Beginning on January 1, 2010, new penalties took effect whenever a change of ownership related to a legal entity is not reported within 45 days. Changes of control are often obvious, such as when a new person or entity directly purchases 100 percent of the stock of a real estate-owning company. Other reassessable events, however, can be much harder to recognize. For example, the “original co-owner” rules found in Revenue and Taxation Code Sections 62 and 64 often catch taxpayers off-guard, because transfers of less than one percent of the company’s shares or membership interests may cause a change in ownership. In legal entities with numerous investors, changes in ownership can occur in unobvious ways, such as when a member revises an estate plan, passes away, or gifts an interest to another investor or a third party. Often, especially in these larger legal entities where the various investors don’t know one another, finding out about and timely reporting changes in ownership can be tricky. The problem is even greater where there are multiple layers of legal entities.
Under the old law, taxpayers were supposed to report these changes in ownership within 45 days after they occurred. But there was no penalty unless a taxpayer failed to report after being asked to do so. This process worked because many taxpayers did report within 45 days, but there was also some leniency to let those taxpayers with more complex change in ownership issues figure them out before penalizing them.
Under the new law, any legal entity that fails to file a change in control statement within 45 days of the earlier of, 1) the date of the change in control or the change in ownership of the corporation, partnership, limited liability company, or other legal entity, or, 2) the date of a written request by the State Board of Equalization (“BOE”), will have a penalty imposed against it. See Revenue and Taxation Code Section 482. The penalty, which is 10 percent of the taxes applicable to the new base year value of the subject real property (or 10 percent of the current year’s taxes on that property if no change in control or change in ownership occurred), will be added to the subject property’s assessment.
Under this new law, the penalty is automatic, although the county board (board of supervisors sitting as a board of equalization or, if applicable, an assessment appeals board) may abate it if the legal entity establishes that the failure to file a timely change in control statement was due to reasonable cause, and the entity has since filed the required statement with the BOE.
(See Letter to Assessor 2010/028, issued on May 19, 2010, for more information.)