BILL ANALYSIS Ó
SB 139
Page 1
Date of Hearing: June 10, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
SB 139 (Hill) - As Introduced: January 29, 2013
SENATE VOTE : 38-0
SUBJECT : Exchange facilitators
SUMMARY : Repeals the sunset date on provisions of law that
regulate exchange facilitators.
EXISTING FEDERAL LAW :
Provides under Internal Revenue Code 1031 that real property for
use an investment or investment property may be exchanged for
like-kind property without incurring tax liability from the
exchange. Simply stated, instead of selling an investment
property or business property and paying taxes on the sales
proceeds, a property owner may exchange that property for
like-kind property and defer the tax liability. In a 1031
exchange replacement property must be acquired within 180 days.
EXISTING STATE LAW (Financial Code Section 51000 et seq.)
provides for all of the
following, through December 31, 2013:
1)Defines an exchange facilitator (EF) as a person who does any
of the following:
a) Facilitates, for a fee, an exchange of like-kind
property, through an agreement with a taxpayer to:
i) Sell a taxpayer's property that is being
relinquished in this state;
ii) Take title to a property in this state on behalf of
a taxpayer as an exchange accommodation titleholder
(EAT); or
iii) Act as a qualified trustee or qualified escrow
holder, as specified.
b) Maintains an office in this state for the purpose of
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soliciting business as an EF; or
c) Holds himself, herself, or itself out as an EF by
advertising services or soliciting customers through
various means.
2)States that an EF is not any of the following:
a) The taxpayer or a disqualified person as those terms are
defined under specified Treasury regulations;
b) A financial institution that is not facilitating
exchanges, but is acting as a depository for exchange funds
or is acting solely as a qualified escrow holder or
qualified trustee, as those terms are defined under
specified Treasury regulations;
c) A title insurance company or escrow company that is not
facilitating exchanges, but is acting solely as a qualified
escrow holder or qualified trustee, as defined;
d) A person that teaches professionals about tax-deferred
exchanges or trains them to act as EFs;
e) A qualified intermediary (QI) who holds exchange funds
from the disposition of relinquished property located
outside this state; or
f) An entity in which an EAT has a 100% ownership interest
and which is used by the EAT to take title to a property in
this state.
3)Requires an EF to comply with one or more of the following at
all times, to provide a source of funds for persons who
sustain damage as a result of a violation of Division 20.5 of
the Financial Code by an EF:
a) Maintain a fidelity bond or bonds of at least $1
million, executed by an insurer admitted to do business in
California. This requirement is satisfied if the EF is
named as a listed insured on one or more fidelity bonds
totaling at least $1 million;
b) Deposit an amount of cash or securities or irrevocable
letters of credit of at least $1 million in an
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interest-bearing account or money market account with the
financial institution of the EF's choice;
c) Deposit all exchange funds in a qualified escrow or
qualified trust, as those terms are defined in Treasury
regulations, and provide that any withdrawals from those
accounts require the client's and the EF's written
authorization.
4)Requires an EF to comply with one or more of the following at
all times:
a) Maintain a policy of errors and omissions insurance of
at least $250,000, executed by an insurer admitted to do
business in California. This requirement is satisfied if
the EF is named as a listed insured on one or more policies
of errors and omissions totaling at least $250,000;
b) Deposit an amount of cash or securities or irrevocable
letters of credit of at least $250,000 in an
interest-bearing account or money market account with the
financial institution of the EF's choice.
5)Requires an EF to notify its clients in writing within ten
days of the effective date of any change in control, as
defined, of the EF.
6)Requires an EF to act as a custodian for all exchange funds,
as specified, to invest exchange funds in investments that
meet a prudent person standard, and satisfy investment goals
of liquidity and preservation of principal. For purposes of
existing law, a prudent person standard is violated if any of
the following occurs:
a) Exchange funds are knowingly commingled by the EF with
the EF's operating accounts;
b) Exchange funds are loaned or otherwise transferred to
any person or entity affiliated with or related to the EF;
c) Exchange funds are invested in a manner that does not
provide sufficient liquidity to meet the EF's contractual
obligations to its clients and does not preserve the
principal of the exchange funds.
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7)Provides that exchange funds are not subject to execution or
attachment on any claim against an EF.
8)Prohibits an EF from knowingly keeping or causing to be kept
any money in any bank, credit union, or other financial
institution under a name designating the money as belonging to
a client of the EF, unless the money does belong to that
client and was actually entrusted to the EF by that client.
9)Prohibits an EF from doing any of the following:
a) Making any material misrepresentations that are intended
to mislead, concerning any like-kind exchange transactions;
b) Pursuing a continued or flagrant course of
misrepresentation or making false statements;
c) Failing, within a reasonable time, to account for any
moneys or property belonging to others that may be in the
possession of or under the control of the EF;
d) Engaging in any conduct constituting fraudulent or
dishonest dealings;
e) Committing any crime involving fraud, misrepresentation,
deceit, embezzlement, misappropriation of funds, robbery,
or theft; or
f) Materially failing to fulfill its contractual duties to
the client to deliver property or funds, unless such
failure is due to circumstances beyond the control of the
EF.
10)Provides that the aforementioned provisions may be enforced
via civil suit in a court of competent jurisdiction.
FISCAL EFFECT : None
COMMENTS :
SB 1007 (Machado, Chapter 708, Statutes of 2008) codified a
series of rules and industry best practices for the EF. Section
1031 of the Internal Revenue Code permits individuals and
businesses to exchange similar real or personal property without
triggering a taxable event. In order to defer the capital gain
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from the sale of property under Section 1031, the taxpayer
cannot receive funds from the sale. The United States Treasury
identified several safe harbors that taxpayers could use to
exchange like property and avoid a taxable event. Among the
safe harbors are the use of a QI and the use of a qualified
trustee or escrow holder, both commonly referred to as an EF.
In the 1031 exchange proceeds from the sale would to go the EF
who holds them until they are needed to acquire a replacement
property, then the funds are delivered to the closing agent. An
EF can generally hold distributed funds for up to 180 days while
the exchange is completed.
SB 139 would only remove the sunset date from the existing
statute.
REGISTERED SUPPORT / OPPOSITION :
Support
Escrow Institute of California
Federation of Exchange Accommodators (FEA)
Investment Property Exchange Services, Inc. (IPX)
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081