Since 1978, with the passage of Proposition 13 that added Article XIII-A to the California State Constitution, California law has limited increases in assessed values of real property to a maximum two percent annual inflation factor, except in the event of a “change in ownership” or a “new construction.” When a change in ownership occurs, the property can be reassessed to current fair market value; likewise, new construction is assessed at the valuation immediately following its completion. (Subsequent legislation has required assessments to be reduced, at least temporarily, if current market value of property actually falls below its socalled “base year value.”)

The most common type of change in ownership occurs when property is transferred by deed or assignment from one owner to another, although certain transfers (such as those between spouses or incident to divorce) are excluded from being changes in ownership for property assessment purposes. However, changes in ownership are not limited to deeds transferring ownership of real properties, they also include some (but by no means all) “changes in ownership” and “changes in control” of “legal entities” that own real property in California.

There are two major types of events that can be treated as changes in ownership of the entity’s underlying real property:

  1. Where one person or legal entity acquires “control” of a legal entity, meaning ownership of more than 50 percent of voting stock in the case of corporations, or both capital and profits interests in the case of partnerships and limited liability companies. Direct control means direct ownership of the owning entity; indirect control means acquisition of a majority interest in an entity that in turn controls the owning entity. Where this type of change occurs, all of the entity’s property in California is subject to reassessment.
  2. Where, following a technical change in ownership that was excluded from reassessment under the “same proportionate interest” rules, described below, a transfer, or series of cumulative transfers occurs, that results in the “original coowners’” interest in the entity being reduced to below 50 percent of the total ownership interest in the entity, the property of the entity that was earlier excluded from reassessment becomes subject to reassessment.

Case 2 is the more common, and also more complicated situation. It arises because California law also provides that transfers of property to, from, or between legal entities, that result in no change whatsoever in the underlying beneficial ownership of the property, are excluded from reassessment. Rev. & Tax. C. Section 62(a)(2). For example, A, B, and C who have owned Blackacre as 33 1/3 percent tenants in common, transfer it to X Corp., each taking back one-third of its voting stock. That is an excluded transfer under Section 62(a)(2), and A, B and C become “original co-owners.” If, subsequently, A transfers her interest in X Corp. to D, no change of ownership occurs at that point, but if thereafter, B transfers his interest to E, there is a change in ownership of Blackacre and it is subject to reassessment.

Direct transfers of real property are reported to County Assessors, but changes in control or ownership of legal entities are reported to the State Board of Equalization (BOE), using Form BOE_100-B.

The law has long required that this form be filed with the BOE within 45 days after a change in control or change in ownership of an entity occurs. Rev. & Tax. C. Sec. 482. However, until this year, no penalty was imposed for failure to file, until the entity was notified by the BOE that the filing was required. Most often, the BOE learned of a change in ownership or change in control through a reference from the Franchise Tax Board. Income tax return forms for legal entities (Forms 100, 100-S, 565, and 568, for C corporations, S corporations, partnerships and LLCs, respectively) have for many years included questions (rather poorly phrased to be sure) seeking to ascertain whether there had been any reportable change in ownership or control of the entity.

Effective for changes in ownership and control occurring in 2010 and thereafter, the rules have changed, due to amendments made to Section 482 of the Revenue & Taxation Code by S.B. 816 (Stat. 2009, C.622). Under the revised rules, a significant penalty, 10 percent of the taxes applicable to the new base year value of the property, will be imposed if the change is not reported on Form BOE-100-B within 45 days after the change occurs. As before, if the Board requests the filing of a change in ownership statement (Form BOE-100-B), and it is not delivered within 45 days after the request, a 10 percent penalty based on the current year’s taxes can be imposed even if no change in ownership has actually occurred and the Board so determines.

Attention must be paid to these new requirements in connection with closing any transaction such as a stock purchase or merger, but the scope of the “original co-owner rule” is actually much broader. For example, there is no parent-child exclusion for transfers of interests in legal entities. Thus, if the transfers from A to C and B to D in the above example were actually the result of deaths and trust or probate administration proceedings, it is arguable that failure to timely report will result in imposition of the penalties, subject to possible abatement on a showing of reasonable cause. However, whether the filing must be done when B dies, or when the administration of his or her estate or trust is completed, is not entirely clear at this time.