In This Issue

A. 2010 Property Values Continue to Move Downward: How to Recover Taxes

Many of our clients, even those who have not recently purchased property, are now asking us about how to obtain property tax relief.  For the past few years, residential and commercial property values have been falling annually as one of the worst real estate cycles in recent history continues.  Santa Clara County Assessor Larry Stone recently stated that his county’s situation was “worse than anyone had expected,” and that his county “has not experienced such a devastating decrease in property values since the Great Depression.”  And while many county assessors have performed select reviews of residential properties, very few have looked systematically at their roll values for non-residential properties. 

This year, out of California’s dozen-largest counties, San Francisco was the only county to avoid a shrinking tax roll. Whereas other counties’ rolls were declining, San Francisco’s tax roll increased by 4 percent.  It is unclear what drove these increases, although Assessor Phil Ting stated that in his opinion, “the overall real estate market in San Francisco has fared relatively well and remains strong.” 

We advise taxpayers across the state to review both their real and personal property assessments very carefully. Under California law, property may not be assessed at a value greater than its fair market value.  If property owners believe that their property is being overassessed, to protect their rights, they should file a timely appeal with the local assessment appeals board.

This article will briefly discuss California's local and state property tax systems and the factors taxpayers should take into consideration when deciding whether to appeal their property tax assessment.

Featured article continues below.

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B. Annual County Assessment Appeal Filing Deadlines

In California, there are two different filing deadlines for challenging annual local property tax assessments. Depending on where the property is located, the deadline is either September 15 or November 30 (except when those dates fall on a weekend or holiday, in which case the deadline generally is extended to the next business day).

In order for a county to impose the September 15 deadline, it must separately inform each assessee of the value that the assessor has placed on the roll for the taxpayer's property. However, because most counties reasonably do not wish to expend the effort or funds to send out this notice, they simply adopt the later filing deadline of November 30.

Nevertheless, there are a handful of counties that do incur the extra cost to send out those notices, primarily in order to shorten the time for taxpayers to file an appeal. This year, the following counties have a deadline of September 15, 2009:

Alameda*

Inyo

Kings*

Monterey

Orange

Placer

San Francisco*

San Luis Obispo

Santa Clara*

Sierra

Sutter

Ventura

*These counties also have filing fees that must be paid in order to lodge an appeal with the assessment appeals board.

Keep in mind that each county has a different assessment appeal application, and that the deadlines referenced above relate only to annual assessment appeals. Other assessments, such as supplemental and escape assessments, have different deadlines based on when the notices and/or bills relating to them are issued.

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C. Warning – Penalties Are Being Imposed for Failure to Timely Report Changes in Control or Ownership of Legal Entities

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.) 

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D. Contractual Assessments – New Trend?

In recent years, a new type of property tax assessment has started to take hold in California.  Contractual assessments are a new way for property owners to voluntarily increase their taxes by financing specified improvements to their property.  Modern contractual assessments were born from an idea put in place in Berkeley in November 2007.  On that date, the Berkeley City Council approved the "Sustainable Energy Financing District," which authorized a city-wide voluntary assessment district to pay for the installation of solar panels and solar hot water systems. The City provided the funding for the project from a bond or loan fund that it repays through assessments on participating property owners' tax bills for 20 years. The tax assessment itself essentially runs with the land and is transferable between property owners.

This idea was later codified at the state level with the passage of AB 811 in 2008; which authorized the legislative body of any city to determine that it would be in the public interest to designate an area within which authorized city officials and free and willing property owners may enter into contractual assessments to finance the installation of distributed generation renewable energy sources or energy efficiency improvements that are permanently fixed to real property.  It also authorized a property owner, upon written consent of an authorized city official, to purchase directly the related equipment and materials for the installation of distributed generation renewable energy sources or energy efficiency improvements and to contract directly for the installation of those sources or improvements.  Since this bill was passed, many local governments have begun enacting these types of conforming laws. 

The legislature is now considering expanding this type of assessment to include other improvements.  AB 2182, for example, which is now pending in the legislature would fund septic improvements that are permanently affixed to residential, commercial, industrial, agricultural, or other real property.  These assessments may spur the economy by allowing private industry to sell products to property owners.  In addition, the cost of these assets, which will automatically be secured to the real estate, theoretically provides a safe form of financing.  Although it may be wise for some property owners to enter into agreements for contractual assessments, buyers must be aware of the potential for increased property tax bills based upon these agreements.    

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E. Recent Winston & Strawn Tax News and Publications

•          Charles J. Moll III was recognized in Chambers USA 2010

Directory as a leading attorney in State and Local Taxation. Chambers and Partners is a prominent UK-based research and publishing organization that conducts extensive research within key legal markets and nationally to evaluate attorneys based on, among other things, reputation and client feedback. 

 

•          Winston & Strawn tax partner Charles J. Moll III was named a

Super Lawyer again in 2010. This recent accolade appeared in the 2010 Northern California Edition of Super Lawyers.

