Opinion
D072818
10-12-2018
ALICIA SMITH et al., Plaintiffs and Appellants, v. CALIFORNIA FRANCHISE TAX BOARD, Defendant and Respondent.
Law Offices of Matthew D. Rifat and Matthew D. Rifat for Plaintiffs and Appellants. Xavier Becerra, Attorney General, Diane S. Shaw, Assistant Attorney General, Brian Wesley and Suman R. Mathews, Deputy Attorneys General, for Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 37-2016-0019344-CU-OR-CTL) APPEAL from a judgment of the Superior Court of San Diego County, Joel R. Wohlfeil, Judge. Affirmed. Law Offices of Matthew D. Rifat and Matthew D. Rifat for Plaintiffs and Appellants. Xavier Becerra, Attorney General, Diane S. Shaw, Assistant Attorney General, Brian Wesley and Suman R. Mathews, Deputy Attorneys General, for Defendant and Respondent.
Alicia and David Smith (collectively, the Smiths) appeal from a judgment in favor of the California Franchise Tax Board (FTB) after the trial court concluded that the FTB did not owe the Smiths a refund for taxes paid on monetary gains from the sale of real property.
After selling certain property in San Diego County in 2003, the Smiths purchased additional properties, including an apartment building on McDowell Road in Scottsdale, Arizona (McDowell Road Property). The Smiths claimed that the transactions were part of a tax deferred exchange under section 1031 of the Internal Revenue Code (26 U.S.C. § 1031; 1031 exchange) and, accordingly, did not pay taxes on the associated gains. However, a 1031 exchange requires the seller to provide written identification of any replacement properties within 45 days of the sale of the relinquished property, and the FTB subsequently concluded that the Smiths had not identified the McDowell Road Property as part of the 1031 exchange within the 45-day period. (26 U.S.C. § 1031(a).) The FTB therefore disallowed the associated deferral and assessed additional taxes; thereafter, the Smiths filed a lawsuit against the FTB contesting the disallowance.
The primary issue at trial was whether the Smiths had identified the McDowell Road Property as required by the statute and associated regulations, and the sole issue on appeal is whether the trial court erred in concluding that the Smiths did not prove that they properly identified the McDowell Road Property within the requisite 45-day period. We conclude that substantial evidence supports the trial court's finding, and therefore affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
Background regarding alleged 1031 exchange
David Smith (Smith) is the sole shareholder of San Diego County Medical Buildings LLC (Medical Buildings), a company that he formed to hold certain real estate assets, and is therefore responsible for the tax consequences of the company. In 2003, Smith decided to sell two properties, an apartment complex and a medical office building, located in San Diego County and held by Medical Buildings. Smith expected to realize gains on the sale of each and wanted to defer the associated taxes, so he planned to use the proceeds in a 1031 exchange. He was also interested in diversifying his real estate holdings, so he looked for potential properties to purchase in Arizona and identified the McDowell Road Property with the help of a broker, Cindy Cooke.
Smith sold the apartment building on September 19, 2003, and Cooke submitted an offer on behalf of Smith to purchase the McDowell Road Property shortly thereafter, on September 30. The parties signed a letter of intent setting the terms of the sale for the McDowell Road Property on October 8, and Smith sold the medical office building in San Diego on October 31. Over the next two months, Smith purchased two other properties—one in Scottsdale, Arizona and one in Escondido, California. His purchase of the McDowell Road Property closed on February 5, 2004.
Chicago Title acted as the escrow agent and Investment Property Exchange Services, Inc. (IPX) acted as the accommodator—an independent party responsible for handling the sale and purchase logistics for complex transactions such as 1031 exchanges—on behalf of Smith and Medical Buildings with respect to the various transactions. Smith was familiar with Chicago Title and had used it as the escrow agent for previous real estate transactions. Chicago Title was a tenant in the medical office building that Smith sold in 2003; IPX was a subsidiary of Chicago Title and had an office inside the Chicago Title office in Smith's building.
