Shiver My Timbers! Is it a Legal Entity Change in
Ownership in California?
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 1
Kim Rogers Senior Tax Manager
DuCharme, McMillen &
Associates, Inc. Phoenix, AZ
Matthew Burke Counsel
PricewaterhouseCoopers LLP
New York, NY
• Assessment on “adjusted base year value”. • Base year value = value on the roll in 1975, or the
fair market value when property changes ownership.
• Adjusted base year value = base year value adjusted for inflation at California CPI but max 2% annually .
• Under Prop 13, property is only reassessed to fair market value if there is a “change in ownership” or the “completion of new construction”.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 2
Prop 13 Basics
• X bought property in June 1995 for FMV $1 million. The “base year value” is $1 million.
• Current FMV $4 million. • Adjusted for inflation (max of 2% annually), the
“adjusted base year value” is $1,370,000.* • Property taxes calculated on $1,370,000. • If there is a change in ownership, property is
reassessed to FMV (new BYV). • Property taxes will be assessed on $4 million. *See http://www.boe.ca.gov/proptaxes/pdf/lta14065.pdf for actual historic inflation rates.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 3
Prop 13 Basics - Example
Transfers Involving Real Property and Legal Entities
• Determining when there is a change in ownership
(and hoping to avoid one where possible). • Rules are divided into:
– transfers of real property interests vs. – transfers of legal entity interests
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June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 5
Transfers of Real Property to/from Legal Entity
• Basic Rule: Transfers of real property interests to or from a legal entity (including between legal entities) is a change in ownership under RTC § 61(j).
• Exceptions: 1. Ultimate ownership is exactly the same - the
“proportional ownership interest transfer exclusion” (RTC § 62(a)(2)), or
2. Transfer is between affiliated corporations (RTC § 64(b)).
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 6
Proportional Ownership Interest Transfer Exclusion
A B
Blackacre
50% 50%
A B
50% 50%
100%
LLC
Blackacre
“Going In”
A and B are 50% TICs of Blackacre and transfer their interests to LLC, which they own 50/50.
Qualifies as proportional under RTC § 62(a)(2), so Blackacre is not reassessed.
However, A and B become “original co-owners” in LLC.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 7
Proportional Ownership Interest Transfer Exclusion
A B
Blackacre
50% 50%
A B
50% 50%
100%
LLC
Blackacre
“Coming Out”
A and B own LLC 50/50. LLC owns Blackacre.
LLC transfers Blackacre out to A and B as 50/50 TICs.
Qualifies as proportional under RTC§62(a)(2). No more original co-owner status. See Rule 462.180, Ex. 5.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 8
Disproportionate Transfer is a 100% Change in Ownership
H W
50% 50%
100%
LLC 1
Blackacre
H W
51% 49%
100%
LLC 2
Blackacre
H and W own LLC 1 50/50 and LLC 2 51/49. LLC 1 transfers Blackacre to LLC 2.
The transfer is not proportional and there is a 100% change in ownership and 100% reassessment.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 9
Proportional Ownership Transfers Case Law
Penner v. County of Santa Barbara 37 Cal. App. 4th 1672 (1995) • Mom owned property 100%. • Transferred to a partnership owned by her and her
kids. Not proportional, so change in ownership. Assessment = from $330K to $2.3 million.
• Does not qualify as parent-child transfer. • Instead? Give property to kids first to equalize
with percentages of partnership, then transfer to partnership.
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Proportional Ownership Transfers Case Law
Munkdale v. Giannini 35 Cal. App. 4th 1104 (1995) Two brothers 50/50 partners in Partnership that owned 11 properties. They wanted to split up. Partnership deeded 5 parcels to each brother and the 11th to both as TICs. Change in ownership of the 10 properties that were transferred to one or the other, not the 11th. Test for proportionality is as to ownership of each property, not as to value.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 11
Reporting Real Property Transfers
• Real property transfers to/from a legal entity or between legal entities reported to the county along with recording the deed (Change in Ownership Statement, Preliminary Change of Ownership Report), just like any normal real property transfer/sale. RTC §§ 480, 480.3.
• Must be reported whether the deed is recorded or not.
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Why Did We Cover Real Property Transfers?
• Because the proportional ownership interest transfer exclusion creates “original co-owners” under RTC § 64(d).
• Future transfers of the entity interests must be counted and could trigger a change in ownership down the road.
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Transfers of Legal Entity Interests
• These “legal entity” rules apply where the real
property itself is not transferred, but interests in the entity that owns real property are transferred.
