BILL ANALYSIS                                                                                                                                                                                                    




                                                                  SB 32 x8
                                                                  Page A
          Date of Hearing:   February 24, 2010

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                             Charles M. Calderon, Chair

                   SB 32 x8 (Wolk) - As Amended:  February 11, 2010

           SENATE VOTE  :   21-14

          Majority vote.  Fiscal committee.

           SUBJECT  :  Taxation: federal conformity.  

           SUMMARY  :  Changes California's specified date of conformity to  
          federal income tax law from January 1, 2005, to January 1, 2009,  
          and thereby, generally conforms to numerous changes made to  
          federal income tax law during that four-year period.   
          Specifically,  this bill  :

          1)Conforms or partially conforms to, among other provisions,   
            the following federal provisions relating to the:

             a)   Federal tax treatment of certain disaster mitigation  
               payments.  [The Disaster Mitigation Payments Act (Public  
               Law (P.L.) 109-7)].

             b)   Federal treatment of electric transmission property,  
               certain atmospheric pollution control facilities, nuclear  
               decommissioning cost, natural gas distribution lines,  
               natural gas gathering lines, and amortizable Internal  
               Revenue Code (IRC) Section 197 intangibles. [The Energy Tax  
               Incentives Act of 2005 (EITA) (P.L. 109-58)].

             c)   Effective date of exception from suspension rules for  
               certain listed and reportable transactions and tax  
               technical provisions of the Gulf Opportunity Zone Act of  
               2005 (P.L. 109-135).    

             d)   Modification of active business definition under IRC  
               Section 355, treatment of loans to qualified continuing  
               care facilities, distributions involving disqualified  
               investment companies, taxation of certain settlement funds,  
               capital gains treatment for certain self-created musical  
               works, amortization of expenses incurred in creating or  
               acquiring music or music copyrights, and the application of  









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               earnings stripping rules to partners that are corporations.  
                [The Tax Increase Prevention and Reconciliation Act of  
               2005 (P.L. 109-222) and the Tax Relief and Health Care Act  
               of 2006 (P.L. 109-432)].

             e)   Clarification of treatment of self-employment for  
               purposes of the limitation on state taxation of retirement  
               income.  [The Clarification of Treatment of Self-Employment  
               for Purposes of the Limitation on State Taxation of  
               Retirement Income (P.L. 109-264)].  

             f)   Reform of funding for self-employed defined benefit  
               pension plans, funding rules for multiemployer defined  
               benefit pension plans, and general reforms of charitable  
               contribution reporting.  [The Pension Protection Act of  
               2006 (PPA) (P.L. 109-280)].

             g)   Inflation indexing of gross income limitations on  
               certain retirement savings incentives and allowance of  
               additional Individual Retirement Account (IRA) payments in  
               certain bankruptcy cases.  (PPA, P.L. 109-280).

             h)   Waiver of the early withdrawal penalty for distributions  
               made from a governmental plan to a qualified public safety  
               employee and penalty-free withdrawals from retirement plans  
               for individuals called to active duty.  (PPA, P.L.  
               109-280).

             i)   Modified treatment of certain charitable contributions  
               and reporting by exempt organizations. (PPA, P. L.  
               109-280).  

             j)   Frivolous tax submissions, sale of property by judicial  
               officers, and exclusion of gain from sale of principal  
               residence by certain employees of the intelligence  
               community. (PPA, P.L. 109-432).  

             aa)  Federal penalty on erroneous refund claims, modified to  
               provide an exemption for individuals with adjusted gross  
               income of less than $250,000 (in the case of a married  
               individual filing jointly or a surviving spouse), and  
               $125,000 in any other case.  [The Small Business Work  
               Opportunity Act of 2007 (SBWOTA), P.L. 110-28, Section  
               8247].










