ARTICLE:
NO LIMITATIONS AND NO ESCAPE: THE LONG
TAIL OF REAL PROPERTY TAX LIABILITY
RESULTING FROM ENTITY INTEREST
TRANSFERS IN CALIFORNIA
By Karl E. Geier*
The general limitations on reassessment of real property without a “change of
ownership” under the 1978 voter initiative known as “Proposition 13”1deserve
renewed attention after the failed effort to enact Proposition 15 in 2020. Under
the California Constitution, as amended by Proposition 13, for ad valorem tax
purposes, real property ordinarily can only be assessed annual taxes equal to 1
percent of its “base value,” which is its full cash value as of the most recent
“change of ownership” (or its 1975 value, in the absence of a change of owner-
ship since 1978), plus an increase for inflation that is capped at 2 percent of
that base value each year thereafter.2The failed Proposition 15 would have
excluded most commercial properties from the operation of Proposition 13,
meaning they could be assessed based on current fair market value with or
without a change of ownership and without regard to the 2 percent annual
limit.
But even without the failed effort to exclude most commercial property
entirely from its restrictions, Proposition 13 and related implementing legisla-
tion already defined “change of ownership” to include various transfers of
interests in a business entity even when that entity continues to hold the same
property without a change of title to the property.3Since these transfers occur
without necessarily triggering any change in the real property records, the
Legislature has enacted detailed reporting requirements to assure that entity
interest transfers are brought to the attention of the local assessor and the State
Board of Equalization in order to allow for a determination of whether there
has been a “change of ownership” of a partial interest in the underlying real
property,4or a “change in control” that results in an entire reassessment of the
underlying real property.5These provisions apply whether the entity involved is
a corporation, a partnership, a limited liability company, or another legal entity,
as defined.6
*Karl E. Geier is shareholder emeritus with the firm of Miller Starr Regalia and Editor-in-
Chief of the firm’s 12-volume treatise, Miller & Starr, California Real Estate 4th, published by
Thomson Reuters.
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The recent decision in Prang v. Los Angeles County Assessment Appeals Board
No. 2,7underscores the importance of strict compliance with the filing and
reporting requirements of Rev. & Tax. Code, §§ 480.1 and 480.2, and the
potential for escape assessment liability to continue in perpetuity if the statu-
tory reporting requirements are not strictly satisfied. As summarized by the
concurrence in Prang:
“[T]his case ultimately stands for one proposition and one proposition only: if you
notify your local assessor’s office of a change in ownership or control but do not
notify the State Board of Equalization, you will be on the hook for unlimited ret-
roactive property tax assessments even if the assessor’s office neglects to undertake
a timely reassessment.”8
The Prang decision adopts a “strict compliance” standard in lieu of a
“substantial compliance” standard for when an ownership entity has satisfied
the statutory reporting requirement. At the same time, Prang enunciates a rule
that no statute of limitations or reachback limitation, including the equitable
doctrine of laches, can ever limit the right and power of the local assessor and
the State Board of Equalization to look back at unreported past entity transfers,
reassess the value of the underlying real property, and impose escape assess-
ments for the years of reduced taxes that should have been increased. In other
words, there is no remedy for the failure to make the correct filing at the time of
the transfer, other than to invite a reassessment and pay the back taxes with
penalties and interest to the extent they can be imposed. The case does not
reach the question of whether the lien for escape assessments could attain prior-
ity over intervening encumbrances and transfers, but as this article discusses,
such lien priority may exist, and the position taken by the local assessor’s and
tax collector’s office may not be relied upon if not consistent with the statutory
requirements—a matter that a third party transferee or mortgagee may be in no
position to determine. This in turn poses due diligence issues for subsequent
encumbrancers and transferees as well as title insurers and others involved in
real estate transactions concerning the affected property.
This article begins with an outline of the statutory reporting and filing
requirements and the related statutory provisions for reassessment and imposi-
tion of ad valorem tax liens and escape assessments for previously unreported
transfers of entity interests. It then discusses th e Prang decision and the
unlimited exposure of parties and properties if such reporting and filing require-
ments were not adhered to. Next, it provides an analysis of the potential lien
priority issues arising from the statutory structure addressed in Prang, which
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