• Focus on transfers of corporation’s voting stock, or partnership or LLC capital and profits interests).
• Transfers can be voluntary, involuntary, by purchase or gift, and include increases in ownership of interests through the redemption of other owners’ interests or any other reorganization.
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Basic Legal Entity Rules
• First rule is that the transfer of a legal entity
interest is not a change in ownership. RTC § 64(a). • Two exceptions:
1. A change in control or majority ownership under RTC § 64(c)(1), or
2. A change in change in ownership under RTC § 64(d)
• Exceptions to the exceptions: interspousal and registered domestic partner, proportional, transfers to certain trusts; also IRC § 368 reorgs among affiliated corporations.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 15
Change in Control or Majority Ownership Under RTC § 64(c)(1), Rule 462.180(d)(1)
• Corporations: When a person obtains direct or indirect ownership or control of more than 50% of voting stock of corporation.
• LLCs and Partnerships: When a person obtains direct or indirect ownership of more than 50% of an LLC or partnership’s capital and profits.
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Result of Change in Control or Majority Ownership
• Change in ownership of all the real property owned by the corporation, partnership or LLC in which the controlling interest is obtained. • Land, improvements and fixtures owned by the entity. • Land, improvements and fixtures being leased if
original term including options is 35 years or longer. • Land, improvements and fixtures leased from a public
owner for any term.
• See Instructions to Form BOE-100-B, Statement of Change in Control and Ownership of Legal Entities.
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Title Insurance & Trust Co. v. County of Riverside 48 Cal. 3d 84 (1989)
BEFORE
Southern Pacific
100%
Spicor
Properties
Ticor
100%
Title Ins. & Trust Co.
100%
Before the transaction, Southern Pacific owned Spicor, and unrelated entity Ticor owned Title Ins. & Trust Co., which owned Riverside properties. Spicor merged into Ticor and the Spicor shares were canceled, so then Southern Pacific became the sole owner of Ticor stock.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 18
Title Insurance & Trust Co. v. County of Riverside 48 Cal. 3d 84 (1989)
Southern Pacific
100%
Properties
Ticor
100%
Title Ins. & Trust Co.
100%
Ticor remained the 100% owner of Title Ins. & Trust Co. An indirect change in control of Title Ins. & Trust Co. occurred, even though it was still owned 100% by Ticor. The court held this was reassessable. All of the property of all entities that undergo both direct and indirect changes in control are reassessable. “The fundamental requirement for a change in ownership under the section is the obtaining of control of the corporation that owns the property subject to reassessment, whether that control is obtained directly or indirectly.”
AFTER
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Direct and Indirect Changes in Control or Majority Ownership
• Look at every entity that owns real property. • Determine if there is a new person or entity that
has obtained direct or indirect ownership (for corporations, LLCs and partnerships) or control (for corporations only).
• Inserting a new holding company will almost always result in a change in control or majority ownership.
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Twentieth Century Fox v. County of Los Angeles 223 Cal. App. 3d 1158 (1990)
Public
Fox Properties
100%
Fox
100%
Fox Properties
Holdings
100%
Fox
100%
New Investors
100%
BEFORE
Fox created a new holding company, Holdings. Through a reverse triangular merger, Holdings obtained all of the Fox voting stock. This is a reassessable direct change in control of Fox because a new entity obtained the Fox voting stock. Fox argued that no new investor owned more than 50% of Holdings. This is not a defense. The only defense would be total proportionality.
AFTER
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 21
Twist on Twentieth Century Fox
Public
Fox Properties
100%
Fox
100%
Fox Properties
Holdings
100%
Fox
100%
100%
AFTER
Public
Assume Fox created Holdings and Holdings obtained Fox in the merger, just as before. However, assume that instead of the new owners, the Holdings voting stock was issued to the Fox public shareholders in the same percentages they owned in Fox. There is still a direct change in control of Fox, because there is a new entity, Holdings, that obtained 100% of the Fox voting stock. However, because the ultimate ownership of Fox afterward is exactly the same after as it was before because the same public shareholders own Fox afterward in the exact same percentages, there is no reassessment. This is the “proportional ownership interest transfer exclusion” applied to legal entities. Property Tax Rule 462.180(d)(4) and Example 10.
BEFORE
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 22
Ocean Avenue LLC v. County of Los Angeles 227 Cal. App. 4th 344 (2014)
• Original deal was a sale of the real property. • Restructured as an acquisition of the entity. • Transfers of entity interests split between Michael
Dell, his wife, and several financial advisors. • No single person individually obtained more than
50% capital and profits in Ocean Avenue LLC. • No spousal attribution in California (Rule
462.180, Example 7). • No change in ownership even though 100% of
entity was transferred.
