Phelps v. Orange Co. Assessment Appeals 5/27/09 CA4/3

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State: California

Court: 1st District Court of Appeal 1st District Court of Appeal

Docket No: G040428

Case Date: 09/10/2009

Preview:Filed 5/27/09; pub. & mod. order 6/24/09 (see end of opn.)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE

JAMES S. PHELPS, as Trustee, etc., Plaintiff and Appellant, v. ORANGE COUNTY ASSESSMENT APPEALS BOARD NO. 1, Defendant and Respondent; WEBSTER J. GUILLORY, as Assessor, etc., Real Party in Interest and Respondent. Appeal from a judgment of the Superior Court of Orange County, Geoffrey T. Glass, Judge. Affirmed. Law Office of Paul D. Draper and Paul D. Draper for Plaintiff and Appellant. G040428 (Super. Ct. No. 07CC09169) OPINION

Freeman Freeman & Smiley, Joanne M. Frasca, Jessica S. Dorman-Davis and Lisa M. Burkdall for Carol B. Phelps as Amicus Curiae on behalf of Plaintiff and Appellant. Paul, Hastings, Janofsky & Walker and Julian B. Decyk for Arthur D. Phelps as Amicus Curiae on behalf of Plaintiff and Appellant. No appearance for Defendant and Respondent. Benjamin P. de Mayo, Nicholas S. Chrisos, County Counsel, and Laurie A. Shade, Deputy County Counsel, for Real Party in Interest and Respondent. * * *

Plaintiff James S. Phelps, as trustee of the John Wilson Phelps Trust (trust), challenges the action of respondent Webster J. Guillory, Orange County Assessor (Assessor), in reassessing a shopping center complex (property) held by the trust upon the death of Wilson W. Phelps (Wilson), an income beneficiary of the trust, and the decision of respondent Orange County Assessment Appeals Board No. 1 (appeals board) to uphold the reassessment. Plaintiff contends the transfer of Wilson`s interest as an income beneficiary to his four children did not qualify as a change of ownership under Revenue and Taxation Code section 60.1 For a change of ownership to occur under section 60, there must be 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. Plaintiff contends the trust`s income beneficiaries do not have a present interest in the improvements on the property because the improvements were constructed and owned by the property`s lessee and sublessees. Plaintiff also contends the income beneficiaries do not have the beneficial use of the property because they do not hold legal title. Finally, plaintiff contends that the beneficiaries` interest in the income flowing from the property is not All statutory references are to the Revenue and Taxation Code, unless otherwise noted. 2
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substantially equal to the value of a fee interest because a lifetime income interest is inherently inferior to a fee. We conclude the trial court properly denied plaintiff`s writ petition seeking to overturn the board`s decision and the reassessment. The income beneficiaries have a present interest in the improvements because they are part of the property and the lease requires the improvements to be surrendered to the lessor in good condition at the close of the lease. The beneficiaries have the beneficial use of the property because they receive income from it; the law does not require legal title to be held by those who are entitled to the beneficial use of a property. Finally, a lifetime beneficiary receiving the rental value of a parcel of real property is considered under the law to be receiving value substantially equal to the value of the fee interest. We therefore affirm the trial court`s judgment denying the writ petition. I FACTUAL AND PROCEDURAL BACKGROUND The trustor, John Wilson Phelps, created the trust as part of his will in 1945, which became irrevocable upon his death in 1974. The trust held real estate from which it derived income, and distributed the income to its beneficiaries. The trust instrument directed the trust to hold the property in trust during the lifetimes of Adele N. Phelps, Wilson, Arthur D. Phelps, Adele Phelps Spellacy, and the trustor`s grandchildren living at the time of his death. The trust is scheduled to terminate on the death of the last survivor of the trustor`s children and grandchildren living when the trustor died. Afterward, the trust corpus will be distributed to the trustor`s then living issue on the principle of representation. Among the trust`s income producing assets are parcels of real property in Fullerton now used as a shopping center. The trustees executed a lease of the property in 1964 to Montgomery Ward & Co. The lease required the lessee to construct 3

improvements on the unimproved land subject to the lessor`s approval. The lessee agreed to surrender the improvements in good condition to the trust at the termination of the lease. After Montgomery Ward & Co. went bankrupt, Target Corporation (Target) became the current lessee of the property. When Target took over, it spent approximately $7 million to renovate the main store on the property. Both Montgomery Ward and Target subleased portions of the property (retail and restaurant pads) to others who constructed improvements for retail and restaurant use. These improvements were constructed by the sublessees at their own expense and are owned by the lessee or sublessees for the duration of the lease. At the conclusion of the lease, these improvements are surrendered to the trust. Upon the trustor`s death, trust provisions directed the trustees to divide the trust`s income among the trustor`s widow and his three children. The trust provided that if any of the trustor`s children died before the termination of the trust, their issue would take per stirpes. If any of the trustor`s children died without issue, the decedent`s share of the trust`s net income was to be divided among the other children. As of January 2002, the trust had three trustees, Wilson, John W. Phelps II, and James S. Phelps, who collectively held legal title to the trust`s assets. Wilson held a one-third interest as an income beneficiary. Wilson died in April 2002. Under the trust document, Wilson`s interest in the net income of the trust was transferred to his four children, each of whom then became entitled to receive 1/12 of the trust`s net income. The assessor concluded the transfer of Wilson`s interest to his four surviving children was a change in ownership under section 60 and reassessed their share of the property. The assessor appraised the entire property at $27,740,000 for the 2002 tax year, with the land valued at $14,740,000, and the improvements valued at $13 million. The trust paid the assessed taxes and filed an application to challenge the assessments with the appeals board. After a hearing, the appeals board upheld the 4

assessor`s position as to the parcel involved in this appeal.2 The trust filed its verified petition for writ of mandate in the superior court, seeking to set aside the board`s findings. After hearing, the trial court denied the petition, concluding the transfer on Wilson`s death constituted a change in ownership under section 60, entitling the Assessor to reassess the property. The trial court entered judgment and plaintiff now appeals. II STANDARD OF REVIEW The interpretation and application of section 60 is a question of law. We review de novo a determination that an assessable change in ownership occurred under section 60. (Reilly v. City and County of San Francisco (2006) 142 Cal.App.4th 480, 487 (Reilly).) III DISCUSSION A. Wilson Held a Present Interest in the Property's Improvements, Which Passed to the New Income Beneficiaries On June 6, 1978, California voters passed Proposition 13, officially titled the People`s Initiative to Limit Property Taxation. Proposition 13 amended the California Constitution by adding article XIIIA, which provides that [t]he maximum amount of any ad valorem tax on real property shall not exceed One percent (1%) of the full cash value of such property. (Cal. Const., art. XIIIA,

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