The California Constitution generally limits ad valorem taxes on real property to 1% of the full cash value of that property. For purposes of this limitation, full cash value is defined as the assessors valuation of real property as shown on the 197576 tax bill under full cash value or, thereafter, the appraised value of that real property when purchased, newly constructed, or a change in ownership has occurred.

Existing law specifies those circumstances in which the transfer of ownership interests in a corporation, partnership, limited liability company, or other legal entity results in a change in ownership of the real property owned by that entity, and generally provides that a change in ownership as so described occurs if a legal entity or other person obtains a controlling or majority ownership interest in the legal entity. Existing law requires the Franchise Tax Board to include a question on returns for partnerships, banks, and corporations to assist in the determination of whether a change in ownership under the circumstances described above has occurred.

This bill would additionally specify that if 90% or more of the direct or indirect ownership interests in a legal entity are sold or transferred in a single transaction, as defined, the real property owned by that legal entity has changed ownership whether or not any one legal entity or person that is a party to the transaction obtains control, as defined. The bill would require the Franchise Tax Board to include an additional question on returns for partnerships, banks, and corporations to assist in the determination of whether a change in ownership as so described has occurred. The bill would require the State Board of Equalization to prescribe regulations as may be necessary to carry out the purposes of this act. The bill would also require the State Board of Equalization to report to the Legislature, no later than January 1, 2021, regarding the implementation of these changes in ownership, including, but not limited to, the revenue impact and frequency of reassessments of real property owned by legal entities. The bill would require the Legislative Analysts Office to report to the Legislature no later than January 1, 2021, regarding the economic impact of this bill.

Existing law requires, upon a change in control or change in ownership of a legal entity that owns an interest in real property in this state, or when requested by the State Board of Equalization, that the person or legal entity acquiring ownership or control, or the legal entity that has undergone a change in ownership, file a change in ownership statement with the board, as specified. Existing law requires a penalty of 10% of the taxes applicable to the new base year value, as specified, or 10% of the current years taxes on the property, as specified, to be added to the assessment made on the roll if a person or legal entity required to file a change in ownership statement fails to do so.

This bill would require a person or legal entity acquiring ownership interests in a legal entity, if 90% or more of the ownership interests in the legal entity are sold or transferred, as described above, to file a change in ownership statement signed under penalty of perjury with the State Board of Equalization. The bill would increase the penalties for failure to file a change in ownership statement, as described above, from 10% to 15%, and would provide that the penalty shall apply for failure to file a complete statement with the State Board of Equalization following a transfer of legal entity ownership interests.

This bill would require the State Board of Equalization to notify assessors if a change in control or a change in ownership of a legal entity has occurred.

By expanding the crime of perjury and by imposing new duties upon local county officials with respect to changes in ownership, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that with regard to certain mandates no reimbursement is required by this act for a specified reason.

With regard to any other mandates, this bill would provide that, if the Commission on State Mandates determines that the bill contains costs so mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

This bill would declare that it is to take effect immediately as an urgency statute.

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Property taxation: change in ownership

Provides that a change in ownership occurs when 90% or more of the direct or indirect ownership interests in a legal entity are sold or transferred in a single transaction.

Background

Changes in Ownership. Proposition 13 (1978) amended Article XIIIA of the California Constitution to preclude assessors from revaluing property for tax purposes unless it changes ownership. However, the initiative didn’t define the term, leaving it to the Legislature to determine just what a “change in ownership” meant. Assessors determine changes in ownership for real property by looking at property records, and reassess the property whenever any interest transfers. If a property is owned by more than one taxpayer, the assessor revalues the property in proportion to the percentage transferred. However, assessors cannot easily determine changes in ownership among legal entities, such as corporations and partnerships, where the ultimate ownership may not be clear and changes in ownership don’t show up in property records.

Shortly after passage of Proposition 13, the Assembly Committee on Revenue and Taxation appointed a task force to wrestle with the various interpretations necessary to implement the initiative. The task force’s initial recommendation concerning changes in ownership of property owned by legal entities was to adopt the “separate entity” theory, providing that so long as the same legal entity owned the property, it would not be reassessed, regardless of whether ownership interests in the entity change, such as stock in the corporation, or partners in the partnership. However, the task force subsequently added the “majority-takeover-of-corporate-stock,” or “change in control,” provision to maintain some parity with the increasing relative tax burden of residential property statewide. As enacted, assessors must reassess property to fair market value when one person or legal entity obtains “control,” defined as purchasing or otherwise acquiring more than 50% ownership of a corporation or other legal entity in a single transaction. Additionally, assessors must reassess a legal entity’s property whenever 50% of its original co-owners cumulatively transfer voting stock or other voting interest in one or more transactions.

