BILL ANALYSIS �
AB 2014
Page A
Date of Hearing: May 7, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2014 (Ammiano) - As Amended: April 30, 2012
Majority vote. Fiscal committee.
SUBJECT : Property taxation: change in ownership: task force.
SUMMARY : Requires the Legislature to convene a task force, as
specified, to update the work done by the 1979 Task Force on
Property Tax Administration (1979 Task Force) regarding the
definition of "change in ownership" (CIO) for complex legal
entities, as provided. Specifically, this bill :
1)Requires the Legislature to convene a task force to update the
work done by the 1979 Task Force that provided recommendations
to the Legislature regarding the definition of CIO for complex
legal entities.
2)Directs the task force to examine all of the following issues
relating to changes in ownership of real property owned by
complex legal entities:
a) The availability of information;
b) The sufficiency of reporting requirements; and,
c) Whether current definitions are sufficient to capture
the concept of CIO.
3)Requires the task force to be composed of a representative
group of citizens and officials who have been engaged in these
issues relating to CIO of real property owned by complex legal
entities.
4)Specifies that the task force shall consist of 15 members,
including two Members of the State Board of Equalization
(BOE), two county assessors, six members of the public, the
Chair of the Senate Committee on Governance and Finance, or
his/her designee, the Chair of the Assembly Committee on
Revenue and Taxation, or his/her designee, one Governor's
appointee from the Department of Finance, one appointee of the
State Controller from the Controller's Office, and one
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appointee of the Treasurer from the Treasurer's Office.
5)Provides that BOE Members and county assessors shall be
appointed, one of each, by the Speaker of the Assembly and the
Senate Committee on Rules. Of six members of the public, two
shall be appointed by the Governor, two shall be appointed by
the Speaker of the Assembly, and two shall be appointed by the
Senate Committee on Rules.
6)Requires the Speaker of the Assembly and the Senate Committee
on Rules, in making appointments, to make a good faith effort
to reflect the economic, social, and geographic diversity of
the state.
7)Requires appointments to be made by April 1, 2013.
8)Requires the task force to convene its first meeting by June
1, 2013, and submit a report to the Legislature within seven
months of the first meeting, as provided.
9)Specifies that, if the Commission on State Mandates determines
that this bill contains costs mandated by the state, these
costs will be reimbursed pursuant to Government Code Part 7
(commencing with Section 17500) of Division 4 of Title 2.
EXISTING LAW :
1)Provides that all property is taxable, unless otherwise
provided by the California Constitution or federal laws,
�Section 1(a), Article XIII, California Constitution]. Limits
ad valorem taxes on real property to 1% of the full cash value
of that property (Proposition 13).
2)Requires real property to be reassessed to its current fair
market value whenever a "CIO" occurs. �California
Constitution, Article XIII A, Section 2; Revenue and Taxation
Code (R&TC) Sections 60 - 69.5].
3)Provides that "CIO" includes a transfer of any interest in
real property between a corporation, partnership, or other
legal entity and a shareholder, partner or any other person.
�R&TC Section 61(j)].
4)Sets forth the general rule that, when real property is owned
by a legal entity, the purchase or transfer of ownership
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interests in that entity does not trigger a CIO of the
property, unless a) there is a "change in control" of the
legal entity, or, b) one person or entity acquires more than
50% of the ownership interest of the entity. (R&TC Section
64). Thus, when any person or entity obtains control, through
direct or indirect ownership or control, of more than 50% of
the voting stock of a corporation, or a majority ownership
interest in any other type of legal entity, a reassessment of
real property owned by the acquired legal entity (or any of
its subsidiaries) is triggered. �R&TC Section 64(c)(1)(A)].
Furthermore, when voting stock or other ownership interests
representing cumulatively more than 50% of the total interest
in a legal entity is transferred by any of the "original
co-owners" in one or more transactions, the real property that
was previously excluded from reappraisal will be reassessed.
�R&TC Section 64(d)].
