1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MAY 24, 2016 10 11 12 13 14 15 16 ITEM F 17 PUBLIC HEARINGS 18 ITEM F3 19 PROPERTY TAXPAYERS' BILL OF RIGHTS HEARINGS 20 21 22 23 24 25 26 27 REPORTED BY: Carole W. Browne 28 CSR NO. 7351 1 1 P R E S E N T 2 3 For the Board of Fiona Ma, CPA. Equalization: Chair 4 Diane L. Harkey 5 Vice Chair 6 Jerome E. Horton Member 7 Sen. George Runner (Ret.) 8 Member 9 Yvette Stowers Appearing for Betty T. 10 Yee, State Controller (per Government Code 11 Section 7.9) 12 Joann Richmond Chief 13 Board Proceedings Division 14 ---o0o--- 15 16 For Board of Equalization Staff: Todd Gilman 17 Taxpayers' Rights Advocate 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 2 1 INDEX OF SPEAKERS 2 3 SPEAKER PAGE 4 Tim Phillis 5 5 Diane Friedman 9 6 John Gamper 19 7 Howard Kato 22 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 24, 2016 4 ---o0o--- 5 MR. GILMAN: We'll move on to the Property Tax 6 Taxpayers' Bill of Rights Hearings. 7 Good afternoon, Chairman Ma and Members of the 8 Board. Todd Gilman, Taxpayers' Rights Advocate with the 9 BOE. 10 This is the Property Tax Taxpayers' Bill of 11 Rights Hearing for Sacramento, May 24th, 2016, where 12 individuals have the opportunity to present their ideas, 13 concerns, and recommendations regarding legislation, the 14 quality of Agency services, and other issues related to 15 the Board's administration of the tax program, including 16 State and County property tax programs to any issues 17 identified in the Taxpayers' Rights Advocate's 2014-2015 18 Annual Report. 19 And I believe we have four speakers signed in. 20 MS. MA: I have five speakers. 21 MR. GILMAN: Five speakers. Okay. 22 MS. MA: Yes. So if the following speakers 23 would please come up: Mr. David Jarrett? Is Mr. David 24 here? 25 I see Mr. -- Assembly Member Gibson here. What 26 is your timeline. 27 ASSEMBLYMAN GIBSON: I've got some time. 28 MS. MA: You've got some time. Okay. Good. 4 1 Okay. Is Mr. Jarrett here? David Jarrett? 2 No? Okay. 3 Tim Phillis. If you could please come up to 4 the front. Denise Friedman, John Gamper, and Howard 5 Kato, if you guys want to come up after? That would be 6 great. 7 So you have three minutes for your 8 presentation, and there may be additional questions 9 after Mr. Gilman makes his remarks to your remarks, and 10 then it will be open to Board Member questions. 11 MR. GILMAN: Well, it would probably be proper 12 to have Mr. Phillis go first. 13 Mr. Phillis, you were the first one that 14 contacted us that said that you wanted to come to the 15 Taxpayers' Bill of Rights Hearing. 16 Mr. Phillis came to us last year, if you 17 recall, and he was in Culver City in June and has an 18 ongoing property tax matter with the Humboldt County 19 Assessor, so I'll let Mr. Phillis have his time. 20 ---o0o--- 21 TIM PHILLIS 22 ---o0o--- 23 MR. PHILLIS: Okay. Thank you. My name is Tim 24 Phillis. I live in Humboldt County, and I purchased 25 property in 2013. And last year at Culver City I did a 26 presentation, and I've been in contact with the Property 27 Taxpayers' Advocate's Office, and so my struggle is 28 continuing. 5 1 I did have a meeting with Mr. Gilman, 2 Mr. Sutter, and Counsel Moon yesterday. 3 Some of what I was going to present today is 4 in -- currently in litigation, so we won't -- we 5 probably won't go over that. But I do have some copies 6 that I would like you guys to have. 7 Okay. These pages are numbered. I think I'm 8 going to start with Page No. 9. And this is the 9 original tax bill I -- I got from the Assessor's Office 10 for 2014-15. It shows a taxable value on this tax bill 11 of $472,000. The purchase price in 2013 was $153,000. 12 According to the laws that I read, this is in 13 violation of Revenue and Taxation Code. And those laws 14 would be 50, 110.1, and 110(b). 15 Also, to support those would be Property Tax 16 Rule 460. That's Page 11. And the one in particular is 17 Rule 460(b)(6), where it says: "Taxable value means the 18 base year full value adjusted for any given lien date as 19 required by law or the full cash value for the same lien 20 date, whichever is less." 21 Okay. So that tells me that it's going to be 22 the lesser of the two. The lesser of 472 and 153 would 23 be 153. 24 If the Assessor does nothing and has no 25 evidence, the value placed on the roll should be the 26 full cash value as determined by Section 110, and that 27 is the purchase price. That would be the default 28 setting for value. 6 1 And -- okay. So let's move on to Page 24. 2 Page 24 is for determining value. 3 Now, this is all about determining value. And 4 remember, the Assessor did not determine any value until 5 November of 2014, well after the roll was completed for 6 2014-15. 7 Everyone seems to try to step over the law for 8 determining value, and that is 110(b). Section 110(b) 9 says the purchase price is rebuttably presumed to be the 10 full cash value. Before determining a value other than 11 the purchase price, an assessor must provide evidence 12 the sale did not take place in an open market 13 transaction. If this evidence is not presented, value 14 is already determined by Section 110(b). 