Under the law, multiple individuals or entities can acquire another entity in a single transaction, but won’t be reassessed so long as none of the purchasers acquire more than 50% interest in the acquired entity. 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% ownership. Even though 100% of the corporation had changed hands, no change of ownership had occurred, because no single party had acquired more than 50% ownership of the corporations. A few years later, E. & J. Gallo bought Louis M. Martini, but split the purchase among 12 Gallo family members, thus preventing the underlying property from being reassessed.

Ocean Avenue LLC has owned the Fairmont Miramar Hotel in Santa Monica since October 1999. Before September 2006, Ocean Avenue LLC was a wholly owned subsidiary of Hotel Equity Fund VII, L.P. That firm initially agreed to sell the hotel outright to MSD Capital LP, a company owned by Michael Dell, the founder and CEO of Dell, Inc., but then canceled it before closing, instead choosing to sell the legal entity itself. 49% percent was sold to Susan Dell’s (Michael Dell’s wife) property trust; 42.5 percent to Michael Dell’s MSD Capital LP, and 8.5% to a third entity in which Michael Dell held majority control. Subsequently, the Los Angeles County Assessor determined a change of ownership had occurred, and the Los Angeles County Assessment appeals board concurred. However, Mr. Dell challenged the determination, and in June, 2014, the Second District California Court of Appeal affirmed a Superior Court decision which held that no change in ownership occurred Ocean Avenue LLC v. County of Los Angeles, Case B246499 (2014). The Court held that because no single entity obtained more than 50% control of Ocean Avenue LLC, a change of ownership did not occur even if the legal entity’s ownership had changed entirely.

Legal Entity Ownership Program. To help track potential reassessments, the State Board of Equalization (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, the Franchise Tax Board (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).

The author wants to amend change in ownership law to provide that transactions similar to Ocean Avenue LLC are considered changes in ownership, thereby requiring reassessment.

Proposed Law

Senate Bill 1237 provides that a change in ownership occurs when 90% or more of the direct or indirect ownership interests in a legal entity are sold or transferred in a single transaction, thereby requiring the assessor to revalue the property owned by that legal entity. The change in ownership applies regardless of whether one legal entity or person party to the transaction obtains control, except when a change in ownership exclusion in current law can apply.

The measure defines many of its terms, including “single transaction” as a plan consisting of one or more transfers that occur on or after January 1, 2019. SB 1237 enacts a rebuttable presumption that a transfer is part of a single transaction if the transferees are related parties as defined by the Internal Revenue Code, and if the transfers occur within a 36 month period commencing on the date of the first sale or transfer of interests.

The measure excludes from changes in ownership any transfer of ownership interests that occurs upon death, or sales of stocks or interests in publicly traded corporations on established securities markets, unless as part of a merger, acquisition, private equity buyout, transfer of partnership shares, or other means. Additionally, SB 1237 requires changes in ownership to be measured proportionally.

SB 1237 makes conforming changes to questions FTB must include on returns for partnerships, banks, and taxable corporations, as well as to change in ownership statements, which taxpayers obtaining property or control of legal entities must file with BOE within 90 days of the change. The measure also increases the penalty for failing to file the statement from 10% of tax to 15%.

