BILL ANALYSIS Ó
SB 507
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Date of Hearing: June 27, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
SB 507 (DeSaulnier) - As Amended: May 11, 2011
REVISED
Majority vote. Fiscal committee.
SENATE VOTE : 21-13
SUBJECT : Property taxation: change in ownership statement:
penalties.
SUMMARY : Extends from 45 days to 90 days the deadline for new
owners of real property and certain legal entities to submit a
change-in-ownership or a change-in-control statement and
increases the penalty for failure to file a change-in-ownership
statement in the case of real property transfers that must be
reported to the local county assessor. Specifically, this bill :
1)Extends from 45 days to 90 days the time period to file:
a) A change-in-ownership statement (COS) required to be
filed by a new property owner for real property transfers
that must be reported to the local county assessor;
b) A Legal Entity Ownership Program (LEOP) COS or a
change-in-control statement required to be mailed by a
legal entity to the State Board of Equalization (BOE); or
c) A response to a BOE written request for a legal entity
to file a LEOP COS or change in control statement.
2)Increases the maximum penalty for failure by a new property
owner to timely file a COS, upon request from the assessor
from:
a) $2,500 to $5,000 for all property eligible for the
homeowners' exemption; and
b) $2,500 to $20,000 for property not eligible for the
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homeowners' exemption.
3)Clarifies that the penalty imposed on a legal entity for
failure to file a LEOP COS with the BOE is to be levied by the
assessor.
4)Requires the assessor to identify, in his/her written request
for a COS, the real property or manufactured home for which
the statement is required to be filed and requires the notice
of penalty to identify the parcel or parcels for which the
penalty is assessed.
5)Clarifies that the penalty applies if either the new owner or
a legal entity submits an incomplete form and does not supply
missing information upon a second request from the assessor or
BOE, whichever is applicable.
6)Provides that a penalty imposed on a legal entity for failure
to file a LEOP COS may be abated by the county assessor
responsible for assessing the penalty, if the entity, within
60 days of the notice of penalty, notifies both the BOE and
the assessor that the request was based on erroneous
information. States that, if a county board of supervisors
(board) has created an assessment appeals board, the appeals
board is authorized to abate the penalty and requires that an
application for the abatement be filed with the assessment
appeals board.
7)Specifies all of the following:
a) The address to which the assessor must mail his/her
request for a COS statement or a notice of a penalty for
failure to file such statement;
b) That the 90-day period, within which a new owner is
required to file the statement, begins with the date of the
mailing, rather than the date of the written request; and
c) That the postmark date will serve as the date on which
the property owner is deemed to have filed the statement.
8)Imposes a state-mandated local program and provides that, if
the Commission on State Mandates determines that this bill
contains costs mandated by the state, reimbursement for those
costs shall be made as specified.
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EXISTING LAW :
1)Provides that all property is taxable, unless otherwise
provided by the California Constitution or federal laws,
ÝSection 1(a), Article XIII, California Constitution]. Limits
ad valorem taxes on real property to 1% of the full cash value
of that property (Proposition 13). Requires real property to
be reassessed to its current fair market value whenever a
"change in ownership" occurs. ÝCalifornia Constitution,
Article XIII A, Section 2; Revenue and Taxation Code (R&TC)
Sections 60 - 69.5]. Provides that "change in ownership"
includes a transfer of any interest in real property between a
corporation, partnership, or other legal entity and a
shareholder, partner or any other person. ÝR&TC Section
61(j)].
2)Specifies in RT&C Sections 60 through 69.5 what constitutes "a
change in ownership." Sets forth the general rule that, when
real property is owned by a legal entity, the purchase or
transfer of ownership interests in that entity does not
trigger a change in ownership of the property, unless (a)
there is a "change in control" of the legal entity, or (b) one
person or entity acquires more than 50% of the ownership
interest of the entity. (R&TC Section 64). Thus, when any
person or entity obtains control, through direct or indirect
ownership or control, of more than 50% of the voting stock of
a corporation, or a majority ownership interest in any other
type of legal entity, a reassessment of real property owned by
the acquired legal entity (or any of its subsidiaries) is
triggered. ÝR&TC Section 64(c)(1)(A)]. Furthermore, when
voting stock or other ownership interests representing
cumulatively more than 50% of the total interest in a legal
entity is transferred by any of the "original co-owners" in
one or more transactions, the real property that was
previously excluded from reappraisal will be reassessed.
ÝR&TC Section 64(d)].
3)Provides specific exemptions from reassessment for
intra-family transfers, replacement residences of senior
citizens and disabled persons, and specific types of home
improvements.