15 So if there's no evidence it was not open 16 market, then it's already determined and there's nothing 17 that needs to be done after that. 18 And to bring this to the attention of all 19 concerned, the Assessment Appeals Manual -- this is 20 Page 26 -- it says: The party asserting the full cash 21 value is other than the purchase price paid bears the 22 burden of proving that the sale was not an open market 23 transaction. 24 And again, relating to Appeals Hearings, if the 25 Assessor does not enroll the purchase price, they bear 26 the burden of proof and must provide evidence the sale 27 was not an open market transaction. So these two things 28 say that she needs evidence this was not an open market 7 1 transaction. 2 Now, Page 27, this is a statement by the 3 Humboldt County Assessor on November 21st, 2014, and she 4 stated she does not have this evidence. 5 An Assessor can't just decide they don't like 6 the purchase price and come up with a different value. 7 No one has the authority to step over the law. 8 Section 110(b) is the law for determining the value of 9 real property. 10 And I went back and researched at the archives 11 and I came up with a letter from Assemblyman Quackenbush 12 in 1988. He is the author of AB3382, which is now 13 Section 110(b). 14 The Board of Equalization supported passage of 15 this bill. In this article he describes exactly where 16 I'm at, and his bill was intended to stop this type of 17 behavior by Assessors. 18 Okay. Page 31, please. I got -- I received 19 some responses from your counsel in January of 2016. In 20 these responses, counsel cites, in defense of the 21 Humboldt County Assessor, counsel cites Guild Wineries 22 versus Fresno. This is in 1975. Okay. 23 There's a more current appellate court ruling. 24 This is Maples versus Kern County, Page 32. And this is 25 in 2002. 26 It counters the Guilds by stating the sale by 27 itself is now sufficient to establish value in the 28 absence of evidence the sale was not an open market 8 1 transaction. 2 Maples came after Prop 13 in 1978 and after 3 Section 110(b) in 1989. 4 I think it's reasonable to expect that a ruling 5 in 2002 would be more applicable than one before 1978, 6 which is when acquisition value became the law. 7 Remember, in November of 2014, the Humboldt 8 County Assessor declared she has no evidence this was 9 not an open market transaction. 10 It's interesting that a taxpayer has to go to 11 such great lengths to get answers about valuation of 12 their property. 13 MS. RICHMOND: Time's expired. 14 MS. MA: Okay. Thank you, Mr. Phillis. 15 Perhaps we'll have some more questions -- 16 MR. PHILLIS: Great. 17 MS. MA: -- after that. 18 MS. MA: Ms. Friedman. 19 ---o0o--- 20 DIANE FRIEDMAN 21 ---o0o--- 22 MS. FRIEDMAN: Thank you. Can you hear me 23 okay? 24 MS. MA: Yes. 25 MS. FRIEDMAN: Good afternoon, Chairman Ma and 26 Honorable Members of the Board. My name is Denise 27 Friedman. I'm here to ask for your help with an issue 28 involving Proposition 90. 9 1 In 2011 I sold my home of 32 years in 2 Los Angeles and bought a home in San Diego of equal or 3 lesser value. Using Proposition 90, which is 4 Section 69.5 of the Revenue and Taxation Code, I planned 5 to transfer the base year value from my Los Angeles home 6 to my San Diego home so that my property tax expense 7 would not increase. 8 Although I met the statutory requirements, my 9 Proposition 90 claim was denied because of incorrect 10 guidance that the Board issued to Assessors. This 11 guidance began as a position taken by a lawyer for the 12 Board in an annotation in 1988 and found its way into 13 the Assessors' Handbook. 14 Because of this guidance, my annual property 15 tax bill is now double the amount I expected to pay. As 16 I will explain, the position taken 30 years ago is 17 incorrect; and although it is not binding on anyone, it 18 has been outstanding for so long that the Assessors feel 19 they must follow it. I am here to respectfully request 20 that the Board correct this erroneous position. 21 In 2011, after my husband died and my children 22 had started families of their own, I sold my home in 23 Los Angeles that my late husband and I had owned for 24 32 years and moved back to San Diego, where I grew up. 25 In 2011, the market value of my home in 26 Los Angeles was slightly more than double the assessed 27 value. Buying a new home having the same value would 28 cause my annual property tax expense to more than 10 1 double. 2 This is a consequence of Proposition 13 that 3 makes it difficult for seniors living on fixed income to 4 relocate. That is why Proposition 90 was passed. 5 Prop 90 allows seniors to relocate or downsize 6 without increasing their annual property tax expense. 7 This is a one-time benefit. 8 Specifically, Prop 90 provides that a person 9 over 55 years of age may transfer that base year value 10 of the original property to a replacement dwelling of 11 equal or lesser value that is purchased or newly 12 restruc- -- constructed by that person as his or her 13 principal residence within two years of the sale of the 14 original property. 