San Francisco Loses Large Tax Case Against Catholic Church

Originally Published on forbes.com on December 6th,2011

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A California Superior Court has ruled against the City of San Francisco in its attempt to levy millions in real property transfer taxes against the Catholic Archdiocese of San Francisco. It is not all that surprising that the city lost.  The case looked rather weak.  The Court did not even get to the constitutional questions since they were able to rule for the Archdiocese based on the statutes.  The interesting question is what Phil Ting, Assessor and Recorder (and mayoral candidate) was up to in pushing the case.  Was it a reflection of the city leadership’s hostility to the church due to its role in Proposition 8 (California’s anti gay marriage referendum) ?  Alternatively Phil Ting, who congratulated himself for bringing in 280 million in new revenue to the City may have just been stretching to grab another 20 million – kind of like a Hail Mary pass – only not against the team that you want to try that on.  First the story.

The Transfers

Here is a portion of the Archbishop’s explanation of what they were up to when the decision was made to make substantial real estate transfers among various church controlled entities:

At that meeting I stated that the issues raised by the civil courts over the past several years have caused dioceses throughout the country to consider whether their existing civil law corporate structures adequately recognize and reflect the unique status of parishes and schools under church law. I added that the courts have made it clear that if a diocese maintains that under Church law parish and school properties cannot be used at the discretion of the bishop then this concept must be unequivocally enshrined in the civil law structures of the Church. As a consequence, our goal here in San Francisco has been to allow the day-to-day operations of our parishes and schools to continue in a cohesive, efficient manner while at the same time establishing simple ownership models that clearly distinguish the canonical assets of the parishes and schools from those of the Archdiocese in general.

There was some suggestion in the media that the motive for the restructuring was asset protection due to sex abuse claims.  The Church denied the accusation.  At any rate a lot of property was shuffled.

The first transfer was made by grant deed dated April 25, 2008 from the Roman Catholic Welfare Corporation of San Francisco (“Welfare Corporation”) to the Roman Catholic Archbishop of San Francisco, a Corporation Sole (“the Corporation Sole”), conveying 111 properties. The second transfer was made by grant deed dated April 25, 2008 from the Corporation Sole to the Archdiocese of San Francisco Parish and School Juridic Persons’ Real Property Support Corporation (“Support Corporation”) conveying 232 properties.

The Case

On December 4, 2008, the Recorder issued a verbal determination that the transfers were subject to San Francisco real property transfer tax of a then unspecified amount. On December 10, 2008, Petitioners timely filed a petition (the “Petition”) with the Review Board challenging the determination that the transfers were subject to the property transfer tax. On June 16, October 6 and October 8, 2009, the Review Board held hearings. On November 30, 2009, the Review Board verbally announced its tentative decision upholding the Recorder’s determination. On January 26, 2010, the Review Board issued its Findings of Fact and Conclusions of Law (“Findings and Conclusions”), which included its written decision upholding the Recorder’s determination.

Not all the property involved was in the City, but other recorders accepted that the transfers were not subject to transfer taxes.  As it turns out they saved their counties some serious legal costs as the Superior Court made the same determination:

The administrative record establishes that the transfers under the restructuring of the Archdiocese were not “realty sold” in either form or substance under applicable law.

The administrative record demonstrates that the transfers were a mere change in form of the ownership of Church properties so as to make them not subject to transfer tax under applicable law.

In the transaction now under consideration the elements characteristic of a “sale” are lacking; there is no agreement to sell; there is no deed containing the description of the realty. The usual bargaining leading up to and culminating in a sale and fixing the value of the property are absent. The change of title results from the filing of the Certificate of Consolidation; it was a form of transfer, but not a sale.

As is set forth above, the administrative record unequivocally establishes that the Archdiocese’s restructuring effected a “mere change in form” because the ultimate responsibility to own and manage the assets of the Archdiocese rests in the Corporation Sole. Both the Welfare Corporation and the Support Corporation were formed to support the Corporation Sole’s religious activities

Tax Policy and The Culture War – A Toxic Mixture

I really wish that tax policy could be declared the Switzerland of the culture war.  It is hard enough to deal with the rigid ideology around fiscal policy that tends to poison the debate without getting into different ideas about sexual morality that probably have minimal net revenue impact.  I’ve been slapping the right around on the issue.  Examples are my pieces – IRS Fight Against Sex Change Deduction was Stupid and Repeal DOMA You Dummies.  When you try to score points for your side of the culture war through interpretations of tax provisions, you are wasting enforcement resources and probably making your side look worse. 

Phil Ting

As a candidate for mayor Phil Ting had started a rather clever campaign called Reset San Francisco.  Since you are probably reading this on a computer, I suppose that I do not have to explain the conceit that forms the basis for the idea. 

Mr. Ting was campaigning for mayor while holding the office of Assessor and Recorder.  Now if you look at a list of  IRS Commissioners, it becomes clear that the office of Commissoner is not a springboard for higher political office.  That is probably a good thing.  We want the IRS to focus on cases that are winners for the government, not ones that play well politicallly to the Commissioner’s political base, win or lose.  So was Mr. Ting trying to score political points by attacking an unpopular deep pocket?  There was certainly enough coverage that indicated the tax was motivated by animosity to the Church:

It seems that Phil Ting likes to promote “gay marriage” and is angry that the Catholic Church supported a YES vote on Prop 8 which defined marriage as between one man and one women. He is now attempting to punish the church financially through the use of his political position.

Somebody with high office in San Francisco who is in favor of marriage equality – shocking.  And there was media support for his postion that did express hostility to the Church:

In a recent press release, Archdiocesan General Counsel Jack Hammel called Ting’s “extreme position” an “assault on all religious organizations and other nonprofits.” But calling Ting a religion/charity-hater is actually pretty mild stuff considering Catholic organizations’ track record  of comparing San Francisco officials to the Third Reich.

The decision is certainly be framed as a victory for the Church, even though it is still tentative:

The Assessor/Recorder apparently expected the Archdiocese to roll over in the face of this attack, but underestimated the resolve of the Church.

 If Mr. Ting was trying to score points for his mayoral campaign, that probably did not work out so well either. He came in twelfth with just over 1,000 votes.  I tend to think that he was just doing his job trying to get more money into the City coffers.  His “reset” mentality is such that the venerable role of the Church, despite what you might think of its teachings on particular moral issues, is of no account.