BILL ANALYSIS Ó
AB 567
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Date of Hearing: May 14, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 567
(Gipson) - As Introduced February 24, 2015
Majority Vote. Non-fiscal
SUBJECT: Property taxation: change in ownership statement:
confidentiality of information.
SUMMARY: Allows the State Board of Equalization (BOE), as well
as county assessors, to disclose that a person or legal entity
has filed a legal entity change in ownership statement with the
BOE or that the BOE has issued a determination to the assessor
relating to that statement. Specifically, this bill:
1)Contains legislative findings and declarations relating to the
transparency of the property tax system, the right to privacy,
and the balance between the taxing authority's responsibility
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to safeguard confidential taxpayer information and the
public's right to timely information.
2)Creates an exception to the confidentiality requirement for
information reported in a change in ownership (CIO) statement
by providing that:
a) The BOE and the assessor are not required to hold
information requested or furnished in a CIO statement for a
change in control or a change in ownership, as defined,
secret; and,
b) The disclosure by the BOE or assessor that a CIO
statement has been filed shall not be deemed to violate the
confidentiality of taxpayer return information in the case
where the filing of the statement was prompted by
information collected by the Franchise Tax Board (FTB) from
the property tax query on the taxpayer's state income tax
return, as specified.
EXISTING LAW:
1)Provides that all property is taxable, unless otherwise
provided by the California Constitution or federal laws
[Section 1(a), Article XIII, California Constitution]. Limits
ad valorem taxes on real property to 1% of the full cash value
of that property [Section 1(a), Article XIII A, California
Constitution (Proposition 13)]. Requires real property to be
reassessed to its current fair market value whenever a "change
in ownership" occurs. (California Constitution, Article XIII
A, Section 2; R&TC Sections 60 - 69.5).
2)Requires new owners of real property and certain legal
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entities to submit a change-in-ownership or a
change-in-control statement, either with the county recorder
or assessor, at the time of recording or, if the transfer is
not recorded, within 90 days of the date of the CIO, except as
provided.
3)Requires certain CIO statements to be filed directly with the
BOE.
4)Imposes a penalty for failure to file any of the following
statements within the prescribed time period:
a) A change-in-ownership statement 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)
change-in-ownership 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 change-in- ownership statement or
change-in-control statement.
5)Requires the BOE and the assessor to hold secret all
information furnished in the CIO statement. (R&TC Section
481). These statements are not considered public documents and
are not open to inspection except to explicitly authorized
persons for certain purposes. (R&TC Sections 408, 481, and
408.2).
6)Allows public access to certain information, including the
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assessment roll and a quarterly updated list of all property
transfers occurring in the prior two years in each county.
(R&TC Section 601, 602, and 408.1).
FISCAL EFFECT: According to the BOE staff, this bill would have
no direct impact on General Fund revenues.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"Transparency in assessed value information is critical to the
integrity of the property tax system. The public should have
sufficient information to provide assurance the property tax
laws are equitably applied and that the property tax burden is
fairly distributed. AB 567 will help add the kind of
oversight the public has been looking for regarding these
types of transactions."
2)Arguments in Support . The proponents of this bill state that
government "functions best when decision-makers can and are
held accountable for the consequences of their decisions and
the means by which those decisions were made." They note that
"one of the most important functions of state and local
government is the collection of taxes." Thus, the proponents
argue that this bill, by "[removing] the secrecy from the mere
fact that change in ownership statements have been filed,"
will make the government accountable to the public for their
decisions." Furthermore, they assert that there "is no risk
to confidential information from disclosing the mere fact that
a change in ownership has been filed" and that "the formal
determinations of state government agencies should not be
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immunized from the kind of accountability that can only come
from public scrutiny."
3)Arguments in Opposition . The opponents of this bill state that
there is "no valid reason to begin violating the fundamental
principle of taxpayer confidentiality." They argue that this
bill "does not promote 'transparency', because no public
interest would be served by allowing a tax agency to release
confidential tax information." The proponents believe that
"an erosion of trust would occur, as the public is acutely
aware that tax agencies currently must safeguard their tax
information, and this bill would break this trust." Finally,
they assert that the "benefits derived from such disclosures
are speculative at best, and do not warrant taking the risk of
inaccuracies or other adverse consequences that may undermine
public confidence in the tax system."