15 I sold my Los Angeles home and purchased my 16 San Diego house within two months, thus meeting the 17 statutory requirements. However, my claim was denied 18 and my property tax bill more than doubled. 19 Why? The house that I bought in San Diego was 20 the house I grew up in. When my father died in 2009, he 21 left his home to me and my three siblings in equal 22 shares. My siblings and I had been holding onto it 23 because we wanted to keep it in the family. 24 I reached an agreement with my siblings to 25 purchase the remaining 60 -- 75 percent at fair market 26 value. 27 In May of 2011, I sold my home in Los Angeles. 28 In July of 2011, I purchased the 75 percent interest in 11 1 my childhood home and became the 100 percent owner of 2 the home. 3 To be sure, the market value of the San Diego 4 house was less than the value of Los Angeles house, so 5 why was my claim denied? Thirty years ago, a BOE lawyer 6 took the position that the word "purchased" in the 7 statute meant that a person had to purchase 100 percent 8 of the replacement property. Thus, since I inherited 9 25 percent of the San Diego house and only purchased 10 75 percent, my claim was denied. 11 This position is wrong. It conflicts with the 12 statute and is inconsistent with the policy of Prop 90. 13 First, the language of Prop 90 required me to 14 purchase a replacement property of equal or lesser value 15 than my original property. This is what I did. Nothing 16 in the statute says that I had to purchase 100 percent 17 of the replacement dwelling in order to qualify for 18 relief. 19 Second, nothing about the policy behind Prop 90 20 requires a senior to purchase 100 percent of the 21 replacement dwelling. 22 The legislature enacted Prop 90 to provide 23 relief to seniors who wanted to downsize and relocate. 24 The legislature did not intend for seniors to trade up 25 and move into nicer homes at the expense of the county. 26 Indeed, the equal or lesser value requirements 27 prevent seniors from trading up, buying a more expensive 28 home with -- while continuing to pay property taxes 12 1 based on the old house. 2 The policy goals are achieved by requiring the 3 100 percent value of the original house compared to the 4 100 percent value of the replacement property. It's the 5 value. 6 I purchased 75 percent, and the value of 7 100 percent of the property was less than the house that 8 I sold. I engaged in a transaction that is exactly what 9 the legislature intended. I just need one more minute. 10 Under these facts I'm entitled to transfer my base year 11 value under the statute. 12 The Board can easily rectify the situation by 13 repudiating the prior erroneous staff position. I have 14 spent four years trying to get my claim approved, and in 15 doing so I learned that I am not the only person that 16 has been denied Prop 60/90 relief for this reason. 17 The staff at the San Diego County Assessor's 18 Office agrees that the Board's 30-year-old 19 interpretation does not automatically follow from the 20 statute and that the result is unfair to those who are 21 trying to buy out their co-owners. 22 Accordingly, I'm here to ask that you fix this 23 problem by asking your staff to revise the Assessors' 24 Handbook and to acknowledge that the prior 25 interpretation is not correct so that the San Diego 26 Assessor can grant my claim. Thank you. 27 MS. MA: Okay. Mr. Gilman, any response? 28 MR. GILMAN: We'll start with Mr. Phillis. 13 1 My staff and I have been engaged with 2 Mr. Phillis since last year, obviously, and we've 3 continued to stay engaged with him and have diligently 4 tried to address all of his issues to the best of our 5 ability with respect to concerns and problems that he's 6 brought to our attention. 7 I think one of the issues that's been kind of 8 confusing is that, you know, the role of the Advocate. 9 And Mr. Phillis and I talked about that yesterday. I 10 think he has a view that we have a certain amount of 11 authority or power over the Assessor to compel them to 12 take a certain action when a taxpayer determines that 13 maybe a value is not being accepted or that they're not 14 viewing the statute the way maybe the taxpayer is. 15 Based on what I've reviewed and what I've read 16 and some of our tax counsels that I've talked to have 17 informed me, that's not how the statute reads. I don't 18 have -- I don't have the discretionary authority to 19 compel the Assessor to do anything. 20 There are -- there are some sections in the law 21 that allow me to work with the Assessor on training and 22 providing publications and education and making sure 23 that the Assessor understands what the taxpayer's needs 24 are, but there -- there really is nothing in the statute 25 that would allow me to compel the Assessor to take the 26 value that he wants them to enroll. 27 Furthermore, with respect to his issue -- and 28 he did mention this -- that -- I think you did -- but 14 1 you -- he's had the opportunity to have two assessment 2 appeals with the Humboldt County Local Assessment 3 Appeals Hearing Board, and now the matter's in 4 litigation. 