BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE SB 1903 - Maddy
Senator Lucy Killea, Chair Amended:
5-10-96
Hearing: June 5, 1996 Fiscal: YES
SUBJECT: Income Tax: Alternative minimum tax reform
Property Tax: Assessment and appeal reforms
Amendments since April 17 hearing
At the April 17 hearing the committee asked the author to
confer with interested parties and attempt to reconcile
differences. To that end the author has made the following
changes to the bill, which are contained in the May 10
amendments:
Alternative minimum tax - Adopted the FTB proposal allowing
personal exemption credits to reduce regular tax below
tentative minimum tax
Renewals & subleases of possessory interests - Adopted Board
of Equalization proposal
Amended & consolidated appeals and stipulations - Adopted
county proposals
Evidentiary standard for overcoming exclusive use test for
possessory interests - Deleted provision
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Award of litigation costs for certain possessory interest
disputes - Deleted provision
Collateral estoppel - Deleted provision
Project mitigation costs - Deleted provision
Business property statements - Deleted provision
Step transactions - Deleted provision
Making homeowners exemption information confidential -
Deleted provision
Trade secrets - Adopted county language
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Additional Amendments
Additional amendments are proposed by proponents, to be taken
in Judiciary Committee on June 4:
Trial de novo - Amendments would attempt to institute a quasi
trial de novo in which the superior court would in effect
treat decisions of the assessment appeals board as a trial
court decision, and would review that decision as though
the superior court were an appellate court.
Separate legal counsel - Provision would be deleted
January 1 lien date extension - Provision would be deleted
ALTERNATIVE MINIMUM TAX
EXISTING LAW provides for an oalternative minimum taxo to
ensure that taxpayers with substantial economic income would
not be able to use exclusions and deductions to eliminate all
income or corporation tax liability. In general terms, an
alternative minimum tax is calculated by comparing the tax
owed under the regular income tax with the amount owed if
certain deductions and credits were not allowed. Under this
alternative tax calculation, married taxpayers can exempt
$40,000 of income; single and head-of-household taxpayers can
exempt $30,000. This calculation is known as the otentative
minimum tax.o
Taxpayers compare the tentative minimum tax with regular
income tax. If tentative minimum tax is greater than regular
tax, the difference is assessed as the Alternative Minimum
Tax (AMT). The AMT rate is 7%.
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The use of some credits is also limited under current
law. Some credits -- such as the personal exemption credit
-- may not be used to reduce the regular income tax below the
tentative minimum tax. Other credits -- generally, business
incentive credits -- may be used to reduce the regular income
tax, but not the Alternative Minimum Tax. For example, a
taxpayer could use the manufactureros investment credit, but
not the personal exemption credit, to reduce his regular tax.
Neither credit could be used to reduce Alternative Minimum
Tax.
One of the criticisms of the Alternative Minimum Tax is
that some taxpayers must fill out the Schedule P only to find
out that they donot have to pay the AMT. Since the
calculation is complex it is frustrating to fill out the form
only to discover that doing so had no effect on tax
liability.
The reason that some taxpayers must fill out the Schedule
P even though it has no impact on their tax liability is due
to the way the AMT calculations interact with business
deductions and tax credits.
The Franchise Tax Board has recently proposed a statutory
change that would allow taxpayers to use personal and
dependent exemption credits to reduce their regular tax
liability below the tentative minimum tax calculation. This
would reduce the complexity of filling out the tax return for
those taxpayers who have no business deductions and would
result in a tax reduction for those who currently cannot take
advantage of their exemption credits because of the
interaction with the AMT calculations. This change would
cost about $9 million in the first fiscal year and $21-28
million in subsequent years. Most of the beneficiaries of
this change would be taxpayers with incomes under $100,000.
THIS BILL, as amended, would allow the personal
exemption credit to reduce the regular tax below the
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tentative alternative minimum tax. The effect of
this change is that the personal exemption will no
longer place large numbers of "ordinary" taxpayers
(those without extraordinarily large amounts of tax
preferences, deductions, credits, etc.) in the
position of having to compute and pay the
alternative minimum tax.
COMMENTS: The purpose of the Alternative Minimum Tax
(AMT) is to ensure that taxpayers with substantial economic
income pay some tax, even if they take advantage of
deductions and other tax provisions that would otherwise
reduce their income tax liability to zero. Some of those
provisions include depletion allowances, exercise of
incentive stock options, and tax shelter farm activities.
While the purpose of the AMT may be worthwhile, there are
aspects of the calculation which occasionally affect
oordinaryo taxpayers even though they donot take advantage of
tax preferences.
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PROPERTY TAX ASSESSMENT PRACTICES
A. Project mitigation costs & contaminated land
EXISTING LAW is not altogether clear on how contaminated
property is to be valued.
