July 12, 2017
M&A Tax: “California Uber Alles”
My apologies to Jello Biafra & “The Dead Kennedys”, but that song was the first thing that popped into my head when I read this excerpt from Keith Bishop’s recent blog:
Suppose Mr. Henry owns all of the outstanding shares of a Virginia corporation that owns all of the issued and outstanding shares of a Massachusetts corporation that owns, among other things, real property in Los Angeles, California. Suppose further that Mr. Henry sells his shares in the Virginia corporation to a buyer in New York and that the transaction is negotiated and closed in New York. Does anyone believe that the County of Los Angeles can impose a documentary transfer tax on the transaction?
In an alarming decision yesterday, the California Supreme Court held that the County of Los Angeles could impose a documentary transfer tax on a written instrument that transferred beneficial ownership of real property from one person to two others. 926 N. Ardmore Ave. v. County of L.A., 2017 Cal. LEXIS 4768 (Cal. 2017).
Big states sometimes flex their tax muscle in odd ways – and applying a county excise tax on real estate transfers to a deal like this certainly qualifies as odd. I don’t know how much of a taste LA wants here, but it will be interesting to see if somebody tries to come up with a workaround.
People sometimes go to great lengths to dodge the tax man when it comes to deals. For instance, when I was a young lawyer, I remember hearing stories about lawyers getting up in the middle of IPO closings & cabbing it over to New Jersey for the formal issuance of the shares in an attempt to avoid application of New York’s stock transfer tax.
Anyway, for now at least, it looks like the lyrics to “California Uber Alles” need to be changed – instead of “mellow out or you will pay,” it probably should be “mellow out AND you will pay.”
Update – Keith Bishop shared the following information on the potential amount of this tax: “The county’s “taste” can be significant. The tax is based on the value of the property. Value is determined exclusive of the value of any lien or encumbrance remaining thereon at the time of sale. This would allow the exclusion of mortgage debt assumed by the buyer, but not new secured debt obtained by the buyer in connection with the purchase.
In Los Angeles County, the rate is $.55 per $500, with no cap. If, for example, if the property is valued at $10,000,000, the amount of the County’s Documentary Tax would be calculated by dividing $10,000,000 by $500, and multiplying that number by $0.55 for a total of $11,000. Some cities impose an additional amount per $1,000 as well. Since California real estate isn’t cheap, the amount of the tax can be significant.”
– John Jenkins