The Smiths filed their 2003 tax returns the following year, and excluded the gains from the 2003 property sales, claiming that any associated taxes were deferred as a result of the 1031 exchange. In 2010, the FTB audited the Smiths and, in 2011, the FTB determined that the Smiths had not provided a written identification of the McDowell Road Property as a replacement property to an appropriate party within 45 days of the sale of the relinquished properties, as required by a 1031 exchange. The FTB therefore disallowed the tax deferral with respect to the funds used to purchase the McDowell Road Property and assessed additional taxes, with interest, in the amount of $129,733. The Smiths paid the additional taxes but continued to dispute the FTB's determination and, in 2015, the Smiths filed a lawsuit seeking a refund of the additional taxes.
The parties agreed to try the case without a jury, and further agreed that the factual issue of whether the Smiths had provided written identification of the McDowell Road Property as a replacement property to a qualified party within 45 days of the sale of the relinquished property was dispositive.
Evidence presented at trial
At trial, the Smiths asserted that David Smith had properly identified the McDowell Road Property in a timely manner by hand delivering a replacement property identification letter that included the McDowell Road Property to IPX, whom the parties agreed was qualified to receive it, on September 30, 2003 (first identification letter). The defense argued that the evidence did not establish that Smith actually delivered the first identification letter and that, if he delivered it at all, he delivered it only to Chicago Title, which was not qualified to receive it.
The FTB asserted that Chicago Title was not qualified because Fidelity National Title (Fidelity), and not Chicago Title, was the escrow agent for the transaction related to the McDowell Road Property, but Smith asserted that he worked with Chicago Title as the escrow agent for all of the transactions related to the 1031 exchange, including the purchase of the McDowell Road Property, and that Fidelity owned Chicago Title in any event. The trial court did not resolve this factual dispute because, as discussed post, it did not find Smith's testimony that he delivered the first identification letter on September 30, 2003 credible, regardless of whether he said he delivered it to Chicago Title or IPX. For the same reason, resolution of the dispute is not essential to our analysis on appeal.
Smith testified on his own behalf and stated that he had personally taken the first identification letter form to the escrow agent for Chicago Title on September 30, 2003; that he identified the properties to be included and had the escrow agent fill in the descriptions on the form to ensure that they were accurate and legible; and that he then signed the document in the presence of the escrow agent. Smith had completed 1031 exchanges in the past and understood that he had to deliver the identification letter to the escrow agent or accommodator within the 45-day period, but did not ask for a time stamp on the document because he had worked with this particular escrow agent previously and believed that the agent "knew what she was doing." Smith explained that Chicago Title shared an office with IPX, and stated that he hand delivered the document to IPX, the accommodator, on September 30, 2003. The first identification letter was entered in evidence as Exhibit 6, page 1.
In addition, Smith testified that he signed a second replacement property identification letter on November 1, 2003 (second identification letter), identifying the same relinquished and replacement properties as were identified in the September 30, 2003 letter. This letter was entered in evidence as Exhibit 6, page 2. When asked why he had signed a second identification letter, Smith said that someone asked him to do so, but he did not recall whom. He further stated that he had no recollection of handing or otherwise delivering the second identification letter to anyone.
Together with the first identification letter, the identification letters.
On cross-examination, defense counsel presented to Smith an "interim exchange closing document" prepared by IPX and dated December 5, 2003, and Smith admitted that the document showed the two relinquished properties and the two other replacement properties, but did not list the McDowell Road Property as a replacement property. In addition, Smith admitted that he had stated during his deposition that he had delivered the identification letter to Chicago Title, and not to IPX, but clarified that IPX was part of Chicago Title and that IPX and Chicago Title were in the same building.
The parties stipulated to the introduction of portions of the transcript from Smith's deposition, taken on July 22, 2016. During the deposition, defense counsel showed Smith a copy of the first identification letter. Smith testified that he did not know who had prepared the document and that he had no recollection of the document or of having ever seen it before.
Cooke testified that a colleague had referred the Smiths to her in August 2003 based on the Smiths' interest in purchasing an apartment building in Arizona as part of a 1031 exchange. Her role in the transaction was limited to the McDowell Road Property, and Cooke always understood that Smith intended for the purchase to be part of a 1031 exchange.
