McMillin-BCED/Miramar Ranch North v. County of San Diego

• Decision Date: 30 March 1995
• Docket Number: MILLIN-BCED,No. D020491,D020491
• Citation: 37 Cal.Rptr.2d 472,31 Cal.App.4th 545
• Court: California Court of Appeals Court of Appeals
• Parties: Mc/MIRAMAR RANCH NORTH, Plaintiff and Appellant, v. COUNTY OF SAN DIEGO, Defendant and Respondent.

Page 472

37 Cal.Rptr.2d 472

31 Cal.App.4th 545

McMILLIN-BCED/MIRAMAR RANCH NORTH, Plaintiff and Appellant, v. COUNTY OF SAN DIEGO, Defendant and Respondent.

No. D020491.

Court of Appeal, Fourth District, Division 1, California.

Argued Sept. 26, 1994.

Decided Jan. 12, 1995.

As Modified on Denial of Rehearing Feb. 7, 1995.

Review Denied March 30, 1995.

Weil & Wright and Archie T. Wright, III, Carlsbad, for plaintiff and appellant.

Lloyd M. Harmon, Jr., County Counsel, Diane Bardsley, Chief Deputy County Counsel, and Andrew J. Freeman, Deputy County Counsel, for defendant and respondent.

HUFFMAN, Associate Justice.

Plaintiff McMillin-BCED/Miramar Ranch North (McMillin-BCED), a California general partnership, appeals the judgment of the superior court in favor of the County of San Diego (the County), defendant and respondent, in McMillin-BCED's action for refund of property taxes. (Rev. & Tax. Code, ¹ §§ 51, 5097, 5149.) Pursuant to California Constitution, article XIIIA, section 2, (article XIIIA) and section 60 et. seq., the County tax assessor reassessed land owned by the partnership on the lien date of March 1, 1991, on the basis that a 100 percent change of ownership had occurred on February 12, 1990. The assessor applied the step transaction doctrine (sometimes called the doctrine) to view several discrete business and real property transfers in 1990 as one taxable transaction accomplishing a change of ownership of the subject 1,200 acres of property.

On appeal, McMillin-BCED contends the trial court erred in applying the step transaction doctrine, because there was an inadequate showing that both of the partners in the McMillin-BCED partnership had the intention throughout the various steps involved in the transactions to reach the same end result, that a different corporation would be the partial new owner of the partnership which owned the property. McMillin-BCED also contends the trial court improperly found that the close proximity in time of some of the steps in the transactions justified application of the doctrine, and improperly extended the accepted tests for the application of such doctrine as created by case law. (Shuwa Investments Corp. v. County of Los Angeles [Shuwa ] (1991) 1 Cal.App.4th 1635, 1648-1657, 2 Cal.Rptr.2d 783.)

In response, the County argues that when the transactions are viewed as a whole, they in effect constituted a 100 percent change in ownership because there was a transfer of ownership of land from a corporation to a partnership consisting of different corporations. We agree with the County that under the step transaction doctrine, the separate transfers must be treated as a single transaction for tax purposes, and the trial court therefore was correct in concluding that a 100 percent reassessment was proper and no tax refund was due. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

The parties do not dispute the facts of the various transactions in this case, only the legal conclusions to be drawn from them. The players are as follows: BCE Development, Inc. (Development) is the parent corporation of a wholly-owned subsidiary, BCE Development Properties, Inc. (Properties). Development and Properties were affiliates for tax purposes for this reason. On May 5, 1989, Properties agreed to sell the subject 1,200 acres of land for $100 million to McMillin/Scripps Ranch (Buyer), a California limited partnership, acting by its sole general partner, McMillin Communities, Inc. (McMillin), a California corporation. Properties was to have obtained title to the land from Development, then the owner, before the sale went through. This agreement fell through Development then decided to develop the land with the assistance of an experienced residential developer. The following transactions ensued: As of January 26, 1990, title to the land was still held by Development. On that date, Development and Properties formed (but did not fund) a general partnership called Scripps Ranch. The partnership agreement required Development to contribute 30 percent tenancy-in-common interest in the land and Properties to contribute 70 percent tenancy-in-common interest in the land to the newly-formed partnership, as initial capital contributions. Profits and losses were to be shared in the same proportions. Four days later, Development conveyed a 70 percent tenancy-in-common interest in the land to Properties. For purposes of discussion, we shall refer to the tenancy-in-common transfer between Development and Properties as Step 1. ²

because Buyer could not obtain the necessary financing and did not want to incur any liabilities arising from pre-development activities on the land.

