Opinion
A153910
11-21-2019
PHONG LA, as County Assessor, etc., Plaintiff and Respondent, v. ALAMEDA COUNTY LEGAL HEARING OFFICER, Respondent; RUSSELL LAI, Real Party in Interest and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Alameda County Super. Ct. No. RG17852446)
INTRODUCTION
Russell Lai appeals the trial court's judgment granting a petition for writ of mandate filed by the Alameda County Assessor (county assessor), who was Ron Thomsen at the time the writ was filed and is now Phong La.
Russell Lai (Russell) and his late stepmother Hanako Lai (Hanako) have prominent roles in the background facts framing the sole issue presented by this appeal. Because a number of people involved share the surname "Lai," we shall refer to Russell and his stepmother by their first names. No disrespect is intended.
At issue is the applicability of the parent-child exclusion under Revenue and Taxation Code section 63.1 (the parent-child exclusion). Where the parent-child exclusion applies, it exempts from property tax reassessment "[t]he purchase or transfer of real property which is the principal residence of an eligible transferor in the case of a purchase or transfer between parents and their children." (Id., subd. (a)(1)(A).) The statute operates by excluding such transactions from what is normally considered a "change in ownership," an event which triggers property tax reassessment. (Id., subd. (a).)
Following the death of his stepmother, Russell, in his capacity as trustee of Hanako's estate, bought her home. He now contends that the trial court erred in finding that a change in ownership of the home occurred, thus denying him the benefit of the parent-child exclusion and exposing him to reassessment. We see no error and will affirm.
BACKGROUND
The facts of the case are not in dispute. We summarize them below, drawing from the trial court's statement of decision.
A. Terms of the Trust
The Lai survivors' trust (the trust) names Hanako as both trustor and trustee. Her powers as trustee include the power to use the assets of the trust estate for her own support and to amend, revoke, and withdraw any and all conditions of the trust. Russell is designated the successor trustee upon Hanako's death. As successor trustee, the trust directs Russell to distribute the assets of the trust by paying her expenses, making specific bequests, and distributing the residue of the trust estate after payment of these bequests; it also gives him "all of the powers and discretions listed in Chapter 2, Article 2 of the California Trust Law commencing at Section 1662 of the California Probate Code."
The specific plan of asset distribution following Hanako's death is as follows: Distribution will first cover all of Hanako's debts and expenses, and then will be split in this manner: (1) a total of $100,000 to her niece, Carol Jean Lim, provided Ms. Lim survives Hanako's death; (2) $25,000 to friends James and Ruby Smith, provided they survive her death; and (3) the residue of the trust, including the home, is to be divided into three equal shares distributed to her children (the sibling beneficiaries) (a) Stephanie Lai, (b) Allen Lai, and (c) Corrine J. Lai, following the distribution of $100,000 to Jessup Coffin (relationship unknown).
The trust estate will be distributed to Russell if and only if none of the noncontingent beneficiaries survived Hanako. Thus, although Russell is the designated successor trustee of the trust, he is only a contingent beneficiary of the trust estate.
B. Factual and Procedural Setting
In December 2014, Hanako died, which made Russell the successor trustee. Because all of Hanako's children and all other noncontingent beneficiaries were living at the time of her death, Russell was not entitled to a share of the trust's assets.
Following Hanako's death, Russell recorded a deed selling the home to himself. The purpose of the transaction, undisputed by the county assessor, is described in the opening brief as follows: Russell "purchased his family home of 50 years from his [step]mother's trust following her death, during the time that he was administering her trust. [He] grew up in the home and his daughter and her wife were living in the property at the time of the purchase." Russell paid the trust $800,000 for the home, which was its fair market value as of the date of Hanako's death. No one questions the propriety of this sale. The contest here is over the tax consequences flowing from it.
Upon taking ownership of the home, Russell filed a claim for exemption from reassessment, invoking the parent-child exclusion. That claim was denied by the county assessor and the home was reassessed. Russell filed an administrative appeal, and an Alameda County legal hearing officer (hearing officer) reversed, giving him an interim victory. The hearing officer opined that the sibling beneficiaries received only an expectancy interest in the home at Hanako's death and did not acquire legal title. Thus, the hearing officer concluded, since the transfer out of the trust was to a child, there was no change in ownership as a matter of law. (Rev. & Tax. Code, § 63.1, subd. (c)(9).)
For purposes of the parent-child exclusion, "children" includes "any stepchild." (Rev. & Tax. Code, § 63.1, subd. (c)(3)(B).)
