Pacific Southwest Realty Co. v. County of Los Angeles

• Decision Date: 26 December 1991
• Docket Number: No. S021134,S021134
• Citation: 1 Cal.4th 155,2 Cal.Rptr.2d 536,820 P.2d 1046
• Court: California Supreme Court
• Parties: , 820 P.2d 1046 PACIFIC SOUTHWEST REALTY COMPANY, Plaintiff and Respondent, v. COUNTY OF LOS ANGELES et al., Defendants and Appellants.

Page 536

2 Cal.Rptr.2d 536

1 Cal.4th 155, 820 P.2d 1046

PACIFIC SOUTHWEST REALTY COMPANY, Plaintiff and Respondent, v. COUNTY OF LOS ANGELES et al., Defendants and Appellants.

No. S021134.

Supreme Court of California.

Dec. 26, 1991.

Rehearing Denied Feb. 20, 1992.

De Witt W. Clinton, County Counsel, Halvor Melom and Albert Ramseyer, Deputy County Counsel, Los Angeles, for defendants and appellants.

Daniel E. Lungren, Atty. Gen., Edmond B. Mamer and Carol H. Rehm, Jr., Deputy Attys. Gen., Louise H. Renne, City Atty., San Francisco, John J. Doherty and Robin M. Reitzes, Deputy City Attys., as amici curiae on behalf of defendants and appellants.

O'Melveny & Myers, Frederick A. Richman, Gregg A. Oppenheimer and Marcy Jo Mandel, Los Angeles, for plaintiff and respondent.

MOSK, Justice.

In 1978 the voters adopted Proposition 13, which provides that until a change in ownership occurs real property may be taxed at no more than 1 percent of its 1975-1976 assessed value adjusted for inflation. When ownership changes, the property may be reassessed at its current market value. We are asked to decide whether, when a vendor sells a fee simple interest to a purchaser and simultaneously acquires from the latter a lease-hold interest in the property, a change in ownership has occurred. We conclude that the California Constitution and implementing statutes compel an affirmative answer to that question, and therefore reverse the judgment of the Court of Appeal.

I.

The parties have jointly stipulated to the following facts: Under a purchase agreement dated September 28, 1984, plaintiff agreed to convey title to Security Pacific Plaza, an office building complex, "in fee simple absolute" to Metropolitan Life Insurance Company (hereafter Metropolitan Life) for $310 million. The conveyance was made by grant deed recorded the same day. As relevant here, the deed provided that "all of Grantor's right, title and interest" was conveyed, "excepting and reserving to Grantor an estate for years subject to conditions subsequent, upon and subject to all of the terms, covenants, conditions and provisions contained in that certain unrecorded Security Pacific Plaza Office Building Lease of even date herewith."

The purchase agreement set forth the terms of the transaction. One condition precedent to the sale was the execution of the lease, which conveyed an estate for years in two towers constituting 73 percent of the property. Plaintiff was to lease one tower for sixty years, including ten consecutive renewal options of five years each. The term of plaintiff's occupancy of the other tower was 21 months, including a renewal option. The lease permitted Metropolitan Life to raise the rent in accordance with changes in the consumer price index. The lease also gave plaintiff substantial control over the structure, including the exclusive use of the building exterior to display its corporate logo, exclusive use of the cafeteria and helipad, and control over security. The lease required plaintiff to pay its share of the property taxes.

For federal and state income tax purposes plaintiff treated the transaction as a sale, deducting its payments under the lease as business expenses. For the same purposes Metropolitan Life treated the transaction as a purchase, claiming a tax basis in the property equal to the price paid. Metropolitan Life used that tax basis to calculate depreciation deductions, excluding the portion of the purchase price attributable to the land. The parties did not stipulate whether Metropolitan Life paid the market price for the property, but did stipulate that plaintiff pays rent at the market rate under the lease. ¹

Following the sale, the Los Angeles County Assessor asked the State Board of Equalization (board) for advice regarding the correct method of reassessing the property. The board advised the assessor to reassess only the portion of the property not subject to the lease, and the assessor fixed the valuation at $169,514,243. Seven months later the assessor asked the board to review the transaction anew. Upon reconsideration the board reversed itself, concluding that the sale and leaseback had resulted in a change in ownership of the whole parcel and therefore the property should be reassessed in its entirety. The assessor accordingly raised the valuation to $323 million. Plaintiff paid tax bills pursuant to the increased valuation but applied for a reduction of the assessment, which it later amended into a claim for a refund under Revenue and Taxation Code section 5097, subdivision (b). ² The board denied the claim without prejudice and plaintiff sought relief in court.

