California Property Taxes: Basic Rules for Legal Entities

By Kenneth Kleinkopf

California has several rules that can have a substantial impact on your property taxes. Given the new limitations imposed by the 2017 Tax Cuts and Jobs Act on deducting state and local taxes (SALT), these rules are now more important than ever.  Often, when real property is transferred, it is classified as a "change in ownership." When a property experiences a "change in ownership" it is potentially subject to reassessment at its current fair market value unless an exclusion applies. There are several exclusions provided, such as certain exclusions for transfers between parents and children. However, the purpose of this article is to identify the basic rules involved when property is owned by a legal entity (e.g. partnerships, limited liability companies and corporations). In some instances, legal entities have owned real property for multiple decades. And, depending upon historical transfers of the underlying interests in these entities, such real properties may have been unknowingly subjected to reassessment.

Under Prop 13, real property is originally assessed at either the value that was on the property’s 1975-76 tax bill, or at the “full cash value” (i.e. fair market value) of the property when it undergoes a change in ownership (or undergoes new construction) after 1975. That value is referred to as the “base year value” (sometimes also referred to as the "assessed value"). When a property undergoes a change in ownership, it is reassessed at fair market value, which becomes the property’s new base year value. Accordingly, if a property has not had a change in ownership (or undergone new construction) since 1975, it has a very low base year value. This is why it’s not uncommon for many properties throughout California to have a very low base year value, but have a fair market value that is hundreds of thousands, or even millions, of dollars above the base year value. Absent a change in ownership, Prop 13 restricts an increase in the base year value to the lesser of the California Consumer Price Index (“CCPI”) or two percent.

When analyzing potential reassessments for legal entities, there are typically one of two basic rules that apply: (1) change in control (under Revenue and Taxation Code Section 64(c)(1)); or (2) change in ownership (under Revenue and Taxation Code Section 64(d)).

Change in Control

This rule applies when a legal entity is the purchaser of the property. This is different from Change in Ownership because in this situation the property is not transferred by individuals to the entity, rather the entity is the original purchaser. The analysis under this rule employs the "ultimate control" test, but is more accurately described as the "change of majority ownership" rule. It states that when a single person or entity obtains (i) direct or indirect ownership or control of more than 50% of a corporation’s voting stock, or (ii) direct or indirect ownership of more than 50% of both the capital and profits interests in a partnership or limited liability company, there is a change in ownership of all real property owned by that entity (e.g. all real property owned by the entity is reassessed to its current fair market value).

A change in control does not occur unless a single person obtains more than 50% of the voting stock or the capital and profits interests, and a husband and wife’s interests are not attributed to one another. Therefore, a husband and a wife each obtaining 50% of an entity does not result in a change in control. However, some pitfalls to be aware of would be either inter vivos or post-death transfers of entity interests. In this same example, if Husband dies and his interest is transferred to Wife, then a change in control will occur.

Change in Ownership

Before discussing change in ownership issues, the proportional ownership interest transfer rule under Revenue and Taxation Code Section 62(a)(2) needs to be analyzed. As discussed above, a change in control is analyzed when the entity directly purchases the property. A change in ownership is analyzed when an individual (or entity) transfers real property to an entity. As a general rule, the transfer of any interest in real property to or from a legal entity is a change in ownership and results in reassessment of the property transferred. An exclusion from change in ownership applies for proportional ownership interest transfers of real property between a legal entity and an individual. Thus, if property is transferred between legal entities or between an individual or individuals and a legal entity, and the proportional ownership interests of the transferors and transferees (whether represented by voting stock or capital and profits interests in a partnership or limited liability company) remain the same, then the transfer is excluded from change in ownership and potential reassessment (absent an exclusion). For example, if A and B own real property as tenants in common, each as to 50% interests, and then transfer the property to AB LLC, the property is excluded from change in ownership so long as A and B each own 50% interests in AB LLC.