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4)Requires an owner to file a COS within 45 days of acquiring
real property located in California. However, it requires the
assessor to make a written request of the property owner for a
COS and precludes the imposition of the penalty, unless the
property owner fails to provide the COS within 45 days after
the written notice. Imposes a penalty for failure to timely
file a COS, after receiving a written request from the local
county assessor. The penalty is equal to the greater of $100
or 10% of the property tax that would be due, where such
failure is not willful. Limits the penalty to $2,500 for all
properties.
5)Provides that, as an alternative to a COS, the new owner may
file a preliminary change-in- ownership report (PCOR), which
is nearly identical to the COS, at the time the deed for
change-in-ownership is recorded.
6)Requires a person who acquires control or ownership of legal
entities that own property to self-report a change in control
and file a COS with the BOE. Imposes a penalty for failure to
self-report within 45 days of the event that triggers the
change in control or a change in ownership. The penalty
amount equals 10% of the taxes applicable to the new base year
value reflecting the change in control or change in ownership
of the real property owned by the legal entity.
7)Provides that the board may abate the penalty if the assessee
(a) establishes to the satisfaction of the board that the
failure to file the COS as required was due to reasonable
cause and not due to willful neglect, and (b) has filed the
statement with the assessor and filed with the board a written
application for abatement of the penalty no later than 60 days
after being notified of the penalty. Specifies that, in those
counties that have adopted a special resolution, the penalty
may be automatically abated if the assessee files the COS with
the assessor no later than 60 days after being notified of the
penalty.
8)Prescribes the specific contents of the form to be used to
report a change of ownership or control.
FISCAL EFFECT : According to the BOE staff, this bill will have
no direct impact on General Fund revenue.
COMMENTS :
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1)The Author's Statement . The author states that, "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)Arguments in Support . The proponents state that SB 507 would
encourage "compliance with existing property tax law by
extending the time period for filing a change in ownership
statement, and increasing the cap on the penalty charged upon
failure to file." They argue that for "properties valued over
$2.5 and $10 million, respectfully, taxpayers often view the
low penalty as an opportunity to postpone timely filing of the
COS ÝChange in Ownership Statement] and delay paying
appropriate property taxes." The proponents contend that the
"increase in penalty on those properties ? is an attempt to
eliminate the financial advantage of late filing and to
facilitate timely payment of property taxes."
3)COS: Transfers of Real Property . A COS is a statement that
must be filed by a buyer of real property or of a manufactured
home with the county in which the property or manufactured
home is located. Most buyers, however, file a PCOR at the
time the transfer of property is recorded by the county
recorder, and thus, are not required to file a COS, which is
almost identical to a PCOR. Both COS and PCOR provide the
local county assessor with the information necessary to value
the transferred property and to determine whether the transfer
of property qualifies for one of the many
"change-in-ownership" exclusions from property reassessment.
Generally, if a buyer has not filed a PCOR, he/she is required
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to file a COS. However, no penalty for failure to file a COS
is imposed on the buyer, unless the assessor makes a written
request and the buyer fails to respond within 45 days of that
request. The penalty equals to the greater of $100 or 10% of
the property taxes due on the property and is capped at $2,500
in the case of a non-willful failure. Thus, as noted by the
BOE staff, at the basic 1% tax rate, the maximum penalty
threshold of $2,500 applies to any property with a new base
year value in excess of $2.5 million. But, if the failure to
file is deemed willful, the $2,500 cap does not apply and the
penalty equals 10% of the property's new base year value.
4)LEOP COS: Transfers of Ownership Interests in Legal Entities .
Generally, properties owned by legal entities are taxed under
a "separate entity" theory, which means that transfers of
interests in legal entities do not constitute changes in
ownership of the real property owned by those legal entities.
Thus, as long as the property is owned by the same legal
entity, it would not be reassessed, even if most or all of the
ownership interests in the entity (i.e., stock in the
corporation, partners in the partnership) had changed
ownership. However, the existing law prescribes two
exceptions to this general rule. First, when a person or an
entity obtains control, through direct or indirect ownership,
of more than 50% of the interest in any type of legal entity,
a reassessment of all real property owned by the acquired
legal entity as of the date of the change in control is
triggered. Secondly, a similar reassessment is triggered when
ownership interests representing cumulatively more than 50% of
the total interests in a legal entity are transferred by any
of the "original co-owners" in one or more transactions.
Often, assessors are unaware when changes in the ownership of a
legal entity occur, as they rely only on changes in title
information supplied by the local county recorder. In 1983,
as explained in the BOE analysis of this bill, BOE created the
LEOP to help track potential reassessments. Under this
program, legal entities are required to report to the BOE a
change in ownership when an entity acquires more than a 50%
ownership interest in another legal entity. Apparently, the
form used to report the change in control is substantively
different from a COS (although both are referred to as 'COS').
To differentiate between those two types of statements, the
BOE refers to the latter as a LEOP COS, which is required to
be filed with the BOE, instead of the local assessor's office.
