BILL ANALYSIS
AB 2492
Page 1
ASSEMBLY THIRD READING
AB 2492 (Ammiano)
As Amended May 18, 2010
2/3 vote. Tax levy.
REVENUE & TAXATION 6-3 APPROPRIATIONS 9-4
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|Ayes:|Portantino, Beall, |Ayes:|Fuentes, Ammiano, |
| |Charles Calderon, Coto, | |Bradford, |
| |Fuentes, Ma | |Charles Calderon, Coto, |
| | | |De Leon, Hall, Skinner, |
| | | |Torlakson |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|DeVore, Harkey, Nestande |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen |
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SUMMARY : Revises the circumstances under which a "change in
ownership" of real property owned by a legal entity is deemed to
occur. Specifically, this bill :
1)Provides that, when 100% of the ownership interests in a legal
entity are sold or transferred in a single transaction, the
purchase or transfer of that interest is considered to be a
"change of ownership" of the real property owned by the
entity, thus, triggering a reassessment of the property for
tax purposes.
2)Specifies that a "sale or transfer" of ownership interests in
a legal entity means a merger, acquisition, private equity
buyout, transfer of partnership shares, or any other means by
which a legal entity or person acquires the ownership interest
of another legal entity, including the subsidiaries or
affiliates of the legal entity and the property owned by those
subsidiaries and affiliates.
3)States that a purchase or transfer of 100% of the ownership
interests in a legal entity is considered to be a "change of
ownership" of the real property owned by that entity, whether
or not any one legal entity or a person that is a party to the
transaction acquires more than 50% of the ownership interests.
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4)Exempts a sale or transfer of ownership interests between
parents and their children, as well as between grandparents
and their grandchildren.
5)Defines the term "legal entity" as a corporation, a
partnership, a limited liability company, or other legal
entity.
6)Defines the phrase "ownership interests" as corporate voting
stock, partnership capital and profits interests, limited
liability company membership interests, and other ownership
interests in legal entities.
7)Defines the phrase a "single transaction" as a transaction in
which 100% of the ownership interests are sold or transferred
in either one calendar year or within a three-year period
beginning on the date of the original transaction when any
percentage of ownership interests are sold or transferred.
8)Requires a person or legal entity acquiring the ownership
interests in a legal entity, when 100% of the ownership
interests in the legal entity are sold or transferred, to file
a change in ownership statement, signed under penalty of
perjury, with the State Board of Equalization (BOE).
9)Requires the BOE to notify assessors when such a change in
ownership has occurred.
10)Increases the penalties for failure to file a change in
ownership statement from 10% to 20%.
11)Requires the BOE to prescribe regulations that may be
necessary to carry out the purposes of this bill.
12)Contains a statement of legislative intent to specify
circumstances under which real property owned by banks and
financial institutions, which have been acquired by other
financial institutions, undergo a "change in ownership."
13)Imposes a state-mandated local program but provides that no
reimbursement is required, as specified.
14)Takes effect immediately as a tax levy.
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FISCAL EFFECT :
1)The BOE estimates that this bill would result in
change-of-ownership related increases in property tax
assessments totaling $21 million per year. Over time, the
effects would be cumulative, potentially increasing property
tax collections by the low hundreds of millions of dollars per
year.
2)About 40% of added property tax revenues would be allocated to
school districts. Under Proposition 98, increased local
revenues to schools translates into a corresponding reduction
on General Fund spending for this purpose.
COMMENTS : The author states that, "The current system for
assessing and taxing commercial and industrial property in
California is riddled with loopholes. The current system
provides property owners with innumerable ways to structure
change of ownership transactions to avoid paying higher taxes.
The system allows billions of dollars of valuable business
property to be vastly under assessed, creates great differences
in taxes paid among property owners, resulting in inadequate
funding of local governments, schools and infrastructure
projects.
"Current law requires that commercial properties be taxed on
their full market value if a 'change of ownership' occurs. 'A
change of ownership' triggers reassessment of property for
property tax purposes. However, current law says that a 'change
of ownership' does not occur unless one owner acquires more than
50% of a property. Unfortunately, loopholes in existing law
have not triggered reassessment, in some cases, even if 100% of
property has changed hands.
"Commercial property is held in many complex ways - limited
liability corporations, limited partnerships, real estate
investment trusts, family trusts, publicly traded corporations,
etc. It is often difficult to identify a 'change of ownership'
under current law, and very easy to avoid a 'change of
ownership' even when a sale occurs that should trigger a
reassessment.
"In 2008, as the nation became consumed by the worst economic
recession in history - caused in no small part by the collapse
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of the mortgage lending industry - and as 'too big to fail'
businesses clearly began to fail, many of the smaller lending
institutions were acquired by the larger national and
international financial institutions. However, it is still
unclear if any of the California assets acquired in these
mergers have been reassessed even though it is reasonable to
assume that 100% of ownership has changed hands.