The county assessor sought review by writ of mandate in the superior court and prevailed. Granting the petition, the court found that a change in the beneficial ownership of the home occurred immediately at the death of Hanako and that, as a result, Russell bought the home from the sibling beneficiaries, not from Hanako. Thus, the court concluded, the parent-child exclusion does not apply.
In this appeal, Russell contends that, because of his power as trustee to purchase the home or to make non-pro rata distributions among the noncontingent beneficiaries, at no point did the sibling beneficiaries acquire the entire beneficial interest in the home. He claims that during the period of trust administration, the ownership of the home was in a "suspended state" and had not "fully vested" in the sibling beneficiaries. Therefore, he contends, the superior court erred and we should hold he is entitled to the benefit of the parent-child exclusion since he qualifies as a child under section 63.1, subdivision (c)(3)(B).
DISCUSSION
We give no deference on appeal to the hearing officer's or to the superior court's view of the applicability of the parent-child exclusion. The interpretation and application of Revenue and Taxation Code sections 60 and 63.1 is a question of law which we review de novo. (Reilly v. City and County of San Francisco (2006) 142 Cal.App.4th 480, 487; see Shuwa Investments Corp. v. County of Los Angeles (1991) 1 Cal.App.4th 1635, 1644.)
Article XIII A, section 1 of the California Constitution, added by vote of the people in 1978, and popularly known as Proposition 13, limits "the assessed value of real property for ad valorem tax purposes to that shown on the 1975-1976 tax bill or to its 'appraised value . . . when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.' " (Empire Properties v. County of Los Angeles (1996) 44 Cal.App.4th 781, 785 (Empire Properties), quoting Cal. Const., art. XIII A, § 2, subd. (a).) Where a "change in ownership" occurs the value of the property is reassessed, unless an exclusion applies. Reassessments can have the effect of increasing the tax value of the property considerably.
A "change in ownership," defined by Revenue and Taxation Code section 60, "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." " 'Every transfer of property qualified as a "change in ownership" shall be so regarded whether the transfer is voluntary, involuntary, by operation of law, by grant, gift, devise, inheritance, trust, contract of sale, addition or deletion of an owner, property settlement . . . or any other means.' " (Empire Properties, supra, 44 Cal.App.4th at p. 786, quoting Cal. Code Regs., tit. 18, § 462.001.) Section 2, subdivision (h), "added to article XIII A of the California Constitution in November 1986" by Proposition 58, provides in part that a "change in ownership" or "purchase" does not include " 'the purchase or transfer of the principal residence of the transferor in the case of a purchase or transfer between parents and their children, as defined by the Legislature . . . .' " (Empire Properties, supra, at p. 789.) To implement Proposition 58 by statute, the parent-child exclusion was added to the Revenue and Taxation Code in 1987. (Stats. 1987, ch. 48, § 1, eff. June 17, 1987.)
Sections 60 and 63.1 of the Revenue and Taxation Code have been interpreted administratively by the California State Board of Equalization (BOE) in its Assessors' Handbook and judicially in extant case law.
"Government Code section 15606 authorizes the [BOE] to prescribe rules and regulations governing local boards of equalization and assessors in performance of their duties. The Assessors' Handbook contains these regulations, which are also made binding on the Assessment Appeals Board. (Cal. Admin. Code, tit. 18, § 324.)" (Carlson v. Assessment Appeals Bd. I (1985) 167 Cal.App.3d 1004, 1012.) --------
At the first step of our analysis, it is useful to begin by outlining the parties' competing views of how the parent-child exclusion applied following Hanako's death. The BOE, in its Assessors' Handbook, states that "[w]hen a revocable trust becomes an irrevocable trust (for example, upon the death of a trustor), there is a change of ownership, unless an exclusion applies." (State Bd. of Equalization, Assessors' Handbook (Sept. 2010) Change in Ownership, § 401, ch. 3, p. 26 (Assessors' Handbook).) Under the county assessor's view of what occurred here—the correct view, as we shall explain—a change in ownership occurred at the death of Hanako when the beneficial interest of the home passed to the sibling beneficiaries, but the parent-child exclusion applied, barring reassessment at that point, because these beneficiaries were her children. The question presented in this case is whether the change in ownership occurred later, when Russell purchased the home, thus triggering the parent-child exclusion at that point, with the sibling beneficiaries (according to Russell) having received at most a contingent expectancy interest during the period of trust administration. He argues, in effect, that he, not the sibling beneficiaries, bought the home from Hanako. We are not persuaded.
