BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JANUARY 27, 2011 ITEM J1 CHIEF COUNSEL MATTERS RULEMAKING Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Jerome E. Horton of Equalization: Chairman 5 Michelle Steel 6 Vice-Chairman 7 Betty T. Yee Member 8 Senator George Runner 9 (Retired) Member 10 Marcy Jo Mandel 11 Appearing for John Chiang State Controller 12 (per Government Code Section 7.9) 13 Diane Olson, Chief 14 Board Proceedings Division 15 16 --oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 2 1 Sacramento, California 2 January 27, 2011 3 ---oOO--- 4 MR. HORTON: Our next item is J1, Petition to 5 Amend Property Tax Rule 462.160, Change in Ownership, 6 and we do have one speaker. 7 MR. HORTON: What's -- Stephen Bennett, please 8 come forward. Let's have the Department introduce the 9 matter and then Mr. -- we will accept your testimony. 10 MR. MOON: My name is Richard Moon with the 11 Legal Department, with Carole Ruwart. This is an item 12 proposed amendment to Property Tax Rule 462.160, which 13 is change in ownership of trusts. 14 MR. HORTON: Thank you, Mr. Moon. 15 Mr. Bennett. 16 MR. BENNETT: I'm Stephen Bennett, the 17 petitioner. Thank you for the opportunity to present my 18 petition. My petition asks this Board to interpret 19 Revenue and Taxation Code Section 61(g) by amending 4 -- 20 Rule 462.160 to incorporate our State Supreme Court's 21 landmark decision in the Steinhart case. 22 Prior to Steinhart it was unresolved when a 23 property tax change in ownership occurs where the change 24 is through the medium of an irrevocable trust. 25 For 30 years everybody, including this Board's 26 legal staff, has struggled with this issue. In 27 Steinhart the Supreme Court resolved this issue once and 28 for all. 3 1 The question raised in Steinhart is on what 2 date does real property change ownership for property 3 tax purposes when legal title to the property is held by 4 the trustee of an irrevocable trust. Is it the day the 5 trustee receives the property from its former owner or 6 is it later when the trustee actually delivers the 7 property to its new owner? 8 The Supreme Court gave us its answer. The 9 Court found the date of transfer is always the day the 10 trustee receives the property from its former owner. 11 My petition asks this Board to amend its 12 interpretation of 61(g) and Rule 462.160 by 13 incorporating Steinhart and other well-settled law into 14 the rule. 15 I summarize my petition as follows: 61(g) 16 provides that real property held in trust change -- 17 changes ownership for property tax purposes on the day 18 the trust beneficiary's interest in the property legally 19 vest. 20 The Supreme Court in Steinhart now tells us 21 that a hundred percent property tax change in ownership 22 always occurs on the day the property tax -- property's 23 former owner delivers the property to the trustee. 24 Other well-settled case law cited in my 25 petition tells us that as a general rule the interest of 26 each trust beneficiary in trust property fully vests 27 when the property's owner delivers the property to the 28 trustee. 4 1 There is a well-settled exception to the 2 general rule. The exception only applies where one 3 trust beneficiary who holds a life estate or similar 4 interest in trust property also holds a general power of 5 appointment over that same property. Such a 6 power-holding beneficiary is the only beneficiary whose 7 interest is legally vested. 8 At the time the power is exercised or lapses 9 the interest of all other beneficiary in trust real 10 property then legally vest. At that same time under 11 61(g) there is then a change in ownership from the 12 power-holding beneficiary to the other beneficiaries. 13 I respectfully ask this Board to either grant 14 my petition or to schedule my petition for public 15 hearing. 16 I also ask this Board to recommend that legal 17 staff depublish all BOE advisory letters that conflict 18 with Steinhart. Example of the advisory letters that 19 should be depublished include but are by no means 20 limited to letter 6250120, dated 12-16-93; letter 21 2200786 dated February 8, '99; letter 6250121 dated 22 March 6, 2006; letter 6250145 dated March 29, 2006 and 23 letter 4930131 dated December 22, 2008. Thank you. 24 MR. HORTON: Thank you, sir. 25 Discussion, Members? 26 MS. YEE: Question. 27 MR. HORTON: Member Yee. 28 MS. YEE: Thank you. Thank you very much, Mr. 5 1 Chairman. 