The so-called 2026 Billionaire Tax Act is a California ballot initiative that has been filed to appear on the November 2026 ballot. If approved by California voters, the initiative would generally impose a one-time tax of 5% on the net worth of “applicable individuals” with net worth of $1 billion dollars or more and “applicable trusts.” On April 28, 2026, supporters of the tax announced that they believed that they had gathered enough signatures to qualify for the ballot. The California Secretary of State has until June 25, 2026, to determine that the initiative qualifies for the ballot. It has been reported that polls “show early voter support for the Billionaire’s Tax initiative, with 52% of voters inclined to vote Yes and 33% inclined to vote No.” In a previous client update, we discussed potential legal challenges to the proposed tax. This client update goes into the details of the proposed tax and the issues that it presents for taxpayers.

Constitutional Amendment

The initiative would amend the California Constitution to provide for “taxation on all forms of personal property and wealth,” including “any legal or equitable interest therein.”

The initiative provides that the validity of the proposed tax could be challenged in court before payment of the tax. The initiative further provides that any challenge must be filed within 60 days after the initiative’s approval by the voters, with a direct appeal to the Supreme Court of California on an expedited basis.

Fundamentals of the Tax - Proposed Revenue and Taxation Code § 50301

The initiative would generally impose an excise tax of 5% on the net worth of “applicable individuals” with net worth of $1 billion dollars or more on December 31, 2026, and “applicable trusts.” The tax would be due on April 15, 2027, and could be paid in five equal annual installments with an annual nondeductible deferral charge of 7.5% of the remaining unpaid balance.

Applicable Individuals and Applicable Trusts

An “applicable individual” is defined as any individual who is a California resident, as determined on January 1, 2026, which is defined to be the “tax obligation date.”

An “applicable trust” is defined as any trust (other than a grantor trust or tax-exempt trust) if an applicable individual still living with net worth of $1 billion or more or “any entity that would constitute a related person with respect to such individual” has transferred property to such trust.

Net Worth

“Net worth” is defined as the total, worldwide value of all assets and property interests of the taxpayer and the taxpayer’s spouse, regardless of where the spouse is resident, reduced by the amount of certain debts and liabilities, as valued on December 31, 2026, which is defined to be the “valuation date.”

Net worth generally would include the value of any property the taxpayer transferred for less than fair market value after October 15, 2025.

Assets in excess of $50,000 held by an individual whom the taxpayer claims as a dependent would be deemed to be the taxpayer’s assets.

The initiative provides a number of rules under which the value of property held by a trust would be included in an individual’s net worth, including the following:

• An individual’s net worth would include the net worth of any trust taxed as a grantor trust as to that individual.
• The initiative provides that an individual’s “net worth” for certain purposes would “include the value of property held by any trust (other than a grantor trust or tax-exempt trust)” to which the individual transfers or has transferred property. The initiative first provides that “[f]or purposes of determining whether an individual's net worth is in excess of $1 billion . . . under subdivision (a) of Section 50301, net worth shall include the value of property held by any trust (other than a grantor trust or tax-exempt trust) to which the individual transfers or has transferred property.” The initiative then goes on to provide that “net worth shall for all purposes include the value of property held by any trust (other than a grantor trust or tax-exempt trust) to which the individual transfers property in 2026, and seventy-five percent of the value of such property transferred in 2025.”
• The beneficiary of a trust, regardless of the trust’s residency, would “be deemed the owner of the trust’s assets to the extent that the assets are distributable to the beneficiary,” except that a beneficiary would “not be deemed the owner of any trust asset if the trust is an applicable trust.”

Assets exempt from taxation would include: qualified pensions and IRAs; amounts held in Roth IRAs or similar accounts up to $10 million in present value; and nonqualified deferred compensation, subject to certain exclusions.

Assets excluded from the calculation of net worth would include: real property held directly by the taxpayer or through a revocable trust; tangible personal property outside of California if located outside of California for at least 270 days in 2026 (unless the relocation was substantially orchestrated to avoid taxes); and up to $5 million for all other assets.

Limitations to Reductions to Net Worth for Liabilities - Proposed Revenue and Taxation Code § 50302

The initiative provides that certain liabilities would be taken into account for purposes of determining a taxpayer’s net worth. Recourse liabilities would generally reduce net worth if there are no limitations on the taxpayer’s personal liability. Nonrecourse liabilities could only reduce net worth to the extent that amounts included in net worth would serve as collateral.

The initiative provides that a liability would not reduce net worth in the following circumstances:

• if the debt or liability is owed to a “related person” (as defined in Internal Revenue Code section 267 or 318 or any other person so specified by regulations adopted by the FTB);
• if the existence or amount of the liability is contingent on future events that are substantially uncertain to occur or that are substantially uncertain to occur within the subsequent five years;
• if the debt or liability was not negotiated for at arm’s length; or
• if market rates of interest are not being charged to the taxpayer.

Baker Botts Tax Note: The initiative does not contain a definition of the term “market rates of interest.”

Pledges for future charitable contributions would not reduce net worth if they were entered into after October 15, 2025, or if they are not legally enforceable.

Liabilities for which the taxpayer is entitled to receive future benefits or ownership rights, including a capital call, would only reduce net worth to the extent that the value of the future benefits is included in the taxpayer’s net assets and the taxpayer can demonstrate by clear and convincing evidence that the liability is greater than any future benefits not included in the taxpayer’s net assets.

Determination of Fair Market Value - Proposed Revenue and Taxation Code § 50303

For many assets, the initiative provides a “presumed” fair market value that could only be rebutted by clear and convincing evidence, which would require the submission of a “certified appraisal.” Where no presumption applies, the fair market value of an asset would generally be “the price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.”