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             bb)  Federal extension of mortgage debt forgiveness until  
               January 1, 2013, modified to increase the state's  
               limitation on the amount that can be excluded from gross  
               income from $250,000 (or $125,000 in the case of a married  
               individual filing a separate return) to $500,000 (or  
               $250,000 in the case of a married individual filing a  
               separate return).  [The Mortgage Forgiveness Debt Relief  
               Act (MFDRA), P.L. 110-343, Division A, Title III, Section  
               303 and the Emergency Economic Stabilization Act of 2008  
               (EESA), P.L. 110-343)].  

             cc)  Exclusion from income for benefits provided to Emergency  
               Medical Services volunteers and firefighters.  (SBWOTA,  
               P.L. 110-28). 

             dd)  Increase in age of minor children whose unearned income  
               is taxed as if it is parents' income.  (SBWOTA, P.L.  
               110-28).  

             ee)  Federal penalty on understatement of a taxpayer's  
               liability by a tax return preparer, in modified conformity,  
               to incorporate the federal rule that the penalty will be  
               the greater of a base amount ($250 for the first-tier  
               penalty and $5,000 for the second-tier penalty) or 50% of  
               the income derived (or to be derived) by the tax return  
               preparer.  (EESA, P.L. 110-343, Division C, Title V,  
               Subtitle A, Section 506).

             ff)  Special rule encouraging contribution of capital gain  
               real property for conservation purposes, dedication of  
               endangered species recovery expenditures, depreciation  
               schedule for race horses, and information reporting for  
               commodity credit corporation transactions. (Heartland,  
               Habitat, Harvest, and Horticulture Act of 2008, P.L.  
               110-246).  

             gg)  Special tax treatment of distributions, contributions,  
               exclusions, and disposition of amounts paid to, or made by,  
               individuals called to active duty, other service members,  
               and employees of the Intelligence Community.  (The Heroes  
               Earnings Assistance and Relief Tax Act of 2008, P.L.  
               110-245). 

             hh)  Various tax incentives related to the low-income housing  
               tax credit.  (The Housing and Economic Recovery Act of  









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               2008, P.L. 110-289).  

             ii)  Special rules for tax treatment of executive  
               compensation of employers participating in the Troubled  
               Assets Relief Program, modified tax treatment of certain  
               payments to controlling exempt organizations, and  
               charitable contributions of property.  (EESA, P.L.  
               110-343).  

             jj)  Treatment of certain reimbursements from governmental  
               plans for medical care and modification of penalty for  
               failure to file partnership and "S" corporation returns.   
               [The Worker, Retiree, and Employer Recovery Act of 2008,  
               P.L. 110-458].  

             aaa) Exclusion from gross income for energy property grants  
               provided to a taxpayer by the Secretary of Treasury for  
               qualified property placed in service during either 2009 or  
               2010 year. 

          2)Provides that the state shall  not  conform to certain federal  
            provisions, including, among others:

             a)   The seven-year recovery period for motor sports racing  
               track facilities.  (EESA, P.L. 110-343, Division C, Title  
               III, Section 317).  

             b)   The five-year recovery period for certain farming  
               business machinery and equipment. (EESA, P.L. 110-343,  
               Division C, Title V, Section 505).  

             c)   The enhanced charitable deductions for contributions of  
               food inventory.  (EESA, P.L. 110-343, Division C, Title  
               III, Section 323).  

             d)   The enhanced charitable deductions for contributions of  
               book inventory.  (EESA, P.L. 110-343, Division C, Title  
               III, Section 324). 

             e)   The federal changes made to the determination of a small  
               refiner for purposes of the depletion deduction.  (EITA,  
               P.L. 109-58, Section 1328).   

           EXISTING LAW  conforms the state's tax code, in many instances,  
          to provisions contained in the federal IRC.  California does not  









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          automatically conform to new federal legislation.  Rather,  
          California may conform to specific enactments at the federal  
          level or may conform to the IRC as of a specified date.  The  
          last IRC to which California conformed was that in effect as of  
          January 1, 2005.  

