BILL NUMBER: SB 105 CHAPTERED 10/10/07 CHAPTER 426 FILED WITH SECRETARY OF STATE OCTOBER 10, 2007 APPROVED BY GOVERNOR OCTOBER 10, 2007 PASSED THE SENATE SEPTEMBER 10, 2007 PASSED THE ASSEMBLY SEPTEMBER 6, 2007 AMENDED IN ASSEMBLY AUGUST 21, 2007 AMENDED IN ASSEMBLY JUNE 20, 2007 AMENDED IN SENATE MARCH 19, 2007 INTRODUCED BY Senator Migden JANUARY 17, 2007 An act to amend Sections 17021.7 and 17024.5 of, and to add Section 19136.13 to, the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy. LEGISLATIVE COUNSEL'S DIGEST SB 105, Migden. Taxation: registered domestic partners. (1) The Personal Income Tax Law imposes taxes on taxable income and treats married couples and registered domestic partners the same in determining ownership of business interests and stock shares. Under existing franchise and income tax laws and the Corporation Tax Law, the marital status of a person is considered in determining the ownership of business interests and stock shares. The Katz-Harris Taxpayers' Bill of Rights Act provides taxpayers with specified protections for purposes of, among other things, determining their correct tax liability, and includes a release from a levy upon a finding that the levy threatens the health or welfare of the taxpayer or the taxpayer's spouse. This bill would provide that a domestic partner or former domestic partner be treated as the spouse or former spouse of that taxpayer for purposes of applying the Personal Income Tax Law, specified franchise and income tax laws, the Corporation Tax Law, and the Katz-Harris Taxpayers' Bill of Rights Act, except where that treatment would result in specified treatment under federal income tax law, as provided. (2) The Personal Income Tax Law defines "adjusted gross income" with regard to registered domestic partners filing a joint return, for the purposes of computing limitations based upon that income, as the total of the amount required to be shown as adjusted gross income on the federal tax return for the same taxable year of each registered domestic partner. This bill would revise the definition of "adjusted gross income" with regard to registered domestic partners, including former registered domestic partners, for purposes of computing limitations based upon that income, to mean the total of the adjusted gross income on a federal tax return computed as if the registered domestic partner or former registered domestic partner was treated as a spouse or former spouse, respectively, for federal income tax purposes and used the same filing status that was used on the state tax return for the same taxable year. (3) The Personal Income Tax Law imposes a penalty on a taxpayer who underpays an estimated income tax but specifies that a penalty may not be imposed for an underpayment in specified taxable years if the underpayment was created or increased by specified changes in law. This bill would prohibit the imposition of a penalty under that law for an underpayment in the 2007 taxable year if the underpayment was created or increased by a specified change in law. This bill would incorporate additional changes made by AB 1561 that would become operative if both bills are enacted and this bill is enacted after AB 1561. This bill would take effect immediately as a tax levy. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 17021.7 of the Revenue and Taxation Code is amended to read: 17021.7. (a) (1) For purposes of this part, the domestic partner of the taxpayer shall be treated as the spouse of the taxpayer for purposes of applying only Sections 105(b), 106(a), 162(), 162(n), and 213(a) of the Internal Revenue Code and for purposes of determining whether an individual is the taxpayer's "dependent" or "member of their family" as these terms are used in those sections. (2) This subdivision shall apply to each taxable year beginning on or after January 1, 2002. (b) (1) Except as otherwise provided, the domestic partner or former domestic partner of a taxpayer shall be treated as the spouse or former spouse of that taxpayer for purposes of applying provisions of this part, Part 10.2 (commencing with Section 18401), Part 10.7 (commencing with Section 21001), and Part 11 (commencing with Section 23001), and for purposes of applying provisions of the Internal Revenue Code that are applicable for purposes of this part, Part 10.2, Part 10.7, or Part 11. (2) A domestic partner shall not be treated as the spouse of a taxpayer as required by paragraph (1) in the following circumstances: (A) Where the treatment would result in the classification of a business entity for purposes of this part, Part 10.2, or Part 11 that would be different than the classification of that business entity for federal income tax purposes. (B) Where the treatment required by paragraph (1) would result in disqualification for