Assuming the transfer to the entity meets the proportionality requirements, the persons holding the interests in the entity immediately after the transfer are the “original co-owners.” Thereafter, whenever cumulatively more than 50% of the total interests in the entity are transferred by any of the original co-owners, there is a change in ownership of the property that was previously transferred to the entity. Any such transfers are generally referred to as being counted and cumulated. There are some exceptions applied to certain transfers that allow for such transfers not to be “counted and cumulated,” including the following: (i) interspousal and registered domestic partner transfers, (ii) transfers to certain trusts and (iii) proportional transfers (where the ultimate ownership of the property remains the same). It is clear that transfers to children and grandchildren must be counted and cumulated, and the parent-child and grandparent-grandchild exclusions do not apply when transferring these interests.

An interest that has been transferred by an original co-owner and counted toward the over-50% threshold is never counted again.  For example, if A is an original co-owner and transfers a 10% interest to B, and then later on B transfers that 10% interest to C, it is counted and cumulated as a transfer of a 10% interest, not 20%.  Original co-owner status ends when the property is reassessed or when the property is transferred out of the entity back to the owners as tenants in common.

Even the most basic rules involving transfers of real property in and out of entities, as well as transfers of interests in entities that own real property, can be complicated.  If you have questions about these rules, or any other property tax related questions, please call any of the attorneys in Fenton & Keller’s estate planning and business transactions group.

De Minimis Off-The-Clock Work

by Susannah L. Ashton

It is becoming more common for employees to have access to their work email on their personal or business-issued cell phone, and when an email chimes in after work hours, it is often hard to resist the almost-compulsive temptation to check the message. The question employers are often faced with is whether this time is compensable.

The current rule is that if a non-exempt employee spends more than a "de minimis" amount of time sending/receiving emails or texting off duty, the employee must be compensated for that time because it constitutes hours worked. While there is no precise amount of time that may be defined as de minimis, some courts have found daily periods of approximately 10 minutes de minimis unless the aggregate amount of time in a week spent checking emails or texting exceeds 10-12 minutes each day. Therefore, if an employee spends 10-12 minutes each day performing tasks like responding to email or texts remotely, and therefore spends 45 minutes to one hour per week performing such tasks, the time would likely be compensable hours worked and would not qualify as de minimis.

We are expecting clarification on the de minimis standard in a case that is currently pending before the California Supreme Court and will keep you updated.

Game Changer: Do you use Independent Contractors?

Do you use Independent Contractors?

Make sure they are properly classified under new game changing California Supreme Court decision.

By Sara Boyns

In April 2018, the California Supreme Court issued a game changing decision for many California businesses that use independent contractors. Historically, in determining whether a worker was an employee or an independent contractor, the Labor Commissioner, Internal Revenue Service, Employment Development Department, and courts applied a multi factor test. Under that test, for the last 29 years the principal factor in determining whether a worker was an independent contractor was “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired.” Other factors were applied to determine if, on balance, a worker was an independent contractor or an employee.

In Dynamex Operations West, Inc. v. Superior Court (Lee), the Supreme Court of California adopted a new standard, the ABC test. Under the ABC test, the hiring entity must prove all of the following in classifying a worker as an independent contractor:

  1. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. That the worker performs work that is outside the usual course of the hiring entity’s business.
  3. That the worker is customarily engaged in an independently established trade, occupation, or business.

The hiring entity’s failure to prove any one of these three factors will be sufficient to establish that the worker is an employee, rather than an independent contractor, for purposes of California employment laws. Even if the parties agree to an independent contractor relationship, or the worker prefers to be an independent contractor, under California law the worker will not be an independent contractor unless all 3 factors are proven by the hiring entity.

In adopting the ABC test, the Court explained that all individuals who are reasonably viewed as providing services to a business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor, are employees. Workers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business and not as working, instead, in the worker’s own independent business.

Now what do I do? If your business uses independent contractors, you need to evaluate whether the workers will satisfy all of the factors in the ABC test. Many businesses will need to re-classify workers and convert independent contractors to employees. The risk of ignoring this new ABC test and misclassifying workers includes lawsuits by misclassified workers (including potential class actions) for wages, overtime, meal and rest periods, paid sick leave and other employee benefits, and audits and claims for back taxes by the Internal Revenue Service, Franchise Tax Board, and Employment Development Department.