           FISCAL EFFECT  :  According to the Franchise Tax Board (FTB)  
          staff, SBx8 32 has the following revenue effect:

           ------------------------------------------------------------------- 
          |  Summary Revenue Estimates for SB 32 x8, as Amended February 11,  |
          |                               2010                                |
          |-------------------------------------------------------------------|
          |                                                                   |
           ------------------------------------------------------------------- 
          |--------------------------+----------+---------+---------+---------|
          |Conformity Provisions     | 2009-10  | 2010-11 | 2011-12 | 2012-13 |
          |--------------------------+----------+---------+---------+---------|
          |Tax Revenue Totals        |          |-$20,623,0|-$21,610,|-$12,460,|
          |                          |   -$23,400,000|    00   |   000   |   000   |
           ------------------------------------------------------------------- 
          |Penalty and Interest      |          |         |         |$16,350,0|
          |Totals                    |   $2,870,000|  $9,800, 000|$13,600,000|00       |
          |--------------------------+----------+---------+---------+---------|
          |         Totals of        |-$20,530,0|-$10,823,0|-$8,010,0|-$3,890,0|
          |Conformity Provisions     |    00    |    00   |   00    |00       |
           ------------------------------------------------------------------- 
           COMMENTS  :   

           1)Author's Statement  .  According to the author's office, "SBx8  
            32 is a vital measure conforming state tax law to federal tax,  
            and includes provisions that provide needed relief to  
            struggling homeowners, ensure that renewable energy projects  
            are not unduly taxed on federal grants, and provides needed  
            conformity to federal tax law, easing tax preparation for  
            taxpayers and tax preparers alike.   This measure works to  
            prevent onerous taxation of distressed Californians who are  
            already struggling to protect their homes, their largest  
            investment, as many Californians face foreclosure and are  
            forced to walk away from their homes; the last thing they  
            should have to think about is paying taxes on debt they  
            couldn't repay. This measure puts an end to this onerous  
            application of tax law.  Additionally, since tax credits are  
            never considered income, taxing renewable energy production  
            grants would treat the renewable energy production industry  









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            inequitably and would add additional costs onto these projects  
            need for job creation and energy sustainability.  It is  
            important that we avoid this kind of unnecessary roadblock to  
            economic growth as our state works to rebuild its financial  
            prosperity."

           2)The importance (and conundrum) of conformity  .  When changes  
            are made to the federal income tax law, California does not  
            automatically adopt such provisions.  Instead, state  
            legislation is needed to conform to most of those changes.   
            Conformity legislation is introduced either as individual tax  
            bills to conform to specific federal changes or as one omnibus  
            bill to conform to the federal law as of a certain date with  
            specified exceptions, a so-called "conformity" bill.  

          The last California-federal conformity bill was enacted in 2005  
            [AB 115 (Klehs), Chapter 691, Statutes of 2005], and for the  
            last three years, businesses, tax practitioners and state tax  
            agencies have been advocating for a new bill to conform state  
            tax laws to ever-changing federal tax laws.  Businesses,  
            generally, prefer conformity to federal tax laws because it  
            reduces their state tax compliance costs.  The tax  
            practitioners have argued that there are significant costs  
            associated with federal non-conformity.  Failure to conform to  
            federal law in some areas may lead to improper tax reporting  
            to California and extra costs to the taxpayers.  As an  
            example, a taxpayer may roll-over balances in an Archer  
            Medical Savings Account to a new Health Savings Account  
            without triggering liability at the federal level, but will  
            unknowingly face penalties for the transfer since it  
            constitutes a disqualified distribution for state purposes.   
            Finally, conformity legislation is also important to state  
            agencies.  Conformity eases the burden, and reduces the costs,  
            of tax administration because the state may rely on federal  
            audits, federal case law, and regulations.   

          While state conformity to federal income tax provisions offers  
            certain advantages and reduces tax compliance costs, it can  
            also significantly impact state revenues.  Thus, it would be  
            difficult to achieve complete conformity with federal income  
            tax rules.  Often, the Legislature needs to increase tax rates  
            to find funding to adopt a new or expand an existing credit or  
            deduction allowed for federal income tax purposes.  Tax  
            credits, deductions, and exemptions are designed to provide  
            incentives for taxpayers that incur certain expenses or to  









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            influence behavior, including business practices and  
            decisions.  Both the Federal and state governments often use  
            tax policy to influence taxpayers' behavior.  However, federal  
            tax incentives may not necessarily produce the same effect on  
            the taxpayer's behavior at the state level, if adopted by the  
            state government, as they do on the federal level.   
            Furthermore, unlike the Federal government, California cannot  
            print money to subsidize its budget.  Therefore, the  
            Legislature must be mindful of fiscal effects of conforming to  
            federal tax laws, even if those may not trigger significant  
            fiscal concerns in Congress. 