5 It's just -- it really boils down to a matter 6 of our legal counsel has advised me and my staff that 7 his understanding of how the statute applies is 8 different than the way we look at it. And so it's 9 just -- it's a matter of "agree to disagree" at this 10 point in terms of how the law applies, so . . . 11 MS. MA: Okay. Members? Mr. Horton. 12 MR. HORTON: Thank you, Madam Chair. 13 I'm sorry, ma'am. What's your name again? 14 MS. MA: Ms. Phillis Friedman. 15 MR. HORTON: Ms. Friedman. 16 MS. MA: Denise Friedman. 17 MR. HORTON: My apologies. 18 Ms. Friedman, thank you for bringing the matter 19 before us. I'm more than happy to meet with the LA 20 Assessor as well as -- in conjunction with Member Harkey 21 to have a conversation with the San Diego Assessor about 22 the issue. 23 It is difficult to micromanage the assessors, 24 who, quite frankly, do an exceptional job in what they 25 do on the norm. I understand the challenge as it 26 relates to the law, though. 27 Proposition 90 at some point expired, and so -- 28 and then they reenacted it -- the legislature reenacted 15 1 it for a period of time, so I think it's sort of 2 incumbent upon us to see to what extent the -- that may 3 be the case. 4 And you're absolutely right. There is nothing 5 in the law or the intent of the law that says you can't 6 acquire less than 100 percent of the actual property. 7 What the law says is like kind for like kind. And the 8 assurance is, if your 75 percent meets that 9 qualification, then theoretically you should have been 10 availed the exemption. So we probably want to take a 11 look at this a little bit closer before -- and be more 12 than happy to assist you with that. 13 The -- Mr. Gilman's office is limited in -- as 14 he's indicated -- is limited in their authority, but the 15 Board does have oversight over the County Assessors and 16 can issue letters -- LTAs -- letters to the Assessors to 17 clarify if there is inappropriate -- or not 18 inappropriate, but -- because rarely is there 19 inappropriate actions -- but if there is a 20 misunderstanding of the application of the law; therein 21 in our inherent authority that might be able to be 22 helpful. 23 MS. FRIEDMAN: Thank you. 24 MR. HORTON: Thank you again for coming before 25 us. 26 MS. MA: Ms. Harkey -- oh, I'm sorry. 27 Mr. Gilman wants to respond or . . . 28 MR. GILMAN: I just -- I just wanted to comment 16 1 because I didn't get a chance to comment on -- on 2 Ms. Friedman's issue. You know, the type of scenario -- 3 this type of scenario may not have been anticipated when 4 the architects of Prop 60 and Prop 90 were looking at 5 this, where a person inherits a piece of property, and I 6 think that's where the problem comes into play. 7 Secondly, a part of what, again, what she 8 mentioned, part of what Prop 60 and Prop 90 were trying 9 to accomplish was to allow those seniors to downsize and 10 move in -- move their base year value with them when 11 they sold their home. But that's -- we've already been 12 looking into Ms. Friedman's issue, and I think what 13 she's recommending is reasonable. 14 It's in the Assessors' Manual that that word 15 "purchased" made its way into from a number of 16 annotations that we have had for a number of years. How 17 it made its way in there I don't know. But Assessors 18 are following it, and that's what's created the problem 19 for Ms. Friedman in San Diego. 20 San Diego has no issue with it in terms of -- 21 I've talked to San Diego County's Assessor's Office. 22 They're just following Board-prescribed guidance. 23 MS. MA: Okay. And I think Mr. Horton said 24 that he would -- 25 MS. HARKEY: I'd just like to say that I bet 26 you the San Diego Assessor actually wrote it. 27 MR. GILMAN: I bet you're right, Ms. Harkey. 28 MS. HARKEY: He was on the Board for 20 years 17 1 and left in the late '90s, would it have been? He 2 was -- 3 MR. GILMAN: Something like that. 4 MS. HARKEY: -- on the Board for 20 years, so 5 Mr. Dronenburg probably understands this very, very 6 well. And with his help and support, maybe we can 7 actually revise the Assessor Handbook for more clarity. 8 But I think I'll pick up the phone and make a call 9 first. 10 MS. FRIEDMAN: Thank you. 11 MS. MA: Yeah. So Mr. Horton, I think, said 12 that he would bring it under his committee, Property Tax 13 Committee, to take a look at this. 14 MS. HARKEY: Oh, is that what -- okay. Okay. 15 You can -- well, I would give -- I would give 16 Mr. Dronenburg a call. 17 MS. MA: Okay. Mr. Horton. 18 MR. HORTON: Assessors are not bound by that 19 handbook. You know, it's just -- well, you know. 20 They -- 21 MR. GILMAN: They kind of have to follow it. 22 MR. HORTON: They can kind of interpret this. 23 I mean, when you say "purchase," purchase is what? 24 She's only purchasing a portion of the -- of the 25 property. She's inheriting another portion. I mean, if 26 she was purchasing one-third of a triplex, you know, we 27 would be faced with the same situation. So inheriting a 28 percentage of a percentage, not new, you know, to this 18 1 process and the interpretation. So this may be what I 2 refer to as a Cool Hand Luke situation. I don't know 3 if -- I may be dating myself, but in the movie Cool Hand 4 Luke he said, "What we have here is a failure to 5 communicate." And so we will provide that with the 6 assistance of Member Harkey. 