IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT

Transcription

1 IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT LORRAINE STEINHART, ) Appeal No. B ) Plaintiff and Appellant, ) Superior Court No. LC ) Los Angeles County vs. ) Northwest Dist./Van Nuys Courthouse East ) COUNTY OF LOS ANGELES and ) DOES 1 THROUGH 10, Inclusive, ) ) Defendant and Respondent. ) ) ) APPELLANT S BRIEF IN REPLY TO AMICUS BRIEFS Appeal from Los Angeles Superior Court Hon. Michael B. Harwin TERRAN T. STEINHART, ESQ Wilshire Boulevard, Suite 415 Los Angeles, California (323) Fax (323) Bar No Attorney for Plaintiff/Appellant

2 TABLE OF CONTENTS INTRODUCTION...1 I. AS DISTINGUISHED FROM A LEASE OF 35 YEARS MORE, THERE IS NO RATIONAL BASIS FOR THE PROPOSITION THAT A LIFE ESTATE CONSTITUTES THE PRIMARY ECONOMIC VALUE OF THE LAND II. III. IV. IN THE INSTANT CASE, THE INTEREST OF THE REMAINDERMEN DOES NOT CONSTITUTE A CHANGE IN OWNERSHIP FOR PURPOSES OF PROPOSITION 13 BECAUSE: 1) IT IS NOT A PRESENT INTEREST; AND 2) IT IS NOT AN INTEREST IN REAL ESTATE....6 THE VESTING OF A LIFE ESTATE IN A TRUST BENEFICIARY WHEN A REVOCABLE TRUST BECOMES IRREVOCABLE DOES NOT CONSTITUTE A CHANGE IN OWNERSHIP, NOTWITHSTANDING REVENUE AND TAXATION CODE 61(h)...7 BECAUSE CALIFORNIA CODE OF REGULATIONS EXCEEDS THE LEGISLATURE S GRANT OF AUTHORITY, IT IS WITHOUT EFFECT AND CANNOT BE ENFORCED CONCLUSION...12 i

3 TABLE OF AUTHORITIES CASES California Shoppers, Inc. v. Royal Globe Ins. (1985) 175 C.A.3d 1, Estate of Troy (1931) 214 C Half Moon Bay Land Co. v. Cowell (1916) 173 C. 543, Hoffman v. Connell (1999) 73 C.A.4th 1194, Leckie v. County of Orange (1998) 65 C.A.4th , 6 McDonald s Corp. v. Board of Supervisors of Mendocino County (1998) 63 C.A.4th 612, Pacific Southwest Realty Co v. County of Los Angeles (1991) 1 C.4th , 2, 4, 5, 7-9, 11, 12 Title Ins. & Trust Co. v. Duffill (1923) 191 C. 629, STATUTES California Code of Regulations , 12 California Code of Regulations 462(k)(4)...11 Civil Code Civil Code CRC 14(c)...13 Proposition Revenue and Taxation Code , 2, 5, 7-10 Revenue and Taxation Code , 9 Revenue and Taxation Code 61(a)...10 Revenue and Taxation Code 61(c)...11 Revenue and Taxation Code 61(g)...7 Revenue and Taxation Code 61(h) , 11 ii