The bill requires BOE to notify assessors if a change in control or ownership occurs. BOE must also report to the Legislature by January 1, 2021 regarding the revenue impact and frequency of reassessments of real property owned by legal entities. The measure directs the Legislative Analyst’s Office to report by the bill’s implementation, economic impact, and frequency or reassessments of legal entity real property.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “Proposition 13 ensures that property taxes do not get out of control for any California homeowner or business, but there is an ambiguity in it that needs to be addressed. On June 3, 2014, the Second District Court of Appeal (in Ocean Avenue LLC v. County of Los Angeles) held that the sale of the legal entity that owned Santa Monica’s Miramar Hotel did not trigger a ‘change in ownershipo’ reassessment of the hotel, as established in Ocean Avenue LLC v. County of Los Angeles, even though 100 percent of ownership interests were sold. This was because no one person obtained more than 50 percent of the entity’s ownership interests. As a result of this ruling, Los Angeles County lost over a million dollars in taxes annually. Current law extends Proposition 13 ‘change in ownership’ reassessment provisions to property of legal entities only when there is an acquisition of more than 50 percent of the ownership interest of a legal entity that owns California property by an individual or other legal entity, not the sale or transfer of such interests. As such, SB 1237 triggers a ‘change in ownership’ reassessment of legal entity property when at least 90 percent of the legal entity interests are sold, even if no one person gets a majority interest in the legal entity, revising the definition of ‘change of ownership’ in the Revenue and Tax Code for purposes of determining the property tax base value of commercial property. Under the provisions of SB 1237, the Miramar Hotel in Santa Monica would have been reassessed. To trigger reassessment, these ownership interests must be sold or transferred within a 36-month period as part of a plan. Excluded from the ‘change in ownership’ reassessments are sales of stock or a publicly traded corporation or partnership on an established securities market, as defined by federal law and transfers at death without payment for ownership interests. The bill also increases the penalty for failure to file a ‘change in ownership’ statement, from 10 to 15 percent of the taxes applicable to the new base year value (or old base year value, if there is no change in ownership). The bill requires the State Board of Equalization (BOE) to notify assessors if a legal entity change in ownership occurs. The BOE also is required to submit a report to the Legislature by 2021 regarding the implementation of the bill, including economic impact and frequency of assessment. SB 1237 corrects an outdated interpretation of property ‘change of ownership’ that has been part of a long debate regarding commercial property and Proposition 13. SB 1237 does not change Proposition 13, but simply makes changes to how it is interpreted in statute.”

2. Too narrow? Taking inspiration from the Fairmont Miramar Hotel case, SB 1237 provides that a transaction that changes 90% of ownership in a legal entity within three years triggers a reassessment of the legal entity’s property, but wouldn’t for many other transactions, such as one that changes 89.9% of ownership in the first three years, then conveys the remaining 10.1% on the first day after the three year window ends. Changing state law in response to a single case ensures that a reassessment results should taxpayers repeat the same transaction, but leaves sufficient flexibility for sophisticated taxpayers to continue to avoid reassessments through tax planning. Additionally, the bill doesn’t direct assessors to enroll new values for future property taxes for taxpayers who avoided reassessment using similar transactions in the past. The Committee may wish to consider whether SB 1237 sufficiently reforms this form of tax avoidance. If the Committee finds the scope of the measure too narrow, it could expand it in the following ways:

• Eliminate the bill’s three year cut-off, instead providing that reassessment occurs whenever the 90% threshold is reached, or,
• Direct assessors to enroll new values for property that would have been reassessed under the bill’s terms.

3. Cold war. Before Proposition 13, assessors valued property at its current fair market value. After the initiative, the Constitution prohibited assessors from doing so, directing them to only enroll a new value for property when it’s newly constructed or changes ownership. The Proposition 13 working group did the best job it could in devising rules to help assessors determine whether changes in ownership in legal entities occur in the unchartered waters after the initiative, and those rules have remained largely unchanged for more than 35 years because of disagreements between business groups, who state that limiting reassessments provides the certainty and low taxes necessary to generate additional economic growth in the state, and Proposition 13’s critics, who deride current change in ownership law as a loophole that enables wealthy parties to traffic in properties without paying their fair share. SB 1237 attempts to bridge this long-standing divide by requiring reassessment for certain forms of property sales transactions not subject to reassessment under current law.

4. How does this work? Three examples demonstrate reassessments under current law and SB 1237.

• John buys 100% of ACME Tools from Anne. The assessor revalues ACME Tools’ property to fair market value under current law because John now controls ACME Tools, and under SB 1237 because more than 90% of ACME tools transferred.
• John, Paul, and Cynthia buy 100% of ACME Tools from Anne in equal shares within three years. The assessor does not reassess the property under current law, as no single new owner obtained more than a 50% interest. However, under SB 1237, the assessor would reassess the property, because 90% or more of ACME Tools transferred, and the 50% threshold doesn’t apply.
• John, Paul, and Cynthia buy a controlling interest in ACME Tools from Anne in equal shares, but Anne maintains an 11% ownership share. The Assessor would not reassess ACME Tools under either current law or the bill, because only 89% of the company was transferred, and neither John, Paul, nor Cynthia control the company. The assessor would reassess ACME tools if Anne sold the remaining 11% to John, Paul, and Cynthia within the three-year window, but would not if Anne sold the remaining share after the three-year window.