4)Background: Proposition 13 and "Change in Ownership" . The
property tax applies to all classes of property and is one of
the major general revenue sources for local governments in
California. A property tax is imposed on the property owners
and is based on the value of the property. Much of the law
pertaining to taxation of property is prescribed by the
California Constitution, Article XIII and Article XIII A
(commonly known as "Proposition 13"). Proposition 13 was
added to the California Constitution in June 1978 and was most
recently amended by Proposition 26 in 2010. Proposition 13
was designed to provide real property tax relief by imposing a
set of interlocking limitations upon the assessment and taxing
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powers of state and local governments.<1> Section 1 of
Article XIII A states that, as a general rule, the maximum
amount of any ad valorem tax on real property may not exceed
1% of the property's full cash value, as adjusted for the
lesser of inflation or 2% per year. The term "full cash
value" means the "county assessor's valuation of real property
as shown on the 1975-1976 tax bill" or, thereafter, "the
appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the
1975 assessment" (emphasis added) [California Constitution,
Article XIII A, Sections 1 and 2]. In other words, the
California Constitution requires that real property be
reassessed to its current fair market value whenever a "change
in ownership" occurs. The definition of a "change in
ownership" was not included in Proposition 13, but was left to
implementing legislation.
Shortly after the passage of Proposition 13, this Committee
appointed a special Task Force - a broad-based, 35-member
panel that included legislative and BOE staff, county
assessors, attorneys in the public and private sectors, and
trade associations - to recommend the statutory implementation
for Proposition 13, including the "change in ownership"
provisions. With respect to a transfer of ownership interest
in a legal entity that owns real property, the Task Force
initially recommended adopting the "separate entity" theory
that respects the separate identity of the legal entity.
According to this theory, so long as the legal entity owned
the property, the property will not be reassessed, even if
most or all of the ownership interests in the entity, i.e.
stock or partnership interests, had been transferred. The
Task Force recommended the "separate entity" approach because
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<1> Since any tax savings resulting from the real property tax
limitations provided in Sections 1 and 2 of Article XIII A could
be effectively eliminated through the imposition of additional
state and local taxes, Sections 3 and 4 place additional
restrictions upon the imposition of any such taxes. See Amador
Valley Joint Union High Sch. Dist. v. State Bd. of Equalization,
(1978) 22 Cal.3d 208.
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of the perceived administrative and enforcements problems with
disregarding the separate identity of a legal entity and the
unpredictable ripple effects of ignoring the general separate
entity laws. It should be noted that while the Task Force, in
order to mitigate administrative difficulties, recommended the
"separate entity" approach for determining when a change in
ownership of real property occurs, it was concerned with the
fact that commercial and industrial properties change
ownership less frequently than residential property.
The "majority-takeover-of-corporate stock" provision was
subsequently added "out of a concern that, given the lower
turnover rate of corporate property, mergers or other transfer
of majority controlling ownership should result in a
reappraisal of the corporation's property - an effort to
maintain some parity with the increasing relative tax burden
of residential property statewide, due to more rapid turnover
of homes." (Implementation of Proposition 13, Volume 1,
Property Tax Assessment, a report prepared by the Assembly
Revenue and Taxation Committee, California State Assembly
Publication 748, October 29, 1979). Thus, the law was amended
to provide that whenever any person or entity has purchased or
otherwise acquired more than 50% ownership of a corporation or
other legal entity, any real property owned by the acquired
entity must be reappraised to full market value.<2>
5)Legal Entities: Change in Ownership: Transfers of Real
Property . Generally, county assessors discover a CIO via
grant deeds or other documents that are recorded with the
county recorder. In addition, the county recorder must
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<2> R&TC Section 64(c)(1) requires reassessment when any person
or entity obtains control through direct or indirect ownership
or control, of more than 50% of corporation voting stock, or
obtains a 50% ownership interest in any other type of legal
entity. R&TC Section 64(d) requires reassessment when voting
stock or other 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.
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provide the assessor with a copy of the transfer of ownership
document as soon as possible. However, ordinarily the
transfer of ownership interests in a legal entity does not
involve a recorded deed even if a property reassessment is
called for under existing law.
The Legislature has attempted to reduce the volume of unreported
business property ownership transfer transactions. The most
significant accomplishment was the creation of the Legal
Entity Ownership Program (LEOP). Under this program, the BOE
gathers, and subsequently disseminates, to county assessors
information regarding changes in control and ownership of
legal entities that own or lease an interest in real property
located in California. That information is obtained through
monitoring publications, such as the Wall Street Journal and
Mergers and Acquisitions, and receiving referrals from
assessors. Existing law also requires the Franchise Tax Board
(FTB) to include a question on returns for partnerships,
banks, and corporations asking if the entity owns real
property in California and whether more than 50% of its voting
stock (or other interest) has been transferred to another
legal entity.<3> This information is shared by the FTB with
the BOE. In turn, the BOE is authorized to make a written
request to the legal entity to file a LEOP change in ownership
statement to determine it there has been a change in control
or ownership of the legal entity. The purpose of the LEOP is
to assist county assessors in discovering changes in control
or changes in ownership that have not been captured by a
county's own discovery systems.