          In 2008, AB 1561 (Calderon), required a 2/3 vote of the  
            membership in each house.  AB 1561 did not advance from the  
            Senate Floor because it failed to secure 27 Senate votes.   
            Last year, the Legislature approved AB 1580 (Calderon), but  
            the Governor vetoed it because of a "single provision inserted  
            at the last minute" that he could not support.  The  
            Legislature continues to struggle with tax conformity and SBx8  
            32 represents the most recent attempt to ease the hardship on  
            taxpayers and tax practitioners by bringing the two tax codes  
            closer together. 

           3)Conformity Decisions  .  Complete tables of the conformity  
            decisions implemented by SB 32 x8 may be found in the Senate  
            Revenue and Taxation Committee's analysis of this bill.  Full  
            descriptions of each of the conformity items in SB 32 x8 are  
            included in the FTB's annual report to the Legislature,  
            "Summary of Federal Income Tax Changes," that are available on  
            the FTB's website. 

           4)Mortgage Debt Forgiveness  .  The Legislature approved SB 1055  
            (Machado), Chapter 282, Statutes of 2008, which provided  
            modified conformity to the MFDRA for discharge of mortgage  
            indebtedness in the 2007 and 2008 tax years.  Last year,  
            Senate Revenue and Taxation Committee held SB 97 (Calderon),  
            which extended modified conformity to discharge of mortgage  
            indebtedness in the 2009 and 2010 tax years, and this  
            Committee held AB 111 (Niello), which provided full conformity  
            to MFDRA.  AB 1580, which was vetoed by the Governor in 2009,  
            would have provided homeowners greater assistance, not only by  
            extending the mortgage debt forgiveness provisions until  
            January 1, 2013, but also by increasing the amount of forgiven  
            mortgage indebtedness excludable from taxpayer's gross income  
            from $250,000 ($125,000 in the case of a married individual  









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            filing a separate return) to $500,000 ($250,000 in case of a  
            married individual filing a separate return).   The same  
            mortgage debt forgiveness provisions are included in SB 32 x8,  
            tying California law to federal law until 2013.  In addition,  
            SB 32 x8 provides for a retroactive application of those  
            provisions for cancellation of debt income arising from  
            mortgage debt forgiveness until the 2012 tax year.  

           5)Waiver of the early withdrawal penalty for public safety  
            employees.   Existing federal tax law imposes a 10% withdrawal  
            penalty tax on early distributions made from a qualified  
            retirement plan to a taxpayer under the age of 59 , unless an  
            exception applies.  For distributions made after August 17,  
            2006, Section 882 of the PPA of 2006 amended IRC Section 72(t)  
            to provide an exception from the 10% penalty for distributions  
            from a governmental defined benefit pension plan to a  
            qualified public safety employee who separates from service  
            after the age of 50.  The exception applies to distributions  
            made to public safety employees after December 31, 2006.   
            Existing federal law also provides tax relief from the penalty  
            to public safety officers who use distributions received from  
            governmental plans to pay for health and long-term care  
            insurance for himself/herself or his/her spouse or dependents  
            (IRC Section 402, as amended by Section 845 of the PPA).    
            This exception from the 10% penalty tax applies to  
            distributions made after December 31, 2006.

          Existing state law conforms to federal law, as of January 1,  
            2005, with respect to taxation of qualified retirement plans,  
            except that California imposes the early withdrawal penalty at  
                 2 %, rather than 10%.  SB 32 x8 provides partial  
            conformity to federal tax laws by allowing relief from the 2  
            % penalty for early distributions made to public safety  
            employees.  Due to the nature of their jobs, public safety  
            employees often retire early, well before age 59 . However,  
            those retired employees are unable to access all of their  
            retirement funds without paying the penalty under California  
            law. 

