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State Agencies Cannot Avoid Property Transfer Tax by Purchasing Property Through An LLC
The California State Teachers’ Retirement System (CalSTRS) formed two limited liability companies (LLCs) for the purpose of purchasing and holding title to two investment properties in Oakland. CalSTRS was the sole member of both LLCs. Following the purchases, the City of Oakland and the County of Alameda imposed documentary transfer taxes on the two LLCs totaling over $3.5 million. The LLCs paid the tax but then filed a petition for a writ of mandate seeking refunds of those payments claiming they were exempt from such taxes.
The LLCs argued that because CalSTRS was exempt from the property transfer tax pursuant to Revenue and Taxation Code section 11922, and CalSTRS was the only member of the LLCs, the LLCs were also exempt. The trial court disagreed, finding that the LLCs are not governmental entities even if a governmental entity is the sole member of the LLC.
The Court of Appeal affirmed the trial court’s ruling. The Court of Appeal found that statutes governing the two LLCs provide that an LLC is an entity distinct from its members. The Court cited both legislative and administrative records to show that government entities can be sole members of an LLC, but still maintain a separateness. The two LLCs were therefore separate entities distinct from their member, CalSTRS, and were therefore subject to the documentary transfer taxes.
The Court concluded by saying the legislature could enact legislation that provides that the separateness of the LLC and the government entity be overlooked in the context of documentary transfer taxes, but ultimately that issue remains with the legislature.
While this decision narrowly addresses the documentary transfer tax exemption, it serves as a valuable reminder for Districts to proceed with caution when creating LLCs or other entities to engage in transactions on its behalf as different legal requirements and obligations may apply.
CSHV 1999 Harrison, LLC v. County of Alameda, (May 31, 2023, Cal. Ct. Appeal Case No. A163369).