4 Revenue and Taxation Code , 9 Revenue and Taxation Code 62(d)...10, 11 Revenue and Taxation Code 62(e)...4, 8 iii

5 INTRODUCTION This Court solicited the filing of Amicus Briefs on the issue of whether the vesting of the use and enjoyment of a life estate in real property by the beneficiary of a trust, which occurred when the trustor of a revocable trust died and the trust became irrevocable, constituted a change in ownership within the meaning of the three-prong test set forth in Revenue and Taxation Code 60. Based upon the reasoning set forth in Pacific Southwest Realty Co v. County of Los 1 Angeles (1991) 1 C.4th 155, Appellant previously argued that such vesting did not constitute the transfer of an interest the value of which is substantially equal to the value of the fee interest pursuant to Revenue and Taxation Code 60 ( value equivalence test), because it did not represent a transfer of the primary economic value of the land. Appellant alternatively argued that if the value of a life estate were to be measured by the life tenant s normal life expectancy per an official life expectancy table, such measurement would be of no avail in the instant case, since at time of the trustor s death, plaintiff was 73, with a life expectancy of 13.4 years pursuant to the CACI Life Expectancy Table, which was far short of the 35 year lease term which is the lower threshold for a change in ownership by virtue of the transfer of an estate for years. Appellant was served with Amicus Briefs by: 1) Stephen H. Bennett, Letwak & Bennett ( Bennett ); 2) Howard Jarvis Taxpayers Association ( Jarvis ) ; 3) California State Association of Counties/California Assessors Association ( Counties ); and 4) California State Board of Equalization ( Board ). None of the Amicus Briefs agreed with the reasoning of Pacific Southwest Realty that a life estate inherently does not constitute the primary economic value of a 1 Having been sufficiently bludgeoned with the argument that the discussion in Pacific Southwest Realty of the value equivalence test with regard to life estates constitutes dictum rather than holding, Appellant concedes the issue. Nonetheless, Appellant respectfully submits that the dictum is persuasive and represents the proper interpretation of Revenue and Taxation Code 60 for the reasons set forth in this Brief. 1

6 parcel of real estate with divided interests because it is of such ephemeral value that rare is the mortgagee willing to lend on its security; thus, the transfer of a life estate does not constitute a change in ownership because it does not satisfy the value equivalence test, regardless of the life expectancy of the life tenant. Bennett and Jarvis argue that a life estate should be treated in the same manner as a lease, such that a change in ownership occurs only when at the time of the vesting of the life estate, the table-established life expectancy of the life tenant is 35 years or more. Contrary to the reasoning in Pacific Southwest Realty, County and Board argue that regardless of the life expectancy of the life tenant at the time of the vesting, the transfer of a life estate always constitutes a change in ownership because it represents the primary economic interest in the land. For the reasons discussed below, Appellant respectfully submits that the proper interpretation of the value equivalence element of Revenue and Taxation Code 60 is that the transfer of a life estate in real property never constitutes a change in ownership. Alternatively, Appellant respectfully contends that by analogy to the transfer of a leasehold interest, the transfer of a life estate constitutes a change in ownership only when the table-established life expectancy of the life tenant at the time of vesting is 35 years or more. In either event, Appellant prevails on this issue. I. AS DISTINGUISHED FROM A LEASE OF 35 YEARS MORE, THERE IS NO RATIONAL BASIS FOR THE PROPOSITION THAT A LIFE ESTATE CONSTITUTES THE PRIMARY ECONOMIC VALUE OF THE LAND. Quoting from the Task Force Report, Pacific Southwest Realty emphasized at 161: [The Task Force] recommends that its general definition of change in ownership [now section 60] should control all transfers, both foreseen and unforeseen. The Task Force also recommends the use of statutory examples to elaborate on common 2

7 transactions.... It is important that the specific statutory examples be consistent with the general test.... 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. 2 That Task Force Report at 40 explained that in order to determine whether a change in ownership has occurred when a divided interest in land is transferred, it is necessary to identify the one primary owner of real property which is the primary purpose of the value equivalence test, noting that when a short-term lease is created in real property, the landlord owns the main economic value; whereas, when a long-term lease is created, the tenant s interest represents the main economic package. The Report therefore equates the primary owner of a divided interest in land with the owner of the interest constituting the main economic value of the property. To elucidate this point, the Report at 41, et seq. sets forth a variety of specific statutory examples: 1. Leases. Leases are good illustrations of the necessity of concrete statutory examples. Both taxpayers and assessors need a specific test - rather than the broad value equivalence test - to determine the tax treatment of leases. The specific test however, must be consistent with the value equivalence rule and have a rational basis. Lenders will lend on the security of a lease for 35 years or longer [emphasis added]. Thus 35 years was adopted as the concrete dividing line References to the Task Force Report are to Exhibit 1 (Task Force Report Pages) attached to the Amicus Curiae Brief of County. 3