federal income tax purposes of a plan that otherwise qualifies under Section 401(a) of the Internal Revenue Code. (C) Where the treatment would result in a tax-favored account that would not be qualified as a tax-favored account for federal income tax purposes. For purposes of this subparagraph, "tax-favored account" means an individual account, plan, or arrangement that is exempt from income tax under Chapter 1 of the Internal Revenue Code, including an individual retirement account, as described in Section 408 of the Internal Revenue Code, an Archer MSA, as described in Section 220 of the Internal Revenue Code, a qualified tuition program, as described in Section 529 of the Internal Revenue Code, and a Coverdell education savings account, as described in Section 530 of the Internal Revenue Code. (3) The amendments made by the act adding this subdivision shall be operative for each taxable year beginning on or after January 1, 2007. (c) For purposes of this section, the term "domestic partner" means an individual partner in a domestic partner relationship within the meaning of Section 297 of the Family Code. SEC. 2. Section 17024.5 of the Revenue and Taxation Code is amended to read: 17024.5. (a) (1) Unless otherwise specifically provided, the terms "Internal Revenue Code," "Internal Revenue Code of 1954," or "Internal Revenue Code of 1986," for purposes of this part, mean Title 26 of the United States Code, including all amendments thereto as enacted on the specified date for the applicable taxable year as follows: Specified Date of Internal Revenue Code Taxable Year Sections (A) For taxable years beginning on or after January 1, 1983, and on or before December 31, 1983....................... January 15, 1983 (B) For taxable years beginning on or after January 1, 1984, and on or before December 31, 1984....................... January 1, 1984 (C) For taxable years beginning on or after January 1, 1985, and on or before December 31, 1985....................... January 1, 1985 (D) For taxable years beginning on or after January 1, 1986, and on or before December 31, 1986....................... January 1, 1986 (E) For taxable years beginning on or after January 1, 1987, and on or before December 31, 1988................. January 1, 1987 (F) For taxable years beginning on or after January 1, 1989, and on or before December 31, 1989....................... January 1, 1989 (G) For taxable years beginning on or after January 1, 1990, and on or before December 31, 1990....................... January 1, 1990 (H) For taxable years beginning on or after January 1, 1991, and on or before December 31, 1991....................... January 1, 1991 (I) For taxable years beginning on or after January 1, 1992, and on or before December 31, 1992....................... January 1, 1992 (J) For taxable years beginning on or after January 1, 1993, and on or before December 31, 1996....................... January 1, 1993 (K) For taxable years beginning on or after January 1, 1997, and on or before December 31, 1997....................... January 1, 1997 (L) For taxable years beginning on or after January 1, 1998, and on or before December 31, 2001....................... January 1, 1998 (M) For taxable years beginning on or after January 1, 2002, and on or before December 31, 2004....................... January 1, 2001 (N) For taxable years beginning on or after January 1, 2005................ January 1, 2005 (2) (A) Unless otherwise specifically provided, for federal laws enacted on or after January 1, 1987, and on or before the specified date for the taxable year, uncodified provisions that relate to provisions of the Internal Revenue Code that are incorporated for purposes of this part shall be applicable to the same taxable years as the incorporated provisions. (B) In the case where Section 901 of the Economic Growth and Tax Relief Act of 2001 (Public Law 107-16) applies to any provision of the Internal Revenue Code that is incorporated for purposes of this part, Section 901 of the Economic Growth and Tax Relief Act of 2001 shall apply for purposes of this part in the same manner and to the same taxable years as it applies for federal income tax purposes. (3) Subtitle G (Tax Technical Corrections) and Part I of Subtitle H (Repeal of Expired or Obsolete Provisions) of the Revenue Reconciliation Act of 1990 (Public Law 101-508) modified numerous provisions of the Internal Revenue Code and provisions of prior federal acts, some of which are incorporated by reference into this part. Unless otherwise provided, the provisions described in the preceding sentence, to the extent that they modify provisions that are incorporated into this part, are declaratory of existing law and shall be applied in the same manner and for the same periods as specified in the Revenue