BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 2372 (Ammiano) - Property Taxation: Change in Ownership
Amended: July 2, 2014 Policy Vote: G&F 5-2
Urgency: No Mandate: Yes
Hearing Date: August 4, 2014
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 2372 would modify current standards for
reassessing property resulting from changes in ownership.
Fiscal Impact:
The Board of Equalization (BOE) indicates that it would
incur costs of $686,000 in 2014-15 and $917,000 annually
thereafter (General Fund).
BOE estimates that the measure would result in an
increase to local property taxes revenues by $73 million
annually. Higher local property tax revenues lead to
reduced General Fund Proposition 98 spending by up to
roughly 50 percent (the exact amount depends on the
specific amount of the Proposition 98 guarantee, which in
turns depends of a variety of economic, demographic and
budgetary factors).
The Franchise Tax Board's cost would be minor and
absorbable.
The bill could result in unknown, significant state
mandated reimbursement of local costs for additional
workload of county recorders and assessors.
Background: Proposition 13 changed the California Constitution
to preclude a county assessor from revaluing property for tax
purposes unless a change in ownership has occurred. However,
the initiative didn't define the term, leaving it to the
Legislature to determine just what a "change in ownership" meant
with respect to property owned by legal entities such as
corporations. As implemented, assessors reassess property when
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one person or legal entity purchases or otherwise acquires more
than 50 percent ownership of a corporation or other legal entity
in a single transaction.
However, if multiple individuals or entities acquire another
entity in a single transaction, but none of the purchasers
acquire more than 50 percent interest in the acquired entity, no
reassessment occurs even if it occurs in a single transaction.
The initial case in point was Kaiser Steel, ownership of which
was acquired by a consortium of seven separate purchasers, none
of whom acquired more than 50 percent ownership. Even though 100
percent of the corporation had changed hands, no reassessable
change of ownership had occurred, since no single party had
acquired more than 50 percent ownership of the corporation.
Often, assessors are unaware when ownership changes in a legal
entity which can trigger reassessment of properties owned by
that legal entity, often times relying only on changes in title
information supplied by the County Recorder, which don't account
for changes in legal entities. To help track potential
reassessments, BOE created the Legal Entity Ownership Program
(LEOP) in 1982 to help find and detect changes in control and
ownership of corporations, partnerships, and other legal
entities, which have no recorded deed or notice of a transfer of
an ownership interest in a legal entity. Under LEOP, FTB sends
to BOE a list of legal entities that have reported a change in
control or change in ownership on income tax returns, analyzes
completed statements to determine changes in control or
ownership, and notifies county assessors of changes in control
and ownership. To assist these efforts, the Legislature
required legal entities to report transfers directly to BOE
within 90 days, and established a penalty for legal entities
failing to self-report a change in ownership and control to BOE
equal to 10% of the tax resulting from enrolling the higher
value (SB 816, Ducheny, 2009).
Bill Summary: AB 2372 would provide that when 90 percent or more
of the ownership interests in a legal entity, as specified, are
sold or cumulatively transferred in one or more transactions,
the transfer of ownership interest is a change in ownership of
the real property owned by the legal entity. The bill
specifically excludes from its changes to reassessment
requirements publicly traded entity stock sales. AB 2372
applies to ownership interest sales made on or after January 1,
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2015.
The bill also would require the legal entity to notify BOE
within 90 days of any ownership interest sale triggering
reassessment under the new test. The measure also increases the
penalty for failing to notify BOE from 10 percent of tax to 15
percent.
Staff Comments: Though the projected revenues far outpace BOE's
costs to implement, BOE would incur costs in 2014-15, while the
Proposition 98 impact from the projected higher property tax
revenues would be scored when those dollars came in the door,
which would be 2015-16 at the earliest.
BOE notes that this bill represents the first substantive change
in legal entity change in ownership law since the original
definitions were first crafted. This bill would require BOE to
make changes to regulations, handbooks, taxpayer guidance
materials, FAQs, and instructions. Furthermore, annotated
letters on legal entity change in ownership law currently relied
upon would no longer be relevant. Substantial time and resources
to research, study, and answer these new issues would be
required by BOE to implement this bill.