BILL ANALYSIS �
AB 2207
Page 1
Date of Hearing: May 14, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2207 (Gordon) - As Amended: May 7, 2012
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Property taxation: welfare exemption: nature
resources and open-space lands.
SUMMARY : Clarifies the scope and application of the welfare
property tax exemption. Specifically, this bill :
1)Provides that, commencing with the 2013-14 fiscal year (FY),
for purposes of determining whether the property is used for
the actual operation of the exempt activity, consideration
shall not be given to the use of property for the following
activities:
a) Activities resulting in direct or in-kind revenues, but
only if those activities further the conservation
objectives of the property as provided in a qualified
conservation management plan for the property; and,
b) Any lease of the property for a purpose that furthers
the conservation objectives of the property as provided in
a qualified conservation management plan for the property.
2)States that the direct or in-kind revenues may include
revenues derived from grazing leases, fees for events or
recreational activities, or fees for permits.
3)Specifies that the activities and lease of the property may
not generate unrelated business income.
4)Defines a "qualified conservation management plan" as a plan
that satisfies all of the following requirements:
a) Identifies that the foremost purpose and use of the
property is for the preservation of native plants or
animals, biotic communities, geological or geographical
formations of scientific or educational interest, or as
open-space lands used solely for recreation and for the
enjoyment of scenic beauty.
AB 2207
Page 2
b) Identifies the overall conservation management goals,
including identification of permitted activities, and
actions necessary to achieve the goals.
c) Describes the natural resources and recreational
attributes of the property and potential threats to the
conservation values or areas of special concern.
d) Contains a timeline for planned management activities
and for regular inspections of the property, including
existing structures and improvements.
5)Is operative beginning with the lien date of the 2013-14 FY.
6)States that, if the Commission on State Mandates determines
that this bill contains costs mandated by the state,
reimbursement to local agencies and school districts for those
costs will be made pursuant to Government Code Part 7
(commencing with Section 17500) of Division 4 of Title 2.
7)Provides that no appropriation is made by this act and the
state shall not reimburse any local agency for any property
tax revenues lost by it pursuant to this act.
8)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW defines an organization as tax-exempt under
Internal Revenue Code (IRC) Section 501(c)(3) if the
organization is organized and operated exclusively for exempt
purposes set forth in IRC Section 501(c)(3). The organization
must not be organized or operated for the benefit of private
interests, and no part of an IRC Section 501(c)(3)
organization's net earnings may inure to the benefit of any
private shareholder or individual. In addition, it may not be
an action organization, i.e., it may not attempt to influence
legislation as a substantial part of its activities and it may
not participate in any campaign activity for or against
political candidates. Organizations described in IRC Section
501(c)(3) are commonly referred to as charitable organizations.
Organizations described in IRC Section 501(c)(3), generally, are
eligible to receive tax-deductible contributions in accordance
with IRC Section 170.
EXISTING STATE LAW :
AB 2207
Page 3
1)Provides that all property is taxable unless explicitly
exempted by the California Constitution or federal law and
limits the maximum amount of any ad valorem tax on real
property at 1% of full cash value.
2)Provides an exemption from taxation for property that is
irrevocably dedicated to religious, hospital, scientific, or
charitable purposes, if the property is used for the actual
operation of the exempt activity and is owned by a nonprofit
entity qualified as an exempt organization by the Internal
Revenue Service, the Franchise Tax Board, or both (the
so-called 'welfare exemption') �Article XIII, Section 4, of
the California Constitution; Revenue and Taxation Code (RT&C)
Section 214]. The entity that owns the property is prohibited
from having any earnings that inure to the benefit of any
private shareholder or individual. This welfare exemption has
been expanded over the years to add certain specific types of
property that do not otherwise qualify under the general
exemption.
3)Extends the application of the welfare exemption to property
that meets all of the applicable general requirements, as
provided above, and satisfies all of the following additional
conditions:
a) Is used exclusively for the preservation of native
plants or animals, biotic communities, geological or
geographical formations of scientific or educational
interest, or open-space lands used solely for recreation
and for the enjoyment of scenic beauty;
b) Open to the general public subject to reasonable
restrictions concerning the needs of the land; and,
c) Is owned and operated by a scientific or charitable
fund, foundation, limited liability company, or
corporation, the primary interest of which is to preserve
those natural areas.
4)Provides that the exemption does not apply to:
a) Property reserved for future development.
b) A non-profit organization that owns more than 30,000
AB 2207
Page 4
acres in a single county if it is not fully independent, as
specified, from the owner of adjacent taxable lands.