 

•          Winston & Strawn tax partner Charles J. Moll III spoke at the

NYU's Summer Institute in Taxation Program.  The conference was held July 26-28, 2010 in New York, NY.  The title of Mr. Moll's discussion was "Corporate and Income Franchise Taxation." The program focused on issues related to tax base; allocation and apportionment; unitary business; UDITPA; separate, consolidated and combined reporting methods; and unique state taxing schemes.  Joining Mr. Moll on the panel were Arthur R. Rosen of McDermott, Will & Emery LLP and William M. Backstrom, Jr. of Jones Walker LLP.

 

•          Winston & Strawn tax attorney Bradley R. Marsh spoke at the

2010 Annual Income Tax Seminar, held on June 18, 2010 in San Francisco.  Mr. Marsh presented "California Residency Rules – A Primer and Recent Developments." Joining him on the panel was Terry Collins, Tax Counsel for the Franchise Tax Board, Sacramento.  The program was presented by Golden Gate University School of Law, LLM in Taxation Program and the Income and Other Taxes Committee, along with the State and Local Tax Committee, the Corporate and Business Entities Committee, and the Tax Procedures and Litigation Committee of the Taxation Section of the State Bar of California.

 

•          Troy M. Van Dongen and Bradley R. Marsh participated in the

invitation-only California State Bar Association's Eagle Lodge West Conference 2010.  At the Eagle Lodge West Conference on April 16-17, 2010, private practitioners and government attorneys met to discuss several topics, including: (a) the implications of Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298; (b) the judicial review and remand of property tax decisions made by county boards (including assessment appeals boards or boards of supervisors sitting as a local board of equalization); (c) the proper role of stock option income in the payroll factor for franchise tax purposes;(d) residency determinations for the income taxation of trusts; and (e) how Lockyer v. City and County of San Francisco (2004) 33 Cal.4^th 1055 may impact administrative enforcement of potentially unconstitutional laws. 

 

•          Winston & Strawn tax partner Charles J. Moll III was among

the speakers at the ABA/IPT Advanced Property Tax Seminar on March 25-26, 2010.  The seminar took place in New Orleans and was hosted by the ABA Section of Taxation and The Institute for Professionals in Taxation.  Mr. Moll spoke on a panel devoted to discussing "Constitutional Issues in Property Taxation." Joining Mr. Moll on the panel were William K. Elias of Elias, Books, Brown & Nelson, PC, and Edward Kliewer, III, of Fulbright & Jaworski, LLP, as moderator.

 

•          Winston & Strawn tax partner Charles J. Moll III spoke at the

American Bar Association's Section of Taxation 2010 Mid-Year Meeting. The conference was held January 21-23, 2010 in San Antonio, TX.  The title of Mr. Moll's discussion was "What's That, You Say? New Property Tax Regimes." The program focused on new tax regimes enacted as a result of state and local government budget shortfalls.  The program addressed new tax regimes enacted in Florida, Texas, Indiana, and California.  The Taxation 2010 Mid-Year Meeting is a forum for tax practitioners to learn from leading attorneys and government officials and discuss the latest federal tax policies, initiatives, regulations, legislative forecasts, and planning ideas.

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F. Upcoming Winston & Strawn Tax News and Publications

•           "California Chief Counsel Roundtable"

California State Bar Association, California Tax Policy Conference

Saturday, November 6, 10:50 a.m.

Loews Coronado Bay, 4000 Coronado Bay Rd., Coronado, CA

Winston & Strawn tax partner Charles J. Moll III will be among the speakers during the State Bar of California's 2010 Annual Meeting of the California Tax Bars & California Tax Policy Conference to be held in Coronado, CA.  This intensive two-and-one-half-day seminar will cover cutting-edge topics in a variety of tax practice areas.  Mr. Moll will speak on the panel discussion titled "California Chief Counsel Roundtable." Along with Kris Cazzadd (Chief Counsel, California State Board of Equalization), Geoff Way, (Chief Counsel, California Franchise Tax Board), and Michael Herbert (PricewaterhouseCoopers LLP), the panel will discuss developments in the franchise, sales, and use and property taxes areas, including significant administrative developments in these areas. 

 

•           "Split Roll Property Tax:  Time for Reform?"

California State Bar Association, California Tax Policy Conference

Friday, November 5, 1:40 p.m.

Loews Coronado Bay, 4000 Coronado Bay Rd., Coronado, CA

Winston & Strawn tax attorney Troy M. Van Dongen will be among the speakers during the State Bar of California's 2010 Annual Meeting of the California Tax Bars & California Tax Policy Conference to be held in Coronado, CA.  Mr. Van Dongen will speak on the panel discussion titled "Split Roll Property Tax:  Time for Reform?" which will discuss the practical, political, and legal implications of a split-roll property tax.  The discussion will also include ways a split-roll property tax could be accomplished, both with and without constitutional amendment, and the potential impact on taxpayers, assessors and practitioners.  Phil Ting (Assessor, San Francisco), Chris Matarese (Ajalat, Polley, Ayoob and Matarese), and Richard Moon (California State Board of Equalization) will also be on the panel.

 

•           "Property Taxation and Appeals, Primer and Best

Practices"

Santa Clara County Bar Association

Tuesday, October 26, 5:30 – 7:30 p.m.