          While some federal law changes relating to qualification of  
            federal plans are automatically incorporated into California  
            tax laws, specific state legislation in other areas is  
            required for federal law enacted after the last conformity  
            date to apply for California tax purposes.  Thus, existing  
            state law provides that federal changes to Part I of  









                                                                  SB 32 x8
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            Subchapter D of Chapter 1 of IRC Sections 401 through 420,  
            inclusive, relating to pension, profit-sharing, stock bonus  
            plans, other employee benefit plans, and IRC Section 457,  
            relating to deferred compensation plans of state and local  
            governments and tax-exempt organizations, automatically apply  
            without regard to taxable years to the same extent as  
            applicable for federal income tax purposes.  All federal  
            changes made to those IRC sections are automatically adopted  
            by California without regard to the specified date.   
            Therefore, as of December 31, 2006, California automatically  
            conformed to the PPA changes to IRC Section 402 relating to  
            employee benefits plans and already allows public safety  
            officers to use up to $3,000 of distributions from  
            governmental plans to pay for qualified health insurance  
            premiums or qualified long-term care insurance contracts.  In  
            addition, California also conforms to the PPA provision  
            providing an exclusion from gross income for distributions  
            from eligible governmental plans to be used to pay qualified  
            health insurance premiums and long-care costs and, therefore,  
            no state legislation is needed to conform to that provision. 

           6)Erroneous Refund Penalty  .  Recently, Congress decided that on  
            and after May 25, 2007, taxpayers filing an erroneous claim  
            for refund should face a penalty equal to 20% of the  
            disallowed amount of the claim, unless the taxpayer shows a  
            reasonable basis for the refund.   The penalty does not apply  
            to any part of the disallowed amount of the claim that relates  
            to the earned income credit or on which the accuracy-related  
            or fraud penalties are charged.  The purpose of penalties is  
            to encourage voluntary compliance.  Taxpayers often take  
            aggressive tax positions, and with taxpayers petitioning FTB  
            for hundreds of millions of dollars in refund claims each  
            year, failing to conform to the erroneous refund penalty may  
            encourage California taxpayers to continue to make tenuous  
            refund claims, especially, since the Internal Revenue Service  
            (IRS) and many other states apply the penalty.  

          When Congress was debating whether or not to enact the erroneous  
            refund penalty, the Treasury Assistant Secretary for Tax  
            Policy, Eric Solomon, was asked to testify regarding the  
            penalty before the Senate Finance Committee on Ways to Reduce  
            the Tax Gap in 2007.  In his testimony, he explained that,  
            under current law, the accuracy-related penalty that a  
            taxpayer might pay, generally, depends on the amount of  
            underpayment of tax.  If a taxpayer wrongfully claims a  









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            refund, however, there is no penalty as long as no additional  
            tax liability is attributable to the wrongful claim, as often  
            happens when there has been over-withholding. Mr. Solomon  
            stated that "the IRS has observed aggressive behavior that is  
            undeterred by the tax code's current accuracy-related penalty  
            framework, which is geared toward deterrence of reported tax  
            deficiencies.  As a practical matter, some taxpayers and their  
            advisors may be taking advantage of the existing penalty  
                                           structure by aggressively claiming credits that generate  
            refunds, in an effectively risk-free gamble."  To address this  
            problem, the IRS suggested an imposition of a penalty on an  
            unreasonable claim for refund or credit.  As emphasized by Mr.  
            Solomon, the erroneous refund penalty creates "a parallel  
            system of deterrence applicable even if the taxpayer is in a  
            refund, rather than a deficiency, procedural posture, thus  
            stemming the tide of aggressive claims that are made without  
            reasonable basis or reasonable cause, regardless of the  
            procedural context."  ("Testimony of Treasury Assistant  
            Secretary for Tax Policy, Eric Solomon, Before the Senate  
            Finance Committee on Ways to Reduce the Tax Gap",  
             http://www.treas.gov/press/releases/hp360.htm  ). 

