Court Opinion

ID: 9719902
Source: CourtListenerOpinion
Date Created: 2023-08-26 08:08:46.202012+00
Date Added: 2024-06-11T12:47:26.257222
License: Public Domain

FROEHLICH, J., Dissenting.
The majority concludes that any “D” type reorganization will result in reassessment of real property owned by the corporate entities involved in the reorganization. While the facts of the instant case are somewhat complicated, they are nevertheless typical of “D” reorganizations, the essentials of which are simple. Perhaps not coincidentally, a “D” reorganization is a “divisive” reorganization. As set forth in Internal Revenue Code section 368, it is one of the several types of changes in corporate structure or ownership deemed by the federal (and usually *909state) government not to be sufficiently substantive as to warrant recognition for income tax purposes.
Simplifying the facts (more fully reported in the majority opinion), the real property in question was initially owned by a partnership, which in turn was owned by a corporation. The corporation was owned equally by Allred and Sammis. The “divisive” reorganization entered into by the parties resulted in division of their corporate entity and division of its assets. Allred wound up as sole owner of a corporation which held the real property. Hence, overlooking the interposition of corporate and other structures, Allred traded a half interest in total property for a whole interest in half the property. Put another way, it appears from the record that there was no change in values owned by Allred and Sammis—they simply divided what they owned, each taking half and now owning his half fully.
Everyone involved in the case has labored mightily over the interpretation of the relevant statute: Revenue and Taxation Code1 section 64. As explained by the majority, reassessment of real property for tax purposes occurs whenever there is a “change of ownership.” Section 64 deals with the problems confronted by changes in ownership of a corporation which owns real property. Generally, transfers of interests in partnerships or corporations which own realty do not result in a “change of ownership” of the realty unless a majority ownership changes hands. (§ 64(c).) The confusing section is section 64(b), which deals with changes in corporate ownership resulting from an Internal Revenue Code section 368 corporate reorganization. Section 64(b) provides that such changes will not be a “change of ownership” provided “all of the corporations involved are members of an affiliated group.”
The term “affiliated group” is subject to technical definition, but for purposes of this case we need not examine its intricacies. Suffice it to say that “affiliated group” is a concept relating to common ownership or control of two or more corporations. There is no dispute in this case: Before the reorganization the corporations in question were commonly owned and were part of an “affiliated group.” After the reorganization the corporation which wound up owning the realty was solely owned by Allred, and hence was not “affiliated” with the corporation Sammis ultimately owned.
Thus our issue is posed. When section 64(b) requires that the corporations involved in the reorganization be part of an “affiliated group,” does it require affiliation before the reorganization, affiliation after the reorganiza*910tion or affiliation both before and after the reorganization? A review of the careful majority opinion satisfies that there is no rule of statutory construction or legislative history which clearly answers this question. To provide an answer, therefore, the majority is required to look to the purposes and objectives of the law. The majority concludes that to come within section 64(b) the affiliation must be both before and after the reorganization. I would conclude that the affiliation need exist only before the reorganization, thus permitting “D” type reorganizations to come within the exemption from reassessment provided by section 64(b).
I reach this conclusion by analyzing the same authorities utilized by the majority. The first case to study is Sav-on Drugs, Inc. v. County of Orange (1987) 190 Cal.App.3d 1611 [236 Cal.Rptr. 100]. This was an example of a type “A” or “merger” reorganization. The reorganization came within Internal Revenue Code section 368 and the parallel state income tax provision, and hence the question of whether realty owned by the corporations was to be reassessed came down to whether the “affiliated group” test was met. As in our case, the status of affiliation was clear. After the reorganization the entities, having been merged, were obviously “affiliated.” Before the merger, however, the entities, being owned by separate premerger interests, were not affiliated. The question in our case is whether post reorganization affiliation is required; in Sav-on the question was whether pre reorganization affiliation is required. The Court of Appeal ruled that pre-merger affiliation was required, and hence reassessment of the underlying realty was proper.
To reach its conclusion, the court analyzed the objectives of the Legislature. It found that the goal was to treat corporate transfers substantively the same as individual transfers. Corporations should not be accorded exemptions from reassessment of their realty simply because of the mode of ownership. While a mere change in the “form” of ownership or corporate organization should not give rise to reassessment, an actual transfer should not escape reassessment by a “simple expedient” of disguising the transfer by use of corporate structures. (190 Cal.App.3d at p. 1617.) The Legislature, the court found, intended that “a reassessment should be permitted when, using control of the entity as its touchstone, a true change in ownership occurs (subd. (c)), but not otherwise (subd. (b)) [referring to the subdivisions of § 64].” (Id. at p. 1620.)
The Sav-on court had little difficulty in resolving the issue when it examined the real “substance” of the transaction. Although the old owners of the realty remained in the reorganized corporation, they were now minority owners. (190 Cal.App.3d at p. 1618.) The “real” owners of the realty had in fact changed. This result could occur in a reorganization qualified under Internal Revenue Code section 368, but would not come within section *91164(b) if the affiliation requirement were imposed before the reorganization. The Sav-on court did not touch our issue—whether affiliation is required after reorganization.