When shown the Master Statement associated with the closing, Cooke noted that it listed a $750 exchange fee paid to IPX and stated that she would expect to see such a fee only if the sale were part of a 1031 exchange. However, when shown Exhibit 6, the purported first identification letter, Cooke testified that she "may have" seen it, but added that she typically does not receive such letters because they are usually given directly to the title company or accommodator.
Cooke was aware that IPX was the exchange accommodator, that Fidelity was the escrow officer, and that Fidelity owned Chicago Title and Chicago Title owned IPX, but Cooke worked exclusively with Fidelity on the sale, since it had an office in her building. After becoming aware of the tax issues, Cooke attempted to obtain records from IPX regarding the transaction, but an IPX representative told her that the records were not available because IPX maintained records for only seven years.
The Smiths did not present any witnesses from IPX, Chicago Title, or Fidelity.
Trial court's statement of decision
The trial court issued a written Statement of Decision. In its statement, the court said that it did not find Smith's or Cooke's testimony persuasive. The court questioned their ability to accurately recall the events of 2003, and determined that their recollections were influenced by their bias, prejudice, or personal stakes in the outcome of the case. The court concluded that Smith and Cooke had testified truthfully about some matters but not others, and accepted only the testimony that it found credible.
Specifically, with respect to the identification letters, the court noted that Smith testified that he had delivered the first identification letter to Chicago Title's office, that IPX was also located in the same office, and that an IPX representative had completed the real property descriptions in the letter. However, the court noted that there was no corroboration of receipt on the face of the first identification letter, and no other evidence to support Smith's testimony that he had delivered it. Given the passage of time and the inconsistent statements made by Smith during his deposition, the court ultimately concluded that Smith's testimony was not sufficient on its own to establish that Smith had delivered an identification letter to the requisite person within the statutory timeframe. The court therefore concluded that the Smiths were not entitled to a tax refund and entered judgment in favor of the FTB.
The Smiths appeal.
DISCUSSION
Section 1031 of the Internal Revenue Code states, "[n]o gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment." (26 U.S.C. § 1031(a).) California Revenue and Taxation Code section 18031 adopts section 1031 of the Internal Revenue Code as part of the California Revenue and Taxation Code.
To take advantage of this provision, a taxpayer must identify the replacement property within 45 days and must receive the replacement property within 180 days of the date on which he or she transfers the relinquished property. (26 U.S.C. § 1031(a)(3).) The identification must be made "in a written document signed by the taxpayer and hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to either—[¶] (i) The person obligated to transfer the replacement property to the taxpayer (regardless of whether that person is a disqualified person as defined in paragraph (k) of this section); or [¶] (ii) Any other person involved in the exchange other than the taxpayer or a disqualified person [as defined therein]. [¶] Examples of persons involved in the exchange include any of the parties to the exchange, an intermediary, an escrow agent, and a title company." (26 C.F.R. § 1.1031(k)-1(c).)
The trial court determined that the Smiths did not meet their burden to prove that they delivered a written identification of the McDowell Road Property as a replacement property to an appropriate party within the 45-day period. The Smiths assert that the trial court erred in making this finding because the court improperly discounted David Smith's testimony regarding his delivery of the first identification letter, and because the court required that additional proof of hand delivery appear on the face of the document, which is not required by the statute or associated regulations.
We review the trial court's factual determination regarding delivery of the identification letters for substantial evidence and our review " 'begins and ends with the determination as to whether there is any substantial evidence contradicted or uncontradicted which will support the finding of fact.' " (Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 503; Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 632 (Winograd).) Accordingly, we defer to the trial court's credibility determinations and weighing of the evidence, and affirm the judgment so long as the trial court's factual findings are supported by credible evidence, even if we consider the supporting evidence to be slight in comparison to the contradictory evidence. (See Winograd, at p. 632; Provencio v. WMA Securities, Inc. (2005) 125 Cal.App.4th 1028, 1031; Howard v. Owens Corning (1999) 72 Cal.App.4th 621, 630-631 (Howard).)