FISCAL EFFECT : The Board of Equalization (BOE) staff estimates
that this bill will result in an annual loss of property tax
revenue of $295,000.
COMMENTS :
1)Author's Statement . The author states that "AB 2207 provides
the needed clarifying language concerning the state's property
tax exemption for lands held by nonprofit organizations for
habitat, open space and recreational uses.
"It directs that such activities do not disqualify the nonprofit
from the exemption so long as the activity is consistent with
the management plan for the property.
"If the bill is successfully passed, the result will be an
important clarification of the law, properties throughout
California will be treated similarly for the purposes of this
law, and the purpose for which the exemption was created will
be advanced."
2)Arguments in Support . The proponents of this bill state that
AB 2207 is needed to clarify "the application of the state's
property tax exemption for habitat, open space and recreation
lands when held by nonprofit organizations." Specifically,
the proponents assert that existing laws "provide ambiguous
guidance to local governments assessing the eligibility of
land for general welfare tax exemption" when the land
generates revenue from management practices, such as cattle
grazing, hunting of invasive species or other activities "that
are consistent with and in furtherance of the property's
conservation objectives." The proponents argue that AB 2207
would improve the ability of "the land conservation community
to protect and steward California's open-space lands" by
ensuring that "all properties are treated similarly and the
benefits of grazing and similar activities for habitat and
open space lands in California can be realized."
3)History of the Welfare Exemption for Nature Resources and
Open-Space Lands . In 1970, this Committee held an interim
hearing and conducted several studies regarding alternative
tax policies intended to encourage natural lands preservation
AB 2207
Page 5
in the state. The staff report submitted to the Committee
indicated that local governments were reluctant to preserve
open space areas, recreational areas, and ecologically
valuable areas because they heavily rely on property tax
revenues. �The Fiscal Implications of Environmental Control:
an Appendix to Final Report of the Assembly Committee on
Revenue and Taxation, Interim Activities (1970), pp. 90-92].
Moreover, the assessment practices used by local county
assessors to value open space areas lacked uniformity and
varied widely among counties.
Subsequently, in 1971, R&TC Section 214.02 was enacted to extend
the application of the welfare property tax exemption to land
in its natural state. The application of the exemption was
limited to property acquired by nonprofit organizations that
is used exclusively for the preservation of native plants and
animals or of geographical formations of scientific or
educational interest or open space lands used solely for
recreation and for the enjoyment of scenic beauty. According
to the staff at the BOE, "�T]he intent of the original
legislation enacting R&TC Section 214.01 was to assist
nonprofit organizations that purchased open-space and similar
lands, held the lands temporarily, and then sold or donated
the lands to public agencies for permanent use as park
facilities." A sunset date was included in the original
legislation as a result of a Senate Revenue and Taxation
Committee hearing to ensure that the charitable organizations
sold or donated the lands rather than hold then indefinitely.
Since that time, it appears that "many charitable
organizations may be the permanent owners of lands due, in
part, to the limited ability of public agencies to acquire
additional parklands." When the original exemption expired
after the lien date in 1982, it has continuously been
extended, first, until 1992, and most recently to January 1,
2023.
4)What Is the Problem? According to the sponsor of this bill,
nonprofit organizations that own habitat or open space lands
sometimes receive revenue from activities that further the
conservation purposes for which the properties are held. For
example, grazing has proven to be an important activity to
maintain native grasses and wildflowers. Other activities,
such as hunting of invasive species that destroy native
habitat, may also provide conservation benefits to open space
lands.
AB 2207
Page 6
Assessors in five counties disallowed the welfare property tax
exemption, in whole or part, for open-space lands held by
nonprofit organizations because those organizations had
received income on the property from grazing leases or hunting
fees. The issue was raised as to whether cattle grazing or
hunting for invasive species, among other activities, qualify
as allowable for purposes of the welfare exemption for
open-space lands. The existing law does not address this
issue, but there are somewhat conflicting court decisions and
individual opinions from the State BOE. Under R&TC Section
254.5, county assessors have full discretion in determining
whether the property is eligible for the welfare exemption.
The sponsor is seeking to ensure that specified activities do
not disqualify open-space lands from the welfare exemption as
long as the activities are consistent with the conservation
purposes of the exemption and the management plan for the
property. Furthermore, the sponsor states that this bill is
needed to create uniformity in the administration of the
exemption and ensure that properties are treated similarly
throughout California.
