Court Upholds Reassessment Following Merger

A state appellate court Tuesday upheld the Orange County assessor’s decision seven years ago to reassess property owned by Sav-On Drugs Inc. after Sav-On was acquired by Jewel Co. Inc. of Chicago.

The opinion by the 4th District Court of Appeal in Santa Ana means higher property taxes for the Chicago firm.

Jewel had claimed that its merger with Sav-On was not a change of ownership or corporate control under Proposition 13. The 1978 voter-passed constitutional amendment cut property taxes and prohibited reassessments, except when ownership or control of property changes.

The Orange County assessor disagreed with Jewel’s claim and reassessed dozens of properties in the county at a total of $32.5 million, up 50% from the pre-merger assessment of $21 million, according to Jewel.

Timothy G. Laddish, the deputy attorney general who filed arguments on behalf of Orange County, said he expected the decision to have a “substantial impact” on business mergers and acquisitions.

“We believe the situation was very clear, and the court came to the same decision that we did,” said Orange County Assessor Bradley L. Jacobs.

Jewel argued that the deal through which it acquired control of Sav-On, with 143 stores in California, Nevada and Texas, did not trigger any federal or state corporate income tax payments. The Internal Revenue Service found the transaction to be “merely a change in the form of an . . . investment,” according to Jewel attorneys.

Determining whether a business merger constitutes a “true” change in ownership as opposed to a “paper” change is like “touring a legal mine field,” according to Justice Thomas F. Crosby Jr., who wrote the appellate court opinion.

“The vicissitudes of corporate control in the business world are often as mercurial and confused as the marital history of Henry VIII,” Crosby wrote.

In the merger, Jewel acquired 100% of Sav-On common stock by cash purchase and an exchange of Jewel preferred stock. Sav-On was merged into a Jewel subsidiary, and the subsidiary then changed its name to Sav-On Drugs Inc.

Although the deal was considered a tax-free reorganization by the IRS and was allowed to go unchallenged by the state Franchise Tax Board, the court concluded that ownership had changed for purposes of Proposition 13 and that the reassessment was proper and legal. To rule otherwise, Crosby wrote, “would effectively stifle the electorate’s intent . . . that a change in control, direct or indirect, will permit a reassessment.”

“The question was simple: Was there a change in ownership of the real property? Then it gets complex,” Laddish said. “The court cut through all that and ruled it was a true change of ownership, rather than a paper change of ownership.”

Lawyers for Sav-On could not be reached for comment.