Empire Properties, supra, 44 Cal.App.4th 781 is instructive. In that case, the court considered essentially the same issue we have here—whether a change in ownership had occurred at the death of the trustor. (Id. at pp. 785-788.) There, the property at issue was held in a revocable inter vivos trust by Mr. and Mrs. Shulman; their two daughters were residual beneficiaries. (Id. at pp. 783-784.) Prior to the death of Mr. Shulman, the two daughters formed Empire Properties to manage the property in the trust. (Id. at p. 784.) When Mr. Shulman passed, both became successor trustees of the trust and the County of Los Angeles reassessed the property. (Ibid.) Following family disputes, the daughters then transferred the property to Empire Properties, which, on the same day, sought a property tax reduction based on the parent-child exclusion. (Ibid.) Empire Properties appealed, first to the Assessment Appeals Board and then to the trial court. (Ibid.) The trial court found in favor of Empire Properties, and the county then appealed from that judgment. (Id at pp. 784-785.) The Court of Appeal reversed, stating that "[w]ith the creation of an irrevocable trust, trust beneficiaries acquire a vested and present beneficial interest in the trust property." (Id. at p. 787.)
Of even greater significance is our Supreme Court's opinion in Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298 (Steinhart), which embraces and adds weight to the holding in Empire Properties. At issue in Steinhart was a tax dispute concerning the reassessment of a Los Angeles property amongst the assets in a revocable living trust following the death of the trustor, Esther Helfrick. (Steinhart, supra, at pp. 1303-1304.) The trust granted Helfrick's sister, Lorraine Steinhart, the right to occupy the property for life, and upon her death it was to be sold and proceeds distributed to all beneficiaries. (Id. at p. 1304.) The death of Helfrick would therefore give Steinhart and her sibling beneficiaries the right to use of the property. (Id. at p. 1320.) When Helfrick died, the County of Los Angeles took the position that the trust became irrevocable, causing a shift of the beneficial interest in the property. (Id. at p. 1304.) It reassessed the home valuation accordingly (ibid.), and the Supreme Court upheld the reassessment, citing Empire Properties with approval (id. at pp. 1319-1320, citing Empire Properties, supra, 44 Cal.App.4th at p. 787 ["upon settlor's death, revocable trust became irrevocable and 'the full beneficial interests in the property transferred to' the 'residual beneficiaries of the trust' "]).
Russell fails to cite or acknowledge Empire Properties or Steinhart in his opening brief. We conclude that these cases are controlling. In its statement of decision, the trial court captured the essence of why they dictate the result here. The court looked to the substance of Russell's purchase transaction, examining through the prism of the trust who owned the home when Russell bought it. "In the interest of clarity," the court explained, "it is helpful to think of the trust as a pot that holds assets. The trustee is responsible for the assets contained in the pot and has the authority to make changes to those assets. However, while the trustee's decision may alter the contents of the pot, they do not affect who owns the pot's contents."
Thus, the moment before Hanako passed away, the trust held the home for her benefit; the moment after she died, the trust held the home for the sibling beneficiaries' benefit; and even though the trustee could "alter the contents" of the "pot of assets" the trust held, there was no state of ownership in-between Hanako's death and the transfer to the siblings of their beneficial interest in the home. As the court explained, "When [Russell], as trustee, sold the [home], the beneficial interest in the [home] was not revoked, it just changed from a house to $800,000. At no time did the beneficiaries lose their interest in that asset." Viewing the transaction in this manner, the court correctly determined that the sibling beneficiaries were the sellers of the home, not Hanako.
Russell insists that the trial court was mistaken on this point. Relying heavily on his reading of the Assessors' Handbook, he argues that the BOE "has prepared a straight-forward distillation of section 60's elements for determining whether a change in ownership has occurred for reassessment purposes, articulating a three-part change in ownership test." In his view, "[a]pplying this test" in accordance with the BOE's guidance "clearly shows that no change in ownership has occurred in [his] purchase of the [home]." Specifically, Russell's argument centers on the statutory powers conferred upon him as trustee to acquire and to dispose of the assets of the trust under Probate Code section 16226. In addition, he argues, the trust contains no specific devise language with respect to the home, which left him free to make non-pro rata distributions. These trusteeship powers, according to Russell, meant that "the beneficiaries had no right to immediate possession, present use, or present enjoyment of the property during the time of the trust's administration. The law requires an administration period to determine the trust beneficiaries." "Consequently," he argues, "the beneficiaries enjoyed no actual present interest in the property prior to [Russell] purchasing the [home] from the trust."