FISCAL EFFECT : The BOE staff states that this bill will not
impact the General Fund revenues.
COMMENTS :
1)The Author's Statement . The author states that, "The
definition of change in ownership has not been re-examined
since 1979. It appears clear that there are many methods in
the law by which changes of ownership can occur but no
reassessment takes place. And, it appears that a substantial
amount of information is necessary for the assessors to
understand when a change of ownership takes place.
"This bill seeks to provide a forum to open the conversation
among stakeholders in order to see how the law is working,
where it succeeds, and where it fails. Various reports have
identified ways in which major change of ownership have gone
without reassessment. Creating a task force to look at the
law will generate information as to whether changes are needed
in a 30-year-old law which has never been systematically
examined.
"This task force is necessary to not only allow for a better
understanding of complexities of our current system, but to
also openly discuss possible changes to the system to ensure
an equitable tax system for all Californians."
2)Arguments in Support . The proponents of AB 2014 state that
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"Proposition 13 was conceived of as a measure to relieve the
tax burden on homeowners but it has had the effect of
benefiting commercial property owners at the expense of
homeowners." The proponents argue that large scale commercial
property owners "have the ability to structure ownership
transactions" in a way that avoids property tax reassessment,
and consequently pay "an artificially low share of property
taxes as compared to homeowners." Consequently, the
proponents assert that AB 2014 is "a good first step in
implementing the needed reforms to Proposition 13."
3)Arguments in Opposition . The opponents of this bill state
that California "has no need for a split roll property tax
study, and therefore, no need for a new split roll task
force," and that this bill is "the first step to unraveling
Proposition 13 by establishing a split roll property tax in
California, requiring more frequent and higher reassessments
of property owned by legal entities." They maintain that this
bill "would circumvent and change what was the prevailing view
of "change-in-ownership" by the very people who voted in
1978." The opponents argue that a split roll is bad for
California, because it would put "California businesses at a
competitive disadvantage," hurt tenants and lessees, affect
residential property, create fiscal instability, and lead to
unfair and subjective valuations of property. They believe
that a mere proposal "of a split roll task force will cause
concern about the uncertainty of California's business
climate, and will certainly have a chilling effect on
businesses considering an operation or expansion in
California." Finally, the opponents assert that "split roll
would place a greater strain on already cash-strapped local
county government budgets by increasing staff workload and
higher operational costs to process the mandated
reassessments."
4)Property Tax and Proposition 13: Background . The property
tax is one of the major general revenue sources for local
governments in California. It applies to all classes of
property, is imposed on property owners and is based on the
value of the property. 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
2010. It was designed to provide real property tax relief by
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imposing a set of interlocking limitations upon the assessment
and taxing powers of state and local governments.<1>
Section 1 of Article XIII A of the California Constitute states
that, as a general rule, the maximum amount of any ad valorem
tax on real property may not exceed 1% 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.
5)The Original 1979 Task Force: Defining a "CIO". The
definition of a CIO was not included in Proposition 13, but
rather, was left to implementing legislation. Shortly after
the passage of Proposition 13, the Assembly Committee on
Revenue and Taxation appointed a special Task Force - a
broad-based 35-member panel that included legislative and
State BOE staff, county assessors, attorneys in the public and
private sectors, and trade associations - to recommend a
statutory scheme for implementing Proposition 13, including
applicable "CIO" provisions. The Task Force focused
specifically on how to define a CIO in cases where property is
owned by a legal entity (e.g., a corporation) as opposed to a
person.
With respect to a transfer of ownership interests in a legal
entity that owns real property, the Task Force considered two
alternative approaches: a "separate entity" theory and an
"ultimate control" theory. The question was whether the
transfer of ownership interests in a legal entity should be
treated as an indirect CIO of real property owned by that
legal entity. Under a "separate entity" theory, the separate
--------------------------
<1> Since any tax savings resulting from the real property tax
limitations provided in Sections 1 and 2 of Article XIII A could
be effectively eliminated through the imposition of additional
state and local taxes, Sections 3 and 4 place additional
restrictions upon the imposition of any such taxes. See Amador
Valley Joint Union High Sch. Dist. v. State Bd. of Equalization ,
(1978) 22 Cal.3d 208.
