BILL ANALYSIS                                                                                                                                                                                                    ”



                                                                       AB 571


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          ASSEMBLY THIRD READING


          AB  
          571 (Brown)


          As Amended  May 4, 2015


          Majority vote


           ------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                |Noes                  |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Revenue &       |9-0   |Ting, Brough,       |                      |
          |Taxation        |      |Dababneh, Gipson,   |                      |
          |                |      |Roger HernŠndez,    |                      |
          |                |      |Mullin, Patterson,  |                      |
          |                |      |Quirk, Wagner       |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Appropriations  |17-0  |Gomez, Bigelow,     |                      |
          |                |      |Bloom, Bonta,       |                      |
          |                |      |Calderon, Chang,    |                      |
          |                |      |Daly, Eggman,       |                      |
          |                |      |Gallagher, Eduardo  |                      |
          |                |      |Garcia, Holden,     |                      |
          |                |      |Jones, Quirk,       |                      |
          |                |      |Rendon, Wagner,     |                      |
          |                |      |Weber, Wood         |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
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                                                                       AB 571


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          SUMMARY:  Revises the "reasonable cause" standard for abating  
          penalties related to late-filed "change in ownership" (CIO)  
          statements and property statements.   Specifically, this bill:  



          1)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,  
            that the failure to file the statement: 

             a)   Was due to circumstances beyond the assessee's control;  
               and, 


             b)   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 [California  
            Constitution Article XIII, Section 1(a)].  Limits ad valorem  
            taxes on real property to 1% of the full cash value of that  
            property [California Constitution Article XIII A, Section 1(a)  
            (Proposition 13 of 1978)].  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; Revenue and Taxation Code (R&TC) Sections 60 to  
            69.5). 


          2)Requires new owners of real property and certain legal entities  
            to submit a CIO 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  








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            CIO, except as provided. 


          3)Imposes a penalty for failure to file any of the following  
            statements within the prescribed time period:   


             a)   A CIO 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) CIO or a  
               change-in-control statement required to be mailed by a legal  
               entity to the State Board of Equalization (BOE).


          4)A response to a BOE written request for a legal entity to file a  
            LEOP CIO statement or change-in-control statement.  


          5)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 CIO  
            statement or change-in-control statement, as required, was due  
            to reasonable cause and not due to willful neglect.  


          6)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. 








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          FISCAL EFFECT:  None  


          COMMENTS:  


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


            California Constitution Article XIII A, Section 1 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 was left to  
            implementing legislation.


          2)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  








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            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 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 CIO  
            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  








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            file was not willful. 


          3)Abatement of Penalties.  The purpose of imposing a penalty for  
            failure to file a CIO 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 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.




          Analysis Prepared by:                                               
                          Oksana Jaffe / REV. & TAX. / (916) 319-2098  FN:  
          0000513










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