Background

On November 24, 2025, the proponents of California Initiative No. 25-0024, the “2026 Billionaire Tax Act” (CBTA), filed a first amendment with the Attorney General’s office to refine the measure for the November 2026 ballot. Since there was no withdrawal of the measure as of the June 25^th deadline, it is now locked onto the General Election Ballot designated as Proposition 40. The CBTA would add Section 37 to Article XIII of the California Constitution and impose a one-time 5% tax on the worldwide net worth of California-resident “billionaires,” individuals whose net worth, excluding directly held real estate, exceeds $1 billion as of December 31, 2026. The tax could be paid in a lump sum or be paid in five annual 1% installments and is projected by the proponents to raise approximately $100 billion over 2027–2031, drawn from roughly 200 California taxpayers.

The political and fiscal merits of the proposal are being debated elsewhere. This article focuses on something narrower and, for tax advisors who serve potentially affected clients, more pressing: the valuation mechanics in Section 50303 of the proposed Revenue and Taxation Code, together with the appraiser-penalty provisions in Section 50305 and the taxpayer-penalty provisions in Section 50312.

Read together, these provisions create at least four issues that will shape many tax exposure analyses, planning conversations, and certified appraisals a client may need to commission.

A Note on Classification

The CBTA labels itself a one-time excise tax that will be imposed on “the activity of sustaining excessive accumulations of wealth.” The California Constitution caps the taxation of intangible personal property at 0.4%, which is why the initiative simultaneously amends Article XIII to supersede that cap for this measure.

A detailed treatment of the classification question is beyond the scope of this paper. The reason to mention it here is that the category in which a court ultimately places the CBTA can influence the valuation standards that apply to it, including the determination of how fair market value is determined.

Standard Valuation Discounts For a Fractional Interest May Be Ambiguous

Section 50303(a) defines fair market value in the familiar Treasury Regulation language: the price at which each asset would change hands between a willing buyer and a willing seller, neither under compulsion, both with reasonable knowledge of the relevant facts. An appraiser reading only subdivision (a) would likely assume the standard of value to be used in the engagement is similar to Treasury Regulations sections 2031 (governing estate tax reporting) or 1.170A (governing charitable donations).

However, subdivision (b) provides that “no valuation or other discount shall be taken into account if such discount would have the effect of reducing the value of a partial interest in an asset below the taxpayer’s pro rata portion of the value of the entire asset.” Subdivision (b) does not preclude a valuation or other discount for a non-partial interest but does preclude a valuation or other discount for a partial interest.

The issue is the conceptual collision between subdivisions (a) and (b). Willing buyers and willing sellers will generally evaluate liquidity or minority interest considerations for a partial interest in the real world and might not pay a pro rata portion of that asset value for the specific interest being acquired. Subdivision (a) tells the appraiser to find the price that a buyer would pay; subdivision (b) provides potentially contradictory instructions.

Voting Percentage Determines Presumed Ownership, Not Equity Percentage

Section 50303(c)(3) addresses interests in business entities that are not publicly traded. For those interests, the Act ties valuation in part to voting power. Specifically, Section 50303(c)(3)(C) provides that, “for any interests that confer voting or other direct control rights, the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer’s percentage of the overall voting rights or other direct control rights.” In other words, for privately held companies, voting percentage can determine the ownership percentage used in the Act’s default valuation formula.

Some commentators have suggested that this language could create an issue for super-voting shares in public-company dual-class structures. The authors of the CBTA have indicated that all shares of public companies should be valued at the public trading value. However, that assertion is far from clear based on the statutory language, where the relevant shares are equity in a public company but are not themselves publicly traded.  But the case for such equivalency is strong in many modern dual-class structures, where the voting or super-voting class is held only by founders and insiders, have identical economics as the publicly traded class, are freely convertible to the publicly traded class, and mandatorily convert into the publicly traded class upon transfer and other events.

If those voting shares are treated as publicly traded assets under Section 50303(c)(1) as the authors state they should be, those voting shares would be valued at the market trading value of the publicly traded shares on the valuation date. But if they are instead treated as non-publicly traded business interests under Section 50303(c)(3), the Act's voting-rights presumption could produce a materially different result.

Under (c)(3)(c), the presumed ownership percentage that feeds the default “book value plus 7.5× three-year average book profits” formula in Section 50303(c)(3)(E) would be based on voting power. If the taxpayer holds 55% of the overall voting rights but only 10% of the economic interests, the presumed ownership percentage would be 55%, not 10%, notwithstanding the fact that the taxpayer’s ownership interest would share in 10% of any dividends and 10% of any proceeds on a sale of the business.  A distortion of that magnitude could implicate Section 50303(c)(3)(F), which allows the taxpayer to displace the default valuation only by obtaining an outside certified appraisal and showing that the presumed value substantially overstates the actual value of the interest.

The Rebuttal Standard Is “Actual Value”

Section 50303(c)(3)(F) is the safety valve. It permits either the taxpayer or the Franchise Tax Board to displace the default presumptions in (c)(3)(C), (D), or (E) by submitting a certified appraisal showing that the presumed value based on voting percentage “would substantially overstate or understate the actual value of the business entity owned by the taxpayer or the percentage owned by the taxpayer.”

The features of this provision should give any appraiser pause. The operative standard for rebuttal is “actual value,” which is a term the Act does not define. Subdivision (a) defines “fair market value.” Subdivision (c)(3)(F) uses a different phrase. Whether “actual value” is meant to be synonymous with FMV under (a), or something else is somewhat ambiguous but presumably that is the case.  

Penalties on Appraisers Are Tied to FTB-Determined Value

Section 50305(c) authorizes the Board to impose a penalty directly on the appraiser, not just on the taxpayer, in the case of any underpayment of tax “attributable to a substantial or gross overstatement or understatement of valuation in a certified appraisal.” The penalty is capped, by rate, at 2% of the understatement of tax for a substantial understatement and 4% for a gross understatement. The Board’s authority is discretionary, and the appraiser is treated, for procedural purposes, as if the appraiser were “the taxpayer” under Section 50312.

The 2% / 4% rate cap is misleading in isolation. The base against which the rate is applied, the understatement of tax, is the difference between the tax shown on the return and the tax ultimately determined by the FTB. Because a 5% tax applies to a number that can easily run into the billions for any one taxpayer in the billionaire club, even a modest percentage of an FTB-determined understatement would appear, based only on the language of Section 50305(c) (without giving consideration to potential future FTB guidance or judicial review) to potentially produce an appraiser penalty in the millions of dollars, with no aggregate cap, no limitation tied to the appraiser’s fee, and no professional-judgment safe harbor in the statute itself.

On the taxpayer side, Section 50312 imposes a 20% penalty for substantial understatements and a 40% penalty for gross understatements. The taxpayer has reasonable-cause and substantial-authority defenses under 50312(f)–(h); the appraiser’s defense, by contrast, is whatever the Board chooses to read into its discretion. Based on the text of Section 50305(c), refunds of penalties would appear to be available only on the ground that the penalty was “not properly computed” by the FTB (50312[e]) and not on the ground that the underlying valuation was reasonable.

The practical effect runs straight to the client. The CBTA’s only meaningful relief from the default valuation machinery is the certified appraisal contemplated by (c)(3)(F), and a credible (c)(3)(F) appraisal requires a qualified appraiser willing to put a name and a number that the FTB may be statutorily empowered to second-guess at the appraiser’s expense. Early indications from the business valuation community suggest that some national firms will decline CBTA engagements outright. For the advisor looking to proactively understand and plan for their clients’ potential tax obligation, the time to secure that appraiser is now.