7 MS. MA: Or perhaps they could clarify it. So 8 thank you for coming and bringing that to our attention. 9 MS. FRIEDMAN: Thank you. 10 MS. MA: Thank you very much. 11 Okay. We're going to have the last two 12 speakers, another issue, a similar related issue. We 13 have Mr. Gamper as well as Mr. Kato. 14 ---o0o--- 15 JOHN GAMPER 16 ---o0o--- 17 MS. GAMPER: Madam Chair, Members, John Gamper, 18 representing the California Farm Bureau Federation. 19 As you know, I'm not a practitioner and this is 20 not my taxpayer. I am an advocate, a public policy 21 wonk, just like you guys are. And I am an advocate for 22 solving problems for my member of the San Joaquin County 23 Farm Bureau, Yolo County Farm Bureau. He has houses in 24 Solano. I missed it by three. He is a resident of 25 Stockton. The ranch is in Yolo County and he's a member 26 of the Solano County Farm Bureau. 27 Be that as it may, this is a Prop 58 issue and 28 transfer of ownership between parents to children. And 19 1 Mr. Kato -- Kato is going to provide his personal 2 situation, but I wanted to try to frame it as how in the 3 heck did we get 30 years down the road from Proposition 4 58 and not have this problem come up before? This is a 5 clean-up bill to a bill that passed 30 years ago, and 6 nobody figured that a president and a secretary of a 7 corporation, a mom and dad, and they're going to 8 transfer the property to son and son or son and daughter 9 upon their death because of a revocable living trust. 10 That revocable living trust owns the C corp. I would 11 have advised him to put it in an S corp, by the way, but 12 they didn't ask me. But LLPs, LLCs, they all don't 13 qualify. And how many agricultural operations are LLPs, 14 LLCs, or S corps? They need legal liability protection 15 from all the laws that have been passed by the 16 legislature that put them in legal jeopardy every single 17 day, whether it's an attractive nuisance because he 18 lives on a creek or because of heat stress or 19 whatever -- or whatever. 20 And the fact that it's a closely held 21 corporation by mom and dad and they're transferring to 22 the son and daughter and the statute says it should be 23 liberally construed, we're -- I'm flabbergasted that 24 this hasn't come up before. 25 And we just need to fix -- and we urge you 26 to -- to do what you did for owners of units of 27 cooperative housing. 28 This was the last amendment to Section 20 1 63.1(c)(8). It was a bill sponsored by the Board of 2 Equalization in an omnibus governance and finance 3 bill -- Chairman Wolfe at the time -- and it went 4 through on consent, unanimous in both houses. They 5 added that statement to the -- to the pocket on Page 14 6 that says: "For the purposes of this section, real 7 property includes an interest in a unit or lot within a 8 cooperative housing corporation as defined in I of 9 Section 61." 10 So the idea that you need a constitutional 11 amendment to fix this as leg. counsel told Assemblyman 12 Ting's staff, I believe it was, is ludicrous. I'm not 13 sure they cracked the constitution and read Proposition 14 58 -- that's Article 13(a)(8) -- where it says real 15 property -- primary residence as defined by the 16 legislature, a million dollars in property as defined by 17 the legislature, they defined it, and then you guys 18 amended it in 2011 in SB947, and now we're asking you, 19 please, let's fix this going forward. Let's fix this 20 going backwards. Let's fix this retroactively by 21 declaring that it's declaratory of existing law so my 22 member does not get screwed. And I'll be perfectly 23 blunt. And I apologize for my language. 24 But at this point I'm going to introduce 25 Mr. Howard Kato. I get a little bit emotional. He's 26 going to probably get a little emotional, too. I'll 27 apologize in advance for him, but he'll lower -- he'll 28 keep his voice down. 21 1 Howard Kato. 2 MS. MA: Thank you. 3 ---o0o--- 4 HOWARD KATO 5 ---o0o--- 6 MR. KATO: Before I begin, I have passed out to 7 all the Board Members four documents, and you should 8 have that in your hands. And the reason I passed it out 9 is because in my presentation I'm going to make 10 reference -- reference to certain texts in the statutes 11 and also in a Board of Equalization letter dated 12 January -- 13 MR. GAMPER: 23rd. 14 MR. KATO: -- January 23rd, 1991. So if you -- 15 I won't begin until you have that documentation. 16 MS. MA: Is it this packet? 17 MR. KATO: Yes. And there -- actually, there 18 should be -- they should be bounded by a clip like this 19 (indicating), a colored clip. 20 MR. RUNNER: Mine's green. 21 MS. RICHMOND: We removed those clips. 22 MR. KATO: Yeah? Okay. 23 My name is Howard Kato. I'm here today before 24 the Board of Equalization to dispute Revenue and 25 Taxation Code Section 63.1(c)(8). 26 My parents were farmers for over 60 years and 27 worked very hard to build their business. The property 28 that they farmed was purchased in the 1950s and placed 22 1 in a family-owned corporation in 1981, years before the 2 passage of Prop 58. 