BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2372 HEARING: 6/25/14
AUTHOR: Ammiano FISCAL: Yes
VERSION: 5/28/14 TAX LEVY: Yes
CONSULTANT: Grinnell
PROPERTY TAXATION: CHANGES IN OWNERSHIP
Changes current standards for reassessing property due to
changes in ownership.
Background and Existing Law
I. Changes in Ownership. Proposition 13 (1978) amended
Article XIIIA of the California Constitution to preclude an
assessor from revaluing property for tax purposes unless a
change in ownership has occurred. However, the initiative
didn't define the term, leaving it to the Legislature to
determine just what a "change in ownership" meant with
respect to property owned by legal entities such as
corporations.
Shortly after passage of Proposition 13, the Assembly
Committee on Revenue and Taxation appointed a task force of
legislative and administrative staff, business interests
and other interested parties to wrestle with the various
interpretations necessary to implement the initiative. The
task force's initial recommendation concerning changes in
ownership of property owned by legal entities was to adopt
the "separate entity" theory, providing that so long as the
same legal entity owned the property, it would not be
reassessed, regardless of whether ownership interests in
the entity change, such as stock in the corporation, or
partners in the partnership. However, the task force
subsequently added the
'majority-takeover-of-corporate-stock,' or "change in
control," provision to maintain some parity with the
increasing relative tax burden of residential property
statewide. As enacted, assessors reassess property to fair
market value when one person or legal entity purchases or
otherwise acquires more than 50% ownership of a corporation
or other legal entity in a single transaction.
AB 2372 - 5/28/14 -- Page 2
However, if multiple individuals or entities acquire
another entity in a single transaction, but none of the
purchasers acquire more than 50% interest in the acquired
entity, no reassessment occurs even if it occurs in a
single transaction. The initial case in point was Kaiser
Steel, ownership of which was acquired by a consortium of
seven separate purchasers, none of whom acquired more than
50% ownership - even though 100% of the corporation had
changed hands, no reassessable change of ownership had
occurred, since no single party had acquired more than 50%
ownership of the corporations. A few years later, E. & J.
Gallo bought Louis M. Martini, but split the purchase among
12 Gallo family members, thus preventing the underlying
property from being reassessed - at a property tax savings
of some $700,000 per year. Recently, the legal entity that
owns the Fairmont Miramar Hotel in Santa Monica was
purchased by three legal entities, and wasn't reassessed,
saving more than $1 million annually in property taxes.
II. Legal Entity Ownership Program. Often, 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, which don't
account for changes in legal entities. 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 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 required legal
entities to report transfers directly to BOE within 90
days, and established a penalty for legal entities failing
to self-report a change in ownership and control to BOE
equal to 10% of the tax resulting from enrolling the higher
value (SB 816, Ducheny, 2009).
Proposed Law
AB 2372 - 5/28/14 -- Page 3
I. Changes in ownership. Assembly Bill 2372 provides that
when more than 90% or more of the ownership interests in a
legal entity are sold in a single transaction to a person
or legal entity, the assessor should reassess the property
owned by the legal entity as a change in ownership,
regardless of whether a single individual acquires more
than 50% of the ownership interest. The measure defines
"single transaction" to include any cumulative ownership
interest sales within a 36-month period. The bill
specifically excludes from its changes to reassessment
requirements publicly traded entity stock sales. AB 2372
applies to ownership interest sales made on or after
January 1, 2015.
II. LEOPs. The bill requires the legal entity to notify
BOE within 90 days of any ownership interest sale
triggering reassessment under the new test. The measure
also increases the penalty for failing to notify BOE from
10% of tax to 15%.
The bill defines several terms, allows BOE to issue new
regulations implementing the bill, and also makes
legislative findings and declarations supporting its
purposes.
State Revenue Impact
BOE states that "the annual revenue gain from AB 2372 could
amount to $73 million."
Comments
1. Purpose of the bill . The purpose of the bill is to
change laws triggering reassessment in response to recent
transactions that avoided revaluing property to its fair
market value.
2. Cold war . Before Proposition 13, assessors valued
property at its current fair market value. After the
initiative, the Constitution prohibited assessors from
doing so, directing them to only enroll a new value for
property when it's newly constructed or changes ownership.
The Proposition 13 working group did the best job it could
in devising rules to help assessors determine whether
AB 2372 - 5/28/14 -- Page 4
changes in ownership in legal entities occur in the
unchartered waters after the initiative, and those rules
have remained largely unchanged for 35 years. Business
groups state that limiting reassessments provides the
certainty and low taxes necessary to generate economic
growth in the state. Proposition 13's critics deride the
limits as loopholes that enable wealthy property owners to
evade taxes. When the Assembly approved AB 2372 by 2/3
vote last month, it became the first substantive change to
the change in ownership laws enacted by the working group
to implement Proposition 13 to receive the necessary 2/3
vote.
3. A little ain't enough ? As stated above, AB 2372 is the
first reform bill to receive a 2/3 vote; however, its
changes are very minor, as taxpayers can slightly alter
their transactions to avoid reassessment under the bill's
terms. The bill provides that a transaction that changes
90% of ownership within three years triggers a
reassessment, but wouldn't for a transaction that changes
89.9% of ownership in the first three years, then conveys
the remaining 10.1% on the first day after the three year
window ends. The measure also doesn't require reassessment
for taxpayers structuring investment transactions using
tiers of companies. The bill doesn't compel any additional
information to help BOE or assessors determine when
partners in a limited liability company buy and sell
ownership interests, although it does increase the penalty
for failing to file existing forms by 5%, which isn't
likely to affect compliance significantly according to the
California Assessors Association. Additionally, the bill
doesn't direct assessors to enroll new values for future
property taxes for taxpayers avoided reassessment in the
past, but don't meet the measure's new terms. The
Committee may wish to consider whether AB 2372
substantively reforms a significant form of tax avoidance.
