BILL ANALYSIS                                                                                                                                                                                                    






                                                                     AB 571


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          Date of Hearing:  April 27, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 571  
          (Brown) - As Introduced February 24, 2015





          Majority vote.  Fiscal committee.


          SUBJECT:  Property taxation


          SUMMARY:  Expands the existing property tax relief provision  
          that allows an eligible person to transfer the base-year value  
          of his/her principal residence to a replacement dwelling, as  
          provided, to include a person who has a severely and permanently  
          disabled child.  Revises the "reasonable cause" standard for  
          abating penalties related to late-filed "change in ownership"  
          (CIO) statements and property statements.  Specifically, this  
          bill:  














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          1)Provides that any person with a severely and permanently  
            disabled child residing in property eligible for the  
            homeowners' exemption, as defined, may transfer, as specified,  
            the base-year value of that property to any replacement  
            dwelling of equal or lesser value that:

             a)   Is located within the same county or a county that  
               allows an out-of-county transfer; and,

             b)   Is purchased or newly constructed by that same person as  
               his/her principal residence within 2 years of the sale of  
               the original property.



          2)Applies, with respect to the transfer of base-year value by a  
            person with a severely and permanently disabled child, to  
            replacement dwelling that are purchased or newly constructed  
            on or after January 1, 2016. 

          3)Requires a person who claims the base-year transfer relief  
            under this measure to provide to the assessor, in addition to  
            other information, proof that she/he or his/her spouse, who  
            resided in the original property with the person, had a  
            permanently disabled child, as provided. 



          4)Revises the "reasonable cause" standard for abating penalties  
            imposed for failure to timely file a CIO statement or business  
            property statement to require the assessee to establish, in  
            addition to reasonable cause and absence of willful neglect,  
            both of the following:



             a)   That the circumstances were beyond the assessee's  
               control; and, 












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             b)   That the circumstances occurred notwithstanding the  
               exercise of ordinary care in the absence of willful  
               neglect.





          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)Allows property owners over 55 years of age and disabled  
            persons once-in-a-lifetime opportunity to transfer the  
            base-year value of their principle residence, within two years  
            from the sale of the original residence, to a replacement home  
            of equal or lesser value within the same county (Proposition  
            60, 1988), or to a replacement home in counties that have  
            adopted ordinances allowing the transfer (Proposition 90,  
            1990), provided certain conditions are met and the county  
            assessor is properly notified.  Currently, Alameda, El Dorado,  
            Los Angeles, Orange, Riverside, San Bernardino, San Diego, San  
            Mateo, Santa Clara, and Ventura Counties allow these  
            out-of-county transfers.  Base-year transfers allow taxpayers  
            to continue to pay property taxes at the amount and rate of  
            growth of their previous home and prevent reassessments of  
            their newly purchased homes to full market value.













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          3)Provides that, if the replacement dwelling is purchased before  
            the original property is sold, the taxpayer may transfer the  
            base-year value only if the replacement property is 100% or  
            less of the original property's value.  If the replacement  
            dwelling is purchased within the first year after the sale,  
            then the taxpayer may transfer the base year if the  
            replacement property is within 105% of the original property's  
            value.  And, if the replacement dwelling is purchased within  
            the second year after the sale, then the taxpayer may transfer  
            the base year if the replacement property is within 110% of  
            the original property's value.


          4)Allows a homeowner, who has been granted a base-year value  
            transfer, to perform new construction on the replacement  
            property subsequent to the transfer and exempts the new  
            construction from assessment.  The new construction must be  
            completed within two years of the sale of the original  
            property and its value may not exceed the sales price of the  
            original property.  


          5)Requires new owners of real property and certain legal  
            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. 


          6)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; 












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             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.  

          7)Allows the county board of equalization or the assessment  
            appeals board, whichever is applicable, to abate the penalty  
            if the assessee, among other things, establishes to the  
            satisfaction of the board that the failure to file the  
            change-in-ownership statement or change-in-control statement,  
            as required, was due to reasonable cause and not due to  
            willful neglect.  

          8)Requires any person owning taxable personal property having an  
            aggregate cost of $100,000 or more for any assessment year to  
            file a signed property statement with the county assessor.   
            Imposes a penalty of 10% of the assessed value of unreported  
            taxable tangible property if the annual statement has not been  
            filed within the prescribed time limit. Allows the county  
            board of equalization or the assessment appeals board to abate  
            the penalty for failure to file an annual business property  
            statement if the assessee establishes that the failure was due  
            to reasonable cause and not due to willful neglect. 

