Hotel Reassessment Invalid When LLC Owning Hotel Sells 100 Percent Membership Interest But No Person Or Legal Entity Obtains More Than 50 percent Interest In The LLC

The rule set out in California Code of Regulations Title 18 Section 462.180(d)(1)(B) provides there is a change in the ownership of real property owned by an LLC, “when any corporation, partnership, LLC, or any person… obtain through multi–tiering, reorganization, or transfer of direct or indirect ownership of more than 50 percent of the total interest in the LLC’s capital and profits.” Recently, in Ocean Avenue LLC v. County of Los Angeles, (Cal. Ct. App. 2014) 173 Cal. Rptr. 3d 445, the court invalidated Los Angeles County’s reassessment of Fairmont Miramar Hotel (“Miramar Hotel”) because no single person obtained a majority interest from the sale of Ocean Avenue LLC (“Ocean Avenue”), the hotel’s parent company.


Since 1999, the Miramar Hotel has been owned by Ocean Avenue, an entity formed by Hotel Equity Fund VII, LP. On July 7, 2006, Ocean Avenue entered into a contract to sell Miramar Hotel to 101 Wilshire LLC. However, in September 2006, the parties terminated that contract, and Hotel Equity Fund sold 100 percent membership interest in Ocean Avenue to The Susan Lieberman Dell Separate Property Trust (49 percent interest), MSD Portfolio, LP (42.5 percent interest), and Miramar Hotel Investor, LLC (8.5 percent interest).

Michael Dell (“Dell”) directly and indirectly owns 99.9 percent of MSD Portfolio, LP. Dell also indirectly owns roughly 68 percent of Miramar Hotel Investors, LLC. The assessor properly applied the multiply-through test and found Dell owned roughly 48 percent of Miramar Hotel.

Los Angeles County (“County”) reassessed the property after the transfer of membership interest in Ocean Avenue despite finding that no individual obtained majority control of Ocean Avenue’s capital and profits. Ocean Avenue appealed the reassessment to the Los Angeles County Assessment Appeals Board (“Board”). The Board upheld the reassessment stating, “the revision of the original transaction was only for the purpose of avoiding reassessment,” and, “the real objective of the transaction was to transfer the hotel’s ownership in its entirety.” Ocean Avenue appealed that decision to the trial court, where judgment was entered in favor of Ocean Avenue. The County then appealed, resulting in this decision.


At trial, the County presented evidence and had employees testify to the fact that Dell did not own 50 percent of Miramar Hotel. The County advanced three arguments as to why reassessment was appropriate despite no individual meeting the 50 percent ownership threshold. Primarily, the County argued that the court should apply the “substance over theory” doctrine the Supreme Court uses when analyzing federal tax issues. The doctrine would require the court to look at the economic realities when examining the transaction. The court refused to apply “substance over theory” in this case because the issue did not involve a federal tax issue. The County is not bound to the federal rules when assessing a state property tax, rather, it is bound to the rules established by the California legislature. In the recent Holland v. Assessment Appeals Bd. No. 1, 58 Cal. 4th 482 (2014) decision, the court emphasized that what constitutes a change in the ownership of property is left to the legislature to decide. The California legislature has not adopted a “substance over doctrine” theory and the court will not obstruct the legislature’s intent. Therefore, the “substance over theory” doctrine did not apply.

Second, the County argued that the first contract for the sale of the Miramar Hotel entered into on July 7, 2006, constituted a change in ownership. The court refused to find that the July contract resulted in a change of ownership for two reasons. First, delivery of various documents, books, and keys were a condition precedent to execution of the contract. These conditions were never satisfied, so the contract was never legally executed. Second, the July contract did not transfer the right to revenue and liability of Miramar Hotel until the date of closing. Without transfer of beneficial use, change of ownership for reassessment purposes never occurs. The sale never closed and beneficial use of Miramar Hotel never transferred. For these two reasons, the court concluded a change of ownership never occurred with the July contract.

Finally, the County also argued that California Code of Regulations Title 18 Section 462.180 is unconstitutional because it contradicts Prop 13. California statutes and regulations must be consistent with the California Constitution. The court found that Section 462.180 defines changes in ownership of property, whereas Prop 13 does not specifically define changes in ownership. Accordingly, the court concluded that Section 462.180 and Prop 13 are consistent with each other and Section 462.180 is constitutional.

The rule set forth in Section 462.180 is governed by its plain language. The County’s arguments justifying reassessment by calling attention to the realities of the transaction and the obvious maneuvers to avoid reassessment were not persuasive to the court. The court concluded that reassessment of Miramar Hotel was inappropriate because no individual or legal entity obtained majority control of Ocean Avenue’s capital and profits as a result of the transfer.

The trial court awarded Ocean Avenue attorney’s fees in the amount of $252,118.75 under California Revenue and Taxation Code Section 5152. The appellate court, however, found that “Before awarding attorney fees a trial court must make a factual finding that a flawed assessment was based on the Assessor’s belief that a tax law was unconstitutional rather than a misunderstanding of the law.” The court noted that in Phillips Petroleum Co. v County of Lake, 15 Cal. App. 4th 180, the court held that Section 5152 requires a finding that the assessor made a cognitive decision that a tax provision is unconstitutional on its face or as applied. Attorney’s fees are therefore dependent upon the assessors intent in making a property tax assessment. The court deferred a ruling on the attorney fees issue pending its decision on the County’s appeal challenging the trial court’s award of attorney fees, which had been stayed.

What This Means To You

Reassessment of property held by an LLC is appropriate when a single person or legal entity obtains through a transfer, reorganization or multi-tiering direct or indirect ownership of more than 50 percent of the total interest in an LLC’s capital and profits as result of such transfer or other transaction. Absent such a transfer or transaction the exception provided by 18 Cal. Code of Regulations § 462.180(d)(1)(B) does not apply This decision clarifies that a county cannot justify reassessment of an LLC’s property based on application of the ‘substance over form doctrine’ utilized in determining federal income tax issues.


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William T. Chisum or Maggie W. Stern | 916.321.4500