THIS BILL clarifies that contaminated property is to be
valued on the basis of the purchase price that property would
bring, in its condition, on the lien date.
EXISTING LAW provides that when developers are required
to make contributions to mitigate contamination or project
impacts, those contributions are included in the valuation of
the project.
THIS BILL would provide that those contributions are not
to be included in the valuation of the project when they do
not result in any addition of tangible property at the
project site.
The bill has been amended to delete these
provisions.
B. Renewals & Subleases of possessory interests
EXISTING LAW provides that both renewals and subleases of
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possessory interests are subject to change in ownership
reappraisal.
THIS BILL would provide that renewals of possessory
interests during the estimated term of possession do not
cause a change in ownership reappraisal.
The bill would also provide that a sublease of a partial
interests in a possessory interest for terms of less than 35
years does not constitute changes in ownership.
COMMENTS: The provision relating to renewals of
possessory interests conforms with proper valuation
procedures for possessory interests.
The bill has been amended to adopt Board of
Equalization's suggested re-write of these
provisions.
C. Use of public transportation corridors
EXISTING LAW provides for assessment of private
(generally for-profit) uses of public property as "possessory
interests." Last year's SB 657 (Maddy) attempted to clarify
the definitions of possessory interest, particularly with
respect to the "exclusivity" of an interest.
THIS BILL attempts to further clarify possessory interest
assessment by providing a rebuttable presumption that a
private use of a public transportation corridor is not a
taxable possessory interest. The presumption could be
rebutted "by a preponderance of the evidence showing that the
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interest sought to be classified as a possessory interest is
independent, durable, and exclusive of rights held by others.
... Further, ... the evidence shall ... show that the
interest ... is greater than 60 days long, and not subject to
cancellation by the entity granting the interest...."
COMMENTS: This provision is designed to distinguish
exclusive from non-exclusive uses of public transportation
corridors. It particularly focuses on the roadway at the Los
Angeles International Airport, where the county has assessed
possessory interest on private vanlines' non-exclusive use of
the roadway. The attempt here is to prohibit possessory
interest assessments of vans simply driving around the road,
picking up passengers and luggage, while at the same time
permitting assessment of possessory interest on the portion
of the curb against which certain vans have an exclusive and
contractual right to park.
As amended, the bill adds a requirement that
similar uses of the property are taxed in a
nondiscriminatory manner as required by provisions
of the United States Code. This is a reference to a
recent case dealing with nondiscriminatory treatment
of common carriers.
D. Other possessory interest provisions
EXISTING LAW is not specific as to what constitutes a
possessory interest. The Board of Equalization has
promulgated Rule 25, which contains detailed descriptions of
methods and standards for assessing possessory interests.
However this rule is somewhat out of date in light of several
subsequent court cases.
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THIS BILL attempts to combine language from Rule 25 with
more recent court language to provide a more complete
statutory guide to possessory interest assessment. In
addition, the proposal provides that if the assessor fails to
document the assessment, he or she would lose the assessor's
traditional "presumption of correctness."
The bill also generally proscribes assessing possessory
interests and other property interests by the "value in use"
standard. This standard, which is based on the value of the
property to the particular occupant rather than the value
which would be placed on the property by the market, has
generally been discredited and is not used. The bill
similarly would clarify that assessing the "enterprise value"
of a business is not appropriate.
COMMENTS: This portion of the proposal is highly complex
and technical, and assessors have yet to advise in detail as
to its effects. Assessors have indicated that the proposed
language, in some cases, appears to raise more issues than it
settles.
Most of the suggested changes proposed by
counties were adopted by the author.
E. Business property statements
EXISTING LAW requires businesses owning personal property
in excess of $100,000 to annually file a property statement
with the assessor. These statements must be very detailed
and are very time consuming for taxpayers to prepare and for
assessors to audit.
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THIS BILL would attempt to simplify the business property
statement process by requiring only the prior year's and
current year's total cost of personal property, and detailed
additions and deletions of property. Sponsors indicate that
this is a process similar to that used in many other states.
This provision has been amended out of the bill.
G. Step transactions
EXISTING LAW provides that where a change in ownership is
accomplished through a series of steps, it constitutes a
reassessable event even though none of the individual steps
would itself constitute a reassessable change in ownership.
The courts have held that whether a transaction is
accomplished in separate steps or all at once, the result is
not affected and the entirety of the transaction can be
viewed as a change in ownership subject to reappraisal under
Prop. 13.
THIS BILL provides that "the step transaction doctrine is
appropriately applied to a series of transfers when one or
more unnecessary transfers are undertaken merely to
circumvent the intent of the change in ownership provisions,
in which case the unnecessary transfer or transfers shall be
disregarded."
This provision has been amended out of the bill.
H. Makes homeowner's exemption confidential
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EXISTING LAW provides a $7,000 property tax exemption for
owner-occupied homes. The presence of this exemption, along
with all other property tax exemptions, is part of the
property tax roll available to the public.