Santa Clara County Bar Association HQ

31 North Second Street, 4th Floor, San Jose, CA

Winston & Strawn tax attorney Bradley R. Marsh will speak about commonly litigated issues in property tax, how to handle those issues at an assessment appeals hearings, as well as other relevant property tax issues. Joining Mr. Marsh on this panel is Robert Nakamae from the Santa Clara County Counsel's Office, who regularly represents the assessor in property tax matters.

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Featured article cont.

Overview—Local Property Tax System.  Unlike some states, California's local real property tax system is not based primarily on a property's annual market value, which may fluctuate from year to year. Rather, under Proposition 13, real property is assessed upon its “base year value.”  For real property owned since the enactment of Proposition 13 (in 1978), the property's "base year" would be 1975, and the 1975 assessed value would be the "base year value."  To determine the maximum taxable value for any year subsequent to 1975, a "factored base year value" is calculated, which is the base year value with annual increases limited to the inflation rate, as measured by the California Consumer Price Index, or 2 percent, whichever is less, until the property changes ownership or is subject to new construction.

At the time of a change in ownership or completion of new construction, the base year value of the property is re-determined.  For changes in ownership, the property's fair market value on the change in ownership date becomes the new base year value.  For new construction, the value of that new construction is added to the existing trended base year value to create the new base year value.  A new "base year value" is established, which is then factored for each subsequent year, with the same limitation on annual increases as described above. 

How is a Base Year Value Determined?  What makes property taxes unique is that, unlike most taxes, which are based upon a taxpayer's declaration of value or income, property taxes are based upon an opinion of value established by the government.  The person making this determination is often someone the taxpayer has never met, and who oftentimes has never actually toured the property.  Although the assessor's office typically enrolls the purchase price as the assessed value, it may choose to enroll either a higher or lower amount if it determines that the property should have transferred for other than that amount.

Temporary Reductions.  Although many appeals involve determining the proper "base year value" following a change in ownership or new construction, taxpayers often file appeals when the property’s value has declined below the trended base year value, called "Proposition 8" appeals.  Under Proposition 8, taxpayers may ask for a temporary revaluation of their property if they believe that its fair market value has decreased below the factored base year value.  Although these appeals technically apply only to the year at issue, the lower value established must remain on the roll for subsequent years until the assessor performs an appraisal and determines that the property's value has increased.  Due to the continuing deterioration of both residential and commercial real estate markets, these temporary reductions are being sought by more and more property owners. 

Overview—State Property Tax System.  Section 19 of article XIII of the California Constitution requires that the State Board of Equalization, rather than the county assessors, annually assess certain types of property.  These types of property include pipelines, flumes, canals, ditches, and aqueducts lying within two or more counties, as well as all taxable property, excluding franchises, owned or used by regulated railway, telegraph, or telephone companies, car companies operating on railways in the state, and companies transmitting or selling gas or electricity.  The annual assessment process for state assessed property differs significantly from the local process.  Not only are state assessed properties not entitled to the base year value protections of Proposition 13, but the assessment and appeal calendar are conducted on a separate timeline and before the State Board of Equalization rather than a county assessment appeals board.  This process starts with the filing of property statements on or before March 1, although proactive state assessees can get involved in the determination of assessment factors prior to then.  The State Board of Equalization issues annual assessments on or before June 1, and taxpayers who do not agree with their assessments may file appeals by July 20.  During the remaining months of the year, the State Board of Equalization decides petitions and completes its roll by December 31.

Common Reasons for Appealing Assessments.  There are many reasons to file an assessment appeal, but some are more prevalent than others. Some of the most common reasons are:  (1) the market value has declined; (2) there was no change in ownership; (3) the assessor failed to enroll the purchase price or the purchase price exceeded the property’s fair market value; (4) contamination was discovered on the property; (5) the property is exempt; or, (6) the assessor overestimated the value of new construction that was completed, or included exempt property in that assessment.  There are, however, many other very common reasons to appeal and even more uncommon reasons.  If you think there is a reason that you might want to appeal, please feel free to contact us to discuss.

Estimating Tax Savings of a Property Tax Appeal.  Estimating tax savings is relatively simple. The basic tax rate is one percent of the assessed value. However, the rate is generally higher due to voter approved indebtedness or contractual assessments.  While actual rates vary from county to county, and even within a county, the general rule of thumb is that the overall tax rate is approximately 1.1 percent of the assessed value.  Thus, for every $100,000 of assessed value, the tax burden is roughly $1,100 per year, and for every million dollars of assessed value, the tax burden is roughly $11,000.

When estimating the potential tax savings that may be recovered when appealing a base year value, estimate the difference between the subject property's actual fair market value and the assessed value, and multiply that value by the number of years that the taxpayer expects to own the property.  If non-base year values are being appealed, perform this calculation for each year in which the assessed value is expected to be higher than the fair market value.  For either of these calculations, consideration must be given to the 2 percent inflationary adjustment for each year after the first year of the appeal.  Finally, because of the “pay first” nature of California property taxes, a successful appeal will typically result in a refund, upon which interest is paid.

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