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identity of a legal entity is respected. In other words, as
long as the property is owned by the same legal entity, that
property would not be reassessed, even if most or all of the
ownership interests in the entity (i.e., stock or partnership
interests) were transferred. In contrast, under the "ultimate
control" approach, a CIO of real property "belonging to a
corporation would occur when a single shareholder gains
majority control of the corporation through the purchase of
shares." (Id., p. 45).
The Task Force initially recommended adopting a "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. (Report of the
Task Force on Property Tax Administration, January 22, 1979).
However, in its second report issued on October 29, 1979, the
Task Force suggested that the "separate entity" approach be
modified to include a "majority-takeover-of-corporate stock"
provision. The Task Force made this recommendation "out of a
concern that, given the lower turnover rate of corporate
property, mergers or other transfers 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. It was also a
trade-off for exempting transfers among 100% wholly-owned
corporations." (Implementation of Proposition 13, Volume 1,
Property Tax Assessment, a second report prepared by the
Assembly Committee on Revenue and Taxation, California State
Assembly Publication 748, October 29, 1979, p. 27).
6)The Current Definition of a CIO . Existing law defines a CIO
as a transfer of a present interest in real property,
including the beneficial use thereof, the value of which is
substantially equal to the value of the fee interest. (R&TC
Section 60). It includes a transfer of any interest in real
property between a corporation, partnership, or other legal
entity and a shareholder, partner or any other person. �R&TC
Section 61(j)]. However, the purchase or transfer of
ownership interests in a legal entity does not generally
constitute a CIO. For example, a purchase of real property by
Corporation A directly from Corporation B would most likely
result in a CIO. In contrast, an acquisition by Corporation A
of Corporation B's shares will not lead to a CIO, unless more
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than 50% of Corporation B's ownership is acquired by the same
entity (i.e., Corporation A).
The general rule states that, when real property is owned by a
legal entity, the purchase or transfer of ownership interests
in that entity does not trigger a CIO of the property, unless
a) there is a "change in control" of the legal entity, or, b)
one person or entity acquires more than 50% of the ownership
interest of the entity. (R&TC Section 64). In other words,
it is only when any person or entity obtains control, through
direct or indirect ownership, of more than 50% of the voting
stock of a corporation, or a majority ownership interest in
any other type of legal entity, that a reassessment of real
property owned by the acquired legal entity (or any of its
subsidiaries) is triggered. �R&TC Section 64(c)(1)(A)].
Furthermore, when voting stock or other ownership interests
representing cumulatively more than 50% of the total interest
in a legal entity is transferred by any of the "original
co-owners" in one or more transactions, the real property that
was previously excluded from reappraisal will be reassessed.
�R&TC Section 64(d)].
7)Is There a Problem With the Existing "CIO" Definition ?
Determining a CIO is a relatively straightforward matter for
properties that are owned by individuals - it occurs when
legal title to the property passes from one person to another.
However, it becomes more complex when the property is owned
by a legal entity - such as a corporation, partnership, an
LLC, or a trust - which itself is sold to another legal
entity. The current system provides property owners with
several ways to structure 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, when multiple
individuals or entities acquire another entity, in a single
transaction, but none of the purchasers acquires more than a
50% interest in the entity, then a reappraisal of the property
held by the acquired entity is not required.