3 After my mother passed away in May of 2014, 4 this farm property is being reassessed just because it 5 is owned by a family-owned corporation whose sole 6 shareholders were my parents. No shares were ever owned 7 by any other family members. 8 This, the financial impact of Section 63.1(c)(8) 9 to our family farm is substantial. It has doubled the 10 property tax on our farm property, and I estimate that 11 in the next 20 years a minimum of an additional hundred 12 thousand dollars in property tax will need to be paid. 13 First, Revenue and Taxation Code Section 14 63.1(c)(8) is unfair and not equitable. This section 15 states, quote: Real property means that real property 16 is defined in Section 104. Real property does not 17 include any interest in a legal entity. For purposes of 18 this section, real property includes an interest in a 19 unit or lot within a cooperative housing corporation as 20 defined in Subdivision (i) of Section 61. 21 MR. GAMPER: I already read it to them. 22 MR. KATO: Okay. A benefit that is provided to 23 a farmer that farms as a sole proprietorship is exempted 24 from reassessment from -- is exempted from reassessment 25 when the farm property is passed from parent to the 26 children, but the same exemption is not afforded to a 27 farmer who farms as a corporation. 28 This Revenue and Taxation Code Section 23 1 63.1(c)(8) is unfair to the family farmer who operates 2 his farm as a corporation, even though both families are 3 in the same type of business. 4 Secondly, Revenue and Taxation Code 63.1 should 5 be liberally construed to carry out the intent of 6 Proposition 58. 7 Section 63.1(c)(8) should not be read in 8 isolation. Rather, this section should be interpreted 9 in conjunction with other sections in Revenue and 10 Taxation Code Section 63.1, including the notes and 11 annotations. 12 Note 1 to the Revenue and Taxation Code 13 Section 63.1 states the following, quote: It is the 14 intent of the legislature that the provisions of 63.1 of 15 the Revenue and Taxation Code shall be liberally 16 construed in order to carry out the intent of both of 17 the following: Number 1, Proposition 58 on the 18 November 4th, 1986 general election ballot, and No. 2, 19 Proposition 193 on the March 26, 1996 primary election 20 ballot. 21 Section 61 point (c)(8) [verbatim] should be 22 liberally construed to carry out the intent of Prop 58. 23 Namely, it must recognize that there's an implied 24 exception in our case because hundred percent of the 25 ownership interest of the legal entity is being passed 26 from parent to child. 27 When hundred percent of the ownership interest 28 in a legal entity is being passed, that means it 24 1 includes the real property. 2 Note that Section 63.1(c)(8) allows for an 3 explicit exception for one legal entity, namely, a 4 cooperative housing corporation, and yet does not allow 5 the property tax exemption to a family farm that is run 6 as a corporation. 7 Thirdly, please refer to the Board of 8 Equalization letter dated January 23rd, 1991. This 9 letter from the Board of Equalization to county 10 assessors states, in part: California trust law 11 recognizes that the administration of a trust is 12 governed by the trust instrument, Union Bank and Trust 13 Company versus McColgan, 1948, 84 Cal App. 2d, 208. 14 This, with a trust instrument, conflicts with 15 statutory power. The instrument controls unless a 16 court, pursuant to Probate Section 16201 relieves the 17 trustee of the restriction in the instrument, end quote. 18 This, the wording in my parents' trust 19 document, should take precedence over the statute 20 language in Section 63.1(c)(8). 21 Fourth, and lastly, my parents formed this 22 family-owned corporation in 1981 and prepared the 23 revocable living trust in 1984 prior to the passage of 24 Prop 58. How my parents or me would have known that 25 Proposition 58 would be passed years later and result in 26 a property taxation issue is unrealistic. Even many 27 Board of Equalization employees, trust attorneys, and 28 other farmers who I've spoken to, do not know about 25 1 Prop 58. 2 In summary, Revenue and Taxation Code 3 Section 63.1(c)(8) is unfair to a family farmer who runs 4 their farming business as a corporation. 5 Operating a business as a corporation is a 6 prudent business practice today because of litigious 7 events and stringent regulations. 8 I respectfully request that our family farm 9 property be provided with the same property tax 10 exemption as a family farm that farms as a sole 11 proprietorship. The intent of my parents, as stated in 12 their trust document, has been always to pass a 13 hundred percent of their assets that they own, including 14 real property, to their children. How can one say that 15 hundred percent of the assets being passed does not 16 include the real property? 17 Section 63.1(c)(8) should be liberally 18 construed to carry out the intent of Prop 58 and should 19 recognize that when hundred percent of the ownership 20 interest in a legal entity is being passed, that implies 21 that the real property is being passed. 22 My parents' trust document clearly stated that 23 the farm property should be passed to my sister and I on 24 a 50/50 basis. 