The Smiths assert that the interpretation of a statute is a legal question that this court reviews de novo. (See Harustak v. Wilkins (2000) 84 Cal.App.4th 208, 212.) We agree, but, as explained ante, the issue presented here does not require this court to interpret any statute or regulation; therefore, the associated de novo standard of review is not applicable. --------
There is substantial evidence supporting the trial court's factual finding that the Smiths failed to carry their burden to prove timely delivery of the first identification letter. The only direct evidence indicating that Smith delivered the letter to Chicago Title or to IPX was Smith's own testimony. However, the trial court did not find Smith's testimony credible because it was self-serving and in direct conflict with his deposition testimony from less than a year earlier. On appeal, we accept the trial court's credibility determination with respect to Smith's testimony. (See Winograd, supra, 68 Cal.App.4th at p. 632.)
The only other witness presented by the Smiths was Cooke. She testified that she was aware that the Smiths were interested in the McDowell Road Property as part of a 1031 exchange, but also stated that she had no specific recollection of the identification letters, and that she typically would not receive such letters since they are usually given directly to the title company or accommodator. Notably, the Smiths did not present any testimony from anyone at IPX or Chicago Title regarding their receipt of the first identification letter. The trial court acknowledged that Cooke's testimony provided some corroborating evidence of Smith's motivation to identify the McDowell Road Property in association with the 1031 exchange, but concluded that there was no further direct or indirect evidence indicating that Smith had delivered the first identification letter to an appropriate party within the 45-day period. Substantial evidence supports that finding.
The Smiths assert that the fact that the FTB allowed the 1031 exchange for the other two replacement properties corroborated Smith's testimony regarding the delivery of the first identification letter. However, the identification of the other two replacement properties was not at issue in the present case and the record on appeal does not indicate whether the Smiths relied on the same first identification letter for those properties, or some other identification that did not include the McDowell Road Property. Further, a closing document from IPX that was acknowledged by Smith and subsequently entered in evidence listed the two other replacement properties, and thus corroborated the identification of those properties, but not the McDowell Road Property.
The Smiths also assert that a letter submitted in evidence from IPX to Medical Buildings, dated January 27, 2004, independently established that IPX received the first identification letter, because it listed an address for IPX that was the same as the address for Chicago Title and identified the McDowell Road Property as "Replacement Property in an exchange." However, despite referring to the McDowell Road Property as a "Replacement Property," the letter does not reference or otherwise provide any evidence of the date on which the McDowell Road Property was identified as such. Moreover, although there was an additional dispute at trial as to whether Smith delivered the first identification letter to Chicago Tile or IPX, if he delivered it at all, the trial court did not base its finding on that issue and instead found that there was no credible evidence proving that Smith delivered the first identification letter to any qualified party within the 45-day period. As discussed, we do not reweigh the evidence or review the trial court's credibility determinations on appeal. (See Howard, supra, 72 Cal.App.4th at pp. 630-631; Winograd, supra, 68 Cal.App.4th at p. 632.)
Finally, the Smiths allege that the trial court improperly inserted a requirement not found in the relevant statute or associated regulations, i.e., that there be actual proof of hand delivery in the form of a receipt or time stamp on the face of the identification letters. The record does not support this assertion. In the Statement of Decision, the court stated, "there must still be some evidence—direct or indirect—to support Dr. Smith's testimony that he 'delivered' one or both of the [identification] letters" and went on to note that neither of the letters reflected any such corroboration, such as a stamped date or time receipt, on its face. The trial court then reiterated that it did not find Smith's own testimony regarding the delivery of the identification letters credible given the passage of time and his own conflicting testimony at his deposition, before concluding that the Smiths had failed to carry their burden to establish that they delivered either of the identification letters within the statutory timeframe. The trial court did not conclude that a time stamp or other documentary evidence of receipt on the face of the identification letters was necessary to prove that a timely identification had been made, but simply noted that none existed and considered that evidence as one factor, among others, in determining that the Smiths had not carried their burden to establish timely delivery of the identification letters.
Based on the foregoing, we conclude that substantial evidence supports the trial court's conclusion that the Smiths did not meet their burden to prove that they delivered written identification of the McDowell Road Property to an appropriate party within the requisite 45-day period, and that the trial court did not improperly inject any additional requirements into the statutory or regulatory provisions.
DISPOSITION
The judgment is affirmed. Respondent FTB to recover costs on appeal.
AARON, J. WE CONCUR: McCONNELL, P. J. O'ROURKE, J.