What happens when a California assessor never enrolls reported construction in progress, and how long should the reserve stay?

The lien date layer and what reporting it means

The setting is a developer's wholly owned LLC that builds a mid-size office and retail building on land it has owned for years in a California county. Construction runs about two years; the building is completed and first occupied in the spring of the completion year; construction cost is about $60 million. On each January 1 during construction, the partly built building is construction in progress, which "shall be appraised at its full value on that date and each lien date thereafter" until completion (section 71; Cal. Code Regs., tit. 18, section 463(d)). On the date of completion, "the date the property or portion thereof is available for use" (Cal. Code Regs., tit. 18, section 463(e)), the new construction is reappraised at full value, "and that value shall be the base year value" (section 71), and the supplemental assessment bills the difference for the rest of the fiscal year (section 75 et seq.). This article is about the first layer when it goes missing.

The lien date value of construction in progress is not a base year value. Section 71 provides that "New construction in progress shall not acquire a base year value on each lien date," a sentence the Legislature added in 2017 to restore the Board of Equalization's longstanding position after a court had read the lien date value as a base year value (Letter To Assessors No. 2017/042, September 27, 2017). Each lien date value is a one-year assessment of the work as it stood that morning, enrolled on the roll for that year and replaced the next. The Board of Equalization's assessment practices survey guidance instructs assessors to enroll construction in progress at its fair market value for each lien date, judged by the degree of completion, and names a failure to do so as a cause of escaped assessments (Board of Equalization, New Construction Recommendation Examples).

Reporting is the owner's half of the exchange. A person owning taxable personal property with an aggregate cost of $100,000 or more files a signed property statement each year, between the lien date and April 1, with the section 463 penalty attaching to a statement not filed by May 7 (section 441(a), (b)). The statement "shall show all taxable property owned, claimed, possessed, controlled, or managed" by the filer (section 442). The form the Board of Equalization prescribes carries a line for this situation: Part II, line 5 of Form BOE-571-L asks for "unallocated costs of construction in progress for improvements to land, machinery, equipment, furniture, buildings or other improvements, or leasehold improvements," with an itemized listing attached (Form BOE-571-L, Rev. 32 (07-25)). A filing by mail is timely by its postmark (section 441(c)), and the assessor may at any time require records regarding the property, including construction and development costs (section 441(d)).

In the invented pattern, the LLC reports $25 million of construction in progress on the January 1 of the second construction year and $55 million on the January 1 of the completion year, each on line 5 with a schedule. The assessor enrolls nothing for either lien date. At completion in April, the assessor sets the base year value and issues the two supplemental assessments. The two lien date values, which should have produced two regular roll assessments, are the open items.

Unenrolled construction in progress is escaped property

Section 531 is written for this case: "If any property belonging on the local roll has escaped assessment, the assessor shall assess the property on discovery at its value on the lien date for the year for which it escaped assessment," and the tax is computed at the rate in effect in the escape year. The escape assessment is taxed "at the same rate applicable to, property regularly assessed on the roll on which it is entered," and for a prior year, at the prior year's rate (section 534(a)). The value is the lien date value section 71 called for, not cost by definition and not the completed building's base year value. Reported cost is the starting evidence, and the Board of Equalization's guidance ties the lien date value to the percentage of completion, so an escape assessment that takes reported cost as value is open to the same valuation argument a timely assessment would have been.

What the escape does not carry, where the owner reported, is interest or a penalty. The interest statute, section 506, applies to "any assessment made pursuant to this article," and that article is Article 3 (sections 501 to 506): the assessor's estimate where requested information is not furnished (section 501), the 75 percent penalty for a fraudulent act or collusion (section 503), and the 25 percent penalty where a person "willfully conceals, fails to disclose, removes, transfers or misrepresents tangible personal property" to evade taxation (sections 502 and 504). Section 531 extends the section 463 penalty (10 percent of the assessed value of the unreported property) and section 506 interest to escapes that result from a failure to file the section 441 statement. Section 531.4 adds section 506 interest, and the section 504 penalty if the misreporting was willful or fraudulent, where a filer "fails to report any taxable tangible property accurately" and the failure causes the assessor not to assess it or to assess it at a lower value; section 531.3 does the same for cost omitted from a required description. Each of those provisions turns on something the taxpayer did or failed to do; none reaches a statement filed on time that described the construction in progress and gave its cost, after which the assessor did not act. The installment statute draws the same line: interest at three-fourths of 1 percent per month on an escape paid in installments applies only "if the escape or underassessment was due, in whole or in part, to the error, omission, or other fault of the assessee" (section 4837.5(c)). Where the omission is the assessor's, the escape is tax at the escape year's rate on the lien date value, and nothing more.

The statement itself draws the line. A line 5 entry with the itemized listing attached is a report; a statement that put the construction in progress nowhere, or carried a figure well below the cost on the owner's books, is a section 531.4 case. The owner's file for each lien date therefore holds the statement as filed, the schedule, the proof of filing date, and the cost ledger behind the figure.