THIS BILL would provide that the presence of the
homeowner's exemption must be kept confidential.
This provision has been amended out of the bill.
I. Extends January 1 lien date to 1998
EXISTING LAW, enacted two years ago, changed the lien
date from March 1 to January 1, with the intent of providing
greater simplicity for business taxpayers and tax
administrators (since most businesses use a calendar year
fiscal period). The first year for the January 1 lien date
is scheduled to be in 1997.
THIS BILL would delay the implementation of the January 1
lien date to 1998.
COMMENTS: Although most counties will be able to meet
the 1997 start-up date for the January 1 lien date law, Los
Angeles has indicated that it will require at least another
year because of the enormous job of reprogramming ancient
computers and software. Sponsors have included this
provision in the bill "in the spirit of compromise," and as
an attempt to blunt opposition from counties.
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Proponents plan to amend the bill to delete this
provisions.
J. Extends use of comparable sales
EXISTING LAW provides that when property is valued using
the "comparable sales" method, the comparable sales must have
taken place up to 90 days after the valuation date.
THIS BILL would expand the 90 day comparable sales period
to 180 days.
COMMENTS: this provision would probably be useful in
increasing the pool of comparable for use in valuing
property.
PROPERTY TAX APPEALS
K. Trial de novo
EXISTING LAW (Article XIII, Section 16) gives the county
assessment appeals board the responsibility of "equalizing
the values of all property on the assessment roll by
adjusting individual assessments." This has generally been
taken by the courts to mean that the assessment appeals board
acts effectively like a trial court in deciding on questions
of valuation. (However, staff are aware of one superior
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court case where the judge disagreed with this view, and
proceeded to hear a question of valuation.)
THIS BILL would permit appellants to seek a "trial de
novo" in superior court if they do not prevail in an
assessment appeals board hearing on a question of valuation.
COMMENTS: This provision was included in Senator Maddy's
SB 657 last year and was amended out on the motion of Senator
Campbell, who was not convinced of the constitutional issue
but was hesitant to increase the workload on an already
overloaded court system. Note that the Judicial Counsel
opposes the bill for that reason, and the bill is
double-referred to Judiciary Committee for a hearing on this
issue.
This provision has been referred to the
Judiciary Committee for hearing, on June 4.
Proponents are proposing amendments which would
institute a quasi trial de novo ("quasi novo" for
short) in which the superior court would in effect
treat decisions of the assessment appeals board as a
trial court decision, and would review that decision
as though the superior court were an appellate
court.
L. Separate legal counsel for assessor and appeals board
EXISTING LAW provides that the same law firm may not be
used to represent both the assessor and the assessment
appeals board on tax hearings before the appeals board.
However, this prohibition doesn't apply to the county
counsel, so different members of county counsel staff may
each represent the assessor and the appeals board at
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hearings.
THIS BILL would prevent county counsel from representing
both the appeals board and the assessor. The county would
have to (1) appoint private counsel on a paid or volunteer
basis, (2) appoint public counsel from the public defender's
office, or (3) appoint other public counsel not under the
authority of county counsel. This prohibition would not
apply in counties of less than 450,000.
COMMENTS: Proponents argue that the present system,
which allows staff of the county counsel's office to
represent both the assessor and the appeals board "creates a
huge conflict of interest, similar to a prosecutor also being
a judge's law clerk." However, to staff's knowledge there
have not been significant problems involving such conflict of
interest, although the potential can certainly exist.
Proponents have repeatedly been asked to cite examples where
problems have arisen; only one has been forthcoming.
Requiring counties to hire outside counsel to represent the
assessment appeals board would be extremely expensive
solution to a problem the existence of which has not been
demonstrated.
If conflicts of interest exist, it would seem more likely
that they would occur in smaller counties -- counties which
are exempt from the new provision by the population limit.
A version of this provision was contained in last year's
SB 657 (Maddy), and was amended out of the bill by this
committee.
Proponents plan to amend the bill to delete this
provision.
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M. Shifts burden of proof for certain possessory interest
appeals
EXISTING LAW (last year's SB 657 - Maddy) specifically
lists various types of situations which indicate an
"exclusive" use for possessory interest purposes.
THIS BILL provides that if an assessor uses a definition
of "exclusive" which goes beyond those now listed in statute,
the burden of proof would shift to the assessor.
This provision has been deleted from the bill.
N. Award of litigation costs for certain possessory interest
appeals
EXISTING LAW awards limited attorney costs when an
administrator or public officer acts in an arbitrary or
capricious manner.
THIS BILL would provide that if an appellate court
renders judgment in favor of a taxpayer in a possessory
interest case, the assessor must reimburse the taxpayer for
"all costs actually and reasonably incurred by the taxpayer."