Fair Market Values of Specific Asset Types

For publicly traded assets, the fair market value would be presumed to be the asset’s market trading value.

For sole proprietorships, assets owned by or held through a sole proprietorship would be treated as owned directly by the taxpayer.

For all other interests in business entities, the initiative provides that the fair market value (“FMV”) of the taxpayer’s interest would be presumed to be determined as follows:

Presumed FMV = [(entity book value) + (7.5 × entity annual book profits)] × (taxpayer’s ownership %)

To rebut this presumption, a taxpayer or the FTB would be required to demonstrate with clear and convincing evidence that the presumed value “would substantially overstate or understate the actual value” of the entity, in which case a certified appraisal would be required. If a taxpayer lacks information on the book value or the book profits of the entity and also lacks the right to obtain that information, then the taxpayer would also be required to submit a certified appraisal. The initiative generally provides that book value and book profits would be according to generally accepted accounting principles (GAAP) and that the annual book profits would be averaged over the current tax year and the preceding two tax years, if available.

For private equity entities, the value of the private equity entity would be presumed to be not less than the sum of the value of each entity owned by the private equity entity over the liabilities (other than profits interests) of the private equity entity.

The value of a business entity could not be less than the valuation reflected in any “funding round or other sale of equity” since December 31, 2024, “unless the taxpayer can show by clear and convincing evidence that such valuation would significantly overstate the value of the entity.”

Presumptions as to the Percentage of a Business Entity Owned by a Taxpayer

For interests that confer voting or direct control rights, the percentage of the business entity that the taxpayer owns would be presumed to be not less than the taxpayer’s percentage of the overall voting or direct control rights.

Baker Botts Tax Note: This presumption that the percentage of the business entity owned by the taxpayer cannot be less than the taxpayer’s percentage of the overall voting or direct control rights would likely lead to anomalous results, but the initiative provides that to rebut the presumption would take clear and convincing evidence.

For profits interests, the percentage of the business entity that the taxpayer owns would be presumed to be not less than the maximum interest in the entity’s profits that the taxpayer may earn, even if such profits interests are subject to a condition precedent.

These presumptions could be rebutted by clear and convincing evidence that they “would substantially overstate or understate” the percentage of the entity owned by the taxpayer, in which case a taxpayer would be required to submit a certified appraisal.

Baker Botts Tax Note: The "clear and convincing evidence" standard is a higher evidentiary standard than the “preponderance of the evidence” standard that generally applies. See Cal. Code Regs., tit. 18, § 30219(b).

Other Valuation Rules

The initiative includes a number of other valuation rules, including the following:

• Fractional interest discounts would be ignored.

Baker Botts Tax Note: The prohibition on fractional interest discounts would mean that assets in which the taxpayer only owns a portion would increase the taxpayer’s net worth beyond what the taxpayer would actually receive in consideration for the property. This provision of the initiative is inconsistent with prior case law on valuation. See, e.g., Pope & Talbot, Inc. v. Commissioner, 162 F.3d 1236, 1241 (9th Cir. 1999) (acknowledging that “courts have consistently recognized that the sum of all fractional interests in a property is less than the whole and have upheld the use of fractional interest discounts in valuing undivided interests”).

• A feature of an asset would not be taken into account “where a significant purpose and effect of adding the feature is to reduce the appraised value of the asset.”
• In no case would the value of an asset be determined to be less than the amount for which the asset is insured.

Certified Appraisals - Proposed Revenue and Taxation Code § 50305

The initiative would direct the FTB to adopt regulations or publish guidance further detailing the requirements for certified appraisals, where the regulations or guidance would be based on Treasury Regulations section 1.170A-17.

The initiative would authorize the FTB to impose penalties on an appraiser of up to 4% of the understatement of the tax attributable to an overstatement or understatement of valuation.

Apportionment - Proposed Revenue and Taxation Code § 50306

The default rule for apportioning the tax between California and other states would be to apportion 100% of the tax to California. However, if the taxpayer could prove by clear and convincing evidence that the taxpayer’s wealth “did not substantially accumulate in California” and that the taxpayer’s wealth “was not substantially sustained in California for at least 365 days in the aggregate” during the period from January 1, 2023, to December 31, 2026, then an alternative apportionment method may apply. This alternative apportionment method would not reduce the apportionment percentage to California below 25% “unless the Office of Tax Appeals (or a court on review) finds on the record that a lower percentage is required to avoid grossly disproportionate taxation in violation of the United States or California Constitutions or governing federal law. “

Baker Botts Tax Note: As discussed in our previous client update, these apportionment rules are likely to be challenged by taxpayers arguing that the tax is not fairly apportioned because worldwide assets would be subject to the tax and the tax could reach wealth generated outside California.

Anti-Avoidance Rules and Application of Judicial Doctrines - Proposed Revenue and Taxation Code § 50312

The initiative includes an anti-avoidance rule, which provides that if the FTB determines that a transaction or series of transactions lack economic substance or were entered into to obtain a tax benefit that is not intended by the voters or the Legislature, then the FTB could determine the tax consequences.

The initiative also provides that the FTB could rely on judicial doctrines developed in income tax cases, including the sham transaction doctrine, the step transaction doctrine, and the substance over form doctrine.

Conclusion

Given the recent announcement that the 2026 Billionaire Tax Act is likely to qualify for the ballot and the poll results indicating early voter support, taxpayers should plan for the possibility that the tax will be enacted.

Baker Botts would be pleased to assist you with your questions about the 2026 Billionaire Tax Act. We will continue to monitor developments relating to the initiative.

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