Filed 6/3/14 Ocean Avenue LLC v. County of Los Angeles CA2/2

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION TWO

OCEAN AVENUE LLC,

Plaintiff and Respondent,

v.

COUNTY OF LOS ANGELES,

Defendant and Appellant.

 B246499

 (Los Angeles County

 Super. Ct. No. BC462619)

APPEAL from a judgment of the Superior Court of Los Angeles County. 

Joanne O’Donnell, Judge. Affirmed and remanded with directions.

John F. Krattli, County Counsel and Albert Ramseyer, Principal Deputy County 

Counsel, for Defendant and Appellant.

Ajalat, Polley, Ayoob & Matarese, Christopher J. Matarese, Richard J. Ayoob and 

Gregory R. Broege, for Plaintiff and Respondent.

_________________________
2

Raised herein is the following tax issue: Is there a Proposition 13 change in 

ownership of property held by a limited liability company when all of its membership 

interests are sold but no one person or entity obtains, directly or indirectly, more than a 

50 percent interest in the capital and profits? The answer is no. Accordingly, the trial 

court properly concluded that the Los Angeles County Assessor (Assessor) should not 

have reassessed Ocean Avenue LLP’s (Ocean Avenue) property as of July 7, 2006, and 

that Ocean Avenue was entitled to a judgment for a tax refund. The County of 

Los Angeles (County) urges us to uphold the reassessment on the theory that a single 

person obtained majority control of the capital and profits; an aborted sales contract 

entered into on July 7, 2006, triggered the doctrine of equitable conversion; the substance 

over form test applied in federal tax cases should be applied in California; and the 

existing tax legislation is unconstitutional because it conflicts with either the letter or 

spirit of Proposition 13. Due to a lack of evidence, supporting law, or both, these 

arguments lack traction. Consequently, we affirm the judgment. 

Ocean Avenue requests attorney fees on appeal pursuant to Revenue and Taxation 

Code section 5152.

1

 That matter is remanded to the trial court and deferred pending our 

resolution of the County’s currently stayed appeal in which it challenges the trial court’s 

award of section 5152 attorney fees below. 

FACTS

Since 1999, the Fairmont Miramar Hotel (Hotel) has been owned by Ocean 

Avenue, an entity formed by Hotel Equity Fund VII, L.P. (Equity Fund). In March 2006, 

the Hotel was put up for sale. On July 7, 2006, Ocean Avenue entered into a contract

(Initial Contract) to sell the Hotel to 101 Wilshire, LLC.

2

 On September 6, 2006, the 

parties signed a document in which they terminated the Initial Contract and related 

 

1 All further statutory references are to the Revenue and Taxation Code unless 

otherwise indicated.

2

The County maintains that 101 Wilshire LLC was formed by MSD Capital LP 

(MSD Capital).
3

escrow. The same day, Equity Fund sold 100 percent of its membership/ownership

interest in Ocean Avenue as follows: The Susan Lieberman Dell Separate Property Trust 

acquired a 49 percent interest; MSD Portfolio, L.P.—Investments (MSD Portfolio) 

acquired a 42.5 percent interest; and Miramar Hotel Investor, LLC (Hotel Investor LLC) 

acquired a 8.5 percent interest.

Michael Dell directly owns 99 percent of MSD Portfolio. The other 1 percent is 

owned by MSD Capital. Because Michael Dell owns 99 percent of MSD Capital, he 

directly or indirectly owns 99.9 percent of MSD Portfolio.3There is no dispute that 

Michael Dell effectively owns 42.5 percent of Ocean Avenue through MSD Portfolio.

Hotel Investor LLC has four owners. They are Kingfish Investments V, LLC 

(Kingfish), Blue Fin Investments, LLC (Blue Fin), Michelangelo LLC (Michelangelo), 

and 645 Investments V, LLC (645 Investments). Blue Fin and Michelangelo each own a 

separate 36.5326 percent interest in Hotel Investor LLC. John Phelan owns a 66.67 

percent profits interest in Blue Fin and a 6.67 percent capital interest. With respect to 

Michelangelo, Glen Fuhrman (Fuhrman) holds the exact same interests. MSD Capital 

owns a 33.3 percent profits interest and a 93.3 percent capital interest in both Blue Fin 

and Michelangelo.4

Melissa Sexton (Sexton), a staff member who worked for the Assessor,

investigated and then analyzed whether the Hotel should be reassessed on the theory that 

one person had acquired more than a 50 percent ownership interest in Ocean Avenue 

such that there was a change in ownership for purposes of Proposition 13, the relevant tax 

 

3 According to Ocean Avenue, Susan Lieberman Dell owns .000001 percent of 

MSD Portfolio.

