BILL NUMBER: AB 1740 CHAPTERED 02/11/04 CHAPTER 13 FILED WITH SECRETARY OF STATE FEBRUARY 11, 2004 APPROVED BY GOVERNOR FEBRUARY 11, 2004 PASSED THE ASSEMBLY JANUARY 29, 2004 PASSED THE SENATE AUGUST 25, 2003 AMENDED IN SENATE AUGUST 18, 2003 AMENDED IN SENATE JULY 17, 2003 INTRODUCED BY Committee on Revenue and Taxation (Chavez (Chair), Laird, Leno, and Simitian) MARCH 11, 2003 An act to amend Sections 17041, 17052.6, 17301.3, 17302, and 19131 of, and to add Section 19136.11 to, the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy. LEGISLATIVE COUNSEL'S DIGEST AB 1740, Committee on Revenue and Taxation. Income taxes: nonresidents. The Personal Income Tax Law provides for specified treatment and calculations with respect to the taxation of the income of nonresidents and part-year residents. This bill would provide that in calculating the taxable income of a nonresident or part-year resident, the calculation of prior year items is to be made as if the nonresident or part-year resident, for the period of nonresidency, was a nonresident for all prior years, would correct a cross-reference, and would waive estimated penalties in connection thereto. This bill would also change a cross-reference relating to adjusted gross income in connection with the child and dependent care tax credit. The Personal Income Tax Law imposes a penalty on a taxpayer who fails to file a return on or before a prescribed due date, unless the failure is due to reasonable cause and not due to willful neglect. This bill would provide that the late filing penalty is presumed not to apply if the taxpayer filed a federal return after its due date, the Franchise Tax Board proposes a deficiency based upon a final federal determination, and the Internal Revenue Service abates the federal late filing penalty based upon reasonable cause. This bill would result in a change in state taxes for the purpose of increasing state revenues within the meaning of Section 3 of Article XIII A of the California Constitution, and thus would require for passage the approval of 2/3 of the membership of each house of the Legislature. This bill would take effect immediately as a tax levy. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 17041 of the Revenue and Taxation Code is amended to read: 17041. (a) There shall be imposed for each taxable year upon the entire taxable income of every resident of this state who is not a part-year resident, except the head of a household as defined in Section 17042, taxes in the following amounts and at the following rates upon the amount of taxable income computed for the taxable year as if the resident were a resident of this state for the entire taxable year and for all prior taxable years for any carryover items, deferred income, suspended losses, or suspended deductions: If the taxable income is: The tax is: Not over $3,650................... 1% of the taxable income Over $3,650 but not over $8,650...................... $36.50 plus 2% of the excess over $3,650 Over $8,650 but not over $13,650..................... $136.50 plus 4% of the excess over $8,650 Over $13,650 but not over $18,950..................... $336.50 plus 6% of the excess over $13,650 Over $18,950 but not over $23,950..................... $654.50 plus 8% of the excess over $18,950 Over $23,950...................... $1,054.50 plus 9.3% of the excess over $23,950 (b) (1) There shall be imposed for each taxable year upon the taxable income of every nonresident or part-year resident, except the head of a household as defined in Section 17042, a tax as calculated in paragraph (2). (2) The tax imposed under paragraph (1) shall be calculated by multiplying the "taxable income of a nonresident or part-year resident," as defined in subdivision (i), by a rate (expressed as a percentage) equal to the tax computed under subdivision (a) on the entire taxable income of the nonresident or part-year resident as if the nonresident or part-year resident were a resident of this state for the taxable year and as if the nonresident or part-year resident were a resident of this state for all prior taxable years for any carryover items, deferred income, suspended losses, or suspended deductions, divided by the amount of that income. (c) There shall be imposed for each taxable year upon the entire taxable income of every resident of this state who is not a part-year resident for that taxable year, when the resident is the head of a household, as defined in Section 17042, taxes in the following amounts and at the following rates upon the amount of taxable income computed for the taxable year as if the resident were a resident of the state for the entire taxable year and for all prior taxable years for carryover items, deferred income, suspended losses, or suspended deductions: If the taxable income is: The tax is: Not over $7,300..................... 1% of the taxable income Over $7,300 but not over $17,300....................... $73 plus 2% of the excess over $7,300 Over $17,300 but not over $22,300....................... $273 plus 4% of the excess over $17,300 Over $22,300 but not over $27,600....................... $473 plus 6% of the excess over $22,300 Over $27,600 but not over $32,600....................... $791 plus 8% of the excess over $27,600 Over $32,600......................... $1,191 plus 9.3% of the excess over $32,600 (d) (1) There shall be imposed for each taxable year upon the taxable income of every nonresident or part-year resident when the nonresident or part-year resident is the head of a household, as defined in Section 17042, a tax as calculated in paragraph (2). (2) The tax imposed under paragraph (1) shall be calculated by multiplying the "taxable income of a nonresident or part-year resident," as defined in subdivision (i), by a rate (expressed as a percentage) equal to the tax computed under subdivision (c) on the entire taxable income of the nonresident or part-year resident as if the nonresident or part-year resident were a resident of