25 I respectfully request that if provisions of 26 63 -- Section 63.1 cannot be liberally construed to 27 carry out the intent of Prop 58, that the Board of 28 Equalization make a finding stating that. 26 1 If there's any questions, I would be happy to 2 respond right now or after this meeting. Thank you. 3 MS. MA: Thank you, Mr. Kato. 4 Mr. Gilman. 5 MR. GILMAN: Thank, Madam Chair. 6 Members, one of my staff has been working with 7 Mr. Kato for about a month now, and we have requested 8 some documentation. I believe he's provided some of it, 9 including a copy of the family trust, to see how the 10 corporation was held in the trust. 11 Regarding his suggestion, what he's 12 recommending would require an amendment to Revenue and 13 Taxation Code 63.1, so really, we're at a stage where 14 we're working with our Legal Department. We have 15 engaged one of our tax attorneys in the Legal 16 Department. Also, our Property Tax Department is aware 17 of it as well. I have not engaged our Legislative 18 Division to discuss it with them. But as we make 19 progress, or whatever direction this ends up going, 20 we'll make sure to keep Mr. Kato informed. 21 The one thing he mentioned that I did pick up 22 on is it sounds like we need to do some education and 23 possibly some outreach to those entities that may be 24 small family farms or other corporations that might have 25 a similar situation in terms of if you have a 26 corporation like this and you're going to be taking 27 people out of it, there could be a property tax 28 consequence down the road. 27 1 MS. MA: Well, I think, similar to the last 2 case, you know, what is the intent of the legislation. 3 Right? 4 MR. GILMAN: Right. 5 MS. MA: If it's seniors, it's that seniors 6 shouldn't be displaced and they shouldn't, you know, 7 have to make that choice. And I think in terms of, you 8 know, parent-to-child transfers, I mean, the intent was 9 clearly for parents to be able to leave their properties 10 to their children, so, again, that they wouldn't be 11 forced to have to sell. 12 So, you know, we've been going around also with 13 Mr. Gamper, Mr. Kato, trying to figure out what the fix 14 is going to be. And thank you for putting more 15 resources into this, and we look forward to hearing what 16 your conclusions are. 17 But Mr. Horton has some comments. 18 MR. HORTON: Thank you, Madam Chair. 19 Mr. Gamper, I think it's important that we do 20 engage the Legislative Unit and -- and seek to clarify 21 whether or not the -- the existing language, as you say, 22 if it -- if it says "as defined by the legislature," 23 that gives the legislature enormous amount of latitude, 24 even though it may be a constitutional amendment, 25 because it -- I'm not saying it is -- I'm saying when it 26 says "as defined by the legislature," all of a sudden it 27 becomes just a regular change that can be made without 28 the voting threshold that's necessary in order to 28 1 accomplish, you know, a constitutional change. 2 So the Leg. Unit probably needs to engage to 3 make sure that that is the case or is not the case, 4 because if it is, then declaratory legislation is a 5 really simple thing, given the wisdom of the 6 legislature, as I experienced, I believe they would be 7 responsive to that. 8 Regulatorily, we can -- you know, I think it's 9 more of a legislative fix than a reg- -- change of the 10 regulation, but we could make a change and say that it 11 is -- we believe -- is declaratory of existing law and 12 send it to the Office of Administrative Law and see if 13 they kick it back. 14 So what I would recommend, in order to expedite 15 this, is that we sort of travel in parallel tracks, that 16 we do both, that we engage the legislature and see where 17 their -- where their thoughts are relative to this, and 18 at the same time -- I believe Member Harkey's committee, 19 Madam Chair, can kind of go through the other process of 20 trying to clarify that. 21 MR. GAMPER: Mr. Horton, may I just say, you 22 did it before, you can do it again. When you amended 23 Section 63.1(c)(8) in 2011, I don't think there was a 24 letter from leg. counsel saying you need a 25 constitutional amendment. The bill passed 78 to zip and 26 40 to zip, so . . . 27 MR. HORTON: Yeah. The -- the good and the 28 bad, legislation can pass. Until it's challenged, you 29 1 know, it remains law, you know. 2 MR. GAMPER: As defined by the legislature. 3 MR. KATO: Ms. Ma -- 4 MS. MA: Yes. 5 MR. KATO: -- I'd like to make a comment to 6 Mr. Gilman's comment. 7 In the interest of time, I did not mention 8 this, but in the Board of Equalization question-and- 9 answer document, there's a Question No. 2, and it reads 10 as follows -- the question reads: "Which transfers of 11 real property are excluded from reassessment by 12 Proposition 58 and 193?" 13 The answer, according to the Board of 14 Equalization, is: "Transfers of primary residence" -- 15 and in quote -- or in parentheses it says "no value 16 limit" -- "Transfers of the first $1 million of real 17 property other than primary residences, the $1 million 18 exclusion applies separately to each eligible 19 transferor." 