8 6. Retained Life Estates. Transfers with a retained life estate are not ownership changes until the life tenant dies. The life tenant is the dominant or primary interest [emphasis supplied] under the value equivalence element of the general change in ownership definition, and there is no transfer of the present interest in the property until the life tenant dies and the property vests in the remainder. The Task Force recognized that each statutory example must be consistent with the value equivalence test and have a rational basis. With regard to a lease of 35 years or more, the rational basis which makes that interest the main economic value of the land is the fact that lenders will lend on the security of such an interest. In contradistinction, in setting forth the retained life estate example, the Task Force made the conclusory observation that the life tenant is the dominant or primary interest, but failed to set forth any rational basis to support that conclusion. Respectfully, the Task Force failed to recite a rational basis for the proposition that a life estate constitutes the primary economic value of real property because that proposition simply is not true, as illustrated in Pacific Southwest Realty. In discussing the retained life estate exclusion in Revenue and Taxation Code 62(e), Pacific Southwest Realty at 165 observed that even if the Legislature had not specifically enunciated that exclusion: [R]eassessment would be barred under the carefully drafted basic test of section 60, not only because the beneficial use would not have transferred, but also because the value of each divided interest in the estate would not approach that of the fee [emphasis added]. A purchaser of the reserved estate would be buying a life estate per autre vie a freehold estate, to be sure, but an estate of questionable value because subject to complete defeasance at an unknown time. Rare is the mortgagee willing to lend on the security of an estate so ephemeral [emphasis added]. The value of the reversionary or remainder 4

9 interest will also be reduced because the time of vesting would be uncertain and, depending on the care with which the original conveyance was drafted, the value of the ultimate estate might be less at the time of vesting because of intervening conveyances, creditors demands, and the like. The Task Force and the opposition in this case seem to be stating, subsilentio, that a life estate is somehow inherently the interest of primary economic value in real property with divided interests. However, they have ignored the requirement imposed by the Task Force itself that a specific statutory example is valid only if consistent with the general definition of change in ownership and premised on a rational basis. The Task Force declared that the rationale basis supporting the proposition that a lease for 35 years or more constitutes the main economic value of real property because lenders will lend on its security. That reason does not apply to a life estate, because rare is the mortgagee willing to lend on the security of an estate so ephemeral. Pacific Southwest Realty at 165. It is a maxim of jurisprudence that: When the reason for a rule ceases to exist, so should the rule itself. Civil Code In applying that maxim, Half Moon Bay Land Co. v. Cowell (1916) 173 C. 543, 548 held: [Because] none of the reasons existing there and given as the foundation of the rule exist in this case... the rule there applied cannot be applied here. Finally, a brief word about the reasoning in Leckie v. County of Orange (1998) 65 C.A.4th 334 and its progeny is in order. The statutory scheme of Revenue and Taxation Code 60, et seq. expressly provides that a retained life estate does not constitute a change in ownership, but does not expressly provide that a transferred life estate does constitute a change in ownership. Leckie was constrained to reach its conclusion that a transferred life estate constitutes a change in ownership by inference, reasoning that since the statute provides that a retained life estate does not constitute a change in ownership, the converse must be true, i.e., that a transferred life estate 5

10 does constitute a change of ownership. However, for all of the reasons discussed above, this inference is not reasonable. Furthermore, [a] legal inference cannot flow from the nonexistence of a fact; it can be drawn only from a fact actually established. [Citations.] It is axiomatic that an inference may not be based on suspicion alone, or on imagination, speculation, supposition, surmise, conjecture, or guess work. California Shoppers, Inc. v. Royal Globe Ins. (1985) 175 C.A.3d 1, 45. The application of this principle is particularly poignant in the instant case. In formulating its scheme of examples in sections 61 and 62, many of the examples of excluded transactions in section 62 are balanced by converse examples of parallel included transactions in section 61. Significantly, section 61 does not contain a parallel included transaction with regard to transferred life estates to balance the section 62 excluded transaction with respect to retained life estates. Respectfully, Leckie and its progeny have drawn an inference from the nonexistence of a fact, improperly based upon speculation, supposition, surmise and conjecture; and as noted above, it is unsupported by a rational basis. II. IN THE INSTANT CASE, THE INTEREST OF THE REMAINDERMEN DOES NOT CONSTITUTE A CHANGE IN OWNERSHIP FOR PURPOSES OF PROPOSITION 13 BECAUSE: 1) IT IS NOT A PRESENT INTEREST; AND 2) IT IS NOT AN INTEREST IN REAL ESTATE. Board argues that the Court is not required to determine whether the vesting of a life estate constitutes a change in ownership, because the trust in the instant case transferred the entire fee when it became irrevocable, transferring a life estate to plaintiff and the remainder to the remaindermen. The subject trust provided that plaintiff was given the right to occupy and use the subject residence for as long as she lived, and upon her death, the trustees were to sell the property and disburse the net proceeds to the remaindermen according to their respective shares. 6