5. Fenced off. When the stock of a publicly-traded corporation is bought or sold, no reassessment of the corporation’s property takes place, even though more than 50% of the stock has changed hands. Property owned by corporations is not reappraised as often as residential property, if ever. Two measures that were not enacted (SB 17, Escutia, 2003 and 2005) would have enacted a rebuttable presumption that a corporation’s property changes hands every three years, but SB 1237 explicitly states that changes in ownership can’t occur due to the regular activity on an established securities market, thereby fencing off the issue by law. However, the bill triggers reassessment when part of a merger, acquisition, private equity buyout, transfer of partnership shares, or other means. The Committee may wish to consider why ownership changes in publicly traded corporations occurring on stock exchanges shouldn’t trigger reassessment, when other transactions should.

6. What’s the plan? SB 1237 states that a “single transaction” means “a plan” consisting of one or more transfers, making reassessment contingent upon the more subjective determination that a coordinated plan exists, instead of a more objective, mathematical measure of ownership interest change. This approach offers more flexibility to determine whether a series of transactions triggers a reassessment, but the measure but doesn’t specifically state the agreements, contracts, or other elements necessary to be considered “a plan,” which could lead to disagreements between assessors and taxpayers regarding the degree of planning necessary to trigger a reassessment.

7. Being presumptive. SB 1237 creates a rebuttable presumption that a transfer or sale is part of a “single transaction,” thereby subjecting the legal entity’s property to potential reassessment, if it takes place between related parties, and occurs within 36 months. Rebuttable presumptions often serve as useful starting points, but what specific evidence does a taxpayer use to rebut the BOE’s or Assessor’s presumption that a transfer is within related parties, or the 36 month period?

8. Recent history. In 2015, the Committee approved SB 259 (Bates), substantially identical to this bill. The Senate Appropriations Committee subsequently held the measure on its suspense file.

9. 2/3. Because SB 1237 increases taxes on any taxpayer according to Section Three of Article XIIIA of the California Constitution, Legislative Counsel assigned the bill a 2/3 vote key.

10. Urgency. Regular statutes take effect on January 1 following their enactment; bills passed in 2018 take effect on January 1, 2019. The California Constitution allows bills with urgency clauses to take effect immediately if they're needed for the public peace, health, and safety. SB 1237 contains such an urgency clause, stating that it’s necessary to provide fair and equitable tax treatment for all individuals in this state, as all property holders should be treated equally with regards to the imposition of property taxes.

Support and Opposition

(4/14/18)

Support: California Business Properties Association, California Association of County Treasurer-Tax Collectors, Howard Jarvis Taxpayers Association, San Francisco Chamber of Commerce.

Opposition: Advancement Project California; Asian Americans and Pacific Islanders for Civic Empowerment Education Fund; Asian Pacific Environmental Network; Bend the Arc Jewish Action; California Alliance for Retired Americans; California Calls; California Federation of Teachers; California Partnership; California Tax Reform Association; Central Coast Alliance for a Sustainable Economy; Clergy and Laity United for Civil Justice; Coalition for Humane Immigrant Rights; Communities for a New California; Community Coalition; Community Economics; Congregations United for Prophetic Engagement; Courage Campaign; Dolores Huerta Foundation; Evolve California; Housing California; IE United; Inland Regional Equity Network; InnerCity Struggle; League of Women Voters of California; Los Angles Alliance for a New Economy; PICO California; PolicyLink; San Francisco Rising; Service Employees International Union (SEIU) California; TechEquity Collaborative; Warehouse Worker Resource Center; Working Partnerships USA.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Property taxation: change in ownership

Provides that a change in ownership occurs when 90% or more of the direct or indirect ownership interests in a legal entity are sold or transferred in a single transaction.

