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For Gallo, Rich Land Yields Low Taxes

The Monte Rosso Vineyard is a gem of Sonoma
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The Monte Rosso Vineyard is a gem of Sonoma
Winemaker saves millions on historic vineyard. Thanks, Prop 13.

SONOMA -- No matter who owns it, the Monte Rosso Vineyard, set high above Sonoma’s Valley of the Moon, is one of the loveliest and most historic vineyards in California’s wine country.  

Several members of the Gallo winemaking family bought the vineyard for an undisclosed amount about eight years ago. The sellers were descendants of another California winemaking dynasty, the Martinis, whose Italian-immigrant forbearer, Louis M. Martini, began making wines in the area a century ago. Martini christened the hillside vineyard he acquired in 1938 “Monte Rosso” as a nod to the land’s rich red soil.

Much changed after the deal closed: the Gallos were the new owners of record of the vineyard. The family-owned Gallo operation, the second-largest winery in the world, was better able to market and distribute the still-extant Louis M. Martini brand.

But other things remained notably unchanged: the vineyard's bargain-basement property taxes, for example.

The Monte Rosso acquisition was intricately structured so that the Gallos still pay the Martini’s old-timer tax rate on the property and several other prime pieces of land in Napa and Sonoma acquired from the Martinis around the same time.

All told, the Gallos acquired about 1,300 acres of their current 15,000 California vineyard acreage from the Martinis, and none of that land was reassessed after the acquisitions. The deal took such elegant advantage of California’s arcane property-tax laws that even Napa’s top tax collector was left ruefully impressed. “We realized from the beginning how smart they were. They used [a] loophole in the law to manage to avoid reassessment,” which would have been in the “tens of millions of dollars,” said Napa County Tax Assessor John Tuteur.

The transaction was “absolutely legal, even though 100 percent of the shares changed hands,” Tuteur said.

The Gallos declined to comment.

Proposition 13, passed in 1978, froze property-tax bills for residential and commercial property at 1975-1976 levels, except for an annual increase that cannot top 2 percent. Property cannot be re-assessed unless it is modified or sold. Some agricultural land is also eligible for lower taxes under the state's Williamson Act, though most of the Martini properties were not.

The sale of a house is relatively straightforward. But the sale of commercial property, as shown by the Martini/Gallo transaction, is considerably more complicated.

Commercial property is reassessed only if a single entity acquires more than 50 percent of the asset. Since none of the Gallo heirs as an individual assumed more than a 50 percent stake in Monte Rosso or any of the old Martini land, it is still treated, for tax purposes, as if it had never changed hands at all.

Commercial property is quite a different beast than residential property, and the act of its changing ownership is obscured by the blur of real estate investment trusts, limited liability corporations, family trusts, and other interests that officially own the properties. Precise data on how much of the state’s commercial property still pays pre Prop. 13-taxes is hard to come by, says Lori Hsu, who follows these issues for the state’s Legislative Analyst's Office, a nonpartisan state agency that evaluates the impact of any ballot initiative or bill. Hsu says that her office cannot afford to buy the necessary county-level data to perform a concrete analysis.

A growing drumbeat sounded by community activists, elected officials and groups backed by public-employee unions has begun focusing wider attention on the Martini/Gallo deal and other commercial beneficiaries of Prop. 13. All are careful not to advocate any changes to Prop. 13 as it applies to residential owners, given that law’s still-widespread popularity among voters.

There is confidence among reform advocates that some adjustments to Prop. 13 and commercial property might be possible in the next couple of years, especially if the state elects a Democrat as governor. “Things are becoming more ripe,” for change, said Tom Ammiano, a state legislator from San Francisco, whose bill to strip commercial properties of their below-market assessments when the property changes hands in May passed a key committee and is awaiting a floor vote.

“The populism of the issue has [recently] been brought home, particularly to middle-class people seeing their teachers laid off, health-care clinics closing,” Ammiano said.

Ammiano said his bill is now in the “quiver” of strategies state Democrats hope to deploy during Sacramento's looming budget battles. If the bill can be bundled with and soften the effects of a bill containing cuts to popular programs and services, there is a possibility that it could be passed as a revenue-neutral way to forestall some likely cuts.

The measure is opposed vehemently by business groups, including the California Chamber of Commerce, and it is unlikely a Republican governor would sign it.

But Tuteur, the Napa County tax chief, doubts that even Ammiano’s measure as now written will actually close the “loophole,” as he calls it, that saved the Gallos so much on their Martini acquisition. “Ammiano is making some waves, and I compliment him for trying to tackle this,” Tuteur says. But terms such as “single transaction” and “person” rather than “persons” in the bill are sufficiently vague and subvertible, he added, that he fully expects sharp-elbowed tax attorneys to structure deals in ways that will continue to dodge reassessments. The economic incentive to do so is just too rich to expect otherwise.

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