BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 507                      HEARING:  4/27/11
          AUTHOR:  DeSaulnier                   FISCAL:  Yes
          VERSION:  3/29/11                     TAX LEVY:  No
          CONSULTANT:  Grinnell                 

                PROPERTY TAXATION: CHANGE IN OWNERSHIP STATEMENT
          

          Increases Penalties for Failing to File, and Extends 
          Deadlines for New Owners to Submit Change in Ownership 
          Statements


                           Background and Existing Law  

          Assessors revalue property at current, full market value 
          for property tax purposes whenever it changes ownership or 
          is newly constructed.  Whenever ownership changes, the new 
          owner must file a Change in Ownership Statement. However, 
          there is no penalty for failure to file the statement 
          unless the Assessor makes a written request for the 
          statement and the owner subsequently fails to file the 
          statement within 45 days.   Additionally, persons who 
          acquire control or ownership of legal entities that own 
          property must file a change in ownership statement with the 
          State Board of Equalization (BOE), but again, no penalty 
          applies for failing to file the statement with BOE.  BOE 
          then makes a written request to the person for the 
          statement, and assessors may then apply the penalty if the 
          person does not respond to the BOE written request.

          The penalty for failing to file a Change in Ownership 
          Statement after receiving a request from the Assessor is 
          10% of the tax, up to a maximum of $2,500, if the violation 
          was not willful.  The County Board of Supervisors may abate 
          the penalty due to reasonable cause, provided the taxpayer 
          filed an application for abatement within 60 days after the 
          Assessor's notification of the penalty.

          Alternatively, the new owner may file a Preliminary Change 
          in Ownership Report (PCOR), which is nearly identical to 
          the Change in Ownership Statement, at the time the deed for 
          change in ownership is recorded, thereby generally 
          satisfying the requirement for filing the Change in 




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          Ownership Statement.  The statute prescribes the details of 
          the report, but leaves to the BOE the task of determining 
          the exact form for Change in Ownership Statements.
















































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                                   Proposed Law
                                         
          SB 507 increases the penalty for new owners failing to file 
          a Change in Ownership Statement upon request from the 
          assessor or the State Board of Equalization (BOE): 
                 From $2,500 to $5,000 for property eligible for the 
               homeowners' exemption, and 
                 From $5,000 to $20,000 for property not eligible 
               for the homeowners' exemption.  
          The measure extends the deadline from 45 days to 90 days 
          for new owners to file a change of ownership statement with 
          either the assessor or BOE, and to comply with the request 
          without penalty.  SB 507 applies to statements law requires 
          new owners file with assessors for locally-assessed 
          property, or with BOE, which collects the statement when a 
          legal entity changes ownership or control.  

          SB 507 provides that the penalty shall be abated if the new 
          owner notifies the BOE and the Assessor within 60 days of 
          notice of the penalty that the request was based on 
          erroneous information.  The bill provides that the penalty 
          also applies if the new owner submits an incomplete form 
          and does not supply missing information upon a second 
          request.  

          The measure requires the assessor to mail the request for 
          the statement to the new owner at the address specified on 
          the instrument that records the property ownership change, 
          the document evidencing the transfer of interest, or on the 
          PCOR.  The assessor must send notice of the penalty to the 
          address on the PCOR, unless the new owner notifies the 
          assessor of a change in address, in which case the assessor 
          shall mail the notice of any penalty to that address.  If 
          none of these documents show an address, the assessor may 
          use any address he or she reasonably knows for the new 
          owner to send the request or the notice of the penalty.  

          SB 507 deems that a change of ownership statement is filed 
          on the date of the postmark affixed by the United States 
          Postal Service or the date certified by a bona fide private 
          courier statement.  The bill changes the contents of the 
          notice to taxpayers on the statement to reflect the higher 
          penalty amounts, longer deadline, and revised dating 
          procedures in each section spelling out the contents of the 
          form (R&T §480, §480.1, and §480.2.)  The measure also 
          states that because this part of Property Tax Law refers 





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          only to County Boards of Supervisors but many counties have 
          assessment appeals boards, then references to Boards of 
          Supervisors also refer to assessment appeals boards.