Fenton & Keller Named County’s Top Law Firm in Monterey County Herald and Monterey County Weekly Reader Polls

In its March 22, 2018, edition, the Monterey County Weekly announced that its readers have once again voted Fenton & Keller the Best Law Firm in Monterey County. This is the third consecutive year Fenton & Keller has received this honor.

In addition, the Monterey County Herald recently announced that its readers have voted Fenton & Keller as the Best Law Firm in Monterey County for 2017 in its “Readers’ Choice Awards” poll. Fenton and Keller partner Sara Boyns was also voted the second place winner in the “Best Lawyer” category. The Herald announced the “Readers’ Choice Awards” winners in its March 14, 2018, issue.

All of us at Fenton & Keller would like to express our gratitude to the readers of Monterey County Weekly and the Monterey County Herald for honoring and expressing their confidence in our firm in this way. We would also like to thank our clients for trusting in us and allowing us to serve their changing legal needs for over 50 years!

Click on the links to view these announcements in the Weekly and Herald (page 50).

The New Tax Law: Do I Need To Amend My Estate Plan?

By Kenneth S. Kleinkopf

The new tax law - formally known as the Tax Cuts and Jobs Act (the "Act") - is effective as of January 1, 2018. This article addresses some of the changes to the federal estate, gift, and generation-skipping transfer tax laws, as well as issues to look for in updating your estate plan.

The Act doubled the federal estate, gift, and generation-skipping transfer tax exemptions through the end of 2025. Effective January 1, 2018, each individual has a federal exemption of approximately $11.2 million, and married couples can combine their exemptions for a total of approximately $22.4 million. These lifetime exemptions will be adjusted annually for inflation, beginning in 2019. But, as of January 1, 2026, the estate tax laws are scheduled to revert to the pre-Act law, which provided an exemption of $5.49 million per individual in 2017 (but will continue to be subject to inflation adjustments). The value of a person’s estate that exceeds his or her remaining applicable exemption will be subject to a flat tax rate of 40%.

In addition to the higher lifetime exemptions, the annual exclusion amount—which is the amount that can be given to any individual without the requirement of reporting the gift on a gift tax return (Form 709)—has increased from $14,000 to $15,000 per year. This annual exclusion limit is per individual and married couples can collectively gift up to $30,000 per year to any individual. For example, if husband and wife have three children, they can gift a total of $30,000 to each of their children (e.g. a total of $90,000) annually without being required to file a gift tax return. However, there remains an unlimited exclusion regarding gifts for tuition and medical expenses that are paid directly to the respective institution. For example, grandma and grandpa can pay their grandchild’s tuition, if paid directly to the educational institution, and still give $30,000 to their grandchild without the requirement of filing a gift tax return.

The doubling of the federal estate, gift, and generation-skipping transfer tax exemptions has important consequences for many people. More individuals and married couples will now have estates that are no longer subject to federal estate tax liability (at least through 2025). Individuals who already used all of their federal gift tax exemption under the 2017 limits may want to consider making additional gifts to take advantage of the increased exemption. In addition to outright gifts, this could include more sophisticated gifting strategies, such as charitable remainder trusts (particularly with the increase in the charitable deduction as discussed below), grantor retained annuity trusts or intentionally defective grantor trusts (e.g. sale of certain assets to an irrevocable trust). While it is possible that the increased exemptions will be extended beyond 2025, it is far from certain.

You should reconsider the terms of your current estate plan to ensure the provisions in your documents reflect your wishes and planning strategy. Revocable trusts often use formulas to calculate the amount to fund certain trusts upon the first spouse’s death. You should revisit your plan to review whether any formulas in your documents will have unintended consequences given the new estate tax exemptions. Certain plans could result in more assets passing to a subtrust (which typically occurs upon the death of the first spouse) than originally anticipated. Other plans could be simplified by the increased exemptions, such as with the use of a disclaimer trust.

Regardless of whether an estate is subject to estate tax liability at death, assets will continue to receive a step-up in basis for federal income tax purposes upon a decedent’s death (which will not expire at the end of 2025). For married couples owning community property, both spouses’ halves of the community property also will continue to receive a full step-up in basis upon the death of the first spouse.