The limitation periods

The general rule is four years. An escape assessment "shall be made within four years after July 1 of the assessment year in which the property escaped taxation or was underassessed" (section 532(a)). An assessment year is "the period beginning with a lien date and ending immediately prior to the succeeding lien date" (section 118), so for construction in progress on a January 1 lien date, the period runs from July 1 of that year and closes on July 1 four years later. For the $25 million reported on the January 1 of the second construction year, the assessor's window closes on July 1 of the fourth year after that; for the $55 million reported on the January 1 of the completion year, one year later. Each lien date is its own escape with its own closing date.

When an assessment is "made" matters at the edge. The assessment is not effective for any purpose until the assessee is notified personally or by mail at the address in the assessor's records, and "For purposes of Section 532, the assessment shall be deemed made on the date on which it is entered on the roll" if the assessee is notified "within 60 days after the statute of limitations or the placing of the escape assessment on the assessment roll"; otherwise "the assessment shall be deemed made only on the date the assessee is so notified" (section 534(b)). An owner that receives nothing by late August of the closing year has a settled answer for that lien date; an entry on the roll in June followed by a notice in July is a timely assessment.

The longer periods belong to other facts. The period is eight years where the section 504 penalty is added, and eight years for an unrecorded change in ownership where the change in ownership statement or preliminary change of ownership report was not filed (section 532(b)(1), (2)). Where property escaped following a change in ownership or change in control and either the section 503 penalty applies or the legal entity statement required by section 480.1 or 480.2 was not filed, an escape assessment is made for each year of escape without a fixed period (section 532(b)(3)); that rule concerns ownership changes and is outside this article. For reported construction in progress with no concealment, the four-year period is the only one.

Two things extend the four years. First, the taxpayer and the assessor may agree in writing, before the period expires, "to extend the time for making an assessment, correction, or claim for refund," with further written extensions permitted before each agreed period runs out (section 532.1(a)). A waiver signed in a personal property audit extends the escape period for everything on that statement, construction in progress included, and the refund period with it. Second, a Notice of Proposed Escape Assessment mailed when the period would otherwise expire in less than 90 days extends the period to the ninetieth day after mailing (section 532.1(b)). That notice is itself required: no escape assessment may be enrolled "before 10 days after the assessor has mailed or otherwise delivered" a notice stating the proposed amount for each year and the assessor's telephone number (section 531.8).

The other two layers have clocks of their own. A supplemental assessment for completed new construction is valid only if placed on the supplemental roll on or before "the fourth July 1 following the July 1 of the assessment year" in which the completion occurred, with the eighth July 1 where the section 504 penalty is added or an unrecorded change in ownership went unreported, no period where the section 503 penalty applies, and written extensions on the same terms (section 75.11(d), (e)). The base year value follows section 51.5. An error or omission in determining a base year value that does not involve the assessor's judgment as to value, "including the failure to establish that base year value," shall be corrected in any assessment year in which it is discovered (section 51.5(a)); an error involving judgment as to value may be corrected only within four years after July 1 of the assessment year in which the base year value was first established (section 51.5(b)). A correction that raises the base year value produces escape assessments under the ordinary rules (section 51.5(d)), so a late-discovered failure to set a base year value reaches the open years only, while the corrected value carries forward from there. An owner that disputes the judgment value enrolled for the completed building has, separately, the appeal window for base year values, the regular filing period for the year the value is placed on the roll or any of the three succeeding years, with relief prospective from the year of the appeal (sections 80(a)(3), (a)(5) and 82).

Sizing and releasing the reserve

The reserve for unenrolled construction in progress is a liability measured by what the assessor can still do, and the statutes answer that lien date by lien date. The measure is the tax: the reported lien date value, at the combined rate for that tax rate area in that fiscal year, with no interest and no penalty where the statement was timely and accurate. Using the invented figures and a combined rate of 1.1 percent, the January 1 of the second construction year carries escape tax of $275,000 ($25 million at 1.1 percent) and the January 1 of the completion year $605,000 ($55 million at 1.1 percent), a gross of $880,000. The figure does not grow with time, because section 506 interest does not apply to it. It is also a ceiling: a supplemental assessment is the new base year value less the value on the roll (section 75.11(a), (b)), so where the supplemental bills netted no construction in progress, they already taxed the completed building from completion onward, and the reserve covers only the months before completion; where they netted the reported figures, the full amounts stand. The invented pattern is the first case: the assessor enrolled nothing, so both supplementals were measured against rolls carrying no construction in progress. The supplemental on the roll being prepared, at a factor of 1.00, already taxed the whole building for the fiscal year the completion-year lien date serves, and the supplemental on the current roll taxed it from the presumed May 1 completion through June 30 at a factor of 0.17 (section 75.41(b), (c)(4)). The reserve is therefore $228,250 for the first lien date ($275,000 less the 0.17 of it already billed) and nothing for the second.