4

The attorney for MSD Capital testified regarding his understanding of how 

Michelangelo’s net income would be distributed under its operating agreement. He said 

that capital investments would receive a preferred rate of return (1 to 1.5 percent interest 

on capital). Next, net income would be used to pay back investors for their capital 

contributions. Then, and only then, would the net income be split two-thirds for Fuhrman 

and one-third for MSD Capital. We presume that Blue Fin was set up in the same 

manner. 
4

statutes (§§ 60, 64),5and the relevant tax rules (Cal. Code. Regs., tit. 18, § 462.180). 

Using a multiply-through test, she concluded that Michael Dell had only a 47.82 percent

interest, and no one had an interest that exceeded 50 percent.

6 Nonetheless, the Assessor 

reassessed the Hotel.

Ocean Avenue appealed to the Los Angeles County Assessment Appeals Board 

(Board). The Board concluded there was a change of ownership based on any of the 

following theories: Equity Fund transferred all of its ownership rights in the Hotel; the 

Initial Contract between Equity Fund and 101 Wilshire, LLC was enforceable, so the 

Hotel transferred on July 7, 2006, by equitable conversion; or, Michael Dell controlled 

more than 50 percent of the capital invested in the purchase, plus he had a right to profits,

including a preferred rate of return. The Board upheld the reassessment, noting that the 

“revision of the original transaction . . . was only for the purpose of avoiding property tax 

reassessment. The real objective of the transaction was to transfer the Hotel’s ownership 

in its entirety.”

Subsequently, Ocean Avenue filed a complaint for a tax refund of $314,680.95 

and alleged, inter alia, that because there had been no change in the Hotel’s ownership, 

the Hotel could not lawfully be reassessed. The trial court entered a judgment in favor of 

Ocean Avenue.

This timely appeal followed. 

 

5

Section 60 provides that a change in ownership means “a transfer of a present 

interest in real property, including the beneficial use thereof, the value of which is 

substantially equal to the value of the fee interest.” Under section 64, subdivision (a), 

however, the transfer of interests in legal entities, such as limited liability companies, 

“shall not be deemed to constitute a transfer of the real property of the legal entity.” 

Section 64, subdivision (c) creates an exception to subdivision (a) when one person or 

entity obtains a majority interest in the legal entity which owns real property. In that 

situation, there is a change in ownership. Section 64, subdivision (a) and (c) are 

implemented by the corresponding tax rules in the California Code of Regulations. 

(Cal. Code. Regs., tit. 18, § 462.180, subds. (c) & (d)(1)(B).)

6

Testimony from Sexton suggested that a second staff member also concluded that 

no one acquired more than a 50 percent interest.
5

After the trial, Ocean Avenue filed motion for attorney fees pursuant to section 

5152 and sought $252,118.75. Under that statute, a prevailing taxpayer can recover 

attorney fees if an assessor, believing a tax law is unconstitutional, acted contrary to the 

tax law without first seeking declaratory relief. The trial court noted that the “gist of [the 

County’s] position, both before the Board and in the court trial, was that the court should 

not apply Section 64[, subdivision] (a) because the scenario it protects—that seized upon 

by the Dells—is ‘too good to be true.’” To support this finding, the trial court quoted 

numerous statements by County witnesses. Then the trial court stated: “In short, [the 

County] advanced the Constitution and the ‘too good to be true’ doctrine as an alternative 

to following the plain language of the statute. While [the County] does not expressly 

charge that the statute and the rule are unconstitutional or invalid, its position is 

transparent. [The County] would not have urged the court to disregard the statute if it did 

not believe it was unconstitutional or otherwise invalid. Accordingly, [the County] was 

required to bring a declaratory relief action, not merely tax [Ocean Avenue] and force it 

to file suit. Because [the County] did not do so, [Ocean Avenue] is entitled to its 

attorney’s fees under [section 5152].”

The trial court granted Ocean Avenue’s motion. The County appealed. That 

attorney fees appeal is stayed until we render an opinion resolving the appeal from the 

judgment.

STANDARD OF REVIEW

“The issue of whether, based on a set of undisputed facts, there has been a change 

in ownership for purposes of property tax assessment ‘is a question of law subject to this 

court’s independent de novo judicial review.’ [Citation.]” (Fashion Valley Mall, LLC v. 