Background

Changes in Ownership. Proposition 13 (1978) amended Article XIIIA of the California Constitution to preclude assessors from revaluing property for tax purposes unless it changes ownership. However, the initiative didn’t define the term, leaving it to the Legislature to determine just what a “change in ownership” meant. Assessors determine changes in ownership for real property by looking at property records, and reassess the property whenever any interest transfers. If a property is owned by more than one taxpayer, the assessor revalues the property in proportion to the percentage transferred. However, assessors cannot easily determine changes in ownership among legal entities, such as corporations and partnerships, where the ultimate ownership may not be clear and changes in ownership don’t show up in property records.

Shortly after passage of Proposition 13, the Assembly Committee on Revenue and Taxation appointed a task force to wrestle with the various interpretations necessary to implement the initiative. The task force’s initial recommendation concerning changes in ownership of property owned by legal entities was to adopt the “separate entity” theory, providing that so long as the same legal entity owned the property, it would not be reassessed, regardless of whether ownership interests in the entity change, such as stock in the corporation, or partners in the partnership. However, the task force subsequently added the “majority-takeover-of-corporate-stock,” or “change in control,” provision to maintain some parity with the increasing relative tax burden of residential property statewide. As enacted, assessors must reassess property to fair market value when one person or legal entity obtains “control,” defined as purchasing or otherwise acquiring more than 50% ownership of a corporation or other legal entity in a single transaction. Additionally, assessors must reassess a legal entity’s property whenever 50% of its original co-owners cumulatively transfer voting stock or other voting interest in one or more transactions.

Under the law, multiple individuals or entities can acquire another entity in a single transaction, but won’t be reassessed so long as none of the purchasers acquire more than 50% interest in the acquired entity. 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% ownership. Even though 100% of the corporation had changed hands, no change of ownership had occurred, because no single party had acquired more than 50% ownership of the corporations. A few years later, E. & J. Gallo bought Louis M. Martini, but split the purchase among 12 Gallo family members, thus preventing the underlying property from being reassessed.

Ocean Avenue LLC has owned the Fairmont Miramar Hotel in Santa Monica since October 1999. Before September 2006, Ocean Avenue LLC was a wholly owned subsidiary of Hotel Equity Fund VII, L.P. That firm initially agreed to sell the hotel outright to MSD Capital LP, a company owned by Michael Dell, the founder and CEO of Dell, Inc., but then canceled it before closing, instead choosing to sell the legal entity itself. 49% percent was sold to Susan Dell’s (Michael Dell’s wife) property trust; 42.5 percent to Michael Dell’s MSD Capital LP, and 8.5% to a third entity in which Michael Dell held majority control. Subsequently, the Los Angeles County Assessor determined a change of ownership had occurred, and the Los Angeles County Assessment appeals board concurred. However, Mr. Dell challenged the determination, and in June, 2014, the Second District California Court of Appeal affirmed a Superior Court decision which held that no change in ownership occurred Ocean Avenue LLC v. County of Los Angeles, Case B246499 (2014). The Court held that because no single entity obtained more than 50% control of Ocean Avenue LLC, a change of ownership did not occur even if the legal entity’s ownership had changed entirely.

Legal Entity Ownership Program. To help track potential reassessments, the State Board of Equalization (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, the Franchise Tax Board (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).

The author wants to amend change in ownership law to provide that transactions similar to Ocean Avenue LLC are considered changes in ownership, thereby requiring reassessment.

Proposed Law

Senate Bill 1237 provides that a change in ownership occurs when 90% or more of the direct or indirect ownership interests in a legal entity are sold or transferred in a single transaction, thereby requiring the assessor to revalue the property owned by that legal entity. The change in ownership applies regardless of whether one legal entity or person party to the transaction obtains control, except when a change in ownership exclusion in current law can apply.

The measure defines many of its terms, including “single transaction” as a plan consisting of one or more transfers that occur on or after January 1, 2019. SB 1237 enacts a rebuttable presumption that a transfer is part of a single transaction if the transferees are related parties as defined by the Internal Revenue Code, and if the transfers occur within a 36 month period commencing on the date of the first sale or transfer of interests.

