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Williamson Act cancellation fee - deduct or capitalize

Technical topics regarding tax preparation.
#1
Wiles  
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The California Government Code allows a landowner that is currently under the Williamson Act to cancel their contract by paying a cancellation fee of 12.5% of the land value.

Does anybody know if this must be capitalized into the land basis or can it be immediately deductible.

The math behind the 12.5% fee represents 10 years worth of property taxes for the value of the property that was in excess of the Williamson Act value. In other words, 10 years of back property taxes.
 

#2
Nilodop  
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Immediately deductible as what? It's a cancellation fee, not a tax. Are you looking for 162 treatment? Was the land being used in a business or an income producing activity? Given that the owner would not pay such a fee unless it was to increase or preserve the value of the land in whatever use he intends to make of it, or even just to allow that use, it sounds to me like a capital expenditure. Is there a plan to develop the property, analogous to a zoning change like the facts in RR 2002-9?

Also, could it be argued that he had a right to give a 10-year notice of non-renewal, so all the cancellation did was allow him to cancel now instead of waiting 10 years, so he should be able to deduct it over 10 years.

Cancellation is an option under limited circumstances and conditions set forth in Government Code Sec. 51280. To grant tentative cancellation, the Board of Supervisors must make specific findings that are supported by substantial evidence to ensure the cancellation is consistent with the purposes of the Williamson Act. The owner's desire to use the property for another use or a more valuable use (other than agricultural use) is not sufficient justification for cancellation. In addition, the unprofitable nature of an existing agricultural use shall not, by itself, be a Guideline for General Administration, Monitoring and Enforcement of Williamson Act Contracts and Open Space Easement Agreement sufficient reason to cancel a contract.

The petition for cancellation must contain a proposal for a specific alternative use for the property. If the Board of Supervisors grants tentative cancellation, the landowner is required to pay a cancellation fee equal to 12.5% of the unrestricted, current fair market valuation of the property as determined by the County Assessor. The Board of Supervisors will require certain conditions be satisfied prior to final contract cancellation, including payment in full of the cancellation fee (within one year from the date of the recording of the certificate of tentative cancellation) and obtaining all permits necessary to commence the alternate use of the property.
 

#3
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I did not find anything on point, but I'm inclined to think it's deductible as a tax under a claim of origin rationale. I see it as a payment to a government entity compensating for past tax breaks.
Steve
 

#4
Nilodop  
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Ah, yes, the old PILOT concept, as discussed in Rev Rul 71-49 https://www.taxnotes.com/research/feder ... 71-49/d8g8 and also in PLR 200926023 https://www.irs.gov/pub/irs-wd/0926023.pdf. But does the program meet those tests? Here's part of the CA law.
(b) Prior to giving tentative approval to the cancellation of any contract, the board or council shall determine and certify to the county auditor the amount of the cancellation fee that the landowner shall pay the county treasurer upon cancellation. That fee shall be an amount equal to 121/2 percent of the cancellation valuation of the property.
. I don't see anything about its being a payment in lieu of taxes. It might be one, but I just haven't seen that.

For one thing, the payment can be waived. That wold be unusual for a property tax.
(c) If it finds that it is in the public interest to do so, the board or council may waive any payment or any portion of a payment by the landowner, or may extend the time for making the payment or a portion of the payment contingent upon the future use made of the land and its economic return to the landowner for a period of time not to exceed the unexpired period of the contract, had it not been canceled, if all of the following occur:


And here is how they use the revenue from the cancellation fees.
(d) The first five million dollars ($5,000,000) of revenue paid to the Controller pursuant to subdivision (e) in the 2004–05 fiscal year, and any other amount as approved in the final Budget Act for each fiscal year thereafter, shall be deposited in the Soil Conservation Fund, which is continued in existence. The money in the fund is available, when appropriated by the Legislature, for the support of all of the following:
(1) The cost of the farmlands mapping and monitoring program of the Department of Conservation pursuant to Section 65570.
(2) The soil conservation program identified in Section 614 of the Public Resources Code.
(3) Program support costs of this chapter as administered by the Department of Conservation.
(4) Program support costs incurred by the Department of Conservation in administering the open-space subvention program (Chapter 3 (commencing with Section 16140) of Part 1 of Division 4 of Title 2).
(5) The costs to the Department of Conservation for administering Section 51250.
(6) When available, after funding the duties of the Department of Conservation pursuant to paragraphs (1) through (5), inclusive, program support costs incurred by the department in carrying out the duties of the department pursuant to Sections 65565 and 66565.1.


FWIW, the cited Rev Rul holds
... that the cooperative housing corporation may deduct the payments as real property taxes under §164 because: (1) The payments are measured by and are equal to the amounts imposed by the regular taxing statutes, (2) the payments are imposed by a specific state statute (even though the vehicle of a lease agreement is used), and (3) the proceeds are designated for a public purpose rather than for some privilege, service, or regulatory function, or for some other local benefit tending to increase the value of the property upon which the payments are made.
 

#5
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I hear you, but I still think it's deductible. The gravamen for me is that it is a payment to a tax authority relating to taxes.

Interesting question...
Steve
 

#6
Wiles  
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Thank you both for your thoughts. And, thank you, Leonard, for those citations.
 

#7
Wiles  
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Here is one interpretation of the cancellation fee:
There is little question that a Williamson Act restriction artificially reduces the fair market value of the property for the period of time it remains on the property. The State legislature recognized this when it provided for the payment of deferred taxes (called a cancellation fee) in the event the property owner exercises his authority to terminate the agreement prior to its full term.

FLANDERS v. U.S., 30 AFTR 2d 72-5872 (347 F. Supp. 95), (DC-CA), 08/04/1972
 

#8
Wiles  
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But then there is this:
California Government Code Sections 51283(f)
(f) It is the intent of the Legislature that fees paid to cancel a contract do not constitute taxes but are payments that, when made, provide a private benefit that tends to increase the value of the property.
 

#9
Nilodop  
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Flanders seems to give you ample authority to treat it like a tax.

I wonder why they put (f) into the law. Have you looked at the legislative history?
There are two main California legislative history research tasks you might need to tackle.

The first is when you must trace the documentary "history" of the statute by assembling the documents that represent various versions of the legislation itself.

The second, immensely more difficult, involves trying to determine legislative intent by analyzing all documents related to the passage or rejection of the particular bill or law.

This second task is particularly challenging because of the limited availability of California legislative history documents (in contrast to federal legislative history documents). For example, committee hearings on California bills are usually not transcribed and reports on bills are rarely prepared. As well, there is no written record of debate.


I see that 51283 was
(Amended by Stats. 2021, Ch. 644, Sec. 8. (SB 574) Effective January 1, 2022.)
but I don't think it was about (f).
 


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