this state for the taxable year and as if the nonresident or part-year resident were a resident of this state for all prior taxable years for any carryover items, deferred income, suspended losses, or suspended deductions, divided by the amount of that income. (e) There shall be imposed for each taxable year upon the taxable income of every estate, trust, or common trust fund taxes equal to the amount computed under subdivision (a) for an individual having the same amount of taxable income. (f) The tax imposed by this part is not a surtax. (g) (1) Section 1(g) of the Internal Revenue Code, relating to certain unearned income of minor children taxed as if the parent's income, shall apply, except as otherwise provided. (2) Section 1(g)(7)(B)(ii)(II) of the Internal Revenue Code, relating to income included on parent's return, is modified, for purposes of this part, by substituting "1 percent" for "15 percent." (h) For each taxable year beginning on or after January 1, 1988, the Franchise Tax Board shall recompute the income tax brackets prescribed in subdivisions (a) and (c). That computation shall be made as follows: (1) The California Department of Industrial Relations shall transmit annually to the Franchise Tax Board the percentage change in the California Consumer Price Index for all items from June of the prior calendar year to June of the current calendar year, no later than August 1 of the current calendar year. (2) The Franchise Tax Board shall do both of the following: (A) Compute an inflation adjustment factor by adding 100 percent to the percentage change figure that is furnished pursuant to paragraph (1) and dividing the result by 100. (B) Multiply the preceding taxable year income tax brackets by the inflation adjustment factor determined in subparagraph (A) and round off the resulting products to the nearest one dollar ($1). (i) (1) For purposes of this part, the term "taxable income of a nonresident or part-year resident" includes each of the following: (A) For any part of the taxable year during which the taxpayer was a resident of this state (as defined by Section 17014), all items of gross income and all deductions, regardless of source. (B) For any part of the taxable year during which the taxpayer was not a resident of this state, gross income and deductions derived from sources within this state, determined in accordance with Article 9 of Chapter 3 (commencing with Section 17301 and Chapter 11 (commencing with Section 17951). (2) For purposes of computing "taxable income of a nonresident or part-year resident" under paragraph (1), the amount of any net operating loss sustained in any taxable year during any part of which the taxpayer was not a resident of this state shall be limited to the sum of the following: (A) The amount of the loss attributable to the part of the taxable year in which the taxpayer was a resident. (B) The amount of the loss which, during the part of the taxable year the taxpayer is not a resident, is attributable to California source income and deductions allowable in arriving at taxable income of a nonresident or part-year resident. (3) For purposes of computing "taxable income of a nonresident or part-year resident" under paragraph (1), any carryover items, deferred income, suspended losses, or suspended deductions shall only be includable or allowable to the extent that the carryover item, deferred income, suspended loss, or suspended deduction was derived from sources within this state, calculated as if the nonresident or part-year resident, for the portion of the year he or she was a nonresident, had been a nonresident for all prior years. SEC. 2. Section 17052.6 of the Revenue and Taxation Code is amended to read: 17052.6. (a) For each taxable year beginning on or after January 1, 2000, there shall be allowed as a credit against the "net tax" (as defined in Section 17039) an amount determined in accordance with Section 21 of the Internal Revenue Code, as modified by the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16), except that the amount of the credit shall be a percentage, as provided in subdivision (b) of the allowable federal credit without taking into account whether there is a federal tax liability. (b) For the purposes of subdivision (a), the percentage of the allowable federal credit shall be determined as follows: (1) For taxable years beginning before January 1, 2003: The percentage of If the adjusted gross income is: credit is: $40,000 or less ................................. 63% Over $40,000 but not over $70,000................ 53% Over $70,000 but not over $100,000............... 42% Over $100,000 ................................... 0% (2) For taxable years beginning on or after January 1, 2003: The percentage of If the adjusted gross income is: credit is: $40,000 or less ................................. 50% Over $40,000 but not over $70,000................ 43% Over $70,000 but not over $100,000............... 34% Over $100,000 ................................... 0% (c) In the case of a taxpayer whose credits provided under this section exceed the taxpayer's tax liability computed under this part, the excess shall be credited against other amounts due, if any, from the taxpayer and the balance, if any, shall be paid from the Tax Relief and Refund Account and refunded to the taxpayer. (d) For purposes of this section, adjusted gross income means adjusted gross income as computed for purposes of paragraph (2) of subdivision (h) of Section 17024.5. (e) The credit authorized by this section shall be limited to employment-related expenses, within the meaning of Section 21 of the Internal Revenue Code, but only for child care services or care provided in this state and only to the extent of earned income (within the meaning of Section 21(d) of the Internal Revenue Code) from sources within this state. (f) For purposes of this section, Section 21(b)(1) of the Internal Revenue Code, relating to a qualifying individual, is modified to