Reconciliation Act of 1990. (b) Unless otherwise specifically provided, when applying any provision of the Internal Revenue Code for purposes of this part, a reference to any of the following is not applicable for purposes of this part: (1) Except as provided in Chapter 4.5 (commencing with Section 23800) of Part 11 of Division 2, an electing small business corporation, as defined in Section 1361(b) of the Internal Revenue Code. (2) Domestic international sales corporations (DISC), as defined in Section 992(a) of the Internal Revenue Code. (3) A personal holding company, as defined in Section 542 of the Internal Revenue Code. (4) A foreign personal holding company, as defined in Section 552 of the Internal Revenue Code. (5) A foreign investment company, as defined in Section 1246(b) of the Internal Revenue Code. (6) A foreign trust, as defined in Section 679 of the Internal Revenue Code. (7) Foreign income taxes and foreign income tax credits. (8) Section 911 of the Internal Revenue Code, relating to United States citizens living abroad. (9) A foreign corporation, except that Section 367 of the Internal Revenue Code shall be applicable. (10) Federal tax credits and carryovers of federal tax credits. (11) Nonresident aliens. (12) Deduction for personal exemptions, as provided in Section 151 of the Internal Revenue Code. (13) The tax on generation-skipping transfers imposed by Section 2601 of the Internal Revenue Code. (14) The tax, relating to estates, imposed by Section 2001 or 2101 of the Internal Revenue Code. (c) (1) The provisions contained in Sections 41 to 44, inclusive, and Section 172 of the Tax Reform Act of 1984 (Public Law 98-369), relating to treatment of debt instruments, is not applicable for taxable years beginning before January 1, 1987. (2) The provisions contained in Public Law 99-121, relating to the treatment of debt instruments, is not applicable for taxable years beginning before January 1, 1987. (3) For each taxable year beginning on or after January 1, 1987, the provisions referred to by paragraphs (1) and (2) shall be applicable for purposes of this part in the same manner and with respect to the same obligations as the federal provisions, except as otherwise provided in this part. (d) When applying the Internal Revenue Code for purposes of this part, regulations promulgated in final form or issued as temporary regulations by "the secretary" shall be applicable as regulations under this part to the extent that they do not conflict with this part or with regulations issued by the Franchise Tax Board. (e) Whenever this part allows a taxpayer to make an election, the following rules shall apply: (1) A proper election filed with the Internal Revenue Service in accordance with the Internal Revenue Code or regulations issued by "the secretary" shall be deemed to be a proper election for purposes of this part, unless otherwise provided in this part or in regulations issued by the Franchise Tax Board. (2) A copy of that election shall be furnished to the Franchise Tax Board upon request. (3) (A) Except as provided in subparagraph (B), in order to obtain treatment other than that elected for federal purposes, a separate election shall be filed at the time and in the manner required by the Franchise Tax Board. (B) (i) If a taxpayer makes a proper election for federal income tax purposes prior to the time that taxpayer becomes subject to the tax imposed under this part or Part 11 (commencing with Section 23001), that taxpayer is deemed to have made the same election for purposes of the tax imposed by this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001), as applicable, and that taxpayer may not make a separate election for California tax purposes unless that separate election is expressly authorized by this part, Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), or by regulations issued by the Franchise Tax Board. (ii) If a taxpayer has not made a proper election for federal income tax purposes prior to the time that taxpayer becomes subject to tax under this part or Part 11 (commencing with Section 23001), that taxpayer may not make a separate California election for purposes of this part, Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), unless that separate election is expressly authorized by this part, Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), or by regulations issued by the Franchise Tax Board. (iii) This subparagraph applies only to the extent that the provisions of the Internal Revenue Code or the regulation issued by "the secretary" authorizing an election for federal income tax purposes apply for purposes of this part, Part 10.2 (commencing with Section 18401) or Part 11 (commencing with Section 23001). (f) Whenever this part allows or requires a taxpayer to file an application or seek