The measure excludes from changes in ownership any transfer of ownership interests that occurs upon death, or sales of stocks or interests in publicly traded corporations on established securities markets, unless as part of a merger, acquisition, private equity buyout, transfer of partnership shares, or other means. Additionally, SB 1237 requires changes in ownership to be measured proportionally.

SB 1237 makes conforming changes to questions FTB must include on returns for partnerships, banks, and taxable corporations, as well as to change in ownership statements, which taxpayers obtaining property or control of legal entities must file with BOE within 90 days of the change. The measure also increases the penalty for failing to file the statement from 10% of tax to 15%.

The bill requires BOE to notify assessors if a change in control or ownership occurs. BOE must also report to the Legislature by January 1, 2021 regarding the revenue impact and frequency of reassessments of real property owned by legal entities. The measure directs the Legislative Analyst’s Office to report by the bill’s implementation, economic impact, and frequency or reassessments of legal entity real property.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “Proposition 13 ensures that property taxes do not get out of control for any California homeowner or business, but there is an ambiguity in it that needs to be addressed. On June 3, 2014, the Second District Court of Appeal (in Ocean Avenue LLC v. County of Los Angeles) held that the sale of the legal entity that owned Santa Monica’s Miramar Hotel did not trigger a ‘change in ownershipo’ reassessment of the hotel, as established in Ocean Avenue LLC v. County of Los Angeles, even though 100 percent of ownership interests were sold. This was because no one person obtained more than 50 percent of the entity’s ownership interests. As a result of this ruling, Los Angeles County lost over a million dollars in taxes annually. Current law extends Proposition 13 ‘change in ownership’ reassessment provisions to property of legal entities only when there is an acquisition of more than 50 percent of the ownership interest of a legal entity that owns California property by an individual or other legal entity, not the sale or transfer of such interests. As such, SB 1237 triggers a ‘change in ownership’ reassessment of legal entity property when at least 90 percent of the legal entity interests are sold, even if no one person gets a majority interest in the legal entity, revising the definition of ‘change of ownership’ in the Revenue and Tax Code for purposes of determining the property tax base value of commercial property. Under the provisions of SB 1237, the Miramar Hotel in Santa Monica would have been reassessed. To trigger reassessment, these ownership interests must be sold or transferred within a 36-month period as part of a plan. Excluded from the ‘change in ownership’ reassessments are sales of stock or a publicly traded corporation or partnership on an established securities market, as defined by federal law and transfers at death without payment for ownership interests. The bill also increases the penalty for failure to file a ‘change in ownership’ statement, from 10 to 15 percent of the taxes applicable to the new base year value (or old base year value, if there is no change in ownership). The bill requires the State Board of Equalization (BOE) to notify assessors if a legal entity change in ownership occurs. The BOE also is required to submit a report to the Legislature by 2021 regarding the implementation of the bill, including economic impact and frequency of assessment. SB 1237 corrects an outdated interpretation of property ‘change of ownership’ that has been part of a long debate regarding commercial property and Proposition 13. SB 1237 does not change Proposition 13, but simply makes changes to how it is interpreted in statute.”

2. Too narrow? Taking inspiration from the Fairmont Miramar Hotel case, SB 1237 provides that a transaction that changes 90% of ownership in a legal entity within three years triggers a reassessment of the legal entity’s property, but wouldn’t for many other transactions, such as one that changes 89.9% of ownership in the first three years, then conveys the remaining 10.1% on the first day after the three year window ends. Changing state law in response to a single case ensures that a reassessment results should taxpayers repeat the same transaction, but leaves sufficient flexibility for sophisticated taxpayers to continue to avoid reassessments through tax planning. Additionally, the bill doesn’t direct assessors to enroll new values for future property taxes for taxpayers who avoided reassessment using similar transactions in the past. The Committee may wish to consider whether SB 1237 sufficiently reforms this form of tax avoidance. If the Committee finds the scope of the measure too narrow, it could expand it in the following ways:

• Eliminate the bill’s three year cut-off, instead providing that reassessment occurs whenever the 90% threshold is reached, or,
• Direct assessors to enroll new values for property that would have been reassessed under the bill’s terms.

