BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 259 (Bates) - Property taxation:  change in ownership
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          |Version: January 14, 2016       |Policy Vote: GOV. & F. 6 - 0    |
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          |Urgency: Yes                    |Mandate: Yes                    |
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          |Hearing Date: January 19, 2016  |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.

          Bill Summary: SB 259 would modify current standards for  
          reassessing property resulting from changes in ownership. 

          Fiscal Impact: 
                 The Board of Equalization (BOE) would likely incur  
               administrative costs in the low hundreds of thousands of  
               dollars annually (General Fund) to implement the provisions  
               of the bill.

                 BOE estimates that the measure would increase local  
               property tax revenues by $26 million annually.  Higher  
               local property tax revenues lead to reduced General Fund  
               Proposition 98 spending by up to roughly 50 percent (the  
               exact amount depends on the specific amount of the  
               Proposition 98 guarantee, which in turns depends of a  
               variety of economic, demographic and budgetary factors).

                 Costs to the Franchise Tax Board (FTB) would be minor  
               and absorbable.


          SB 259 (Bates)                                         Page 1 of  

                 Under the California Constitution, this bill's imposing  
               of new duties on local county officials related to the real  
               property tax assessment process could be subject to  
               reimbursement by the State. The magnitude is unknown.

          Background: Under Proposition 13, county assessors are precluded  
          from revaluing property for tax purposes unless a change in  
          ownership has occurred.  However, the initiative did not define  
          the term; consequently, Legislature determined what constitutes  
          a "change in ownership" with respect to property owned by legal  
          entities such as corporations. As implemented, assessors  
          reassess property when one person or legal entity purchases or  
          otherwise acquires more than 50 percent ownership of a  
          corporation or other legal entity in a single transaction.

          However, if multiple individuals or entities acquire another  
          entity in a single transaction, but none of the purchasers  
          acquire more than 50 percent, no reassessment occurs even if it  
          occurs in a single transaction.  As example of this was Kaiser  
          Steel, ownership of which was acquired by a consortium of seven  
          separate purchasers, none of whom acquired more than 50 percent.  
          Even though 100 percent of the corporation had changed hands, no  
          reassessable change of ownership had occurred, since no single  
          party had acquired more than 50 percent ownership of the  

          It is difficult for property tax administrators to independently  
          discover reassessable events involving legal entities, because  
          ordinarily there is no recorded deed or notice of a transfer of  
          an ownership interest in a legal entity. To help track potential  
          reassessments, BOE created the Legal Entity Ownership Program  
          (LEOP) in 1982 to help find and detect changes in control and  
          ownership of corporations, partnerships, and other legal  
          entities, which have no recorded deed or notice of a transfer of  
          an ownership interest in a legal entity. Under LEOP, BOE (1)  
          receives from FTB a list of legal entities that have reported a  
          change in control or change in ownership on income tax returns,  
          (2) analyzes completed statements to determine changes in  
          control or ownership, and (3) notifies county assessors of  
          changes in control and ownership.  To assist these efforts, the  
          Legislature required legal entities to report transfers directly  
          to BOE within 90 days, and established a penalty for legal  
          entities failing to self-report a change in ownership and  


          SB 259 (Bates)                                         Page 2 of  
          control to BOE equal to 10 percent of the tax resulting from  
          enrolling the higher value.

          Bill Summary: This bill would create a new "change in ownership"  
          event for legal entity owned real property that occurs when 90  
          percent or more of the direct or indirect ownership interests in  
          that legal entity transfer in a planned single transaction.  
          Specifically, this bill would do all of the following:

                 On or after January 1, 2016, require reassessment of a  
               legal entity's real property holdings whenever 90 percent  
               or more of its ownership interests transfer in a "single  

                 Define "single transaction" to mean a plan consisting of  
               one or more sales or transfers.

                  o         Create a rebuttable presumption that sales or  
                    transfers occurring within a 36-month period are part  
                    of a single transaction, thus allowing cumulative  
                    counting of ownership interest transfers to reach the  
                    90 percent threshold.

                  o         Create a rebuttable presumption that sales or  
                    transfers are part of a single transaction when the  
                    transferees (buyer) are related persons/entities per  
                    federal law, thus effectively allowing counting of the  
                    cumulative ownership interests of all the related  
                    parties to reach the 90 percent threshold. 