2 Mr. Bennett, you -- have you seen the staff's 3 writeup on this particular item? 4 MR. BENNETT: Yes. 5 MS. YEE: Okay. I note that you didn't make 6 any reference to the Phelps case. I was wondering what 7 your --- 8 MR. BENNETT: Well, in -- in my addendum I 9 cited ten cases, including Phelps. 10 MS. YEE: Okay. 11 MR. BENNETT: And nine others. Phelps is one 12 of ten cases and I probably read 100 cases -- published 13 cases involving when vesting takes place. 14 MS. YEE: Uh-huh. 15 MR. BENNETT: And -- and they're all in the 16 addendum to my petition. 17 MS. YEE: Okay. Let me ask the staff then, if 18 I could, I'm of the opinion that the rule doesn't need 19 further clarification, but maybe you can walk through 20 the pieces of the Court's rulings and then if you could 21 speak to Mr. Bennett's request for depublilshing any 22 advice letters that we have out on this issue. 23 MR. MOON: Absolutely. The Petitioner cites a 24 number of cases, but I would first note that they're 25 largely not change in ownership cases and they were 26 decided prior to the passage of Prop. 13. 27 Second, they were cited for the proposition 28 that a remainder interest can vest at the time of the 6 1 trustor's death, but that's not the test for change in 2 ownership. The test for change in ownership is whether 3 it trans -- whether there's a transfer of a present 4 interest, not whether a future remainder has vested. 5 And in the examples that Petitioner gives to -- 6 to amend the rule the examples essentially equate the 7 vesting of a future interest with the transfer of a 8 present interest. And in order to make that kind of a 9 change to the rule we would essentially have to set back 10 30 years of -- of change in ownership law. And I would 11 recommend that we don't do that. 12 The Phelps case, as well as there are two other 13 cases, Steinhart being one and Reilly -- and there's 14 another Appellate Court decision called Reilly out of 15 San Francisco that essentially look at our Rule 462.160 16 in light of Sections 60 of the Revenue and Taxation 17 Code; Section 61(h) which has to do with a change in 18 ownership on a -- on irrevocable trusts, and then 61(g) 19 the statute that Mr. Bennett cites, and comes to the 20 same conclusion that we would, that there would be a 21 change in ownership upon a successor beneficiary 22 receiving trust property. 23 And, again, it's because there's a present 24 interest received at that time or transferred at that 25 time, and the other two elements of the change in 26 ownership test as required by Section 60 are met, as 27 well. 28 With respect to the depublication request of 7 1 the annotations that he cited, we are actually in the 2 process of looking through all of our change in 3 ownership annotations to see if they conflict or somehow 4 are inconsistent with Steinhart, and to the extent that 5 they do they'll be pulled. 6 MS. YEE: Okay. Thank you, Mr. Moon. 7 MR. HORTON: Further discussion, Members? 8 SEN. RUNNER: Just a quick question. 9 MR. HORTON: Mr. Runner. 10 SEN. RUNNER: To the -- to Mr. Bennett. Just 11 again to get some perspective in regards to -- to your 12 concerns that you've brought forward, there are trade 13 groups, association groups, who obviously deal in this 14 specialty out there. Is this an identified item that 15 the -- that other organizations have seen seeking 16 clarity? I'm just trying to get an idea of how -- how 17 particular this concern is or how broad-based this 18 concern is. 19 MR. BENNETT: I would say this -- this affects 20 every single irrevocable trust in California. 21 SEN. RUNNER: That being said then my question, 22 I guess, goes back to the original thought, and that is 23 are there -- the other associations and -- and groups, 24 specialty groups, that deal with that issue -- I guess 25 my question is are they with you or why aren't they with 26 you? Do you have their -- I mean, you know what I mean, 27 just a broader question? 28 MR. BENNETT: Well, my only response to that 8 1 would be the legal treatises I've read in the last six 2 months since Steinhart indicate that the confusion is 3 probably even greater today than it was prior to 4 Steinhart about how trusts change ownership. 