11 The first prong of the three-part test of Revenue and Taxation Code 60 requires the transfer of a present interest in real property. Therefore, a remainder interest that vests only upon the termination of a life estate does not constitute a change in ownership until the life estate terminates. Revenue and Taxation Code 61(g); see Pacific Southwest Realty, supra at 166. Furthermore, the interest of the remaindermen in this case does not constitute an interest in real estate, but only an interest in personalty. Under previously-repealed Civil Code 863, it was held that a trust beneficiary had only a personal right against the trustee to enforce performance of the trust, but no equitable estate in the trust property. See, e.g., Estate of Troy (1931) 214 C. 53. Subsequent to the repeal of 863 many years ago, California cases held that in addition to personal rights against the trustee, the beneficiary has an equitable estate in the trust property that is both alienable and subject to the claims of creditors, but only where the beneficiary is to receive at some time not only money, but property constituting the corpus of the trust. See, Title Ins. & Trust Co. v. Duffill (1923) 191 C. 629, 646; Hoffman v. Connell (1999) 73 C.A.4th 1194, Because the remaindermen beneficiaries in the instant case are not entitled to a distribution of the real property corpus of the trust in kind, but merely to the monetary proceeds of its sale after the death of the life tenant beneficiary, they are note deemed to hold an equitable interest in the real property. Therefore, their interest is not subject to real estate taxation. See Hoffman, supra. III. THE VESTING OF A LIFE ESTATE IN A TRUST BENEFICIARY WHEN A REVOCABLE TRUST BECOMES IRREVOCABLE DOES NOT CONSTITUTE A CHANGE IN OWNERSHIP, NOTWITHSTANDING REVENUE AND TAXATION CODE 61(h). Revenue and Taxation Code 61(h) provides that a change in ownership, as defined in Section 60, includes: 7

12 Any interests in real property that vest in persons other than the trustor... when a revocable trust becomes irrevocable. Applying the language section 61(h) literally to the facts of the instant case would lead to the conclusion that when the trust in the instant case became irrevocable upon the death of the trustor, and the legal title to the real estate vested in the successor trustees, and an equitable life estate vested in plaintiff as the life beneficiary, a change in ownership occurred. However, such an interpretation is improper because it is in conflict with the general definition of change in ownership set forth in section 60. In Pacific Southwest Realty, which involved a sale and lease-back of real property, the lessee-taxpayer contended for a literal interpretation of Revenue and Taxation Code 62(e), which provides that a change in ownership does not include: Any transfer by an instrument whose terms reserve to the transferor an estate for years or an estate for life. In rejecting such interpretation, the Court held at 169: Although plaintiffs interpretation arguably comports with the language of the code provision, it disregards other pertinent sections... of the Revenue and Taxation Code. As we have already observed, code sections in pari materia must be harmonized with each other to the extent possible; a section should be construed in light of the whole system of law of which it is a part. [Citations.] Considered in isolation, we might agree with plaintiff that the language of subdivision (e) of section 62 appears to confer an exemption from reassessment.... We have already explained that the transaction did achieve a change in ownership within the meaning of section 60, which was intended as the fundamental rule implementing Proposition 13. As we have also observed, the report drafters declared 8

