The California Supreme Court, in a 6-1 decision, has held that a city or county may impose documentary transfer tax on the transfer of the ownership interests in a legal entity that owns real property located in the locality. In 926 North Ardmore Avenue, LLC v. County of Los Angeles,1 the court held that the documentary transfer tax applies to a written instrument conveying an interest in a legal entity that owns real property. This approach adopts the “change in ownership” regime for property tax purposes and applies it to the documentary transfer tax.
The documentary transfer tax is imposed by cities and counties throughout California. It is based on the former Federal Stamp Act, which imposed a tax on deeds for the transfer of real property. The Federal Stamp Act was repealed effective 1966—two years before the California documentary transfer tax was enacted. Drawing on the purpose and language of the Federal Stamp Act, the documentary transfer tax applied to deeds, instruments, or writings by which lands, tenements, or other “realty sold” is granted, assigned, transferred, or otherwise conveyed. Thus, the documentary transfer tax statute was drafted to impose the tax on the direct transfer of property, and not the indirect transfer of ownership interests in entities that own property; and for decades, California cities and counties applied the documentary transfer tax in accordance with the plain language of the statute.