consent, the rules set forth in subdivision (e) shall be applicable with respect to that application or consent. (g) When applying the Internal Revenue Code for purposes of determining the statute of limitations under this part, any reference to a period of three years shall be modified to read four years for purposes of this part. (h) When applying, for purposes of this part, any section of the Internal Revenue Code or any applicable regulation thereunder, all of the following shall apply: (1) References to "adjusted gross income" shall mean the amount computed in accordance with Section 17072, except as provided in paragraph (2). (2) (A) Except as provided in subparagraph (B), references to "adjusted gross income" for purposes of computing limitations based upon adjusted gross income, shall mean the amount required to be shown as adjusted gross income on the federal tax return for the same taxable year. (B) In the case of registered domestic partners and former registered domestic partners, adjusted gross income, for the purposes of computing limitations based upon adjusted gross income, shall mean the adjusted gross income on a federal tax return computed as if the registered domestic partner or former registered domestic partner was treated as a spouse or former spouse, respectively, for federal income tax purposes, and used the same filing status that was used on the state tax return for the same taxable year. (3) Any reference to "subtitle" or "chapter" shall mean this part. (4) The provisions of Section 7806 of the Internal Revenue Code, relating to construction of title, shall apply. (5) Any provision of the Internal Revenue Code that becomes operative on or after the specified date for that taxable year shall become operative on the same date for purposes of this part. (6) Any provision of the Internal Revenue Code that becomes inoperative on or after the specified date for that taxable year shall become inoperative on the same date for purposes of this part. (7) Due account shall be made for differences in federal and state terminology, effective dates, substitution of "Franchise Tax Board" for "secretary" when appropriate, and other obvious differences. (i) Any reference to a specific provision of the Internal Revenue Code shall include modifications of that provision, if any, in this part. SEC. 2.5. Section 17024.5 of the Revenue and Taxation Code is amended to read: 17024.5. (a) (1) Unless otherwise specifically provided, the terms "Internal Revenue Code," "Internal Revenue Code of 1954," or "Internal Revenue Code of 1986," for purposes of this part, mean Title 26 of the United States Code, including all amendments thereto as enacted on the specified date for the applicable taxable year as follows: Specified Date of Internal Revenue Code Taxable Year Sections (A) For taxable years beginning on or after January 1, 1983, and on or before December 31, 1983....................... January 15, 1983 (B) For taxable years beginning on or after January 1, 1984, and on or before December 31, 1984....................... January 1, 1984 (C) For taxable years beginning on or after January 1, 1985, and on or before December 31, 1985....................... January 1, 1985 (D) For taxable years beginning on or after January 1, 1986, and on or before December 31, 1986....................... January 1, 1986 (E) For taxable years beginning on or after January 1, 1987, and on or before December 31, 1988................. January 1, 1987 (F) For taxable years beginning on or after January 1, 1989, and on or before December 31, 1989....................... January 1, 1989 (G) For taxable years beginning on or after January 1, 1990, and on or before December 31, 1990....................... January 1, 1990 (H) For taxable years beginning on or after January 1, 1991, and on or before December 31, 1991....................... January 1, 1991 (I) For taxable years beginning on or after January 1, 1992, and on or before December 31, 1992....................... January 1, 1992 (J) For taxable years beginning on or after January 1, 1993, and on or before December 31, 1996....................... January 1, 1993 (K) For taxable years beginning on or after January 1, 1997, and on or before December 31, 1997....................... January 1, 1997 (L) For taxable years beginning on or after January 1, 1998, and on or before December 31, 2001....................... January 1, 1998 (M) For taxable years beginning on or after January 1, 2002, and on or before December 31, 2004....................... January 1, 2001 (N) For taxable years beginning on or after January 1, 2005, and on or before December 31, 2006....................... January 1, 2005 (O) For taxable years beginning on or after January 1, 2007................ January 1, 2007 (2) (A) Unless otherwise specifically provided, for federal laws enacted on or after January 1, 1987, and on or before the specified date for the taxable year, uncodified provisions that relate to provisions of the Internal Revenue Code that are incorporated for purposes of this part shall be applicable to the same taxable years as the incorporated provisions. (B) In the case where Section 901 of the Economic Growth and Tax Relief Act of 2001 (Public Law 107-16) applies to any provision of the Internal Revenue Code that is incorporated for purposes of this part, Section 901 of the Economic Growth and Tax Relief Act of 2001 shall apply for purposes of this part in the same manner and to the same taxable years as it applies for federal income tax purposes. (3) Subtitle G (Tax Technical Corrections) and Part I of Subtitle H (Repeal of Expired or Obsolete Provisions) of the Revenue Reconciliation Act of 1990 (Public Law 101-508) modified numerous provisions of the Internal Revenue Code and provisions of prior federal acts, some of which are incorporated by reference into this part. Unless otherwise provided, the provisions described in the preceding sentence, to the extent that they modify provisions that are incorporated into this part, are declaratory of existing law and shall be applied in the same manner and for the same periods as specified in the Revenue Reconciliation Act of 1990. (b) Unless otherwise specifically provided, when applying any provision of the Internal Revenue Code for purposes of this part, a reference to any of the following is not applicable for purposes of this part: (1) Except as provided in Chapter 4.5 (commencing with Section 23800) of Part 11 of Division 2, an electing small business corporation, as defined in Section 1361(b) of the Internal Revenue Code. (2) Domestic international sales corporations (DISC), as defined in Section 992(a) of the Internal Revenue Code. (3) A personal holding company, as defined in Section 542 of the Internal Revenue Code. (4) A foreign personal holding company, as defined in Section 552 of the Internal Revenue Code. (5) A foreign investment company, as defined in Section 1246(b) of the Internal Revenue Code. (6) A foreign trust, as defined in Section 679 of the Internal Revenue Code. (7) Foreign income taxes and foreign income tax credits. (8) Section 911 of the Internal Revenue Code, relating to United States citizens living abroad. (9) A foreign corporation, except that Section 367 of the Internal Revenue Code shall be applicable. (10) Federal tax credits and carryovers of federal tax credits. (11) Nonresident aliens. (12) Deduction for personal exemptions, as provided in Section 151 of the Internal Revenue Code. (13) The tax on generation-skipping transfers imposed by Section 2601 of the Internal Revenue Code. (14) The tax, relating to estates, imposed by Section 2001 or 2101 of the Internal Revenue Code. (c) (1) The provisions contained in Sections 41 to 44, inclusive, and Section 172 of the Tax Reform Act of 1984 (Public Law 98-369), relating to treatment of debt instruments, is not applicable for taxable years beginning before January 1, 1987. (2) The provisions contained in Public Law 99-121, relating to the treatment of debt instruments, is not applicable for taxable years beginning before January 1, 1987. (3) For each taxable year beginning on or after January 1, 1987, the provisions referred to by paragraphs (1) and (2) shall be applicable for purposes of this part in the same manner and with respect to the same obligations as the federal provisions, except as otherwise provided in this part. (d) When applying the Internal Revenue Code for purposes of this part, regulations promulgated in final form or issued as temporary regulations by "the secretary" shall be applicable as regulations under this part to the extent that they do not conflict with this part or with regulations issued by the Franchise Tax Board. (e) Whenever this part allows a taxpayer to make an election, the following rules shall apply: (1) A proper election filed with the Internal Revenue Service in accordance with the Internal Revenue Code or regulations issued by "the secretary" shall be deemed to be a proper election for purposes of this part, unless otherwise provided in this part or in regulations issued by the Franchise Tax Board. (2) A copy of that election shall be furnished to the Franchise Tax Board upon request. (3) (A) Except as provided in subparagraph (B), in order to obtain treatment other than that elected for federal purposes, a separate election shall be filed at the time and in the manner required by the Franchise Tax Board. (B) (i) If a taxpayer makes a proper election for federal income tax purposes prior to the time that taxpayer becomes subject to the tax imposed under this part or Part 11 (commencing with Section 