August 18, 2009

Sham Agreements -- They Will Not Take You Where You Need to Go

During the 1960's, Sam the Sham and the Pharaohs was a rock band which reached great heights considering that their big hit was "Wooly Bully." In a way, Sam was modest to call himself the Sham because no one could deliver "Wooly Bully" or "Little Red Riding Hood" like he and the Pharoahs.

Fast forward 40 years. The California Court of Appeal has rejected sham agreement prepared "solely for property tax purposes" -- to avoid the reassessment of a 50% interest in a shopping mall transferred several years earlier by the owner, Equitable Life, to a holding company and then to a LLC. The case is of interest to lawyers and accountants who advise clients how to use entities such as limited liability companies to structure the transfer of real estate without triggering a reassessment of the property under Proposition 13.

The Court reasoned that since the agreement that had no economic substance other than to avoid property tax liability, it was a sham document that could not be given effect. For a change in ownership to occur, there must be a transfer of legal title and of that transferor’s beneficial or equitable interests in that property. For purposes of property tax reassessment, a 100 percent change in ownership occurred when record title in property was transferred by Equitable Life to the holding company as its initial capital contribution. Even though Equitable Life was entitled to receive distributions if the holding company made a profit and had a right to participate in certain management decisions, those benefits and rights derived from Equitable Life’s membership interest in the holding company, not from ownership of the transferred property. Thus, the transferor did not retain a beneficial interest in the property itself. See, Fashion Valley Mall, LLC v. County of San Diego - filed August 17, 2009, Fourth District, Div.One, 2009 SOS 4956. To read the case, click here.

Add to Technorati Favorites