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Changes in Ownership Under RTC § 64(d)
• After a proportional ownership exclusion is used,
the “holders of the interests in the transferee entity” become “original co-owners.”
• Once the original co-owners have transferred cumulatively more than 50% of their interests, there is a change in ownership of the property that was transferred in the prior excluded transaction.
• NOT all the property as under RTC § 64(c)(1).
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 24
“Counting and Cumulating” Transfers
• Count all except transfers (i) between spouses or
registered domestic partners, (ii) to certain trusts (revocable or irrevocable and the transferor or spouse is beneficiary), or (iii) that are proportional. Rule 462.180(d)(2).
• Example: X and Y own Blackacre 50/50 and transfer it to LLC (owned 50/50). They become original co-owners. If X transfers his 50% LLC interest to wholly owned X Corp, that is not counted because it is proportional.
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“Counting and Cumulating” Transfers
• Counting Rules: Once an interest has been
counted and cumulated, the transferee does not become an original co-owner with respect to that interest (not counted again). Property Tax Annotation 220.0451.010.
• Counting Rules: If the exclusion applies (such as proportional or interspousal), the transferee is an original co-owner.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 26
Who is the Original Co-Owner?
X
Blackacre
100%
HoldCo
100%
X Corp
100%
100%
X
Blackacre
X owns Blackacre. X transfers Blackacre to X Corp, which X owns indirectly through HoldCo. HoldCo becomes an original co-owner of X Corp, the transferee entity. Future transfers by HoldCo of X Corp must be counted to determine if there is a change in ownership under RTC §64(d).
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Reporting Legal Entity Changes
• Form BOE-100-B, Statement of Change in Control
and Ownership of Legal Entities, to be filed with the State Board of Equalization within 90 days of the change in control or ownership. RTC § 480.1, 480.2.
• Do not report to the County. • State BOE reports this to the County.
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Income Tax Return Questions
• Under RTC § 64(e), there are questions on entity
income tax returns to discover the BOE-100-B filing obligation (Ques. T on partnership Form 565; Ques. O on LLC Form 568; Ques. J on corporation Form 100 return).
• If entity answers “YES” to any of these questions, the Franchise Tax Board reports that to the State BOE, which will then request a filing from the taxpayer.
• Be careful interpreting these – they are unreasonably broad!
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 29
Statute of Limitations
• Under RTC § 532(b)(3), there is no statute of
limitations on issuing “escape assessments” if an entity was required to file Form BOE-100-B and fails to do so.
• Distinguish this from the statute for real property transfers and changes in ownership to be reported at the COUNTY under RTC § 532(a) which is generally 4 years if a document was recorded, or 8 years if nothing was recorded.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 30
Late Filing Penalties
• A late filing results in a penalty of 10% of the tax
based on the new reassessment (applied to new base year value).
• If there is not a new reassessment, there is a penalty of 10% of the tax based on the current year’s taxes.
• How could there be a filing requirement without a new reassessment?
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 31
Abating Penalties
• Must file an assessment appeal with Assessment
Appeals Board. • Appeal must be filed within 60 days of being
notified of penalty. • Must establish failure was “due to reasonable
cause and not due to willful neglect.” • Must have filed the statement. • AAB may order the penalty abated.
June 28 - July 1, 2015 IPT Annual Conference * San Diego, California 32
Filing BOE-100-B When You’re Already Late
• The requirement to file never goes away. • Before 2012, the penalty only applied if the State
BOE asked the taxpayer for a filing and the taxpayer failed to respond timely.
• Beginning January 1, 2012, the penalty became automatic.
• Advising clients who are already late.
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Pending Legislation on Penalty Abatement
• In 2014, legislation that failed would have increased the late filing penalty to 15%.
• Current Assembly Bill 571 would change the abatement standard from “failure was due to reasonable cause and not due to willful neglect” to “due to reasonable cause and circumstances beyond the assessee’s control, and occurred notwithstanding the exercise of ordinary care in the absence of willful neglect.”
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Pending Legislation on Form BOE-100-B Privacy
• RTC § 481 provides Form BOE-100-B is not open to public inspection (except may be shared by government agencies under RTC § 408.)
• Current Assembly Bill 567 amends § 481, and would allow the fact that a BOE-100-B has been filed, or that the State BOE has issued a determination to the assessor on a filing, to be public information.
• State BOE and county assessors could also disclose that the filing was prompted by FTB and tax return questions.