The first amended complaint claimed an improper and illegal assessment on the 1984-1985 and 1985-1986 tax rolls and sought a refund of property taxes and attorney fees. After a hearing the court entered judgment for plaintiff. The court ruled that under the statutes and regulations implementing Proposition 13 plaintiff was entitled to a refund. The Court of Appeal affirmed.

II.

The essence of Proposition 13 is its provision that all real property in the state shall be taxed at an ad valorem rate not to exceed 1 percent of its full cash value. (Cal. Const., art. XIII A, § 1, subd. (a).) "The full cash value means the county assessor's valuation of real property as shown on the 1975-76 tax bill under 'full cash value' or, thereafter, the appraised value of real property when purchased [or] newly constructed, or [when] a change in ownership has occurred after the 1975 assessment." (Id., § 2, subd. (a).) The only possible adjustment relevant here is for inflation, and that increase may not exceed 2 percent per annum. (Id., § 2, subd. (b).)

Because Proposition 13 did not explicate the meaning of "change in ownership" (Title Ins. & Trust Co. v. County of Riverside (1989) 48 Cal.3d 84, 95, 255 Cal.Rptr. 670, 767 P.2d 1148; Industrial Indemnity Co. v. City and County of San Francisco (1990) 218 Cal.App.3d 999, 1004, 267 Cal.Rptr. 445), it fell to the Legislature to define the phrase, a task it has striven to perform during the 13 years since Proposition 13 was adopted by the electorate. The main effort to create consistent and uniform guidelines to implement Proposition 13's undefined "change in ownership" provision was undertaken by a 35-member panel that included legislative and board staff, county assessors (including defendant), trade associations, and lawyers in the public and private sectors. The panel's work culminated in the Report of the Task Force on Property Tax Administration (hereafter task force report), which was submitted to the Assembly Committee on Revenue and Taxation on January 22, 1979.

As plaintiff notes, the task force recommendations resulted in the enactment of the Revenue and Taxation Code provisions now before us. The Legislature adopted some of the recommendations verbatim or with nonsubstantive technical revisions, and others with rather minor changes. The report's key change-in-ownership test was adopted verbatim and is now codified as section 60, quoted hereafter.

The task force report drafters stressed the need for uniformity and consistency in the application of section 60's general rule. They stated that they "sought to distill the basic characteristics of a 'change in ownership' and embody them in a single test [now section 60] which could be applied evenhandedly to distinguish between 'changes' and 'non-changes,' both those which the Task Force could and those which it did not foresee. The Task Force was also anxious that the single test be sufficiently consistent with the normal understanding of 'change in ownership' to withstand legal attack." (Task force rep., supra, at p. 38.)

The task force "recommends that its general definition of change in ownership (proposed Section 60 Rev & Tax Code) should control all transfers, both foreseen and unforeseen. The Task Force also recommends the use of statutory 'examples' to elaborate on common transactions. Lay assessors and taxpayers would otherwise have difficulty applying legal concepts such as 'beneficial use' and 'substantially equivalent.' Thus, common types of transfers were identified and concrete rules for them were set forth in proposed Sections 61 and 62." (Task force rep., supra, at p. 40.)

"It is important that the specific statutory examples be consistent with the general test," the report drafters explained. "The entire statutory design would be destroyed by providing statutory treatment for specific transfers which are inconsistent with the general test. In that case, the general test would be overruled by the specific rules and the entire statutory design might be held invalid because of the lack of any consistent, rational interpretation of the constitutional phrase, 'change in ownership.' " (Task force rep., supra, at pp. 40-41.)

Because the Legislature, in enacting section 60, adopted its language verbatim after reviewing the task force report, it is evident that the Legislature intended for section 60 to contain the overarching definition of a "change in ownership" for reassessment purposes.

A. Application of the Three-part Test

Section 60's governing test contains three parts: "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." To determine whether the transaction in the case at bar worked a change in ownership under Proposition 13, we begin with that test. Plaintiff contends the transaction failed to meet any of the three parts of the test. As will appear, however, the transaction met the definition of a change in ownership in all respects.

1. "Transfer of a Present Interest in Real Property"

Plaintiff maintains that the transaction failed to meet the portion of the test requiring a transfer of a present interest. As will appear, plaintiff's view of the nature of the conveyance is...