4. How does this work ? Three examples demonstrate
reassessments under current law and AB 2372.
John buys 100% of ACME Tools from Anne. The
assessor revalues ACME Tools' property to fair market
value under both current law because John now controls
ACME Tools, and under AB 2372 because more than 90% of
ACME tools transferred.
John, Paul, and George buy 100% of ACME Tools from
Anne in equal shares within three years. The assessor
AB 2372 - 5/28/14 -- Page 5
does not reassess the property under current law, as
no single new owner obtained more than a 50% interest.
Under AB 2372, the assessor would reassess the
property, because 90% or more of ACME Tools
transferred, and the 50% threshold doesn't apply.
John, Paul, and George buy a controlling interest
in ACME Tools from Anne in equal shares, but Anne
keeps an 11% ownership share. The Assessor would not
reassess ACME Tools under either current law or AB
2372, because only 89% of the company was transferred.
The assessor would reassess ACME tools if Anne sold
the remaining 11% to John, Paul, and George within the
three-year window, but would not if Anne sold the
remaining share to them after the three-year window.
The third example shows that by retaining an 11% interest,
reassessment can be avoided under AB 2372's change. So
it's unlikely to result in many reassessments among
sophisticated taxpayers who have time to plan or who have
the means to structure transactions with layers of
companies that can make indirect transfers. However, the
measure may trap unsophisticated ones under the measure's
new trigger since they would continue to buy a company
outright without first undertaking these time consuming,
complex and costly maneuvers. In the case of persons who
inherit property, the decedent can't hold back the
necessary 11%. A married couple who buy a business, or
two siblings that inherit one aren't reassessed under
current law because neither has control when each has an
equal share. Under AB 2372, the assessor would revalue the
business in both cases because 90% of the ownership
interests transferred.
5. Fenced off . When the stock of a publicly-traded
corporation is bought or sold, no reassessment of the
corporation's property takes place, even though more than
50% of the stock has changed hands. Property owned by
major corporations is not reappraised as often as
residential property, if ever. SB 17 (Escutia, 2005 and
2007) proposed a rebuttable presumption that a
corporation's property changes hands every three years, but
AB 2372 explicitly states that changes in ownership can't
occur due to the regular activity on an established
securities market, thereby fencing off the issue by law.
However, the bill triggers reassessment when applicable for
changes in corporate voting stock, partnership capital and
AB 2372 - 5/28/14 -- Page 6
profits interests, limited liability company membership
interests, and other ownership interests in legal entities.
Why should changes in ownership of publicly traded
corporations on stock exchanges not trigger reassessment,
when other transactions do? The Committee may wish to
consider the forms of ownership changes that should trigger
reassessment.
6. Options . If the Committee finds the scope of AB 2372
too narrow, it could expand it in the following ways:
Eliminate the bill's three year cut-off, instead
providing that reassessment occurs whenever the 90%
threshold is reached,
Include indirect transactions,
Reinsert or revise provisions of the bill deleted
from the bill on the Assembly Floor requiring persons
and legal entities to report to BOE whenever an
ownership interest changes,
Direct assessors to enroll new values for property
that would have been reassessed under the bill's
terms.
7. Technicals . BOE and Committee staff suggest the
following technical amendments:
AB 2372 speaks only to a "single transaction,"
which could create an ambiguity as ownership interest
transfers of 90% or more of an entity could be
structured in a series of transactions. The measure
should be amended to account for multiple transfers
after the date of the originating event to avoid
conflicts between taxpayers and assessors,
The measure should clarify whether assessment
occurs as a result of the bill's changes to R&T Code
Section 64(c) (1) or 64(d), as both could apply to the
same event, but provide for different methods of
reassessment.
The bill should specify a valuation date,
AB 2372 should make conforming changes to FTB forms
querying taxpayers regarding changes in ownership, and
to LEOP reporting to make clear who is responsible for
reporting the change,
8. Interim Study . If the Committee would rather direct
staff to study or convene a working group to study change
in ownership issues, it could approve a motion holding the
measure in Committee for interim study.
AB 2372 - 5/28/14 -- Page 7
9. 2/3 . Because AB 2372 increases taxes on any taxpayer
according to Section Three of Article XIIIA of the
California Constitution, Legislative Counsel assigned the
bill a 2/3 vote key.
Assembly Actions
Assembly Floor 57-13
Assembly Appropriations 12-3
Assembly Revenue and Taxation 6-2
Support and Opposition (06/12/14)
Support : California Association of Realtors; California
Business Properties Association; California Business
Roundtable; California Chamber of Commerce; California
Labor Federation; California State Association of Counties;
City of Sacramento; Los Angeles Mayor Eric Garcetti; Los
Angeles Chamber of Commerce.
Neutral: American Federation of State, County and
Municipal Employees; California Labor Federation.
Opposition : California Taxpayers' Association; California
Tax Reform Association (unless amended).