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
change-in-ownership statement (or Form BOE-100-B) within 90
days of the event that triggers a change-in-control or CIO of
a legal entity, where the entity or any subsidiary owned or
held California real property at the time of the change. If
the entity fails to self-report, the BOE may send a written
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<3> R&TC Section 64(e).
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request to complete the LEOP CIO statement, in which case the
statement must be filed within 90 days of the BOE's written
request.<4> If a legal entity fails to either self- report or
answer the BOE's written request and the failure is discovered
later on, then an escape assessment will be made for every tax
year that the entity failed to file the CIO statement. There
is no statute of limitations applicable to these escape
assessments. The penalty for failure to file is 10% of the
taxes applicable to the new base-year value of the real
property (e.g., land, improvements, and fixtures) if a change
in control or CIO has occurred or 10% of the current year's
taxes on the real property if a change in control or CIO has
not occurred. However, the penalty is limited to $5,000 in
the case of the property eligible for the homeowners'
exemption and to $20,000 in the case of other types of
property, provided that the failure to file was not willful.
6)Disclosure of Tax Information . The State of California, as
well as other states, readily publishes information on unpaid
taxes and delinquent taxpayers with respect to property taxes.
An unpaid property tax becomes a lien against the real
property and dissemination of information on such liabilities
is important for protecting potential buyers, lenders, etc.
Any recorded real property transfers are made available to the
public. A county assessor may also share specified
information, otherwise confidential, with various local and
state government entities.
In the area of income tax liabilities, however, state law
generally prohibits disclosure or inspection of any income tax
return information, except as specified in law. In fact, the
FTB is required to notify taxpayers if criminal charges have
been filed for willful unauthorized inspection or disclosure
of their tax data. However, FTB may release tax return
information to certain other agencies, including the BOE,
--------------------------
<4> As explained by the BOE staff, the BOE searches for
unreported changes in control and ownership of legal entities
under Section 64(c) and (d), in addition to receiving
information from the FTB.
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legislative committees, the Attorney General, the California
Parent Locator Service, the Commissioner of the IRS, and
others for certain statutorily enumerated purposes. BOE is
similarly restricted from divulging taxpayer information
unless specifically authorized by statute. For example, since
2007, both FTB and BOE are required to make as a matter of
public record a list of the largest 500 tax delinquencies over
$100,000.
7)The Limited Scope of this Bill . As noted by the BOE staff, in
recent years, media reports of the disparate consequences of
reassessing property owned by legal entities and property
owned by individuals have resulted in an increasing number of
inquiries from the public whether specific sales, mergers,
acquisitions, and buyouts reported by media trigger the
reassessment of a legal entity's real estate holdings.
Existing law, however, prohibits BOE staff from providing
basic factual information to public, even though this
information could eventually become public, when, for example,
the assessor reassesses (or does not reassess) the property
owned by the legal entity.
Under this bill, the BOE and county assessors are authorized
to disclose the fact that a CIO statement has been filed with
the BOE or that the BOE has issued a determination to the
assessor relating to a CIO statement filed with the BOE. In
addition, this bill would exempt from the confidentiality
requirement the fact that the filing of a CIO statement was
prompted by information collected by the FTB from the
taxpayer's state income tax return. The scope of the
disclosure proposed by this bill is very limited - it does not
require a disclosure of any factual information reported on
the taxpayer's state income tax return, such as the amount of
gross receipts or sales, gross profit, the amount of credit
carryovers, income subject to apportionment, or the amount of
each individual credit claimed on the tax return.
Furthermore, no actual information reported on a CIO
statement, other than the fact that the statement has been
filed, may be disclosed to the public. Detailed financial
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information reported in the state income tax return or CIO
statement will remain confidential.
Legal entity change in ownership discovery relies heavily on
self-reporting, which does not always result in 100%
compliance. State agencies assist local assessors because
real property owned by legal entities often undergoes a change
in ownership without the public recordation of documents. As
stated by the BOE staff in its analysis, the "delayed
transparency undermines the public trust in the current
property tax system as it applies to legal entity changes in
ownerships and fuels the perception that laws are inequitable
and should be changed." Transfers of real property are
recorded and are already public information. Thus, it is
unclear why a disclosure of the mere fact of filing a CIO
statement by a legal entity, or the fact that the filing was
prompted by the information collected by the FTB, would
undermine public trust or should remain confidential.
REGISTERED SUPPORT / OPPOSITION:
Support
The Service Employees International Union (SEUI)
California Tax Reform Association
The American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
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Opposition
California Taxpayers Association
California Chamber of Commerce
National Federation of Independent Business
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098