additionally provide that a child (as defined in Section 151(c)(3) of the Internal Revenue Code) shall be treated, for purposes of Section 152 of the Internal Revenue Code (as applicable for purposes of this section), as receiving over one-half of his or her support during the calendar year from the parent having custody for a greater portion of the calendar year, that parent shall be treated as a "custodial parent" (within the meaning of Section 152(e) of the Internal Revenue Code, as applicable for purposes of this section), and the child shall be treated as a qualifying individual under Section 21(b)(1) of the Internal Revenue Code, as applicable for purposes of this section, if both of the following apply: (1) The child receives over one-half of his or her support during the calendar year from his or her parents who never married each other and who live apart at all times during the last six months of the calendar year. (2) The child is in the custody of one or both of his or her parents for more than one-half of the calendar year. (g) The amendments to this section made by the act adding this subdivision shall apply only to taxable years beginning on or after January 1, 2002. SEC. 3. Section 17301.3 of the Revenue and Taxation Code is amended to read: 17301.3. For purposes of this part, in the case of a nonresident or part-year resident, the term "California adjusted gross income" includes each of the following: (a) For any part of the taxable year during which the taxpayer was a resident of this state (as defined by Section 17014), all items of adjusted gross income, regardless of source. (b) For any part of the taxable year during which the taxpayer was not a resident of this state, adjusted gross income derived from sources within this state, determined in accordance with Article 9 (commencing with Section 17301) of Chapter 3 and Chapter 11 (commencing with Section 17951). SEC. 4. Section 17302 of the Revenue and Taxation Code is amended to read: 17302. In the case of a nonresident or part-year resident, the deduction provided by Section 215 of the Internal Revenue Code, relating to alimony payments, shall be allowed in computing "taxable income of a nonresident or part-year resident" in the same ratio (not to exceed 1.00) that California adjusted gross income (as defined in Section 17301.3), computed without regard to the alimony deduction, bears to total adjusted gross income (as defined in Section 17301.4), computed without regard to the alimony deduction. SEC. 5. Section 19131 of the Revenue and Taxation Code is amended to read: 19131. (a) If any taxpayer fails to make and file a return required by this part on or before the due date of the return or the due date as extended by the Franchise Tax Board, then, unless it is shown that the failure is due to reasonable cause and not due to willful neglect, 5 percent of the tax shall be added to the tax for each month or fraction thereof elapsing between the due date of the return (determined without regard to any extension of time for filing) and the date on which filed, but the total penalty may not exceed 25 percent of the tax. In the case of a commencing corporation, the penalty shall apply to all tax accruable on the due date of the return. The penalty so added to the tax shall be due and payable upon notice and demand from the Franchise Tax Board. (b) In the case of an individual or fiduciary who fails to file a return of tax required by this part within 60 days of the date prescribed for filing of that return (determined with regard to any extension of time for filing), unless it is shown that the failure is due to reasonable cause and not due to willful neglect, this penalty may not be less than the lesser of one hundred dollars ($100) or 100 percent of the amount of tax required to be shown on the return. (c) For purposes of this section, the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed upon the return. (d) If any failure to file any return is fraudulent, subdivision (a) shall be applied by: (1) Substituting "15 percent" for "5 percent," and (2) Substituting "75 percent" for "25 percent." (e) This section does not apply to any failure to pay any estimated tax required by Section 19025 or 19136. (f) (1) The penalty described in this section is presumed not to apply if, with respect to the same taxable year, all of the following conditions are met: (A) A taxpayer fails to make and file a return required by this part on or before the due date of the return, determined with regard to any extension of time for filing, and fails to make and file a return required by Section 6012 of the Internal Revenue Code on or before the due date of the return, determined with regard to any extension of time for filing. (B) The Franchise Tax Board proposes a deficiency assessment that is based upon a final federal determination. (C) The Commissioner of Internal Revenue or other officer of the United States determines that the penalty described in Section 6651 (a)(1) of the Internal Revenue Code does not apply because the failure to file the federal return on or before the date prescribed for its filing was due to reasonable cause and not due to willful neglect. (2) The Franchise Tax Board may rebut the presumption described in paragraph (1) by establishing, by a preponderance of the evidence, that the taxpayer's failure to make and file a return required by this part was not due to reasonable cause or was due to willful neglect. SEC. 6. Section 19136.11 is added to the Revenue and Taxation Code, to read: 19136.11. (a) No addition to tax shall be made under Section 19136 for any period before April 15, 2003, with respect to any underpayment of an installment for the 2002 taxable year, to the extent that the underpayment was created or increased by any provision of Chapter 920 of the Statutes of 2001. (b) The Franchise Tax Board shall implement this section in a reasonable manner. SEC. 7. This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.