                 Exclude transfers that occur upon death (i.e.,  

                 Exclude sales of publicly traded corporate stock or  
               partnerships occurring in regular trading activity on an  
               established securities market. 

                 Require the change in ownership event to be reported to  
               BOE within 90 days.

                 Increase from 10 percent to 15 percent the penalty for  
               failure to report legal entity reassessment events to the  


          SB 259 (Bates)                                         Page 3 of  
                 Require BOE to notify assessors when legal entity  
               reassessment events occur.

                 Require BOE to report the reassessments occurring under  
               the new trigger event and their revenue impact by 2021.

                 Require the Legislative Analyst's Office to report on  
               the economic impact of the bill by 2021.

          Staff Comments: BOE estimates the annual revenue gain from this  
          measure to be $26 million. However, any estimate in the area of  
          change of ownership is subject to considerable uncertainty. Key  
          pieces of information needed to produce a robust estimate are  
          not known, requiring BOE staff to use related assumptions in  
          their place. BOE staff examined county assessment roll data and  
          estimated that in 2014-15, legal entities owned real property  
          assessed at $646 billion. To get from assessed value to market  
          value (reassessment), BOE research staff applied a ratio that it  
          develops annually for a related purpose known as the 4R Act  
          Ratio. Specifically, current law requires BOE to conduct a study  
          to determine the effective assessment level (i.e., the  
          percentage difference between assessed value and market value)  
          for commercial/industrial property in order to determine a  
          comparable assessment level for rail transportation property.  
          The latest study found the effective assessment level was about  
          71 percent. BOE applied this ratio to its estimated legal entity  
          owned real property assessed value, consequently estimating  
          2014-15 market value to be $910 million. 

          BOE, noting that it could not predict the annual number of legal  
          entity property reassessments resulting from the bill, assumed  
          that one percent of legal entity properties are subject to  
          reassessment each year to current market value under the bill.  
          At the basic one percent tax rate, the resulting revenue gain  
          was $26 million. 

          The uncertainty in the revenue estimate stems from two sources.  
          First, the 4R act ratio is derived from sales reports provided  
          to BOE by the counties. These reports are voluntary;  
          participation by the counties is not universal, and generally is  
          not submitted if a county has fewer than 10 affect property  
          sales. Thus, the 4R Act ratio could contain incomplete sales  
          information. The 4R act ratio itself is not static, and  


          SB 259 (Bates)                                         Page 4 of  
          generally moves inversely from fiscal year to fiscal year with  
          the change in market values. In other words, when market value  
          is rising, the 4R act ratio is generally falling, and  
          vice-versa. For illustrative purposes, using BOE's estimate of  
          $646 billion for assessed value of legal entity-owned property,  
          for every one percentage point change in the 4R Act ratio, the  
          revenue estimate would change by about $1 million. Second, the  
          extent to which taxpayers structure their transactions to ensure  
          that 90 percent does not change within a three year period  
          cannot be predicted in advance. To the extent that legal  
          entities restructure their transactions to avoid reassessment,  
          the revenue gain would be lower than $26 million. 

          BOE estimates that the revenue increase from the bill's  
          increasing the penalty from 10 percent to 15 percent would  
          likely be minimal. 

          Though the projected revenues resulting from this bill far  
          outpace BOE's implementation costs, BOE would incur costs in  
          2016-17, while the Proposition 98 impact from the projected  
          higher property tax revenues would be scored when those dollars  
          came in the door, which would begin in 2017-18.

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