This provision has been deleted from the bill.
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O. Amended appeals
EXISTING LAW provides that assessment appeal applications
may not be substantially amended after the filing deadline.
THIS BILL would permit amendments after the filing
deadline.
COMMENTS: As drafted there would be no deadline for
amending assessment appeals. Presumably, the appeal could be
substantially amended up to the day of the hearing. Although
there does appear to be a need for a more liberal amendment
policy, not providing a deadline at all would probably make
hearing appeals very difficult, since the assessor would
potentially have no idea what the issues were before the
hearing.
County-proposed amendments were adopted by the
author.
P. Consolidated appeals
EXISTING LAW does not permit a taxpayer to consolidate
multiple appeals on different properties into one assessment
appeals hearing.
THIS BILL would allow such consolidation if the issues in
dispute are the same.
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COMMENTS: This proposal would probably ease the appeal
burden for taxpayers and counties alike.
County-proposed amendments were adopted by the
author.
Q. Stipulation adopted if not acted on within 60 days;
findings required if stipulation rejected; fees waived if
findings not issued within 45 days
EXISTING LAW allows written stipulations between the
assessor and the taxpayer to be filed with the board in lieu
of personal presentations by the assessor and taxpayer.
Existing law also provides that the taxpayer may, upon
payment of a fee, request an assessment appeals board to
provide written findings of fact with respect to its
determination on an assessment reduction.
THIS BILL would provide that if a stipulation is not
acted on within 60 days it will be deemed accepted by the
assessment appeals board. It would also provide that if
findings of fact are not provided within 45 days, the fee
would be waived.
COMMENTS: These proposals arise out of proponents'
frustration at having to "wait in line" at the unusually
congested assessment appeals process. This congestion is
caused by the recent decline in assessed values, which in
turn stimulates assessment appeals, and by the growth of the
"tax consultant" business, which in some counties has clogged
the appeals process with pro forma or worthless appeals.
County-proposed amendments were adopted by the
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author.
R. Prohibits disclosure of trade secrets
EXISTING LAW requires appeals board meetings to be open
to the public, but authorizes applicants to request that the
hearing be closed when evidence relating to trade secrets is
presented.
THIS BILL makes it a misdemeanor for any person to
divulge "trade secrets, parameters used to acquire or dispose
of property, financial information and other information
pertaining to the business affairs of the applicant."
The amendments re-write this provision per
suggestions by counties. It is one of the
provisions being heard by Judiciary on June 4.
S. Deferral of contested tax payments
EXISTING LAW requires taxpayers to pay in full any
disputed amount of tax before obtaining any relief from the
disputed assessment.
THIS BILL would allow a taxpayer to withhold payment of
any disputed amount of property tax until an assessment
appeals board issues its final decision. The taxpayer would
be required to pay at least the amount paid in the prior
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year.
COMMENTS: Proponents argue that this provision is
consistent with requirements for appeal under the income or
sales tax. Counties are concerned with the delayed cash flow
which would result.
The amendments do not change this provision.
T. Collateral estoppel
EXISTING LAW recognizes the doctrine of collateral
estoppel, which is intended to foreclose relitigation of an
issue that is identical to one decided in a prior case,
involves the same parties, and resulted in a final judgment.
THIS BILL would bring the doctrine of collateral estoppel
from the court trial context into that of assessment appeals
hearings.
COMMENTS: The provision is intended to prevent taxpayers
and counties from having to rehear and relitigate the same
issues over and over, from one property to another, or from
one year to the next. It has been suggested that adding this
provision would have little practical effect since the
doctrine is already well established by the courts.
The amendments delete this provision from the
bill.
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FISCAL EFFECT:
Franchise Tax Board estimates a revenue loss due to
repealing the personal income tax minimum tax at $9 million
in the first year (1995-96), growing to $28 million by the
third year. (Note that as 1995-96 is almost over, these
numbers would probably shift by one year.)
Board of Equalization has estimated property tax revenue
losses for various components of the prior version of the
bill. Revised estimates are pending.
Support and Opposition
Note: The following do not reflect the most recent
amendments.
Support: Cal-Tax (sponsor)
Sears, Roebuck and Co.
California Manufacturing Association
AT&T
Great Western Financial Corporation
Property Tax Assistance Co., Inc.
Xerox Corp.
GTE California Inc.
Texaco
California Chamber of Commerce
Air Transport Association
Western States Petroleum Association
Pacific Telesis
American Electronic Association
Dow Chemical Co.
Oppose: California Tax Reform Association
County Clerks Association of California
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Superior Court, Orange County
Assessor, County of Los Angeles
County of Los Angeles
Assessor, County of Yolo
Judicial Council of California
Trial Courts Legislation Committee
CSAC
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Consultant: Martin Helmke & Anne Maitland
May 31, 1996 10:06 AM