5)Is Clarification Needed ? Under existing law, a non-profit
organization must use the property exclusively for charitable
purposes. (R&TC Section 241). While the statute does not
define the phrase "used exclusively," courts have held that it
includes any use of the property that is "incidental to and
reasonably necessary for the accomplishment of the �exempt]
purpose." (Cedars of Lebanon v. County of Los Angeles (1950)
35 Cal.3d 729, 736). For example, the court in Santa Catalina
Island Conservancy v. Los Angeles (1981) 126 Cal. App. 3d 221,
concluded that motor tours offered by a for-profit
organization on the open-space land, which was otherwise used
for charitable purposes, provided an instructive opportunity
for people to see and enjoy conservancy property and thus,
were reasonably necessary and incidental to the preservation,
instructive and recreational purposes of the Conservancy.
Similarly, a hunting program conducted by another independent
for-profit operator was found to be essential to the good
management of Conservancy property.
With respect to the issue of whether a cattle grazing activity
qualifies as an incidental and reasonably necessary use of
open-space land, the BOE staff issued legal opinions to the
Sonoma County and Monterey County assessors. The BOE staff
AB 2207
Page 7
opined that, pursuant to the particular facts in those two
cases, property subject to a cattle grazing lease did not
qualify for the welfare exemption because the cattle grazing
activity was not incidental nor was it reasonably necessary
for the accomplishment of the exempt purpose. The opinions
were advisory and not binding on any county assessor.
As explained by the BOE staff in its analysis of this bill,
since there is no express threshold or standard in law as to
what constitutes "incidental to and reasonably necessary for,"
county assessors' interpretations may differ. The lack of
clarity may account for the fact that some counties consider
grazing and hunting on certain properties as incidental and
reasonably necessary activities, while others do not.
6)The Proposed Solution . AB 2207 would provide that any
activity or lease that furthers the conversation objections,
as provided in the conservation management plan for the
property, will be considered incidental to, and reasonably
necessary for, the accomplishment of the preservation of the
open-space lands. A similar argument - that the cattle
grazing leases are a management tool incidental to land
preservation and essential to the proper management of the
property - was made by the non-profit organizations in the two
cases mentioned above. The BOE staff, however, rejected this
argument.
7)The Implementation Concerns of the BOE Staff . In its analysis
of this bill, the BOE staff raises the following issues:
a) A for-profit operator of the property . Existing law
requires that, in order to qualify for the welfare property
tax exemption, the property must be both owned and operated
by a non-profit organization. A user of the property on a
regular basis, with or without a lease agreement, is
considered an "operator." Any operator of the property
receiving the welfare exemption must be a qualifying
organization. The BOE staff questions whether some sort of
a threshold or de minimis standard for a lessee's use of
the property should be established to ensure that the use
is incidental when the lessee is not a qualifying
organization.
b) Limitations on the types of leases or activities
outlined in a conservation management plan . The BOE staff
AB 2207
Page 8
questions whether it would be prudent "to set standards or
delineate specific qualifying activities to limit any
unintended consequences." In addition, the question was
raised as to whether there should be a distinction "between
a nonprofit that owns recreational lands open to the
general public where occasional grazing occurs and a
nonprofit that acquires a large ranch for preservation but
continues to operate it as a working ranchland by a private
operator," not open to the public.
AB 2207 provides that the activities or leases that generate
unrelated business income would not qualify as exempt
activities. Generally, unrelated business taxable income
(UBTI) is defined as income from a trade or business
regularly conducted by an exempt organization and not
substantially related to the performance by the
organization of its exempt purpose or function. For
example, an investment in an active trade or business
through a partnership, a working interest in an oil and gas
well, or unrelated debt-financed income from trading on the
margin would be considered UBTI. By limiting qualifying
activities only to those that do not generate UBTI, this
bill would ensure that qualifying activities are
substantially related to the organization's exempt purpose
or function.
c) Ranches and Rangeland . The BOE staff questions whether
this bill is intended to apply to ranches and rangeland
owned by a nonprofit organization, and if so, whether they
would meet the definition of eligible open-space land.
8)Related Legislation.
AB 703 (Gordon), Chapter 575, Statutes of 2011, extended the
application of the welfare property tax exemption for
specified land acquired by nonprofit organizations for natural
resource preservation and open-space purposes until 2022.
REGISTERED SUPPORT / OPPOSITION :
Support
California Council of Land Trusts (Sponsor)
Catalina Island Conservancy
Elkhorn Slough Foundation
AB 2207
Page 9
Marin Agricultural Land Trust
Save the Redwoods League
Solano Land Trust
Big Sur Land Trust
Bodega Land Trust
Mendocino Land Trust
Ojai Valley Land Conservancy
Peninsula Open Space Trust
Sierra Foothill Conservancy
Trust for Public Land
Wildlife Heritage Foundation
Audubon California
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098