County of San Diego (2009) 176 Cal.App.4th 871, 877.)
6

DISCUSSION

I. Proposition 13; Binding Regulations.

Proposition 13, adopted by California voters in 1978, added article XIIIA to our 

state Constitution and “limited the rate at which real property in this state may be taxed 

and the extent to which the assessed value of real property may be increased. As 

[provided], real property may be taxed at no more than 1 percent of its ‘full cash value,’ 

with ‘full cash value’ defined to mean either the assessed value of that property in the 

1975–1976 tax year or the property’s value at the time of a subsequent ‘change in 

ownership,’ subject to an adjustment for inflation. [Citation.] Thus, real property 

generally is taxed based on its value at the time of acquisition, not its current value. The 

task of defining when there has been a change in ownership that triggers reassessment has 

been left largely to the Legislature. [Citation.]” (Holland v. Assessment Appeals Bd. 

No. 1 (2014) 58 Cal.4th 482, 485.)

The State Board of Equalization has promulgated administrative regulations 

interpreting the change in ownership statutes. “Local assessors must follow these 

regulations.” (Industrial Indemnity Co. v. City and County of San Francisco (1990) 218 

Cal.App.3d 999, 1006, citing Gov. Code, § 15606, subds. (c), (h).) 

II. The Applicable Property Tax Rule.

Generally, the purchase of an ownership interest in a legal entity is not a change in 

ownership of the real property held by that entity. (Cal. Code. Regs., tit. 18, § 462.180, 

subd. (c).) But there are exceptions. One provides that there is a change of ownership in 

real property owned by a limited liability company “[w]hen any corporation, partnership, 

limited liability company, Massachusetts business trust or similar trust, other legal entity 

or any person: [¶] . . . [¶] (B) obtains through multi-tiering, reorganization, or any 

transfer direct or indirect ownership of more than 50 percent of the total interest in [the 

limited liability company’s] capital and more than 50 percent of the total interest in [its]

profits[.]” (Cal. Code. Regs., tit. 18, § 462.180, subd. (d)(1)(B).)
7

III. The Change in Ownership Theory.

The County contends that there was a change in ownership of the Hotel. As 

discussed below, we disagree.

Exhibits submitted to the Board to support Ocean Avenue’s tax appeal reveal that 

Sexton and another staff person in the Assessor’s office applied a multiply-through test to 

conclude that Michael Dell acquired about a 48 percent interest in Ocean Avenue, and 

that no one person acquired more than 50 percent. Thus, the evidence submitted below 

established that Michael Dell’s indirect interests in the capital of Ocean Avenue did not 

exceed the 50 percent threshold. Moreover, there was no evidence that he owned an 

indirect interest in more than 50 percent of the profits. The County makes no attempt to 

debunk the multiply-through test applied by the Assessor’s staff. Nor does it provide and 

apply a different formula for calculating Michael Dell’s interests. Thus, California Code 

of Regulations, title 18, section 462.180, subdivision (d)(1)(B) has no application.

According to the County, it “should be undisputed that Michael S. Dell has a 

majority interest in the capital of Ocean Avenue LLC.” As indicated by the numbers 

relied upon by the County, this argument fails. According to the County, Michael Dell 

owns 99.99 percent of the capital of MSD Portfolio, which owns 42.5 percent of Ocean 

Avenue. He owns 93.3333 percent of Blue Fin and Michelangelo, and those two entities, 

collectively, own 73.065 percent of Hotel Investor, which owns 8.5 percent of Ocean 

Avenue. The flaw in the County’s argument is that it never does the math. The multiplythrough test reveals the following: Michael Dell’s capital interest in Ocean Avenue 

through MSD Portfolio is 42.49575 percent, which is the sum of .9999 x 42.5. His 

interest in Ocean Avenue through Hotel Investor is derived by multiplying .933333 by 

73.065, the sum of which is 68.194, and then by multiplying .68194 by 8.5, to reach 

5.79649 percent. When 42.49575 percent is added to 5.79649 percent, the total is 

48.29224 percent.7

 

7 Our calculations are similar to the calculations on the worksheets done by Sexton 

and another member of the Assessor’s staff. One worksheet containing rounded off 

numbers showed that because MSD Portfolio owned 42.5 percent of Ocean Avenue, and 
8

In a convoluted argument, the County argues that Michael Dell controls a majority 

of the capital and profits of Blue Fin and Michelangelo, and that this somehow results in 

a majority interest in Ocean Avenue. But even supposing Michael Dell owned 100 

percent of Blue Fin and Michelangelo, it would not matter. Those two entities have a 

73.065 interest in Hotel Investor, which has an 8.5 percent interest in Ocean Avenue. If 

.73065 is multiplied by 8.5, the sum is 6.210525. When 6.210525 is added to 42.49575, 

the equation reveals a figure that is still less than a 50 percent interest in Ocean Avenue, 

i.e., a 48.706275 percent interest.