Two refinements are defensible and belong in the file. First, the Board of Equalization's guidance values construction in progress by its degree of completion, and cost incurred is evidence of value, not the definition of it; an owner with a basis to say the lien date value was below reported cost may reserve at the lower figure with a memorandum explaining why, knowing the escape notice will start from the reported number. Second, the rate is the actual combined rate for the tax rate area in the escape year, available from the parcel's prior bills, not a rounded planning rate; on $80 million of reported value, each tenth of a percentage point of rate is $80,000.

Release follows the calendar. The first reserve is released after July 1 of the fourth year following the second construction year, once 60 days have passed without a notice (sections 532(a), 534(b)); the second, where one is held, a year later. A written waiver, a Notice of Proposed Escape Assessment, or an audit under section 469 in progress when a closing date approaches holds the reserve open for that lien date until the extended period runs (sections 531.8, 532.1). The release memorandum for each lien date records the statement as filed, the absence of any notice, the closing date under section 532(a), and the 60-day tail of section 534(b). That document is what the owner's auditors ask for, and what a buyer's diligence asks for if the building is sold.

A sale changes who pays. Where real property that escaped assessment is transferred to a bona fide purchaser for value before the escape assessment appears on the secured roll, the escape is entered on the unsecured roll against the person who would have been the assessee, creates no lien on the property, and is taxed at the secured rate for the escape year (section 531.2(a)). The exposure follows the seller for the open years, so the reserve stays with the selling LLC through its own closing dates, and a purchase agreement that allocates pre-closing property tax names the open lien dates and their amounts.

When the notice arrives

An escape assessment reaches the owner in two steps: the Notice of Proposed Escape Assessment at least 10 days before enrollment (section 531.8), then the notice of the enrolled assessment, which states the date it was mailed, the right to an informal review and to appeal, and the requirements, procedures and deadlines for an application under section 1605 (section 534(c)). The appeal window is 60 days. In most counties the application for reduction is filed within 60 days after the mailing date printed on the notice or the postmark, whichever is later, and an assessee that did not receive the notice at least 15 days before that deadline may file within 60 days of the mailing date on the tax bill with a sworn statement to that effect (section 1605(b)). In counties whose board of supervisors has adopted the alternative, and in Los Angeles County, the 60 days runs from the mailing date printed on the tax bill or its postmark (section 1605(c); section 534(c)(3)). The window is counted from mailing, not receipt, and it passes whether or not the owner has finished reconciling the proposed figures to its own schedule.

The appeal of an escape is a value appeal for the lien date in question, and the owner's position is the one section 71 gave it: the full value of the work as it stood that January 1, measured by degree of completion. An appeal of a timely enrolled construction in progress value is filed in the regular filing period for that year (section 82), so an owner that let the regular period pass on an enrolled value cannot revive it through the escape procedure; it is the unenrolled lien date that the escape appeal reopens. Where the escape is the product of a section 469 audit, the original assessment of all of the owner's property at that business location for that year is also open to review, unless already equalized, on an application filed within 60 days of notice (section 1605(e)); the assessor gives the audit findings in writing (section 469); and refunds from incorrect assessments found in the same audit offset the proposed escape liabilities for the years the audit covers, where the refund claim is not already barred (section 533).

Payment has its own relief. Where the additional tax from an escape assessment for prior fiscal years exceeds $500, the owner may elect to pay it in installments over four years, by a written request filed with the tax collector by the later of the delinquency date of the second installment on the secured roll or the last day of the month after the bill is mailed, with at least 20 percent paid by that date and current-year taxes kept current (section 4837.5). No additional penalties accrue while the plan is kept; interest at three-fourths of 1 percent per month applies only where the escape was due, in whole or in part, to the assessee's error, omission or other fault; a missed installment accelerates the balance. For an escape that was the assessor's omission, the plan is four interest-free annual payments after the first 20 percent.

Practice notes

The sound sequence for an owner that reported construction in progress and sees nothing enrolled begins with the file: for each lien date, the property statement as filed, the line 5 schedule, the proof of filing date, and the cost ledger behind the figure. The reserve for each lien date is the reported value at the actual combined rate for that fiscal year, less any of that value the supplemental bills already taxed, with no interest or penalty component, and a memorandum stating why (sections 506, 531, 531.4, 4837.5), with a separate line for any basis to value the work below cost. The closing date is July 1 of the fourth year after the lien date year, plus the 60-day notice tail, and the reserve is released on a dated memorandum when that date passes without a notice, a waiver or an audit in progress. A waiver offered in a personal property audit is read for what it extends before it is signed, because it reaches every item on the statement and the refund period with it. When a Notice of Proposed Escape Assessment arrives, the owner reconciles the proposed value for each year to the reported figure and the degree of completion, calendars the 60-day application window from the mailing date on the notice (or the tax bill, in Los Angeles County and counties that have adopted section 1605(c)), and files the installment request if the bill exceeds $500 and cash timing matters. On a sale, the open lien dates and their reserve amounts are named in the purchase agreement, because an escape enrolled after closing is assessed to the seller on the unsecured roll. G&G State Tax Group provides construction in progress and escape assessment analysis, reserve documentation for owners and their auditors, and representation in escape assessment appeals, alongside its state and local tax practice.