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The reports help assessors to 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, which allows BOE to analyze completed
statements to determine changes in control or ownership and
notify county assessors of those changes.
Thus, similarly to the filing requirements applicable to buyers
of real property, a person or legal entity that acquires
control of another legal entity is responsible for filing a
LEOP COS within 45 days of the event that triggers a change in
control or change in ownership. A penalty applies if the
legal entity fails to self-report a change in ownership and
control to BOE, as specified. The penalty amount equals 10%
of the amount of property tax calculated taking into account
the new base year value of property and is not subject to a
cap. The penalty would be imposed when and if the BOE
discovers a potential change in control or ownership and mails
a written request for a LEOP COS. The legal entity is
required to respond within 45 days of the mailing. Notably,
the penalty would apply regardless of whether or not a change
in control or a change in ownership actually occurred.
However, it may be imposed only one time, even though the BOE
or assessor may initiate a request as often as he/she deems
necessary.
5)What Does This Bill Do ? Among other things, SB 507 would
allow buyers of real property or manufactured homes more time
to file a COS, before the penalty will apply, by extending the
period within which the buyer must respond to an assessor's
written request from 45 days to 90 days. But, at the same
time, it would increase the maximum penalty amount for
non-compliance from $2,500 to $5,000, in the case of
properties eligible for the homeowner's exemption, and to
$20,000, in the case of all other properties.
Secondly, SB 507 would also extend from 45 days to 90 days the
time period within which a legal entity must self-report a
change in ownership or change in control to the BOE and to
respond to a BOE's written request to file a LEOP COS. This
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bill does not change the amount of penalty imposed for failure
to file a LEOP COS with the BOE. It states, however, that the
penalty also applies when an incomplete LEOP COS is filed and
a second request to complete this statement is not satisfied.
Finally, it clarifies the county assessor's authority to levy
this penalty and to abate it if a BOE's request for the
statement was based on erroneous information.
6)Would Increased Penalties Result in Increased Compliance ? The
purpose of imposing a penalty for failure to file a COS is to
ensure that property owners have an incentive to report
required information to the county assessor or respond to the
assessor's inquiry, so that assessors may accurately assess
properties after a change in ownership. When purchasers fail
to provide accurate information to the assessors, local
governments are forced to spend their limited resources to
obtain this information from other sources which, in turn,
causes delays in property tax billings. Arguably, unless the
penalty amount exceeds the benefit of non-compliance, there is
very little incentive for purchasers to spend their time
filling out a COS. As described in the Senate Government and
Finance Committee's analysis, "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 would change this cost-benefit calculation by increasing
the penalty cap to $5,000 for principal residences and $20,000
for all other real property. In practical terms, it means
that the increased penalty would affect only properties with
an assessed value of more than $2.5 million. Under existing
law, the penalty amount for failure to file a timely COS is
10% of the taxes applicable to the new assessed value of the
real property, not to exceed $2,500, provided that the failure
is not willful. Thus, at the basic 1% tax rate, the maximum
penalty cap applies to any property with a new base year value
in excess of $2.5 million.
Under existing law, a penalty may be imposed only after the
assessor makes a request for the information and receives no
response within 45 days. As noted by the BOE staff in its
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analysis of this bill, multiple opportunities exists for the
property owners to avoid the imposition of the penalty: they
may file a PCOR at the time the deed is presented for
recordation, inform the assessor's office voluntarily, or wait
until they receive a written request from the assessor and
respond within the prescribed time (which is extended by this
bill from 45 days to 90 days).
7)BOE's Suggested Amendments . The BOE staff suggested a few
technical amendments to the provisions allowing for automatic
abatement of penalties and clarifying amendments to specify
that in counties that have established assessment appeals
boards, those boards, rather than the board of supervisors,
will hear appeals for both COS and LEOP COS- related
penalties.
8)Related Legislation .
AB 843 (Eng), introduced in the 2007-08 Legislative Session,
included provisions similar to the provisions contained in SB
507. SB 843 would have increased the number of days to file a
COS from 45 to 60 days, and would have increased the penalty
cap to $10,000 for properties other than principal residences.
AB 843 was passed by the Legislature but vetoed by the
Governor.
AB 926 (Chu), introduced in the 2005-06 Legislative Session,
included provisions similar to the provisions contained in SB
507. SB 926 would have increased the number of days to file a
COS from 45 to 60 days, and would have increased the penalty
cap to $10,000 on properties other than principal residences.
AB 926 was passed by the Legislature but vetoed by the
Governor.
REGISTERED SUPPORT / OPPOSITION :
Support
California Assessors' Association
California State Association of Counties
California Tax Reform Association
Opposition
None on file
SB 507
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Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098