BILL ANALYSIS �
AB 2372
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ASSEMBLY THIRD READING
AB 2372 (Ammiano and Bocanegra)
As Amended May 19, 2014
2/3 vote. Tax levy
REVENUE & TAXATION 6-2 APPROPRIATIONS 12-3
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|Ayes:|Bocanegra, Gordon, |Ayes:|Gatto, Bocanegra, |
| |Mullin, Pan, Williams, | |Bradford, Ian Calderon, |
| |Ting | |Campos, Eggman, Gomez, |
| | | |Holden, Pan, Quirk, |
| | | |Ridley-Thomas, Weber |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Beth Gaines |Nays:|Donnelly, Jones, Wagner |
| | | | |
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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
have occurred. Specifically, this bill :
1)Contains legislative findings and declarations regarding the
existing system for determining a "change in ownership" for
the purpose of commercial property assessment.
2)Provides that a sale or transfer of 90% or more of the
ownership interests in a legal entity to a nonaffiliated
entity or person, in a single transaction as defined,
constitutes a "change of ownership" of the real property owned
by the acquiree, regardless of whether any one purchaser
acquires more than 50% of the ownership interests.
3)Specifies that a "purchase or transfer" of ownership interests
in a legal entity includes a merger, acquisition, private
equity buyout, transfer of partnership shares, or any other
means by which a legal entity acquires the ownership interests
of another legal entity, including the subsidiaries or
affiliates of the legal entity and the property owned by those
subsidiaries and affiliates.
4)Exempts from the definition of "sale or transfer" a sale or
transfer of ownership interests in a publicly traded company
in the regular course of trading on a recognized stock
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exchange, unless the stock or interests are acquired as part
of a merger, acquisition, buyout, or by other legal means, as
specified.
5)Defines the phrase "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 is sold or transferred.
6)Defines the term "legal entity" as a corporation, a
partnership, a limited liability company, or other legal
entity.
7)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.
8)Defines the term "original transaction" as a transaction that
occurs on or after the effective date of this bill.
9)Requires the State Board of Equalization (BOE) to notify
assessors when a change in ownership, as specified, has
occurred.
10)Requires persons acquiring ownership interests in a legal
entity to record a deed with the county recorder and report
the acquisition to the BOE.
11)Requires legal entities to report "original co-owners"
interest changes to the assessor.
12)Requires the BOE to prescribe regulations that may be
necessary to carry out the purposes of this bill.
13)Revises provisions relating to a "change in ownership"
statement required to be filed by a legal entity with the BOE
and increases the penalty for failure to file the "change in
ownership" statement from 10% to 15%.
14)States that no reimbursement is required for costs that may
be incurred by a local agency or school district for specified
reasons.
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15)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Provides that all property is taxable, unless otherwise
provided by the California Constitution or federal laws
(California Constitution Section 1(a) Article XIII). Limits
ad valorem taxes on real property to 1% of the full cash value
of that property (Proposition 13 of 1978).
2)Requires real property to be reassessed to its current fair
market value whenever a "change in ownership" occurs.
3)Provides that "change in ownership" 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.
4)Specifies in Revenue and Taxation Code (R&TC) Sections 60
through 69.5 what constitutes "a change in ownership." Sets
forth the general rule that, when real property is owned by a
legal entity, the purchase or transfer of ownership interests
in that entity does not trigger a change in ownership of the
property, unless: (a) there is a "change in control" of the
legal entity, or (b) a cumulative transfer of more than 50% by
the "original co-owners." 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. 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.
5)Requires legal entities to file a change in ownership
statement (LEOP COS) with the BOE within 90 days of a change
in control or change in ownership under R&TC Section 64(c) or
(d). In the case of a change in control under R&TC Section
64(c), the person or legal entity that acquired control is
responsible for filing the LEOP COS.
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6)Imposes a 10% tax penalty, applicable to the new base year
value reflecting a change in ownership, on legal entities that
fail to file a change in ownership statement with the BOE.
