County Assessors Assume A Conversion Involves A Transfer, But Are They Correct?

by Allen Matkins

When an entity converts into another business form, does a transfer occur?  Many California Assessor’s offices seem to think so.  Therefore, don’t be surprised if following a conversion you receive a notice threatening a possible reappraisal of your real property.  The notice may seek additional information regarding the transaction or may provide a form for claiming an exclusion for the purported “transfer”.  But does a “transfer” really occurr when an entity converts?  Section 1158(a) of the California Corporations Code provides:

An entity that converts into another entity pursuant to this chapter is for all purposes other than for the purposes of Part 10 (commencing with Section 17001) of, Part 10.20 (commencing with Section 18401) of, and Part 11 (commencing with Section 23001) of, Division 2 of the Revenue and Taxation Code, the same entity that existed before the conversion.

The Board of Equalization’s rules make it clear that a conversion does not constitute a transfer:

Proportional Interest Transfers.  Transfers of stock, partnership interests, limited liability company interests, or any other interests in legal entities between legal entities or by an individual to a legal entity (or vice versa) which result solely in a change in the method of holding title and in which proportional ownership interests of the transferors and transferees, in each and every piece of property represented by the interests transferred, remain the same after the transfer, do not constitute changes in ownership, as provided in subdivision (b)(2) of this rule and Section 62(a)(2) of the Revenue and Taxation Code. This provision shall not apply to a statutory conversion or statutory merger of a partnership into a limited liability company or other partnership (or a limited liability company into a partnership) when the law of the jurisdiction of the converted or surviving entity provides that such entity remains the same entity or succeeds to the assets of the converting or disappearing entity without other act or transfer and the partners or members of the converting or disappearing entity maintain the same ownership interest in profits and capital of the converted or surviving entity that they held in the converting or disappearing entity.

Examples of Excluded Proportional Interest Transfers:

Example 9:  General Partnership (GP), which owns Whiteacre and in which A and B hold equal partnership interests, converts to Limited Partnership (LP) under the Revised Uniform Partnership Act of 1994 (California Corporations Code section 16100 et seq.). As a result of the conversion, A and B each hold 50 percent of the LP interests in capital and profits.  No change in ownership of Whiteacre upon the conversion, because, under Section 16909 of the Corporations Code, there is no transfer of Whiteacre.  Section 62(a)(2) of the Revenue and Taxation Code does not apply.  However, if A and B were “original coowners” in GP, they remain “original coowners” in LP. . . .

18 CCR § 462.180(d)(9).

“As virtuous men pass mildly away . . .”

I was deeply sadden to learn of the recent passing of Lee R. Petillon.  I first met Lee about two decades ago when he was working on one of his many projects to encourage capital formation for small business.  Ultimately, he was responsible for drafting seven bills that became law, a remarkable accomplishment for which he did not receive all the recognition that he deserved.  But what impressed me more than his accomplishments was his enthusiasm, cordiality and kindness.  It may be old-fashioned to say so, but Lee was a true gentleman of the bar.  I will miss him – “atque in perpetuum frater ave atque vale“.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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