Court ruling challenges some Prop. 13 reappraisals; Shuwa claims it is being overtaxed $2 million a year.

Court ruling challenges some Prop. 13 reappraisals

Shuwa claims it is being overtaxed $2 million a year

A recent court ruling on a contested interpretation of Proposition 13 may help California businesses -- especially giant Japanese developer Shuwa Investments Corp. of Los Angeles -- escape costly reappraisals.

At stake is the ability of county assessors to hike property taxes after sales.

Shuwa, which exploded onto the local real estate scene in 1986 with the record $611 million purchase of the twin Arco towers in downtown Los Angeles, is fighting in court the county's full reappraisal of its property. Shuwa contends the county over-valued by more than $200 million and is overtaxing by more than $2 million a year.

Meanwhile, the state Court of Appeals ruled in a similar case in favor of a small-scale landlord, Marian C. Aden of Sherman Oaks. The court ordered the opinion published. That indicates the justices believed the ruling created a new legal standard.

"Winning this case set a precedent statewide," said William M. Bullis, the victorious attorney in Marian C. Aden v. John J. Lynch, L.A. County Assessor.

County officials, mulling an appeal to the state Supreme Court, were understandably upset last week. "This means that anybody that has enough money to hire good attorneys can structure a sale to get him out of having to pay taxes on a portion" of the land, said Assistant Assessor Roy Sharman.

"This case has broad impact," said attorney Charles Ajalat, an expert in local taxes. Ajalat, a partner in the downtown law firm Ajalat and Polley, added, "It should reverse most determinations by the Assessor's Office where the `step-transaction doctrine' has been applied."

That federal doctrine, which concerns two-step sales, is key to both Shuwa's and Aden's attempts to keep their properties from undergoing 100 percent reassessment. In both cases the landowners argued that only 50 percent of their land deserves reassessment, because only 50 percent changed hands. The cases, however, differ in other ways.

Aden and her partner, Winfield MacDonald, each owned half of Matador Apartments Inc. from 1967 to 1985. The corporation's sole asset was a 67-unit apartment complex in Northridge. One day in 1985 they had Matador Inc. deed the land to each person. Then, on the same day, she bought his half for approximately $900,000.

The Proposition 13 amendment to state tax law calls for newly sold property to be reassessed at the new sales price. That value is then used to compute the annual property taxes, which after 17 years of continuous ownership during the city's heyday of soaring land prices, leapt considerably for both Aden and Shuwa.

In the second case, Shuwa appeared as a third party who first bought out one partner, and in a separate transaction the same day, bought out the other.

These two-step sales were considered by the county as essentially one transaction, crafted to dodge taxes. The county justified its finding by applying the federal "step-transaction doctrine," which was developed in federal income tax law to prevent sham transactions from precluding taxation that would otherwise occur.

But the three appellate justices said the doctrine didn't apply because "there were independent economic reasons for both transfers," besides Aden's desire to lower her tax bill.

Bullis said his client had two viable motives for first dissolving the corporation before buying out her partner. "First, if she had bought 100 percent of Matador's stock, she would have also gotten 100 percent of its liabilities. Secondly, there were income tax reasons -- better depreciation," said Bullis, 54, of the two-man law firm McCarthy & Bullis in Century City.

Nevertheless, his client paid the higher tax bill since 1985 and now deserves a refund, the court ruled, which Bullis says is between $40,000 to $50,000.

Further, the court said the assessor's interpretation of tax law was "unfairly used" against Aden. Specifically, the county was only viewing two-step transactions as one when the steps occured within six months of each other. That unwritten policy was "arbitrary," Justice Reuben A. Ortega concluded in the opinion published May 31.

Further, Ortega agreed with Aden's attorney that the county's action likely has denied, or would have denied, tax relief to at least five property-tax payers in the county. (Ortega didn't name other parties; but both Bullis and Sharman of the county said Shuwa and the plaintiff in Arnold v. County of Los Angeles, are affected.)

Five is a magic number. Under state law, if five assessees are concerned, the county must first seek advice from the courts before adopting a new interpretation of state law. The penalty is recovery of attorney's fees, and Ortega ordered the county to pay Aden's legal bill, which totals more than $26,000.

"You just don't put the taxpayer through this horrendous expense when you're applying a unique rule willy-nilly," said Bullis. "It's just f------ people over."

Recovery of attorney's fees could prove even more upsetting, and costly, if the county loses the Shuwa case. When questioned by the Business Journal last week, Shuwa instructed its attorneys not to comment but added a paragraph to a previous statement on the affair: "The attorneys are pleased that in a similar case (Aden v. Lynch) the Court of Appeals in the same appellate district has recently affirmed Shuwa's position in this case."

Since Shuwa sued the county 13 months ago, it has employed counsel at downtown law firm Kindel & Anderson; Shuwa's major tenants in Arco Plaza, Bank of America and Atlantic Richfield Co., have employed downtown powerhouse O'Melveny & Myers in supporting the lawsuit. Neither law firm is known for low hourly fees.

Arco and BofA occupy about half of the 2.4 million square feet of Arco Plaza. Along with the other tenants they pay most of Shuwa's tax bill, under lease contracts.

Shuwa's history, however, is unlike Aden's in that Shuwa increased its ownership in one day from 0 percent to 100 percent.

First Shuwa bought Atlantic Richfield's 50 percent interest in the partnership that owned Arco Plaza. That move, argues Shuwa, did not amount to a change of ownership, which otherwise would trigger full reassessment under Proposition 13. In Shuwa's second step, it purchased BofA's 50 percent interest in the same partnership. That should have only caused revaluation of BofA's share of the land, contends Shuwa.

The first step was valid independent of the second because it freed Arco from about $36 million in federal income taxes, Shuwa has stated.

"If the court wants to open the door side, then you'll find the most of the big property owners in the county will find some `business purpose' for structuring sales to take advantage" of lower taxes, said Assistant Assessor Sharman. "Certain taxpayers will be assessed different than the majority."

Shuwa reportedly owns $2.7 billion worth of U.S. real estate.

PHOTO : Bullis: A statewide precedent