The Act also makes many changes to personal income tax rates, corporate tax rates, taxation of pass-through businesses, deductions for charitable gifts (increases the deduction from 50% to 60% of adjusted gross income for gifts to public charities), use of 529 plans, like-kind exchanges, and other tax matters. For example, the new federal deduction for business income from pass-through entities may be relevant to certain business owners, regardless of whether the business is a sole proprietorship, s-corporation, partnership or limited liability company. However, like the estate tax, the pass-through deduction is set to expire at the end of 2025.

If you are interested in reviewing your estate plan, or have questions in general regarding these changes, please contact us to schedule a consultation.

NEWSLETTER - New Gender Identification Laws Will Impact California Employers

By Angus J. Cannon

American society has traditionally recognized only two gender identifications - male and female. However, recent California law has created a third gender identification and expanded the right of individuals to be classified by the gender of their choosing. These laws impose new requirements upon employers with respect to employee gender identity. To avoid potential liability for harassment or discrimination, employers should revise their policies and procedures, and ensure that they are compliant with current law.

California now recognizes a third gender identification for state issued birth certificates and driver’s licenses. In addition to male and female, the Gender Recognition Act creates a "nonbinary" gender identification. Nonbinary is an umbrella term for people with gender identities that fall somewhere outside of the traditional conceptions of strictly either female or male. For changes to birth certificates and other legal documents, the law is effective on September 1, 2018. For changes to driver’s licenses, the law is effective on January 1, 2019. Employers are likely to encounter practical and legal issues if employee identification documents do not conform to state issued identification documents. Notably, employers may be liable for gender-based discrimination if they do not provide legal recognition and equal treatment of an employee’s accurate gender identity.

California has also expanded its anti-harassment training and notice requirements for employers. Senate Bill 396 requires employers with 50 or more employees to include in their mandated sexual harassment prevention training for supervisors and managers additional training about harassment based on gender identity, gender expression, and sexual orientation. The training must include practical examples of such harassment and must be presented by trainers or educators with knowledge and expertise in those areas. The bill also requires all employers to post a Department of Fair Employment and Housing poster regarding transgender rights in a prominent and accessible workplace location. Employers face increased exposure to liability for gender-based discrimination if they not update their sexual harassment prevention policies.

In sum, times are changing and employers must adapt to California’s new gender related laws. Employers who fail to do so will be confronted with practical and legal consequences. As such, gender identification is an area to be aware of and to devote resources to in order to comply with existing non-discrimination laws. The attorneys at Fenton & Keller are well-equipped to provide guidance and training to employers on these issues. Please contact us to learn more about these new laws and to ensure that your business’ practices, policies, and procedures are compliant with current law.

NEWSLETTER - Proposed Changes to PAGA May Limit Lawsuits Filed by "Aggrieved" Employees

By Susannah L. Ashton

The Private Attorneys General Act of 2004 (“PAGA”), Labor Code sections 2699 et seq., permits aggrieved employees to file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for Labor Code violations.

Currently, the only burden on an employee filing a PAGA claim is to simply set forth “the facts and theories to support the alleged violation.” Relying on this language, employees have been able to make accusations against their employer without any real substance to back it up. Further, there is no requirement that the employee actually be “aggrieved.” Consequently, civil penalties are being awarded to employees without regard to whether the employee actually suffered an injury. However, a bill pending before the California Legislature may raise the bar for making allegations and offer some rationality to the PAGA process.

AB-2016 alters the language of PAGA to require that allegations be made with particularity, rather than simply stating an amorphous theory of labor code violations. Specifically, the amendment requires an employee submit notice of alleged violations to the employer that contains, “a statement setting forth the relevant facts, legal contentions, and authorities supporting each alleged violation. The notice shall also include an estimate of the number of current and former employees against whom the alleged violation or violations were committed and on whose behalf relief is sought.”