13 their intention that the examples set forth in sections 61 and 62 were to be derivative or explanatory, and not to conflict with section 60's general rule.... We therefore conclude that the Legislature did not intend for a sale and leaseback to fall within the ambit of section 62, subdivision (e). Any other conclusion would render meaningless the preeminent command of section 60 a result we are constrained to avoid. Similarly, although a literal interpretation of the language of section 61(h) considered in isolation would appear to support the conclusion that a change in ownership occurred in the instant case when the revocable trust became irrevocable, considered in light of the entire statutory scheme with the intention of harmonizing the various sections, and applying the principle that the examples set forth in section 61 and 62 are derivative or explanatory, and not to conflict with section 60's general rule, it must be concluded that a change in ownership did not occur in this case. First, the legal title to the property vesting in the successor trustees does not satisfy the second element of the three-prong test of section 60, that the transferred interest include the beneficial use thereof. The beneficial use of the trust property was granted not to the trustees, but to plaintiff as life beneficiary. Second, as previously discussed, the vesting of the life estate in plaintiff was not a change in ownership because the Legislature intended to find a change in ownership [only] when the primary economic value of the land is transferred from one person or entity to another; and a life estate does not constitute the primary economic value of the land. Pacific Southwest Realty at 165, 167. Third, the interest of the remaindermen does not constitute a present interest (as required by the first element of the three-prong test); and in any event, does not constitute a taxable interest in real estate because the remaindermen were granted an interest in the proceeds of the sale of the trust s real estate, not an interest in the real estate itself. Furthermore, a close analysis of the statutory scheme of examples of transactions 9

14 included or excluded from the definition of change in ownership demonstrates that scheme displays carelessness, lack of consistency, and to some extent, arbitrariness by design. For instance, the Task Force Report made the recommendation in its proposed language for section 61(a) that section 60 be deemed to include as a change in ownership the creation, renewal, sublease, assignment or other transfer of the right to produce or extract oil, gas or other minerals for so long as they can be produced or extracted in paying quantities. (Emphasis added). However, the Legislature declined to implement that suggestion, modifying it to provide in section 61(a): The creation, renewal, sublease, assignment, or other transfer of the right to produce or extract oil, gas, or other minerals regardless of the period during which the right may be exercised. The balance of the property, other than the mineral rights, shall not be reappraised pursuant to this section. (Emphasis added). The principle set forth in the Task Force Report was that whenever the primary economic interest in land was transferred, the value of the entire parcel of land, both that of the primary and secondary interests, was to be reappraised as a change in ownership under Proposition 13. In regard to section 61(a), the Legislature wholly departed from this concept, providing that any transfer of the right to extract minerals constitutes a change in ownership, regardless of the period during which the right may be exercised, even if the right may be exercised only for a year, or only for a month! Furthermore, realizing the arbitrariness of this change in ownership definition example, the Legislature further departed from the general statutory scheme by providing that the balance of the property, other than the mineral rights, shall not be reappraised! Another example of inconsistent draftsmanship is illustrated in Revenue and Taxation Code 62(d), which provides that there shall be excluded from change in ownership: Any transfer by the trustor... into a trust for so long as (1) the transferor is the 10

15 present beneficiary of the trust, or (2) the trust is revocable;... or, any creation or termination of a trust in which the trustor retains the reversion and in which the interest of others does not exceed 12 years duration. This section contains provisions with respect to both revocable and irrevocable trusts. One of its provisions is that the creation of an irrevocable trust does not constitute a change in ownership where the trustor retains the reversion and the interest of others does not exceed 12 years duration. This provision is contrary to the literal language of section 61(h) in any situation in which a revocable trust becomes irrevocable, but the trustor retains the reversion and the interest of others does not exceed 12 years. Rhetorically, where did the Legislature come up with the concept of 12 years? How does that jibe with the concept of 35 years in section 61(c) with regard to the creation of a leasehold interest? One would have bet that the Legislature would have sought consistency by using 35 years in section 62(d). Inexplicably, it did not. Respectfully, when a statutory scheme is sufficiently riddled with inconsistent provisions, some of which appear to have occurred by oversight, and at least one of which appears to have occurred by arbitrary design, one should rightfully lack confidence in the scheme. The saving grace is the well-settled rule that in case of doubt, statutes levying taxes are construed most strongly against the government and in favor of the taxpayer. McDonald s Corp. v. Board of Supervisors of Mendocino County (1998) 63 C.A.4th 612, 617. IV. BECAUSE CALIFORNIA CODE OF REGULATIONS EXCEEDS THE LEGISLATURE S GRANT OF AUTHORITY, IT IS WITHOUT EFFECT AND CANNOT BE ENFORCED. In Pacific Southwest Realty, plaintiff argued that the administrative rule contained in California Code of Regulations 462(k)(4) should have been applied to reach a result favorable to the taxpayer. In rejecting this argument, the Court held at 171: 11

