BILL ANALYSIS                                                                                                                                                                                                    



                                                                     AB 571


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          571 (Brown)


          As Amended  September 1, 2015


          Majority vote


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          |ASSEMBLY:  |77-0  |(May 28, 2015) |SENATE: |40-0  |(September 3,    |
          |           |      |               |        |      |2015)            |
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          Original Committee Reference:  REV. & TAX.


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


          The Senate amendments specify that the revised "reasonable  
          cause" standard for abating penalty would also apply to  
          late-filed or incomplete CIO statements for transfers of real  
          property or manufactured homes.


          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  








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            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 Sections 60 to 69.5). 


          2)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.


          3)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); 


          4)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)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  








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            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. 


          AS PASSED BY THE ASSEMBLY, this bill revised 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: 



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


          2)Occurred notwithstanding the exercise of ordinary care in the  
            absence of willful neglect.


          FISCAL EFFECT:  None  


          COMMENTS:  


          1)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  








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            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.


            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  
            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 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  








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            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 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. 


          3)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  
            be abated under the same "reasonable cause and not due to  








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            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:  
          0002079