicial notice of legislative committee reports related to Assembly Bill No. 3382, affirming that courts can consider legislative records to ascertain legislative intent.