16 [A]n administrative rule that exceeds the Legislature s grant of authority as expressed in section 60 et seq. is without effect and may not be enforced. [Citations.] Therefore, to the extent the regulation conflicts with the Constitution and the Revenue and Taxation Code as construed in this opinion, well-settled principles of administrative law proscribe its enforcement. Based upon the quoted principle enunciated in Pacific Southwest Realty, and for all of the reasons set forth above, California Code of Regulations should be held to exceed the Legislature s grant of authority, and hence to be without effect and unenforceable. CONCLUSION For all the reasons set forth above, the Judgment should be reversed. Respectfully submitted, Terran T. Steinhart Attorney for Plaintiff and Appellant 12

17 ATTORNEY S CERTIFICATE OF COMPLIANCE WITH CRC 14(c) Counsel for plaintiff and appellant hereby certifies that the number of words in APPELLANT S BRIEF IN REPLY TO AMICUS BRIEFS is 3782 words. Date June 19, 2007 Terran T. Steinhart Attorney for Plaintiff and Appellant 13

18 PROOF OF SERVICE BY MAIL I am employed in the County of Los Angeles, State of California. I am over the age of 18 and not a party to the within action. My business address is 4311 Wilshire Boulevard, Suite 415, Los Angeles, California , which is located in the county where the mailing described below took place. I am readily familiar with the business practice at my place of business for collection and processing of correspondence for mailing with the United States Postal Service. Correspondence so collected and processed is deposited with the United States Postal Service that same day in the ordinary course of business. On the date set forth below, at the aforesaid place of business, one copy each of the document described as APPELLANT S BRIEF IN REPLY TO AMICUS BRIEFS was placed for deposit in the United States Postal Service in a sealed envelope, with postage fully pre-paid, addressed as set forth in the attached Service List to opposing counsel and the Superior Court judge care of the court clerk, and four copies to the California Supreme Court per said Service List; and that envelope was placed for collection and mailing on said date following ordinary business practices. I declare under penalty of perjury under the laws of the State of California that foregoing is true and correct. Executed on June, 2007 at Los Angeles, California. Thomas R. Steinhart 14

19 SERVICE LIST RAYMOND G FORTNER JR ESQ RICHARD GIRGADO ESQ 648 KENNETH HAHN HALL OF ADMINISTRATION 500 W TEMPLE ST LOS ANGELES CA [Attorneys for Defendant COUNTY OF LOS ANGELES] CALIFORNIA SUPREME COURT 300 S SPRING ST LOS ANGELES CA CLERK OF THE COURT HON MICHAEL B HARWIN VAN NUYS COURTHOUSE EAST 6230 SYLMAR AVE VAN NUYS CA Courtesy copies were also sent to the following: RICHARD E WINNIE ESQ ALAMEDA COUNTY COUNSEL CLAUDE R KOLM ESQ DEPUTY COUNTY COUNSEL COUNTY OF ALAMEDA 1221 OAK ST STE 450 OAKLAND CA TREVOR A GRIM ESQ JONATHAN M COUPAL ESQ TIMOTHY A BITTLE ESQ HOWARD JARVIS TAXPAYERS ASSOC TH ST STE 1201 SACRAMENTO CA STEPHEN H BENNETT ESQ LETWAK & BENNETT LA ALAMEDA #200 MISSION VIEJO CA WILLIAM L CARTER ESQ SUPERVISING DEPUTY ATTORNEY GENERAL 1300 I STREET STE 125 P O BOX SACRAMENTO CA \Appellant s Brief in Reply to Amicus Briefs 15