                               State Revenue Impact
           
          No Estimate.












































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                                     Comments  

          1.   Purpose of the bill  .  According to the Author, "A 
          property owner's failure to report changes in ownership, 
          willful or not, has greatly reduced the ability of county 
          assessors and the BOE to efficiently process these changes. 
          It is time to increase the penalty for non-compliance so as 
          to encourage timely response to requests for information, 
          should a preliminary change in ownership be incomplete or 
          should a county assessor or the BOE require additional 
          information for processing. The purpose of this legislation 
          is not to generate revenue for assessors' offices; rather 
          the penalty increase is an attempt to encourage timely 
          filing of the Change of Ownership Statement (COS). 
          Taxpayers often view the low penalty as an opportunity to 
          postpone timely filing of the COS to delay paying 
          appropriate property taxes. The increase in the penalty is 
          an attempt to eliminate the financial advantage of late 
          filing and to facilitate timely payment of property taxes."

          2.   Uncomfortable questions  .  Taxpayers generally want to 
          do the right thing.  Most do not intentionally flaunt the 
          law, and comply with relevant reporting requirements.  
          Increasing penalties for failing to report property 
          transfers assumes widespread malfeasance which may or may 
          not exist.  Additionally, assessors may be levying 
          penalties on notices which never reach the new owners of 
          the property, who would have complied had they been made 
          aware of the requirement.  

          3.   On the nature of penalties  .  Tax enforcement depends on 
          effective penalties to maintain taxpayer compliance, 
          thereby promoting equity among taxpayers and preventing 
          shifting the costs of public services from tax scofflaws to 
          law-abiding citizens.  Taxpayers cannot be expected to 
          follow the law unless the penalty amounts exceed the 
          benefit of not following the law.  Consider a taxpayer who 
          purchased an office complex for $5 million with a current 
          assessed valuation of $1 million. The taxpayer would pay 
          $40,000 more in property taxes per year if reported and 
          reassessed (at the 1% rate), but only be subject to a 
          maximum penalty of $2,500 under current law for failing to 
          file the statement.  A sensible person would not report the 
          information.  SB 507 changes this cost-benefit calculation 
          to improve compliance with existing law amongst owners of 
          high-value ($2.5 million or more), non-homeowners' exempt 





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          properties with a strong incentive not to report given the 
          cap on penalties in existing law.

          4.   Look before you LEOP  .  Often times, assessors are 
          unaware when ownership changes in a legal entity which can 
          trigger reassessment of properties owned by that legal 
          entity, often times relying only on changes in title 
          information supplied by the County Recorder.  To help track 
          potential reassessments, BOE created the Legal Entity 
          Ownership Program (LEOP) in 1982 to help find and detect 
          changes in control and ownership of corporations, 
          partnerships, and other legal entities, which have no 
          recorded deed or notice of a transfer of an ownership 
          interest in a legal entity.   Under LEOP, the Franchise Tax 
          Board sends to the BOE a list of legal entities that have 
          reported a change in control or change in ownership on 
          income tax returns, analyzes completed statements to 
          determine changes in control or ownership, and notifies 
          county assessors of changes in control and ownership.  To 
          assist these efforts, the Legislature established a penalty 
          for legal entities failing to self-report a change in 
          ownership and control to BOE (SB 816, Ducheny, 2009).   

          5.   Have we met before  ?  SB 507 is very similar to AB 843 
          (Eng, 2007) and
          AB 926 (Chu, 2006), measures approved by the former 
          Committee on Revenue and Taxation, but vetoed by Governor 
          Arnold Schwarzenegger.  Governor Schwarzenegger stated in 
          vetoing AB 926 that while a reasonable argument existed for 
          raising the penalty cap, he was concerned that taxpayers 
          did not actually receive requests and penalty notices from 
          Assessors in a timely manner.  AB 843 responded to the veto 
          message and crafted provisions in this bill that extend the 
          time period from 45 days to 60 days before the Assessor 
          levies penalties for failing to respond to a request and 
          clarify taxpayer delivery protocols.  However, Governor 
          Schwarzenegger was not convinced by the changes, stating 
          his reservation "that the notification procedures in this 
          measure do not adequately ensure that property owners 
          actually receive requests from county assessors in a timely 
          manner."  SB 507 allows new owners 90 days to respond to 
          the request of the assessor and BOE, double the time in 
          existing law, and 30 days longer than AB 943 offered.

          6.   Suggested amendments  .  The Committee should amend SB 
          507 to delete the specific requirements on the assessor 





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          from the form to prevent it from becoming too long and 
          cumbersome for taxpayers (Page 4, lines 37 through 40, Page 
          5, lines 1 through 3 and 4 up to "assessor.")  The 
          Committee should also amend the measure to clarify that the 
          assessor determines whether the penalty was based on 
          erroneous information, abates the penalty, and notifies the 
          new owner of the abatement.

                        Support and Opposition  (04/21/11)

           Support  :  California Assessors' Association; California 
          State Association of Counties, California Tax Reform 
          Association.

           Opposition  :  Unknown.