          FISCAL EFFECT:  According to the BOE staff, this bill would  
          reduce property tax revenues at the basic 1% tax rate by $1,400  
          per claim granted.  This amount however could grow over time if  
          assessed value differences also grow in relation to real estate  
          market values. 


          COMMENTS:  


           1)Author's Statement  . The author has provided the following  











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            statement in support of this bill:

          "First, the bill would allow the transfer of Proposition 13 base  
            year value on residential property to assist those families  
            caring for children who are permanently and severely disabled.  
             Current law, Proposition 60, allows a Proposition 13 base  
            year transfer for persons over the age of 55 and to persons  
            who are severely and permanently disabled. The bill arises  
            from a situation in San Diego County where permanently  
            disabled veterans are returning from military action and  
            returning to their parents' home, a house that is not  
            accessible to permanently disabled inhabitants. Allowing base  
            year transfers under these limited circumstances maintains the  
            spirit of Proposition 60 and can easily be administered by the  
            County Assessor's office.

          "'Second, Assembly Bill 571 eliminates confusion regarding the  
            standard for the forgiveness of the application of a penalty  
            for the lack of filing a change of ownership.  Today, a County  
            Assessor or the State Board of Equalization may request  
            information regarding a change of ownership.  A penalty may be  
            assessed if the taxpayer does not respond in the required  
            time.  This penalty may be waived if the taxpayer demonstrates  
            that the failure to file a response was due to circumstances  
            beyond his or her control and occurred notwithstanding the  
            exercise of ordinary care.  The authority to waive the penalty  
            occurs in Sections 463 and 483 of the Revenue and Taxation  
            Code and in Section 4985.2 of the Revenue and Taxation Code.   
            Clarification of the Revenue and Taxation Code will provide  
            consistency and eliminate confusion."



           2)Arguments in Support  .  The proponents state that in order "to  
            qualify for the disability based exemption under current law,  
            the disabled individual must be on the title of the property"  
            - a potentially "costly and complicated process if the only  
            reason to do so would be to qualify for the exemption."  The  
            proponents also note that, "[o]ver the years, numerous parents  











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            have had to contend with the hardship of what occurs when a  
            minor child becomes suddenly and severely disabled."  The  
            proponents argue that this bill is a "common sense measure to  
            help homeowner" and it "maintains the spirit of Revenue and  
            Tax Code 69.5 while also helping those who have serious  
            needs."


           3)Proposition 13  .  Much of the law pertaining to property  
            taxation is prescribed by Articles XIII and XIII A (commonly  
            known as "Proposition 13") of the California Constitution.   
            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 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 one percent 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  
            --------------------------

          <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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            was left to implementing legislation.


           4)Base-Year Value Transfers  .  Proposition 13 contains provisions  
            allowing a homeowner over the age of 55<2> or a homeowner who  
            is a disabled person<3> a once-in-a-lifetime opportunity to  
            transfer the base-year values in his/her principal residence,  
            within two years from the sale of the original residence, to a  
            replacement home of equal or lesser value within the same  
            county or to a replacement home in counties that have adopted  
            ordinances allowing the transfer<4>, provided certain  
            conditions are met and the county assessor is properly  
            notified.  Base-year transfers allow homeowners to continue  
            paying property taxes at the amount and rate of growth of  
            their previous homes and prevent reassessments of their newly  
            purchased or constructed homes to full market value.



            Thus, subject to certain conditions, the Constitution and  
            implementing statute allow a severely and permanently disabled  
            homeowner to sell his/her home, buy or build a new one, and  
            transfer the base-year value to a replacement dwelling.  To  
            qualify, the move must be necessary to meet disability  
            requirements and the new home must be of equal or lesser value  
            and located in the same county or another county that offers  
            this property tax benefit.  In addition, the claimant must  
            provide certain information to the assessor, including proof  
            --------------------------
          <2> In 1986, the voters passed Proposition 60 that amended the  
          Constitution to allow persons over the age of 55 to sell a  
          principal residence and transfer its base-year value to a  
          replacement principal residence within the same county. 
          <3> In 1990, the voters passed Proposition 110 that amended the  
          Constitution to extend these provisions to any severely and  
          permanently disabled person regardless of age. 
          <4> In 1988, Proposition 90 was passed by the voters.  It  
          amended the Constitution to extend the base-year value transfer  
          provisions to a replacement residence located in another county  
          on a county-optional basis. 