23001), that taxpayer is deemed to have made the same election for purposes of the tax imposed by this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001), as applicable, and that taxpayer may not make a separate election for California tax purposes unless that separate election is expressly authorized by this part, Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), or by regulations issued by the Franchise Tax Board. (ii) If a taxpayer has not made a proper election for federal income tax purposes prior to the time that taxpayer becomes subject to tax under this part or Part 11 (commencing with Section 23001), that taxpayer may not make a separate California election for purposes of this part, Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), unless that separate election is expressly authorized by this part, Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), or by regulations issued by the Franchise Tax Board. (iii) This subparagraph applies only to the extent that the provisions of the Internal Revenue Code or the regulation issued by "the secretary" authorizing an election for federal income tax purposes apply for purposes of this part, Part 10.2 (commencing with Section 18401) or Part 11 (commencing with Section 23001). (f) Whenever this part allows or requires a taxpayer to file an application or seek consent, the rules set forth in subdivision (e) shall be applicable with respect to that application or consent. (g) When applying the Internal Revenue Code for purposes of determining the statute of limitations under this part, any reference to a period of three years shall be modified to read four years for purposes of this part. (h) When applying, for purposes of this part, any section of the Internal Revenue Code or any applicable regulation thereunder, all of the following shall apply: (1) References to "adjusted gross income" shall mean the amount computed in accordance with Section 17072, except as provided in paragraph (2). (2) (A) Except as provided in subparagraph (B), references to "adjusted gross income" for purposes of computing limitations based upon adjusted gross income, shall mean the amount required to be shown as adjusted gross income on the federal tax return for the same taxable year. (B) In the case of registered domestic partners and former registered domestic partners, adjusted gross income, for the purposes of computing limitations based upon adjusted gross income, shall mean the adjusted gross income on a federal tax return computed as if the registered domestic partner or former registered domestic partner was treated as a spouse or former spouse, respectively, for federal income tax purposes, and used the same filing status that was used on the state tax return for the same taxable year. (3) Any reference to "subtitle" or "chapter" shall mean this part. (4) The provisions of Section 7806 of the Internal Revenue Code, relating to construction of title, shall apply. (5) Any provision of the Internal Revenue Code that becomes operative on or after the specified date for that taxable year shall become operative on the same date for purposes of this part. (6) Any provision of the Internal Revenue Code that becomes inoperative on or after the specified date for that taxable year shall become inoperative on the same date for purposes of this part. (7) Due account shall be made for differences in federal and state terminology, effective dates, substitution of "Franchise Tax Board" for "secretary" when appropriate, and other obvious differences. (8) Except as otherwise provided, any reference to Section 501 of the Internal Revenue Code shall be interpreted to also refer to Section 23701. (i) Any reference to a specific provision of the Internal Revenue Code shall include modifications of that provision, if any, in this part. SEC. 3. Section 19136.13 is added to the Revenue and Taxation Code, to read: 19136.13. No addition to tax shall be made pursuant to Section 19136 for any period before the date prescribed under Section 18566 for the filing of the return for the 2007 taxable year, with respect to any underpayment of an installment for the 2007 taxable year, to the extent that the underpayment was created or increased by any provision of the act adding this section or Chapter 802 of the Statutes of 2006. SEC. 4. Section 2.5 of this bill incorporates amendments to Section 17024.5 of the Revenue and Taxation Code proposed by both this bill and AB 1561. It shall only become operative if (1) both bills are enacted and become effective on or before January 1, 2008, (2) each bill amends Section 17024.5 of the Revenue and Taxation Code, and (3) this bill is enacted after AB 1561, in which case Section 2 of this bill shall not become operative. SEC. 5. This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.