On February 7, 1990, Development and Properties, as tenants-in-common, refinanced the land for $50 million. They executed a promissory note and deeds of trust in favor of their lender, Mortgage Development Corporation (MDC), which was, like Development, a wholly-owned subsidiary of BCE Canada. MDC immediately assigned the note to yet another wholly-owned subsidiary of BCE Canada, BCED Pacific, Inc. In a declaration prepared by Jeffrey H. Wagner, the director of taxation of the BCED corporations, submitted in support of the McMillin-BCED opening trial brief, the purpose for this loan was explained: "(a) to strengthen and improve [Development's] interest in the Land by becoming a secured lender and (b) to reduce the amount of equity in the Land a future developer/investor would be required to 'buy into.' " We shall refer to this transaction, the refinancing of the land by Development and Properties as tenants-in-common, as Step 2.

Step 3 also took place on February 7, 1990, when Development and Properties deeded their respective interests in the land to the Scripps Ranch partnership, as required by the partnership agreement. In other words, they exchanged their 30-70 percent interests in the land for general partnership interests which would own the land. This structure would provide flexibility to negotiate a particular financial deal with a developer. The Scripps Ranch partnership assumed the loan on a non-recourse basis.

Development then carried out negotiations with McMillin, as well as a competing developer, Davidson Communities, Inc. (Davidson), to establish terms for a partnership agreement. On February 9, 1990, the Scripps Ranch partnership and McMillin entered into a contribution agreement establishing the terms and conditions for McMillin's admission as a partner and Development's withdrawal from the partnership. Development agreed to guarantee the performance of all of Properties' present and future obligations to McMillin under the partnership agreement. McMillin agreed to contribute $5 million cash to the partnership. Properties' capital account was valued at $30 million. Development assigned its 30 percent partnership interest to, and withdrew from, the partnership.

The effective date of the first amended and restated agreement of general partnership was February 12, 1990. Step 4 thus took place when McMillin bought into the appellant partnership. Two days later, the partnership name was changed from Scripps Ranch to McMillin-BCED. Pursuant to this agreement, McMillin now held a 14 percent interest in the capital of the partnership, a 30 percent interest in the profits, and a 50 percent management interest.

On March 1, 1991, the assessment date next occurring after these transactions took place, the county assessor reassessed the land, claiming that a 100 percent change in ownership had occurred on February 12, 1990. McMillin-BCED appealed this decision to the County Assessment Appeals The board's decision was upheld and judgment entered for the County. The trial court analyzed the timing and the nature of the transactions, the evidence of the desire to develop the land, and the end result in order to conclude that a 100 percent change of ownership had taken place under the step transaction doctrine. The court reasoned:

Board, No. 2 (the board), which denied the application for a reduction of property taxes after an administrative hearing. McMillin-BCED then filed its complaint for refund of property taxes and a court trial was held in which opposing declarations and the administrative record were admitted into evidence. McMillin-BCED set forth its asserted business reasons for the various steps, including the use by Development of certain net operating losses of Properties for income tax purposes after the transfer of the tenancy-in-common interests.

"All of the actual steps occurred within a two-week period. Each of the steps can logically be traced to Development's intention from the outset to reach the ultimate result of having an unaffiliated developer with an ownership interest in place to develop the land.

"There seems to be clear interdependence within the steps. Objectively, one can reasonably interpret the transfers to affiliates, the loan to reduce the equity to make the capital contribution of an incoming partner more reasonable, the assumption of the indebtedness and the transfer of ownership to McMillin as interdependent steps to a planned conclusion. Objectively, it seems clear the creation of the co-tenancy was to facilitate the sale to McMillin. Knowing the objective of the various transactions, it appears that Development and Properties were committed to the end result of developing the land in a partnership with an unaffiliated developer."

The court thus concluded that all three tests established for application of the step transaction doctrine, the "end result test," the "interdependence test," and the "binding commitment test" were all met, and thus a 100 percent change of ownership was found. McMillin-BCED timely appealed the judgment.

DISCUSSION

Was there a change in ownership of the property under these facts? "Article XIIIA of the California Constitution (Proposition 13) provides that real property shall be reassessed for property tax purposes when a 'change in...