California Supreme Court Decision on Documentary Transfer Tax

On June 29, 2017, the California Supreme Court held in 926 North Ardmore Avenue, LLC, v. County of Los Angeles, “Section 11911 [of the Revenue and Taxation Code] permits the imposition of a documentary transfer tax whenever a transfer of an interest in a legal entity results in a change in ownership of real property within the meaning of section 64, subdivision (c) or (d), so long as there is a written instrument reflecting a sale of the property for consideration.” So, whenever there is a change in control of an entity owning California real property or an original co-owner rule change in ownership of an entity owning California real property, documentary transfer tax applies, “so long as there is a written instrument” reflecting the sale of the interest in the legal entity for consideration.” In this case the written instruments were “six limited partner transfer and substitution agreements.”

The decision emphasizes the term “written instrument.” The statute refers to “each deed, instrument, or writing.” It is possible for a partnership interest, an LLC membership interest or a corporate stock transfer to occur without a written purchase and sale, transfer or substitution agreement, but the partnership agreement, LLC operating agreement and corporate stock register, respectively, would need to be updated to reflect the transfer of the partnership interest, membership interest or corporate stock. It remains to be seen whether in a case involving an oral transfer agreement a court would hold the update to the partnership agreement, LLC operating agreement or corporate stock register constituted a “written instrument.” We certainly know the counties and cities will take an affirmative position.

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