IV. The Substance Over Form Theory.

The County next argues that we should apply the substance over form doctrine set 

forth by the United States Supreme Court for analyzing federal tax issues (Frank Lyon 

Co. v. United States (1978) 435 U.S. 561, 573; Commissioner v. Court Holding Co.

(1945) 324 U.S. 331, 334) and conclude that the economic reality of the underlying 

transactions was a sale of the Hotel. This argument lacks merit. First, this is a California 

property tax issue, not a federal income tax issue, which means that federal law is not 

controlling or even helpful. Second, the Board was bound by the property tax rules in the 

California Code of Regulations, so we cannot justify departing from those rules to uphold 

the Board’s decision. And third, the County failed to show that the sale of Ocean 

Avenue’s membership was the equivalent of a sale of the Hotel, i.e., an asset sale. 

Notably, general counsel for MSD Capital testified in front of the Board that a purchase 

of Ocean Avenue’s membership involved much more than a purchase of the Hotel. For 

example, it involved the acquisition of a pension liability as well as succession to liquor 

licenses and business permits.

 

because Michael Dell owned 99 percent of MSD Portfolio, the formula for Michael 

Dell’s interest in Ocean Avenue through MSD Portfolio was this: .99 x 42.5 = 42.08. 

Multiplying Michael Dell’s interest through Michelangelo and Blue Fin, and then through 

Hotel Investor, the worksheet concluded that his interest was 5.736 percent. The 

worksheet added the sum of 42.08 percent and 5.736 percent to establish that Michael 

Dell’s interest in Ocean Avenue was 47.82 percent. Another worksheet, which contained 

more decimal fractions, concluded that Michael Dell’s direct and indirect interest in 

Ocean Avenue was 48.19068 percent.
9

V. The Equitable Conversion Theory.

In the County’s view, the Hotel changed ownership on July 7, 2006, under section 

60, the day the Initial Contract was signed, based on equitable conversion. As we discuss 

below, this argument misses the mark.

“An unconditional contract for the sale of land, of which specific performance 

would be decreed, grants the purchaser equitable title, and equity considers him the 

owner. [Citations.]” (Parr-Richmond Industrial Corp. v. Boyd (1954) 43 Cal.2d 157, 

165 (Parr-Richmond) [no equitable conversion for property tax purposes because the 

seller did not have merchantable title and the sale contract was not subject to specific 

enforcement at the time of assessment].) Regardless of the foregoing rule, equitable 

conversion “may or may not be absolute. Whether it is, or not, will depend upon whether 

the terms of the contract of sale are subsequently complied with.” (In re Estate of Dwyer

(1911) 159 Cal. 664, 675.) And, in any event, “there is no equitable conversion where 

the contracting parties demonstrate an intention to the contrary. [Citations.]” (ParrRichmond, supra, at p. 166.) Further, the doctrine will not be invoked when “it would 

compel an inequitable result[.]” (13 Witkin, Summary of Cal. Law (10th ed. 2005) 

Equity, § 174, p. 502.) 

Here, there was no equitable conversion because the contractual terms were never 

satisfied, and the parties demonstrated an intention contrary to equitable conversion when 

they terminated the Initial Contract. 

But even if there was equitable conversion on July 7, 2006, there was no change in 

ownership. For section 60 to trigger a reassessment, there must be a present interest, a 

transfer of the property’s beneficial use, and the value of the interest transferred must be 

substantially equal to the value of the fee interest. (Reilly v. City and County of 

San Francisco (2006) 142 Cal.App.4th 480, 492–496 (Reilly).) As discussed below, this 

three-prong test cannot be satisfied. 

On July 7, 2006, any interest obtained by 101 Wilshire, LLC was contingent 

because the sale contained conditions precedent, such as payment of the purchase price. 

Also, 101 Wilshire, LLC was not obligated to purchase the Hotel unless Ocean Avenue 
10

delivered various documents, books and records, keys and other items. The Reilly court 

explained that “the ‘present interest’ requirement [was] an attempt to avoid treating 

contingent . . . transfers as changes in ownership[.]” (Reilly, supra, 142 Cal.App.4th at 

p. 492, citing the Report of the Task Force on Property Tax Administration.) In light of 

the foregoing, we conclude that on July 7, 2006, 101 Wilshire, LLC’s interest, if any, was 

not a present interest under section 60. 