7)States that, generally, when real property is owned by a
homeowner, the purchase or transfer or ownership interests in
that entity triggers a change in ownership of the property.
However, specific exemptions from reassessment are provided
for intra-family transfers, replacement residences of senior
citizens and disabled persons, and specific types of home
improvements.
8)Requires business personal property to be reassessed annually
at its current market value. Personal property owned by a
homeowner is not generally subject to property taxation.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)Potentially significant General Fund costs to the BOE to
administer the changes to forms and systems.
2)Potentially significant state-mandated reimbursement of local
costs for additional activity generated for county recorders
and assessors.
3)Estimated annual increase in property tax revenue of up to $73
million, though estimating the revenue impact with any
precision is difficult.
COMMENTS :
1)Background: Proposition 13 and "Change in Ownership".
Property tax applies to all classes of property and is one of
the major general revenue sources for local governments in
California. Property tax is imposed on 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 Section
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. The property is reassessed to its market
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value when the ownership of property is changed. 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 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, the "majority-takeover-of-corporate stock" provision
was subsequently 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
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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.
2)Is There a Problem With the Existing "Change of Ownership"
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 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, a reappraisal of the property
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. The point of the Task Force, in its
role of finding the appropriate rule for a "change in
ownership," was to implement a statutory scheme that best
represented the public intent when it voted for Proposition
13. The idea of enabling a 100% change in ownership by
multiple purchasers, each of which has acquired less than a
50% ownership interest, to completely avoid a reappraisal of
the corporation's underlying property is probably not what the
voters were contemplating when they passed Proposition 13. As
noted by the Task Force, the initial recommendation for using
a "separate entity" approach was due to the perceived
administrative and enforcement problems, not necessarily
because it best represented the will of the voters. With 35
years of experience, it seems appropriate to look again at the
rules for "change of ownership."
3)The Proposed Solution. As discussed, properties owned by
legal entities are taxed under a "separate entity" theory,
which means that as long as the property is owned by the same
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legal entity, that property would not be reassessed even if
most or all of the ownership interests in the entity (i.e.,
stock in the corporation, partners in the partnership) had
changed ownership. According to the author, this bill is
designed to close this obvious and egregious loophole in the
law by providing that when 90% or more of 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 have taken 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.
4)Notification Requirement. As explained by BOE staff,
assessors discover changes in ownership of real property via
grant deeds or other documents that are recorded with the
county recorder. The county recorder must provide the
assessor with a copy of the transfer of ownership document as
soon as possible. However, no grant deed or other document is
recorded when a change in ownership of a legal entity occurs,
even if it triggers reassessment of underlying real property.
The BOE monitors changes in ownership and changes in control
of legal entities via the Legal Entity Ownership Program and
helps assessors discover unreported changes. But ultimately
assessors depend on legal entities to self-report these types
of changes of ownership.
Existing law requires a legal entity to file a change in
ownership statement with BOE within 90 days of whenever a
change in control or a change in ownership of a legal entity
occurs. If a legal entity fails to report and the failure is
discovered later on, an escape assessment will be made for
every tax year that the entity failed to file the change in
ownership statement. There is no statute of limitations that
would apply to those escape assessments. The penalty for
failure to file a change in ownership statement upon written
request by the BOE is 10% of the new base year value resulting
from the transfer, or 10% of the current year's taxes on that
property if no change in control or change in ownership
occurred.
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This bill requires persons acquiring an ownership interest in a
legal entity to report the acquisition to the BOE and file a
deed with the county recorder. In turn, the BOE will have to
notify assessors of a sale or transfer of 90% or more of
ownership interests in a legal entity, as provided.
Additionally, this bill would require a legal entity to report
any changes of the original co-owner interest to the assessor,
as provided, within 90 days of the date of the change in the
ownership interests. Finally, this bill proposes to increase
a penalty for failure to file a change in ownership statement
with the BOE from 10% to 15%.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0003656