5 And, you know, one of the cases I cited in 6 here, and many of them were tax cases, in 1930 the 7 United States Supreme Court issued a ruling that affects 8 all states that there only can be a transfer tax levied 9 once on one transfer. And when Steinhart determined 10 that the transfer tax or the change in ownership occurs 11 when the trustor or the grantor of the trust contributes 12 the property to the trust, the United States Supreme 13 Court has said no taxing authority can tax it again when 14 that same property is -- is distributed by the trustee 15 to the same beneficiaries. 16 So all of the prior annotation letters that say 17 the tax -- the change in ownership occurs when the 18 trustee distributes the property to the beneficiary is 19 now con -- in conflict with Steinhart. Steinhart said 20 the change in ownership occurs when the trustor 21 contributes the property to the trustee you can't have a 22 double tax. You can't have a change in ownership -- the 23 same person can't receive the same property twice from 24 the same -- same person. 25 And, you know, my amendment to the rule 26 would -- would -- all it would do is incorporate all 27 prior existing law plus Steinhart into the rule. It 28 wouldn't change anything. What it would change is all 9 1 the annotation letters to the contrary. 2 SEN. RUNNER: Okay. Well, again, my question 3 is just one of observation, and that is if, indeed, the 4 issue -- excuse me, is that concerning and dramatic? 5 I'm just wondering where others in the industry would be 6 in that -- in that concern. That's all -- 7 MR. BENNETT: I would think we would learn in a 8 public hearing. 9 SEN. RUNNER: Okay. Okay. Thank you. 10 MR. MOON: If -- if I could respond just very 11 quickly. Typically when there -- a major Court decision 12 like Steinhart or Phelps that are issued, if 13 practitioners have consternation over those -- over 14 those decisions typically we would hear, and the more 15 consternation the more we would hear. 16 Again, typically I would suggest that the 17 reason why we haven't heard is because Phelps answers 18 the question. 19 MS. YEE: And -- and the Steinhart decision 20 really relied on this rule, yes, and -- and went through 21 a fairly thorough discussion of how the statutes -- 22 MR. MOON: Yes, it did. 23 MS. YEE: -- are wrong. 24 MR. MOON: But the Steinhart decision dealt 25 with the first part of Mr. Bennett's petition -- 26 MS. YEE: Yes. 27 MR. MOON: -- and it -- and it declined to 28 really talk about the second part. 10 1 MS. YEE: The second part, right. 2 MR. MOON: The second part was answered in 3 Phelps. 4 MS. YEE: Okay. 5 MR. BENNETT: May I -- may I comment? 6 MR. HORTON: One second, sir. Member Yee. 7 MS. YEE: And that's why I had posed the 8 question about Phelps to Mr. Bennett, because it seems 9 like that those address the second -- 10 MR. BENNETT: The -- 11 MS. YEE: -- part of your petition. 12 MR. BENNETT: The Phelps case, the -- and other 13 cases where the vesting was determined to occur when the 14 distribution was made by the trustor -- trustee to the 15 beneficiary, they're fact-based, they're facts. In 16 certain cases the vesting occurred when the trust -- 17 trustor contributed the property to the trustee. 18 In Phelps there was a fact determination made 19 that the vesting occurred when the distribution was made 20 to the beneficiary. That conflicts with other decisions 21 where the vesting was determined to occur, and several 22 of these are tax decisions, by the way. They're 23 inheritance tax division. Inheritance tax is very 24 similar to change in property -- change in ownership. 25 It's where a tax arises from the change in ownership 26 from one person to another. 27 Well, when does that occur? Is it when the -- 28 when the person actually receives it, which could be a 11 1 year or two later? Or is it when the person 2 surrendering the property actually surrenders it? It 3 can only be at one of these two events. Steinhart says 4 it's at the former in every situation. 5 In other words, Steinhart didn't draw any 6 exceptions. 7 MR. HORTON: Thank you very much, sir. 8 Any further discussion, Members? 9 Is there a motion, Members? 10 MS. YEE: I'm going to move to deny the 11 petition. 12 MR. HORTON: It's been moved to deny the 13 petition. Is there a second? 14 MS. MANDEL: Second. 15 MR. HORTON: Second by Ms. Mandel. 16 Objection, Members? 17 Hearing none, such will be the order. 18 MR. MOON: Thank you. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 12 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 January 27, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 12 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: February 14, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 13