"AB 2492 begins the process of major property tax reform by
closing the most obvious and egregious loopholes in property tax
law by requiring that where 100% of a company changes ownership,
from bank mergers and private equity buyouts, the property held
by that company and its subsidiaries and affiliates must be
reassessed, no matter how many purchasers take ownership of the
property."
Arguments in support and opposition: The proponents argue that
this bill is necessary to close the major loophole in the tax
system that allows an avoidance of property reassessment even
where 100% of a business entity changes ownership. The
opponents, however, argue that the increase in the property
taxes paid by the affected entities will result in higher prices
for goods and services, a reduction in California's
competitiveness, a decrease in profits to owners and investors,
and lower wages for employees, and will overall harm the
California economy.
Background. The property tax applies to all classes of property
and is one of the major general revenue sources for local
governments in California. It is imposed on the property owners
and is based on the value of the property. Much of the law
pertaining to taxation of property is prescribed by the
California Constitution, Article XIII and Article XIII A. Since
the adoption of Proposition 13 in 1978, real property has,
generally, been taxed based on its value at the time of its
acquisition, with increases for inflation limited to 2% per
year. Once the ownership of property is changed, the value of
the property is re-determined based on the current market value.
While the requirement to reassess property upon a change in
ownership is contained in the California Constitution, the
phrase "change in ownership" is not defined.
Shortly after the passage of Proposition 13, this Committee
appointed a special Task Force - a broad-based 35-member panel
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that included legislative and BOE staff, county assessors,
attorneys in the public and private sectors, and trade
associations - to recommend the statutory implementation for
Proposition 13, including the "change in ownership" provisions.
With respect to a transfer of ownership interest in a legal
entity that owns real property, the Task Force initially
recommended adopting the "separate entity" theory that respects
the separate identity of the legal entity. According to this
theory, so long as the legal entity owned the property, the
property will not be reassessed, even if most or all of the
ownership interests in the entity, i.e. stock or partnership
interests, had been transferred. The Task Force recommended the
"separate entity" approach because of the perceived
administrative and enforcements problems with disregarding the
separate identity of a legal entity and the unpredictable ripple
effects of ignoring the general separate entity laws.
However, subsequently, the "majority-takeover-of-corporate
stock" provision was added "out of a concern that, given the
lower turnover rate of corporate property, mergers or other
transfer of majority controlling ownership should result in a
reappraisal of the corporation's property - an effort to
maintain some parity with the increasing relative tax burden of
residential property statewide, due to more rapid turnover of
homes." (Implementation of Proposition 13, Volume 1, Property
Tax Assessment, a report prepared by the Assembly Revenue and
Taxation Committee, California State Assembly Publication 748,
October 29, 1979). Thus, the law was amended to provide that,
whenever any person or entity has purchased or otherwise
acquired more than 50% ownership of a corporation or other legal
entity, any real property owned by the acquired entity must be
reappraised to full market value.
It should be noted that, while the Task Force, in order to
mitigate administrative difficulties, recommended the "separate
entity" approach for determining when a change in ownership of
real property occurs, it was concerned with the fact that
commercial and industrial properties change ownership less
frequently than residential property and proposed that the
Legislature study the idea of a constitutional amendment to
appraise commercial and industrial property periodically at
current market value.
Is There a Problem With the Existing "Change of Ownership"
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Definition? The current system provides property owners with
several ways to structure "change in ownership" transactions to
avoid paying higher property taxes and allows purchasers to
avoid reassessment even if 100% of a company changes hands. A
business may avoid a major reappraisal of the property of an
acquired entity by simply structuring the acquisition in a way
that prevents any of the separate purchasers from receiving more
than 50% ownership in the acquired entity. Thus, if multiple
individuals or entities acquire another entity, in a single
transaction, but none of the purchasers acquires more than 50%
interest in the entity, then a reappraisal of the property held
by the acquired entity is not required. The statutory
provisions implementing Proposition 13 were intended to ensure
that, when an entity or person acquires a business entity, a
reassessment of the acquired entity's real property is
triggered, especially in cases when 100% of ownership has
changed. It is unlikely that the idea of enabling multiple,
affiliated purchasers of a corporation, each acquiring less than
a 50% ownership interest, to completely avoid a reappraisal of
the corporation's underlying property was contemplated by the
voters when approving Proposition 13, or by the Legislature when
enacting R&TC Section 64 that sets forth the definition of
"change in ownership."
The Proposed Solution. According to the sponsor, this bill is
designed to close this obvious and egregious loophole in the law
by providing that, when 100% of the ownership interests in a
legal entity holding real property are sold or transferred in a
single transaction, the property must be reassessed, no matter
how many purchasers take ownership of the entity and regardless
of whether any one legal entity acquires more than 50% of the
ownership interest. Under current law, only if a particular
transaction results in a change in control of a legal entity
(i.e. one legal entity or individual acquires more than half of
the ownership interest in the legal entity) would the property
owned by that legal entity be subject to reassessment.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0004907