As evidenced by an informational hearing held by this Committee
on March 12, 2012, there is a difference in opinion as to
whether the existing definition of CIO needs updating. Some
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argued that the existing statutory framework for determining
when, and if, a CIO has occurred is in line with the intent of
Proposition 13, and thus, there is no need to revisit the
issue. Others assert that 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 the
definition of CIO. It has been also argued that, while
Proposition 13 was intended to provide a tax property relief
to struggling homeowners, it inadvertently shifted the tax
burden from commercial property owners to homeowners because a
CIO of nonresidential commercial properties does not occur as
often as a CIO of residential properties. At the same time,
all property owners, regardless of their property tax burden,
equally benefit from the public services paid for through
taxes.
It should be noted that, while the 1979 Task Force, in order to
mitigate administrative difficulties, recommended the
"separate entity" approach for determining when a CIO 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. (Report of the Task Force on Property
Tax Administration, January 22, 1979, p. 57).
8)What Does This Bill Do ? AB 2014 proposes to create a task
force to examine the existing definition of CIO and its
application in the case of real property owned by complex
legal entities. Specifically, this bill would direct the task
force to review the work done by the 1979 Task Force that
provided recommendations to the Legislature regarding the
definition of CIO. The task force will also be required to
evaluate the availability of information on changes in
ownership of real property owned by complex legal entities and
assess the sufficiency of the existing reporting requirements.
AB 2014, however, does not define the phrase "complex legal
entities". The task force will convene its first meeting on
or before June 1, 2013 and will submit its report to the
Legislature by no later than October 1, 2013. If the task
force report recommends revisions to the existing definition
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of CIO, the recommendations would have to be enacted into law
by the Legislature, most likely with a 2/3 vote of each house,
or via a constitutional amendment.
9)What is a "Split Roll" ? The phrase "split roll" refers to a
system of taxation where various types of real property are
taxed according to different standards or at different tax
rates. The split is typically proposed between residential
property (or the subset of owner-occupied homes) and all other
property types. For instance, rather than taxing all property
at the same rate, nonresidential property could be taxed at a
higher rate or at a higher percentage of market value. This
phrase is also used to describe any legislation attempting to
redefine "CIO" as it applies to the purchase or transfer of
ownership interests in legal entities (i.e., stock or
ownership shares in a corporation or partnership) that own
real property in a way that would trigger more frequent
reassessments to current market value levels.
10)The Legal Entity Ownership Program (LEOP). 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 or other notice that
would inform county assessors, 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 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.
Existing law requires a legal entity to file a CIO statement
with the BOE within 45 days following a "change in control" or
a 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
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45 days of the BOE's written request. Effective January 1,
2012, the applicable period of 45 days was extended to 90
days.
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 board of supervisors may also
add interest to the escape assessments and there is a 10%
penalty applicable to the new base year value of the real
property (e.g., land, improvements, and fixtures).
11)Related Legislation . The BOE notes that, in recent years,
numerous bills have been introduced to require annual
reassessment of nonresidential property to its current market
value via constitutional amendment, increase the tax rate on
nonresidential property, or modify the CIO definitions for
legal entities (which generally own nonresidential property).
The following BOE table lists some of those measures.
However, none of these bills listed ever reached the
Governor's desk.
