CA Supreme Court Applies Documentary Transfer Tax To Legal Entity Transfers

Surprisingly, the California Supreme Court has held that the Documentary Transfer Tax--that has historically only been applied when deeds were recorded affecting real property ownership changes--can now be applied to any transfer of a legal entity interest which would constitute a reassessment of the underlying property for Proposition 13 purposes.  (See 926 N. Ardmore Ave. V. County of L.A., 2017 Cal. LEXIS 4768.)

For example, if Jack sells Blackacre to Jill and records a deed affecting such a transfer, it has been undisputed that on recordation of such a deed, the Documentary Transfer Tax (similar to a stamp tax) would be applied.  In essence, it’s like an additional recording fee.  In addition, at the same time, such a transfer would constitute a “change of ownership” for Proposition 13 property tax reassessment purposes and Blackacre would be reassessed. 

However, if Jack owned Blackacre in an LLC and sold his LLC interests to Jill, such a transfer, previously, would not have been considered a transfer of real property necessitating the payment of the Documentary Transfer Tax as no deed is recorded.  However, such a transfer of LLC interests would trigger a reassessment of the property.  This seemed to make perfect sense to most counties and practitioners.

 As a result of this recent California Supreme Court decision, however, it appears that any transfer of stock or LLC interests that results in a new Prop 13 reassessment also requires the calculation and payment of the Documentary Transfer Tax.