What Russell overlooks, as the county assessor correctly puts it, is Steinhart's "command that change in ownership analysis focus on the interest transferred, rather than the interest received." (See Steinhart, supra, 47 Cal.4th at p. 1324 ["Steinhart's argument fails for the simple reason that it erroneously focuses only on the interest Steinhart received, rather than the total extent of the interest Helfrick transferred when the trust became irrevocable."].) The argument advanced by Russell in reply, attempting to distinguish Empire Properties and Steinhart, suffers from the same weakness. Russell emphasizes that the sibling "beneficiaries were not fully vested in the family home and [as trustee he] had the absolute authority to sell the property to himself." But whether the siblings were fully vested in this sense is immaterial. The fact is that the transfer from Hanako of a beneficial interest in the home was irrevocable and unconditional at her death. Russell ignores this critical nuance in what Steinhart meant by "fully vested." Instead, he offers up, and the hearing officer appears to have embraced, a different approach to analyzing change of ownership in the context of trust transactions at variance with Steinhart. The superior court was right to reject this alternative approach since it is inconsistent with established law.
Citing the Assessors' Handbook, Russell contends nonetheless that, according to BOE guidance, his power to encumber trust assets for purposes of equalizing non-pro rata distributions of properties in the trust, which he claims was the effect of his purchase, calls for a different result. (Assessors' Handbook, supra, § 401, ch. 12, p. 90.) In examples 12-6 and 12-7 of the Assessors' Handbook, where a portion of the property in trust is financed by a mortgage encumbered on the property, and where one beneficiary takes it encumbered by the loan and the other takes monetary values, Russell points out that the parent-child exclusion applies. (Ibid.) The encumbrances serve to equalize the non-pro rata distributions, and if the beneficiaries are the children of the decedent trustor, then transfer of the property qualifies for the parent-child exclusion. (Ibid.) Russell makes much of what he characterizes as an inconsistency between the BOE's guidance and the assessor's reading of Empire Properties and Steinhart. But we agree with the assessor's reading of those cases, as did the superior court. And even accepting for purposes of analysis Russell's reading of the Assessors' Handbook, under Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, we give the BOE's view of Revenue and Taxation Code section 63.1 such deference as is " 'appropriate to the circumstances' " (id. at p. 8, italics omitted), which is no deference at all in the face of settled case law interpreting the statutory scheme.
In any event, we do not agree with Russell's reading of the Assessors' Handbook. There is a stark difference between the examples Russell cites and the situation at hand. In all of these examples, the purchased property remains in the possession of a present, noncontingent beneficiary. (Assessors' Handbook, supra, § 401, ch. 3, p. 26 & ch. 12, p. 90.) Here, none of the sibling beneficiaries retained possession of the home after Russell purchased it. The relevant guidance in the Assessors' Handbook—which Russell overlooks—actually cuts against him. Where the entire property has been sold before a trustee seeks to equalize the non-pro rata distribution, the buyer, regardless of whether a child of the decedent or not, does not qualify for the parent-child exclusion. (State Bd. of Equalization, Annot. 625.0235.005 (Aug. 4, 2003) [where the beneficiary who is to receive the real property from a trust provides the loan to equalize the non-pro rata distribution, the parent-child exclusion does not apply].) Instead, the purchase is considered to be from the beneficiaries, not from the decedent trustor. (Ibid.)
Consider the BOE's example 12-4. (Assessors' Handbook, supra, § 401, ch. 12, p. 89.) Example 12-4 states, "M's trust directed that the trust property be distributed equally to each of her three children—X, Y, and Z." (Ibid.) In this example, the trustee "transfer[s] M's principal residence to X, Y, and Z as tenants in common. X and Y subsequently transfer[] their interests to Z. [¶] The initial transfer of the principal residence to the three children qualifies for the parent-child exclusion. However, the subsequent transfers by X and Y to Z results in a two-thirds reassessment of the property." (Ibid.) The rationale here is that the beneficiary receives non-pro rata distributions "in excess of the recipient beneficiary's share of the trust property." (Ibid.) By way of explanation, the BOE states that, for the parent-child exclusion to apply, the value of the property that each beneficiary receives may "not exceed each beneficiaries' equal percentage interest in the trust property." (Id. at p. 88.) In this case, because all the noncontingent beneficiaries were living at the death of Hanako, Russell was not entitled to a share of the trust's holdings. The purchase of the home thus exceeded any share he had in trust assets, rendering the parent-child exclusion inapplicable.
DISPOSITION
The decision of the trial court is affirmed. Costs shall be recovered by respondents.
STREETER, J. WE CONCUR: POLLAK, P. J.
TUCHER, J.