The California State Teachers’ Retirement System ("CalSTRS"), formed  two Delaware limited liability companies for the purpose of purchasing and holding title to two investment properties in Alameda County, California.   CalSTRS was the sole member of these LLCs and The City of Oakland and Alameda County imposed over $3.5 million in documentary transfer taxes.  Both LLC agreements provided that "The purpose of the Company is to implement the essential governmental function of the Member ([CalSTRS]) by entering into that certain Contract of Sale (the ‘Purchase Agreement’) between the Company and [the LLC], . .   among others, in connection with the acquisition by the Company of the property located at [the specified location]. . . ."  After paying the taxes the LLCs sought refunds based on the theory that they, like their sole member CalSTRS, are “political subdivisions” of the State of California and therefore exempt from paying the tax.

Neither the trial court nor the Court of Appeal bought the LLCs' argument.  In CSHV 1999 Harrison, LLC v. County of Alameda, Cal. Ct. Appeal Case No. A163369 (May 31, 2023), the Court noted that LLCs are entities distinct from their owners under both Delaware and California law.  The Court further noted that each of the LLC agreements provided that the LLC would be disregarded entities "Federal and relevant State income and/or franchise tax purposes and for no other purpose whatsoever . . ." (emphasis in original).  The Court of Appeal acknowledged that it could be argued that local government receives a windfall when CalSTRS uses an LLC to purchase property rather than purchasing the property directly.  However, the Court believed that was an argument that CalSTRS should address to the legislature.

California State Agency Prefers Delaware to California Law

Apart from the holding, the Court's opinion is another unfortunate example of the judicial conflation of corporations and LLCs - describing CalSTRS as having "incorporated" the two LLCs.  The fact that a California state agency would prefer Delaware's LLC law to California's law is also a striking vote of "no confidence" in California law.