Background

As a result of the implementation of Proposition 13 in 1978, most locally-assessed real property is subject to reassessment only when there has been a change in ownership or new construction as defined by various constitutional, statutory and regulatory provisions. Questions J1, J2, and J3 on FTB Form 100, along with Form BOE-100-B, are designed to identify transfers of voting stock and other interests in legal entities that trigger a change in ownership resulting in property tax reassessment. When a change in control or ownership occurs and goes unnoticed, it will result in an escaped assessment if there was an underassessment of property tax. The questions on FTB Form 100 and Form BOE-100-B are designed to ensure that real property is reassessed at its fair market value on the date of change in ownership.

Information about Transfers of Interests in Legal Entities

A transfer of an interest in real property is not the same as the transfer of an interest in a legal entity. Revenue and Taxation Code section 64, subdivision (a) provides the general rule that transfers of interests in legal entities do not in and of themselves constitute a change in ownership of the real property owned by those legal entities.

However, there are two exceptions to that general rule. The first exception is found in subdivision (c) of section 64, which provides that when any person or entity obtains control through direct or indirect ownership or control of more than 50 percent of the voting stock of a corporation or of a majority ownership interest in any other type of legal entity, a change of ownership of any and all the real property owned by the entity occurs. The first two questions in section J of FTB Form 100 address this exception.

The second exception to the general rule is found in section 64, subdivision (d), which provides that when voting stock or other ownership interests representing, over time, cumulatively more than 50 percent of the total interests in a legal entity are transferred by any of the original co-owners in one or more transactions, the real property, which was previously excluded from change in ownership under Revenue and Taxation Code section 62, subdivision (a)(2) shall be reappraised.

Under section 62, subdivision (a)(2), there is no change in ownership when a transfer of real property to a legal entity results solely in a change in the method of holding title to the real property. In other words, there is no change in ownership when the proportional ownership interests of the transferors and transferees, whether directly or indirectly through stock, partnership interests, or otherwise, in each and every piece of real property transferred, remain exactly the same both before and after the transfer. However, when a transfer of real property to a legal entity is excluded from change in ownership under section 62, subdivision (a)(2), the then owners of the legal entity interests immediately after the transfer become “original co-owners.” Thereafter, when the original co-owners cumulatively transfer more than 50 percent of their ownership interest in one or more transactions, the real property previously excluded is reappraised.

FTB Form 100

• Summary - A corporation should answer “yes” to Question J3 when there has been a transfer of a cumulative total of more than 50 percent of the voting stock in the corporation since March 1, 1975. If there has also been a change in control of more than 50 percent of the voting stock or ownership interests of the corporation or other legal entity, respectively, the corporation should indicate this by answering “yes” to Questions J1 and J2 on FTB Form 100.



• Question J1 Explanation - Question J1 on FTB Form 100 asks whether there was any change in control or majority ownership in the corporation or any of its subsidiaries. This question is designed to discover whether, during the past tax year, there has been a change in control (or an obtaining of control) by any individual or legal entity of the corporation or any of its subsidiaries. If there has been a change in control (or obtaining of control) in the corporation as defined above and the corporation owns or leases real property in California, then Question J1 should be answered “yes.”



• Question J2 Explanation - Question J2 on FTB Form 100 is designed to discover whether, during the past tax year, the answering corporation or any of its subsidiaries obtained control through direct or indirect ownership or control of more than 50 percent of the voting stock of another corporation or a majority ownership interest in any other type of legal entity. If the corporation has acquired control or majority ownership of any other corporation or legal entity that owned or leased real property in California, a change in ownership of all the real property owned by the acquired legal entity occurs and the answer to Question J2 is “yes.”



• Question J3 Explanation - Question J3 is designed to identify potential changes in ownership under section 64, subdivision (d), which provides that if real property was excluded from reappraisal on its transfer to the corporation under section 62, subdivision (a)(2), a change in ownership of the excluded property will result when “original co-owners” (defined below) transfer cumulatively more than 50 percent of their voting stock. This question should be answered “yes” if more than 50 percent of the voting stock in the corporation or any of its subsidiaries has been transferred, whether in one or more transactions, since March 1, 1975. However, a “yes” answer to this question does not mean that a reappraisal is required; more information is needed. This information is gathered in the responses to Question 3 and Schedule C of the Form BOE-100-B.

BOE Form 100-B
Question 3 on Form BOE-100-B apply only when there is a transfer of a cumulative total of more than 50 percent of the voting stock by the original co-owners.

• Question 3 Explanation - Question 3 on Form BOE-100-B is designed to identify any property that was previously excluded from reassessment under subdivision (a)(2) of section 62. It should be answered “yes” if any of the real property of the corporation or any of its subsidiaries was not reappraised at the fair market value at the time of the transfer or contribution of such real property to the corporation or subsidiary. The records of the corporation must be reviewed to determine:

1. Whether any real property was acquired by, or transferred or contributed to the corporation or any of its subsidiaries, including any subsequent transactions among the affiliated entities; and
2. Whether the acquired, transferred or contributed property was reappraised at fair market value at the time of the acquisition, transfer or contribution, to or among the corporation and any of its subsidiaries.

As indicated above, pursuant to section 62, subdivision (a)(2), there is no change in ownership when a transfer of real property results solely in a change in the method of holding title to the real property. In other words, there is no change in ownership when the proportional ownership interests of the transferors and transferees, whether directly or indirectly through stock, partnership interests, or otherwise, in each and every piece of real property transferred, remain exactly the same both before and after the transfer.

In order to determine whether or not a corporation’s real property has previously been excluded from reassessment under section 62, subdivision (a)(2), the corporation will need to determine whether the real property owned by the corporation, partnership, or other legal entity was reassessed upon its initial purchase by or transfer to the corporation, partnership, or other legal entity. If any of the corporation’s real property was reassessed upon acquisition, then such property has not been excluded from reappraisal unless a subsequent transfer was excluded from change in ownership under section 62, subdivision (a)(2). If, on the other hand, some of the corporation’s real property was previously excluded from change in ownership under section 62, subdivision (a)(2), either during corporate formation or later, then the answer to Question 3 is “yes” and the then-owners of the corporation may be “original co-owners.” However, if neither the corporation nor any its subsidiaries own any real property, which was previously excluded from change in ownership under section 62, subdivision (a)(2), then the answer to Question 3 is “no,” and no change in ownership will occur even if more than 50 percent of the voting stock have been transferred since March 1, 1975.

To determine whether or not original co-owners have transferred more than 50 percent of their voting stock since the excluded transfers identified in Question 3, the corporation must first determine the total number of the corporation’s outstanding voting stock issued on the date of the section 62, subdivision (a)(2) excluded transfers and the owners of such voting stock. These shareholders are considered to be original co-owners as discussed in the response to Question 1 above. If the original co-owners have transferred more than 50 percent of their voting stock since the section 62, subdivision (a)(2) excluded transfer, then the answer to Question 3 is “yes.” The shares do not need to be transferred in a single transaction, or even in a single tax or assessment year. As each original co-owner voting stock is transferred, it is cumulatively “counted” until the “more than 50 percent” threshold is reached.