Court of Appeals Victory over Property Tax Reassessment (Step Transaction Doctrine)
Client: Fieldstone Communities
Background: Prior to forming a limited partnership with Fieldstone Communities to master plan and develop over 2,700 acres in San Diego’s north county region, BCE Development owned this same property for many years. As a result, the real property taxes prior to the partnership were much lower than they were estimated to be after the formation of the partnership. In part to avoid a costly reassessment of the entire property, BCE sold a 47% interest to Fieldstone resulting in a reassessment of the interest conveyed. On the same day, both parties then conveyed their respective interests to the new partnership (with Fieldstone as the General Partner).
Challenge: The San Diego Tax Assessor, applying the so-called “Step Transaction Doctrine” to the transfer, reassessed 100% of the property, resulting in an increase in present and potential future property tax liability of millions of dollars. HechtSolberg was hired by Fieldstone Communities to pursue a legal challenge to the reassessment of the interest which BCE conveyed to the new partnership. The key to this challenge was persuading the court that the transfers were made for business reasons in addition to tax avoidance.
Solution: HechtSolberg was successful in overturning the County Tax Assessors decision before both the trial court and the Court of Appeal. Of note, the very same Court of Appeal had heard, decided and published a nearly identical case (in which HechtSolberg was not involved), shortly before oral arguments, in which the application of the Step Transaction Doctrine and total reassessment by the County Tax Assessor were upheld. Demonstrating the strength of its legal team, HechtSolberg (after two oral arguments) was able to distinguish that decision and persuade the Court of Appeal unanimously that the Step Transaction Doctrine did not apply under the facts of the Fieldstone Communities case. The reassessment was disallowed.