Nor was there a transfer of beneficial use because, under the Initial Contract, 

Ocean Avenue was entitled to all revenue and responsible for all expenses pertaining to 

the Hotel until the date of closing. As explained by Reilly, “The receipt of income 

generated by property qualifies as a ‘beneficial use’ of the property[.]” (Reilly, supra, 

142 Cal.App.4th at p. 495.) Moreover, there is no dispute that Ocean Avenue retained 

legal title. Evidence Code section 662 provides: “The owner of the legal title to property 

is presumed to be the owner of the full beneficial title. This presumption may be rebutted 

only by clear and convincing proof.” When analyzing whether there has been a change in 

ownership under section 60, courts have applied this rule. (Pacific Southwest Realty Co. 

v. County of Los Angeles (1991) 1 Cal.4th 155, 164.) The County makes no attempt to 

rebut the presumption. 

Finally, the County adverts to no evidence that the value of what 101 Wilshire 

LLC received on July 7, 2006, was substantially equal to the value of the fee interest. In 

particular, the County fails to point to any testimony or documents in which 

101 Wilshire, LLC’s contingent interest was assigned a value and found to substantially

compare to the value of a fee interest.

VI. The Constitutional Theory.

The County argues that Proposition 13 should control our analysis, not the 

Revenue and Taxation Code or the tax rules in the regulations. Further, it argues that any 

legislation that is inconsistent with Proposition 13 is unconstitutional. There are a variety 

of infirmities with these arguments. First, the Board was bound by the tax rules, and it 

therefore erred when it did not follow them. Second, Proposition 13 did not define 

change in ownership, so it does not contradict the definitions of change in ownership in 
11

section 64 and the tax rules in California Code of Regulations, title 18, section 462.180. 

Third, the Assessor was not permitted to reassess the Hotel on the theory that the 

legislation is unconstitutional without first prevailing in a declaratory relief action on that 

issue.8

VII. Attorney Fees.

Section 5152 provides in part: “In an action in which the recovery of taxes is 

allowed by the court, if the court finds that the void assessment or void portion of the 

assessment was made in violation of a specific provision of the Constitution of the State 

of California, of this division, or of a rule or regulation of the board, and the assessor 

should have followed the procedures set forth in Section 538 in lieu of making the 

assessment, the plaintiff shall be entitled to reasonable attorneys’ fees as costs in addition 

to the other allowable costs.” 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. (Phillips Petroleum Co. 

v. County of Lake (1993) 15 Cal.App.4th 180, 197–198 [“Section[s] 5152 and 538 require 

a cognitive decision on the part of the assessor that a particular provision, rule or 

regulation is unconstitutional or invalid either on its face or as applied to the

circumstances in the case”].)

 

8

In relevant part, section 538, subdivision (a) provides: “If the assessor believes 

that a specific provision of the Constitution of the State of California, of this division, or 

of a rule or regulation of the [State Board of Equalization] is unconstitutional or invalid, 

and as a result thereof concludes that property should be assessed in a manner contrary to 

such provision, . . . the assessor shall, in lieu of making such an assessment, bring an 

action for declaratory relief against the board under Section 1060 of the Code of Civil 

Procedure.” In addition, the California Constitution, article III, section 3.5 provides, in 

relevant part: “An administrative agency, including an administrative agency created by 

the Constitution or an initiative statute, has no power: [¶] (a) To declare a statute 

unenforceable, or refuse to enforce a statute, on the basis of it being unconstitutional 

unless an appellate court has made a determination that such statute is unconstitutional; 

[¶] (b) To declare a statute unconstitutional[.]”
12

Ocean Avenue requests attorney fees on appeal because the Assessor failed to 

comply with section 538 before reassessing the Hotel. We conclude that this matter must 

be deferred until after we decide the County’s related appeal challenging the award of 

section 5152 attorney fees below. 

DISPOSITION

We affirm the judgment. Regarding Ocean Avenue’s request for section 5152 

attorney fees on appeal, that matter is remanded to the trial court and deferred pending 

our resolution of the County’s appeal of the award of section 5152 attorney fees below. 

Ocean Avenue is entitled to its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

__________________________, J.

ASHMANN-GERST

We concur:

_____________________________, P. J.

BOREN

______________________________, J.*

FERNS

 

*

Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to 

article VI, section 6 of the California Constitution.