AB-2016 will also limit awards of civil penalties to employees “based only upon violations by the employer actually suffered by that employee.” The bill also increases the amount of time given to employers to cure any alleged violations from 33 days to 65 days. If such violations are cured within the given time frame, employers may avoid a civil action and resulting penalties.

While these amendments are an exciting prospect for employers, it is important to keep in mind that AB-2016 is still in its early changes. AB-2016 is scheduled for a Hearing with the Committee on Labor and Employment on April 4, 2016 at 1:30pm. To encourage passage of this bill, you may contact the Committee on Labor and Employment by calling (916) 319-2091.

Susannah Ashton Joins Fenton & Keller As Employment Law And Litigation Associate

Fenton & Keller is pleased to announce that Susannah L. Ashton has joined the firm. Susannah’s practice focuses on general civil litigation and employment law litigation and counseling.

With extensive litigation experience in both California and New York, Susannah has represented and advised management in all areas of labor and employment matters including complex class actions and union representation campaigns. Susannah has experience representing clients before the California Labor Commissioner, the California Department of Fair Employment and Housing, the National Labor Relations Board, and the California Agricultural Labor Relations Board. Before joining Fenton & Keller, Susannah gained valuable employment and immigration law experience through her participation in litigation in federal court involving the processing of H-2A visa applications.

Susannah earned her B.A. from the University of California, Santa Cruz and her J.D. from Brooklyn Law School in 2009. During law school, Susannah co-founded the Brooklyn Law Students for Veterans Rights and won second place in a national legal writing competition for employment law.

Andrew Kreeft Becomes Fenton & Keller Shareholder

Fenton & Keller is pleased to announce that Andrew Kreeft has become a shareholder and director of the firm.

Andrew is a 1983 graduate of Georgetown University and a 1986 graduate of Santa Clara University School of Law. Andrew was in private practice in the San Francisco and Monterey Bay areas since 1987 before joining Fenton & Keller in 2016. For almost 30 years, Andrew has specialized in civil litigation with an emphasis on trial practice, general negligence, and tort liability law. His experience includes product liability, premises liability, professional negligence, employment & labor, and business matters. Andrew represents individuals as well as corporate/private entity clients and has tried numerous cases in multiple counties in Northern California and Federal District court. Notably, Andrew was co-lead counsel on a product defect case against an automobile manufacturer which resulted in a $12.5 million dollar jury verdict. He has received the designation of AV Preeminent by Martindale-Hubbell, the highest peer review rating given to attorneys based on legal ability and ethical standards, and is a member of the American Board of Trial Advocates.

Kenneth Kleinkopf Certified As Estate Planning, Trust & Probate Law Specialist

Fenton & Keller is proud to announce that Kenneth S. Kleinkopf has been certified as a specialist in estate planning, trust and probate law by the State Bar of California Board of Legal Specialization. The State Bar program for certifying legal specialists is a California Supreme Court-approved method of certifying attorneys as specialists in eleven specialty areas of law. Attorneys are certified through a process of which includes successful passage of a written examination, completion of specific tasks in the specialty area, attendance at a prescribed number of approved educations programs, and peer review.