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            of severe and permanent disability.  
           5)Disabled Children  .  It is unclear if the definition of a  
            "severely disabled homeowner" includes a child who resides in  
            his/her parents' home but has no legal right as a homeowner.   
            According to a BOE annotation<5>, a minor may obtain the  
            benefit of a base-year value transfer indirectly if a  
            guardianship or trust is created for the minor and the minor  
            has received the title to both the original and replacement  
            homes.  A minor may not convey or make contracts relating to  
            real property, even though he/she may own real property or an  
            interest therein.  Nonetheless, if a guardian or trustee is  
            appointed to sell real property owned by a minor, the benefits  
            of a base-year value transfer may be obtained indirectly  
            through a guardianship or trust.  In other words, a disabled  
            child must qualify as a claimant and must be on title in order  
            to transfer the base-year value.  The act of adding the minor  
            child on title to the original property can be excluded from  
            CIO under the parent-child exclusion.  However, adding a minor  
            child to a home's legal title may be a lengthy, complicated  
            and costly legal process.  

            This bill would extend the benefit of a base-year value  
            transfer to any person with a severely and permanently  
            disabled child who resides in the home. The intent of this  
            bill is to assist a family caring for a child who is severely  
            and permanently disabled by allowing the family to sell their  
            home and build or buy a new one to accommodate their child's  
            needs.  To that end, this bill allows a parent to claim  
            directly the benefit of the base-year value transfer without  
            adding the child's name to title. 

           6)BOE's Implementation Concerns  . In its analysis, the BOE staff  
            noted that this bill does not appear to require that the child  
            reside in the home with the parent.  To clarify the intent of  
            the author and minimize any future implementation issues, the  
            BOE staff recommends amending R&TC Section 69.5(g)(12).   
            Furthermore, under the language of this bill, any person, such  


          ---------------------------
          <5> Property Tax Annotation 200.0076, State Board of  
          Equalization.










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            as a caregiver, a relative or friend, and not just a parent,  
            with a severely and permanently disabled child would qualify  
            for the base-year value transfer relief.  The Committee may  
            wish to consider amendments that would clarify the intent of  
            the bill. 

           7)Related Legislation: Contingency.   ACA 6 (Brown), a companion  
            measure to AB 571, would authorize the Legislature to provide  
            for a transfer of base-year value of property to a replacement  
            dwelling for persons who have a severely disabled child.  The  
            author intends to amend this bill to specify that the  
            provisions relating to the expansion of the base-year value  
            transfer relief would be operative only if ACA 6 is approved  
            by the voters and would only apply to replacement dwellings  
            that are purchased or newly constructed on or after the  
            effective date of ACA 6.  Because the base-year value transfer  
            relief was created by constitutional amendments, a new  
            constitutional amendment is required to expand the scope of  
            the relief to include disabled children.  


           8)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  
            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.  The purpose of the program is to  











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            assist county assessors in discovering changes in control or  
            changes in ownership that have not been captured by a county's  
            own discovery systems.  
             
             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 change-in-ownership statement 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.  A legal  
            entity must also file a CIO statement within 90 days of the  
            BOE's written request.  If a legal entity fails to report 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. 

           9)Abatement of Penalties . The purpose of imposing a penalty for  
            failure to file a change-in- ownership or a change-in-control  
            statement 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 CIO.  The penalty,  
            however, may be abated if the property owner establishes to  
            the satisfaction of either the county board of equalization or  
            the assessment appeals board, whichever is applicable, that  
            the failure to file a statement is due to reasonable cause and  
            not due to willful neglect.  Similarly, a penalty imposed for  
            failure to timely file an annual property statement may also  











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            be abated under the same "reasonable cause and not due to  
            willful neglect" standard. 

          The county assessment appeals boards have the authority to abate  
            penalties for reasonable cause for numerous violations of  
            property tax law.  However, different standards for abatement  
            apply to different penalties.  This bill proposes to align  
            various property tax provisions to create identical standards  
            for abatement of property tax related penalties.  The proposed  
            language mirrors the "reasonable cause" standard employed in  
            many other provisions of the property tax law and provides  
            that penalties may be waived if a taxpayer demonstrates that  
            the failure to file was due to reasonable cause and  
            circumstances beyond their control and occurred  
            notwithstanding the exercise of ordinary care. 
                                                                           
          REGISTERED SUPPORT / OPPOSITION:




          Support


          Diane L. Harkey, Member, State Board of Equalization


          Howard Jarvis Taxpayers Association




          Opposition


          None on file














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          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098