          SB 32 x8 seeks to implement a similar penalty to deter taxpayers  
            from filing aggressive claims for refund.  Opponents of the  
            erroneous refund penalty, however, assert that the terms of  
            the penalty, such as "reasonable basis" and "excessive amount"  
            are undefined, that the penalty disproportionately punishes  
            taxpayers compared to the amount of noncompliance, and that no  
            reasonable cause exception exists, among other arguments.  To  
            alleviate the burden of this penalty on individuals who,  
            generally, are not sophisticated in complicated tax matters,  
            SB 32 x8 (similarly to AB 1580 from last year) provides an  
            exemption for the vast majority of individuals.  Thus,  
            individuals with adjusted gross income of less than $250,000  
            (in the case of single/married filing jointly taxpayers) or  
            $125,000 (married filing separately) are not subject to the  
            erroneous refund penalty under this bill.  

           7)"Kiddie" Tax  .   SB 32 x8 would conform to federal law by  
            increasing the age of minor children for purposes of the  
            "kiddie" tax.  This tax requires unearned income (e.g.,  
            interest, dividends, etc.) of children under a specified age  
            to be taxed at the parents' tax rate.  The federal law was  
            initially introduced to address certain practices whereby  
            wealthy taxpayers would transfer assets like stocks or bonds  









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            to their children, who usually paid tax at a lower rate.  In  
            2005, the federal law was changed to apply to children under  
            the age of 18, and in 2007, those rules were changed again to  
            apply to dependent children under the age of 24. 

           8)Inflation-indexing of gross income limitations on retirement  
            savings incentives  .  For taxable years beginning on or after  
            January 1, 2007, the PPA indexes the income limits for  
            Individual Retirement Account (IRA) contributions beginning in  
            2007.  The indexing applies to the income limits for  
            deductible contributions for active participants in an  
            employer-sponsored plan,<1> the income limits for deductible  
            contributions if the individual is not an active participant  
            but the individual's spouse is, and the income limits for Roth  
            IRA contributions.  Indexed amounts are rounded to the nearest  
            multiple of $1,000.  SB 32 x8 would conform the Personal  
            Income Tax Law to those provisions. 

           9)Grants for qualified energy property  .  Federal law allows a  
            renewable electricity income tax credit for the production of  
            electricity from qualified energy resources at qualified  
            facilities.  Qualified energy resources generally include  
            wind, biomass, solar energy, geothermal energy, small  
            irrigation power, municipal solid waste, qualified hydropower  
            production and marine and hydrokinetic renewable energy.  To  
            be eligible for this credit, electricity produced from the  
            qualified energy resources at qualified facilities must be  
            sold by the taxpayer to an unrelated person.  The production  
            tax credit for electricity produced from renewable resources  
            is generally claimed over a 10-year period and is not  
            refundable. 

          In addition to the renewable electricity production tax credit,  
            under federal tax law, a taxpayer is allowed to claim a credit  
            for the investment in certain property.  The investment tax  
            credit includes an energy credit that is allowed for certain  
            qualifying energy property placed in service.  The qualifying  
            energy property includes certain fuel cell, solar, geothermal  
            power production, small wind energy property, combined heat  
            and power system, and geothermal heat pump property.  The  
            energy credit is generally equal to 30% of the taxpayer's  
          ---------------------------
          <1> Under the PPA, for 2007, the lower end of the income phase  
          out for active participants filing a joint return is $80,000, as  
          adjusted to reflect inflation.









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            basis in qualified fuel cell property, certain solar energy  
            property, and wind energy property.  It is 10% of the  
            taxpayer's basis in all other types of qualifying energy  
            property.  The investment tax credit may be claimed entirely  
            in the year the facility is placed in service.  