WORKPLACE LAW – Fantasy Sports in the Workplace

Question: I recently had an employee ask for permission to host a fantasy football league in the office.  I enjoy fantasy sports and think an office pool could be a nice (pardon the pun) team building activity.  But, I am concerned about allowing something that could be viewed as gambling.  Is an office pool legal?  Are there other concerns or best practices I should consider?
Answer: Allowing for a fantasy football pool in the office may seem like a harmless morale boost (and in fact, studies have found that certain types of office pools can boost morale), but it may present legal and practical challenges for your business.
In California, gambling for money at work is illegal.  Until 2009 even a low-stakes office pool could theoretically result in a misdemeanor.  However, in 2009 the law was revised making most pools an infraction (like a parking ticket, with a $250 fine), so long as the payout is under $2,500 and a few other conditions are met.
Unfortunately, this means that your employee’s suggested office pool is problematic.  In creating the “infraction only” exception the legislature made clear it does not consider small scale pools a problem, and I have found no cases of enforcement occurring except in circumstances that would not have qualified for the exception anyway (such as where the pool administrator is taking a large cut).
That said, condoning any illegal activity at work can lead to significant issues for employers.  For example, while gambling addiction itself is not a protected classification in California - symptoms such as depression are protected and office pools may present dangers for employees facing compulsive gambling issues.  Religious harassment allegations are also a risk if players abstaining for religious reasons are pressured to participate.  Indeed, significant concerns come less from the potential illegality itself, and more from the non-participants.  Whistleblowers reporting illegal activity are protected from retaliation, including those reporting illegal gambling.
It may be legal to institute an office pool with no entry fee or prize of any value (including money, items, perks, or anything of material value).   However, as discussed above, there are numerous issues to consider which potentially outweigh any possible morale gains.
As a practical matter it’s probably impossible to entirely prevent gambling or fantasy sports in the workplace.  If nothing else, employees have rest breaks and smart phones.  Yet, even if the potential for workplace gambling cannot be entirely prevented, cautious employers would still be well served to institute policies forbidding gambling in the workplace, during work time, using work resources (including computers and email), and any involvement with online daily fantasy sports betting (at least until pending legislation clarifies the legality of such websites).
On the other hand, if you do decide to attempt to create an office pool that falls outside of the definition of “gambling” be sure to carefully review California gambling law and implement best practices including describing what types of pools are permitted, describing whether, when and how company property may be used, and specifying that pools cannot be done during work time and cannot interfere with productive work time.  Any policy should also include a complaint reporting procedure, and specify the discipline that applies for violations.


Question: I just hired a new employee and when I gave him a Form I-9 to complete, I noticed that it says “Expires 03/31/2016.”  Does that mean I can’t use this form anymore?  Is there a new Form I-9?
Answer: As you note, the current Form I-9, also known as the Employment Eligibility Verification, appears to have expired a couple of months ago.  Nevertheless, the U.S. Citizenship and Immigration Services (“USCIS”) advises that until further notice, employers should continue using that Form I-9.  The USCIS will be providing updated information on its website about the new version of the form, which is not yet available.  You can access the USCIS website at
All employers, even those with only one employee, are required to complete a Form I-9 for every new employee hired.  The purpose of the Form I-9 is to ensure that employers hire individuals who are legally authorized to work in the United States, which includes U.S. citizens, noncitizen nationals, lawful permanent residents, and aliens authorized to work.
On the first day of employment, the employer must give the Form I-9 to the employee, who on that same day must complete Section 1 of the Form, including the employee’s name, address, date of birth, and an attestation, under penalty of perjury, of the employee’s status in the United States as a citizen, permanent resident, or other.  The employee must sign and date the form.
Subsequently, within three business days of the date employment begins, the employee must present to the employer an original unexpired document or documents showing his or her identity and employment authorization.  The Form I-9 lists acceptable documents to meet this requirement.  It is important that the employee choose which document or documents he or she wishes to present.  The employer cannot require that an employee present specific documents.
Once the employee has presented the original documents, the employer must physically examine each one to determine if it reasonably appears to be genuine and to relate to the person presenting it.  The person examining the documents must complete and sign section 2 of the Form I-9 certifying that he or she has examined the documents, that they appear to be genuine and to relate to the employee, and that to the best of that person’s knowledge, the employee is authorized to work in the United States.
Some employers choose to make photocopies of the documents presented.  If an employer chooses to do this, it must photocopy documents presented by all employees, regardless of position, and regardless of status.
Employers must keep an employee’s completed Form I-9 for the duration of the employee’s employment.  Once that employment relationship ends, the employer must keep the employee’s Form I-9 for three years after the date of hire, or one year after the employment relationship ends – whichever is later.
It is very important for employers to ensure that they keep these Form I-9 records, properly completed, and for the correct period of time.  The Department of Homeland Services, Office of Special Counsel for Immigration-Related Unfair Employment Practices, and the Department of Labor can come to an employer’s premises, with a minimum of three days’ notice, and inspect an employer’s Form I-9’s.  The employer must make these available to any of these agencies.  The penalty for failing to comply with these requirements ranges from $110 to $1,100 per form.