The other authority of interest is Title Ins. & Trust Co. v. County of Riverside (1989) 48 Cal.3d 84 [255 Cal.Rptr. 670, 767 P.2d 1148], The real property subject to reassessment in this case was owned by Title Insurance & Trust Company. Title Insurance & Trust Company was a wholly owned subsidiary of Ticor. Southern Pacific, through purchase of stock and merger, acquired Ticor as a wholly owned subsidiary. The taxpayer’s contention was that reassessment was improper because no change of ownership had occurred. In refuting this position the Supreme Court relied on what it found to be unambiguous provisions of section 64(c). The transfer of control of a corporation results in “change of ownership” when the change of control is either direct or indirect. (48 Cal.3d at p. 91.) While Title Insurance & Trust Company, the property-owning corporation, had not changed, and its parent Ticor remained its sole owner, the ownership of Ticor had been acquired by new majority owner Southern Pacific. Looking through the corporate entities, therefore, substantive ownership of a majority interest in the realty had been transferred. {Id. at p. 92.)
In analyzing the rationale of the statutory design, the court confirmed the Sav-on conclusion that an objective was to equalize the reassessment treatment of individuals and corporate entities, stating: “In our view, the equalization of the tax burden between individual and corporate purchasers of real property is an obvious purpose of [section 64(c)], . . . The Legislature, . . . recognized that it would be patently unfair to require the ordinary homeowner, who cannot avoid reassessment in purchasing property by placing title in the name of a corporate subsidiary, to bear the higher tax burden which would result from allowing corporations to avoid reassessment by such means. As the court observed in Sav-on, supra, 190 Cal.App.3d 1611, 1622, under the construction urged by the taxpayer in that case, a corporation could avoid reassessment ‘by a simple step transaction involving the creation of a wholly owned subsidiary for the purpose of holding title to corporate realty.’ ” (48 Cal.3d at pp. 95-96).
While the Title Ins. case sheds no light on the timing of the “affiliated group” requirement of section 64(b), it nevertheless provides guidance. The effort, we are told, should be to equalize insofar as possible the reassessment treatment of individuals and corporations. Instruction in this process, then, may come from a review of the provisions applicable to individuals which deal with situations most like the plight of Allred and Sammis. As will be remembered, Allred and Sammis were co-owners of realty. That the realty was owned through intervening corporate and limited partnership entities is *912a matter, we are told by Sav-on and Title Ins., which we should overlook. The “substance” of their ownership was as co-owners. Their objective was not to buy or sell each other’s ownership, but to sever their relationship, each taking half of total ownership. This they did, and part of the moiety of assets allocated to the entity and transferred to Allred turned out to be real property.
What is the noncorporate exemple most similar to the above? I submit that it is co-ownership of realty by individuals. Looking to the Revenue and Taxation Code, we find that generally the division of ownership in realty by co-owning individuals does not result in reassessment. Section 62(a)(1) provides that the partition of a tenancy in common is not a “change in ownership.” Section 63 exempts from “change of ownership” status various transfers between spouses. Section 65 exempts transfers into and out of joint tenancy so long as an “original transferor” remains vested in ownership. Putting these results in corporate jargon, a “D” reorganization of individual co-ownership of realty does not result in reassessment. It is not necessary, therefore, in order to equalize tax treatment of individuals and corporations, to subject “D” reorganizations of corporations uniformly to reassessment.
Our comparison of the individual to the corporate situation is, of course, not perfect. Co-ownership of land which is severed always results in subsequent ownership of land by the former co-owners, and in fact is the very land they previously owned in undivided interests. The situation would be similar where the sole asset of a corporation consisted of land. Should the prereorganized corporation own both realty and personalty, and should all the realty be transferred to one owner in a “D” reorganization, the comparison with the individual example would seem strained. We do not know, in the case of Allred and Sammis, what sort of assets Sammis received as his share of the corporation.
The thrust of this train of logic is that in applying the rationale of the Sav-on and Title Ins. cases, it is likely that they point to a conclusion favoring nonreassessment results for typical “D” reorganizations. There is no other identifiable policy to guide our construction of the statute. No one would contend, I presume, that ambiguity of a taxing statute should lead to the presumption of intention to tax. A very reasonable interpretation of the limiting condition of section 64(b)—that “all of the corporations involved [in the reorganization] are members of an affiliated group”—is that the time of measurement is at, and not after, reorganization. Sav-on reached the conclusion that absence of affiliation before the reorganization precluded applicability of the exemption. This result was required, however, to avoid creating a special assessment status for property owned by corporations.
*913The “D” type reorganization mirrors property severances by individuals who are exempt from reassessment. There is therefore no compulsion to read absent requirements into the statute in order to equalize corporate treatment with individual treatment. A reasonable practitioner, I suggest, would after due study of section 64(b) conclude that “D” reorganizations which qualify under Internal Revenue Code section 368 would be exempt from California property tax reassessment. I find no compelling reason to defeat this reasonable expectancy. I would therefore reverse the judgment of the trial court.
Appellants’ petition for review by Supreme Court was denied June 29, 1989.

 All statutory references are to the Revenue and Taxation Code unless otherwise specified. When referring to statutory subparts I omit repetition of the word “subdivision.”