20 And in -- in yellow highlight, and which you 21 have a copy of, it says this: "Transfers may be the 22 result of a sale, gift, or inheritance. A transfer via 23 a trust" -- which my parents had -- "also qualifies for 24 this exclusion. For property tax purposes, we look 25 through the trust to the present beneficial owner. When 26 the present beneficial ownership passes from a parent to 27 child, this is a change in ownership that is eligible 28 for the parent-to-child exclusion." 30 1 So nowhere in this question and answer does it 2 mention about Revenue and Taxation Code 63.1(c)(8). And 3 so the taxpayer, if he has a trust document and he has 4 property that's in a corporation, by just reading this 5 alone, he'll think, okay, I'm okay. I can qualify for a 6 parent-to-child exclusion. 7 But -- but nowhere is it mentioned that there's 8 a catch here. You'd -- 9 MR. GAMPER: Right. 10 MR. KATO: -- better not own property in a 11 corporate -- 12 MR. GAMPER: In a legal entity. 13 MR. KATO: -- in a legal entity. And that's -- 14 and the only way I found out about Prop 58 is when I got 15 a notice of reassessment from the Yolo County Assessor's 16 Office, and I didn't understand why it was being 17 reassessed, and I wondered. 18 And then I looked at the date of -- on that. 19 It says the reassessment is effective as of a certain 20 date, and the date was the date of the passing of my 21 mother. That's how I found out about it. And I had no 22 idea of Prop 58 until I received this letter of 23 reassessment. 24 So the general public needs to know that if 25 they are going to form a corporation or a legal entity, 26 they'd better be aware that when they want to pass on 27 that -- that property to their kids that they're going 28 to face the consequence of possibly facing a property 31 1 tax reassessment. Okay. 2 MS. MA: Okay. So I -- I thank you, Mr. Kato 3 and Mr. Gamper. You know, the Board of Equalization was 4 formed in 1879, and times change, and, you know, 5 entities are created and technology and all this, and so 6 that's what makes our job interesting is trying to 7 update the code for these particular problems. So I 8 thank you for coming, bringing that to our attention, 9 letting the public know that this could be an issue for 10 other folks; and then also Mr. Gilman's attention by his 11 staff to seeing what we can do to solve this. 12 But I think you can hear from the Board that we 13 are sympathetic and, you know, look back to the 14 intention of the legislature or the Board, you know, 15 so -- so we hope that there's going to be a favorable 16 outcome for you. 17 MR. GAMPER: Thank you very much. 18 MS. MA: Thank you. 19 MR. KATO: Thank you. 20 MR. GILMAN: I have one written submission for 21 the Property Tax Committee. 22 MS. MA: Okay. 23 MR. GILMAN: May I read it into the record real 24 quick? 25 MS. MA: Sure. 26 MR. GILMAN: Mr. Larry Kaplan has submitted a 27 written submission regarding his property tax bill. 28 Mr. Kaplan was informed by the Assessor of Santa Cruz 32 1 County of a reduction in value that was understood would 2 be effect -- would be in effect for his first 3 installment payment, which was due October 10th -- 4 pardon me -- December 10th. 5 Mr. Kaplan believes he was not adequately 6 informed by the County Assessor or Tax Collector that 7 his tax bill would be due in full, even though there was 8 a pending value change. 9 Mr. Kaplan suggested that the Assessor, when 10 notifying a taxpayer of a reduction in value, also 11 provides specific notice that the amount of the current 12 bill must be paid in full and the adjustment to the bill 13 will be done later. 14 In other words, what happened was is that 15 there -- there was an adjustment -- it was an adjustment 16 down in value, and he discussed that with the Assessor 17 over the phone, and so he took that for granted and sent 18 a check in plus 20 percent, and then they -- it hadn't 19 been put on the roll or the adjustment hadn't been made 20 and so the check was kicked back, so there was penalties 21 involved. 22 And he went ahead and paid it, but he thinks 23 that the Assessor can do a better job notifying property 24 owners that you need to pay the full amount until the 25 adjustment's made, so . . . 26 MS. MA: Okay. 27 MR. GILMAN: That concludes our hearing. 28 MS. MA: Well, I see Mr. Yeung is here, in 33 1 charge of our property taxes, so perhaps he can make 2 sure that the policies are uniform with all the 3 Assessors across our 58 counties. 4 So we thank the taxpayer for writing in, and we 5 will look into this further. 6 MR. GILMAN: Thank you, Madam Chair and 7 Members. 8 This concludes our Business Tax and Property 9 Tax Taxpayers' Bill of Rights for Sacramento. 10 Thank you. 11 MS. MA: Thank you, Mr. Gilman. 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 34 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, CAROLE W. BROWNE, Hearing Reporter for the 8 California State Board of Equalization, certify that on 9 May 24, 2016, I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 34 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: June 1, 2016 17 18 19 _________________________________ 20 CAROLE W. BROWNE, CSR #7351 21 Hearing Reporter 22 23 24 25 26 27 28 35