BILL ANALYSIS Ó
SB 507
Page 1
SENATE THIRD READING
SB 507 (DeSaulnier)
As Amended July 1, 2011
Majority vote
SENATE VOTE :21-13
REVENUE & TAXATION 6-3 APPROPRIATIONS 12-5
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|Ayes:|Perea, Beall, Charles |Ayes:|Fuentes, Blumenfield, |
| |Calderon, Cedillo, | |Bradford, Charles |
| |Fuentes, Wieckowski | |Calderon, Campos, Davis, |
| | | |Gatto, Hall, Hill, Lara, |
| | | |Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Donnelly, Harkey, |Nays:|Harkey, Donnelly, |
| |Nestande | |Nielsen, Norby, Wagner |
| | | | |
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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
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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
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. Authorizes the county BOE or assessment appeals
board, instead of the county board of supervisors, to order
the penalty abated, as provided, and makes related changes.
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.
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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.
EXISTING LAW :
1)Provides that all property is taxable, unless otherwise
provided by the California Constitution or federal laws.
ÝCalifornia Constitution, Article XIII, Section 1(a)]. 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 60-69.5 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. ÝR&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)].
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3)Provides specific exemptions from reassessment for
intra-family transfers, replacement residences of senior
citizens and disabled persons, and specific types of home
improvements.
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 BOE may abate the penalty if the assesse:
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.
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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 :
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."
Arguments in support . The proponents state that this bill 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."
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
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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
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.
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,
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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.
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.
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
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the homeowner's exemption, and to $20,000, in the case of all
other properties.
Secondly, this bill 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
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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001976