-------------------------------------------------------------------
|Year|Bill |Summary |
| | | |
|----+-------------+------------------------------------------------|
|2011|AB 448 |Change in Ownership Definitions. Reassessment |
| |(Ammiano) |of property owned by a legal entity whenever |
| | |100% of the ownership interests in that legal |
| | |entity are sold or transferred in a three-year |
| | |period. |
|----+-------------+------------------------------------------------|
|2010|AB 2498 |Change in Ownership Definitions. Reassessment |
| |(Ammiano) - |of property owned by a legal entity whenever |
| |Amended |100% of the ownership interests in that legal |
| |5/18/10 |entity are sold or transferred in a three-year |
| | |period. |
|----+-------------+------------------------------------------------|
|2010|AB 2492 |Change in Ownership Definitions. Reassessment |
| |(Ammiano) - |of property owned by publicly traded companies |
| |Amended |once every three years (rebuttable |
| |4/8/10 |presumption). Property owned by other types of |
| | |legal entities would be reassessed to current |
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| | |market value in proportion to the percentage of |
| | |ownership interests in the legal entity |
| | |transferred. |
|----+-------------+------------------------------------------------|
|2008|AB 2461 |Split Roll - Revenue Estimate. Required the BOE |
| |(Davis) |to conduct a study on the amount of revenue |
| | |that would have been generated if |
| | |nonresidential commercial property, as defined, |
| | |had been reassessed at its fair market value. |
|----+-------------+------------------------------------------------|
|2005|SB |Change in Ownership Definitions. Provided that |
| |17(Escutia) |a change in ownership occurs when more than 50% |
| | |of the ownership interests in a legal entity |
| | |(excluding publicly traded companies) are |
| | |transferred to one or more persons or entities |
| | |during a calendar year. |
|----+-------------+------------------------------------------------|
|2003|SB |Change in Ownership Definitions. Redefine |
| |17(Escutia) |change in ownership for nonresidential |
| | |commercial and industrial property. |
| | |(Legislative intent) |
|----+-------------+------------------------------------------------|
|2003|ACA 16 |Annual Reassessment. Annual reassessment of |
| |(Hancock) |nonresidential, nonagricultural property. |
|----+-------------+------------------------------------------------|
|2003|SBx1 3 |Change in Ownership Definitions. Redefine |
| |(Escutia) |change in ownership for nonresidential |
| | |commercial and industrial property. |
| | |(Legislative intent) |
|----+-------------+------------------------------------------------|
|2002|SB 1662 |Change in Ownership Definitions. Reassessment |
| |(Peace) |of nonresidential property when cumulatively |
| | |more than 50% of the ownership has been |
| | |transferred. Broaden the state and local sales |
| | |and use tax base and reduce both the state and |
| | |local sales and use tax rate. (Legislative |
| | |intent) |
|----+-------------+------------------------------------------------|
|2001|AB 1013 |Change in Ownership Definitions. Reassessment |
| |(Leonard) |of property owned by a legal entity when more |
| | |than 50% of the ownership shares transfer. |
|----+-------------+------------------------------------------------|
|2000|AB 2288 |Change in Ownership Definitions. Reassessment |
| |(Dutra) |of property owned by legal entity once every |
| | |three years - Rebuttable presumption of change |
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| | |in ownership. Possible income tax credit to |
| | |homeowners based on fair market value of homes |
| | |from additional revenue. Reduce the sales and |
| | |use tax rate by 0.25%. |
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REGISTERED SUPPORT / OPPOSITION :
Support
Antonio R. Villaraigosa, Mayor of the City of Los Angeles
University of California Student Association (UCSA)
Opposition
American Council of Engineering Companies of California
Apartment Association, California Southern Cities, Inc.
Apartment Association of Greater Los Angeles
Asian American Business Women Association
Associated General Contractors
Association of California Life & Health Insurance Companies
Beverly Hills/Greater Los Angeles Association of Realtors
Building Owners and Managers Association of California
California apartment Association
California Aerospace Technology Association
California Association of Bed & Breakfast Inns
California Attractions and Parks Association
California Bankers Association
California Cable and Telecommunications Association
California Grocers Association
California Hotel and Lodging Association
California Manufacturing and Technology Association
California Mortgage Bankers Association
California Retailers Association
Harbor Association of Industry & Commerce
Howard Jarvis Taxpayers Association
International Council of Shopping Centers
Justin Vineyards and Winery
Los Angeles County Business Federation
NAIOP of California, the Commercial Real Estate Development
Association
Orange County Business Council
Palm Desert Area Chamber of Commerce
Paramount Citrus
Paramount Farming Company
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Paramount Farms
POM
Roll Global LLC
San Diego County Apartment Association
Santa Barbara Rental Property Association
Small Business Action Committee
TechAmerica
Tenet Healthcare
The California Railroad Industry
Valley Industry & commerce Association
Silicon Valley Leadership Group
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098