3. Cold war. Before Proposition 13, assessors valued property at its current fair market value. After the initiative, the Constitution prohibited assessors from doing so, directing them to only enroll a new value for property when it’s newly constructed or changes ownership. The Proposition 13 working group did the best job it could in devising rules to help assessors determine whether changes in ownership in legal entities occur in the unchartered waters after the initiative, and those rules have remained largely unchanged for more than 35 years because of disagreements between business groups, who state that limiting reassessments provides the certainty and low taxes necessary to generate additional economic growth in the state, and Proposition 13’s critics, who deride current change in ownership law as a loophole that enables wealthy parties to traffic in properties without paying their fair share. SB 1237 attempts to bridge this long-standing divide by requiring reassessment for certain forms of property sales transactions not subject to reassessment under current law.

4. How does this work? Three examples demonstrate reassessments under current law and SB 1237.

• John buys 100% of ACME Tools from Anne. The assessor revalues ACME Tools’ property to fair market value under current law because John now controls ACME Tools, and under SB 1237 because more than 90% of ACME tools transferred.
• John, Paul, and Cynthia buy 100% of ACME Tools from Anne in equal shares within three years. The assessor does not reassess the property under current law, as no single new owner obtained more than a 50% interest. However, under SB 1237, the assessor would reassess the property, because 90% or more of ACME Tools transferred, and the 50% threshold doesn’t apply.
• John, Paul, and Cynthia buy a controlling interest in ACME Tools from Anne in equal shares, but Anne maintains an 11% ownership share. The Assessor would not reassess ACME Tools under either current law or the bill, because only 89% of the company was transferred, and neither John, Paul, nor Cynthia control the company. The assessor would reassess ACME tools if Anne sold the remaining 11% to John, Paul, and Cynthia within the three-year window, but would not if Anne sold the remaining share after the three-year window.

5. Fenced off. When the stock of a publicly-traded corporation is bought or sold, no reassessment of the corporation’s property takes place, even though more than 50% of the stock has changed hands. Property owned by corporations is not reappraised as often as residential property, if ever. Two measures that were not enacted (SB 17, Escutia, 2003 and 2005) would have enacted a rebuttable presumption that a corporation’s property changes hands every three years, but SB 1237 explicitly states that changes in ownership can’t occur due to the regular activity on an established securities market, thereby fencing off the issue by law. However, the bill triggers reassessment when part of a merger, acquisition, private equity buyout, transfer of partnership shares, or other means. The Committee may wish to consider why ownership changes in publicly traded corporations occurring on stock exchanges shouldn’t trigger reassessment, when other transactions should.

6. What’s the plan? SB 1237 states that a “single transaction” means “a plan” consisting of one or more transfers, making reassessment contingent upon the more subjective determination that a coordinated plan exists, instead of a more objective, mathematical measure of ownership interest change. This approach offers more flexibility to determine whether a series of transactions triggers a reassessment, but the measure but doesn’t specifically state the agreements, contracts, or other elements necessary to be considered “a plan,” which could lead to disagreements between assessors and taxpayers regarding the degree of planning necessary to trigger a reassessment.

7. Being presumptive. SB 1237 creates a rebuttable presumption that a transfer or sale is part of a “single transaction,” thereby subjecting the legal entity’s property to potential reassessment, if it takes place between related parties, and occurs within 36 months. Rebuttable presumptions often serve as useful starting points, but what specific evidence does a taxpayer use to rebut the BOE’s or Assessor’s presumption that a transfer is within related parties, or the 36 month period?

8. Recent history. In 2015, the Committee approved SB 259 (Bates), substantially identical to this bill. The Senate Appropriations Committee subsequently held the measure on its suspense file.

9. 2/3. Because SB 1237 increases taxes on any taxpayer according to Section Three of Article XIIIA of the California Constitution, Legislative Counsel assigned the bill a 2/3 vote key.

10. Urgency. Regular statutes take effect on January 1 following their enactment; bills passed in 2018 take effect on January 1, 2019. The California Constitution allows bills with urgency clauses to take effect immediately if they're needed for the public peace, health, and safety. SB 1237 contains such an urgency clause, stating that it’s necessary to provide fair and equitable tax treatment for all individuals in this state, as all property holders should be treated equally with regards to the imposition of property taxes.

Support and Opposition

(4/6/18)

Support: California Business Properties Association, California Association of County Treasurer-Tax Collectors, Howard Jarvis Taxpayers Association, San Francisco Chamber of Commerce.

Opposition: Unknown.

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