          In February of 2009, Congress enacted, and the President signed,  
            the American Recovery and Reinvestment Act (ARRA), which,  
            among other things, allows taxpayers to make an irrevocable  
            election to treat certain qualified property that is part of a  
            qualified investment credit facility placed in service in 2009  
            through 2013 as energy property eligible for a 30% investment  
            credit.   The investment tax credit option may be attractive  
            to tax investors that are not sure of their tax liability in  
            the future (the 10-year period).   Furthermore, the ARRA  
            authorizes the Secretary of Treasury to provide a grant to  
            each person who places in service during 2009 or 2010 energy  
            property that is either (a) an electricity production facility  
            otherwise eligible for the renewable electricity production  
            credit, or (b) qualifying property otherwise eligible for the  
            energy investment tax credit.  The grant amount equals to up  
            to 30% the basis of the qualified property.  In other words, a  
            taxpayer that elects to receive the investment tax credit can  
            also elect to receive a 30% grant rather than the 30% tax  
            credit.  The ability to receive the credit or grant in the  
            year in which property is placed in service helps owners to  
            finance the project.   

          Congress excluded the grant proceeds from a taxpayer's income  
            but required that the basis of the property be reduced by 50%  
            of the amount of the grant.  In addition, some or all of each  
            grant is subject to recapture if the grant eligible property  
            is disposed of by the grant recipient within five years of  
            being placed in service.   The provision also permits  
            taxpayers to claim the credit with respect to otherwise  
            eligible property that is not placed in service in 2009 and  
            2010 so long as construction begins in either of those years  
            and is completed prior to 2013 (in the case of wind facility  
            property), 2014 (in the case of other renewable power facility  
            property eligible for credit under IRC Section 45), or 2017  
            (in the case of any specified energy property described in IRC  
            Section 48).  Under the program, if a grant is paid, no  
            renewable electricity credit or energy credit may be claimed  
            with respect to the grant eligible property.  
           









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          The grant program was created to help developers of renewable  
            energy projects to finance these projects.  Often, developers  
            seek investors that are usually allocated 99% of the income,  
            gains, losses, deductions and tax credits of the project.   
            However, in the current economic environment the potential  
            investors may not have enough tax liability to utilize those  
            deductions and credits.  The creation of the grant program  
            allows developers to receive a federal subsidy to continue  
            with the renewable energy projects.  Committee staff notes,  
            however, that it is unclear how a grant paid after the project  
            is placed in service, i.e. after it is completed, helps  
            taxpayer with obtaining financing for the project, given the  
            current state of the financial markets. 

          In absence of an authorized statute, taxpayers must include the  
            grant proceeds as income for state purposes.  SB 32 x8  
            excludes these grants from income because an unexpected tax  
            could cause project developers to terminate or delay the  
            projects, causing job losses and less renewable power for the  
            state.  SB 32 x8 also conforms to federal law by excluding  
            these grants from taxpayer's income, requiring the 50% basis  
            adjustment, and incorporating the recapture provisions of  
            Section 1603(f) of the ARRA.  

           10)Proposed Technical Amendments  .  The FTB's staff suggests the  
            following technical amendments to SB 32 x8.  

          AMENDMENT 1

          On page 23, line 33, strike out "50(a)", and insert:

          AMENDMENT 2

          On page 23, line 34, after "Code, and", strike out "increased by  
            any recapture provided," and insert:

          adjusted in accordance with rule applied

          AMENDMENT 3

          On page 25, line 3, strike out "events," and insert:

          event

          AMENDMENT 4









                                                                  SB 32 x8
                                                                  Page N

          On page 83, line 34, strike out "50(a)", and insert:

          48(a) 

          AMENDMENT 5

          On page 83, line 35, after "Code, and", strike out "increased by  
            any recapture provided", and insert:

          adjusted in accordance with rules applied
           
          AMENDMENT 6 

          On page 107, line 21, strike out "events", and insert:

          event

            AMENDMENT 7 

            On page 107, line 22, strike out "April 6, 2007", and insert:

            April 16, 2007

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Federation of Teachers
          California Wind Energy Association
          Center for Responsible Lending 
          Service Employees International Union
          Solar Alliance

           Opposition 
           
          California Bankers Association
          California Chamber of Commerce
          California Taxpayers' Association
          California Manufacturing and Technology Association
          Tech America
          Western States Petroleum Association
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916)  
          319-2098 









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