BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1492
                                                                  Page  1

          Date of Hearing:  June 28, 2010

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                              Anthony Portantino, Chair

            SB 1492 (Committee on Revenue and Taxation) - As Introduced:   
                                   March 15, 2010

          Majority vote.  Fiscal committee.

           SENATE VOTE  :  30-0
           
          SUBJECT  :  Voluntary disclosure agreements:  income taxes.  

           SUMMARY  :  Makes several changes to the voluntary disclosure  
          agreement (VDA) program, administered by the Franchise Tax Board  
          (FTB).  Specifically,  this bill :   

          1)Allows taxpayers to file the most recent tax return as late as  
            the extended due date. 

          2)Eliminates the underpayment-of-estimated-tax penalty when  
            imposed because the VDA is signed after the quarterly tax  
            payment due date.

          3)Allows VDA applicants requesting an Installment Payment  
            Arrangement (IPA) additional time to satisfy the VDA if the  
            IPA request is denied after the VDA period ends.

          4)Provides that the changes to the VDA program are effective for  
            all VDAs entered into on or after January 1, 2011. 

           EXISTING LAW  :

          1)Allows the FTB to enter into a VDA with qualified taxpayers  
            and waive the following penalties that would normally apply  
            for the period covered by the VDA: 

             a)   Failure to make and file a return under Revenue and  
               Taxation Code (R&TC) Section 19131.

             b)   Failure to pay tax by the due date under R&TC Section  
               19132.

             c)   Underpayment of estimated tax under R&TC Sections 19136  








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               and 19142.

             d)   Failure to file a Corporate Organization Statement under  
               R&TC Section 19141.

             e)   Failure to furnish information or maintain records under  
               R&TC Section 19141.5.

             f)   Failure to file a partnership return under R&TC Section  
               19172.

             g)   Failure to file information returns under R&TC Section  
               19183.

             h)   Any penalty related to relief from contract voidability  
               under R&TC Section 23305.1.

          2)Allows qualified taxpayers requesting a VDA to remain  
            anonymous until the signed agreement is returned to the FTB.  

          3)Defines qualified taxpayers for the purposes of a VDA as  
            qualifying business entities, including corporations, certain  
            limited liability companies (LLCs), qualified trusts,  
            qualified shareholders, qualified members of LLCs, and  
            qualified beneficiaries of qualified trusts.  

          4)Defines a "qualifying business entity" as any out-of-state  
            corporation or LLC not classified as a corporation that has  
            never filed a California income or franchise tax or LLC return  
            and that voluntarily applies for a VDA prior to any contact  
            from the FTB regarding income, franchise, or LLC tax  
            liability. 

          5)Defines a "qualified shareholder" as a nonresident shareholder  
            of an S corporation that has applied for a VDA and disclosed  
            all material facts pertaining to the shareholder's liability. 

          6)Defines a "qualified member" as an individual who is a  
            nonresident on the signing date or a corporation or LLC that  
            is not organized in California nor qualified or registered  
            with the Office of the Secretary of State.  A qualified member  
            in all cases is a member of an LLC that has applied for a VDA  
            and disclosed all material facts pertaining to the member's  
            liability.  









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          7)Defines a "qualified trust" as a trust that has never been  
            administered in California and that has had no resident  
            beneficiaries in California for six taxable years ending  
            immediately preceding the signing date of the VDA.  However,  
            "qualified trust" includes a trust with a resident beneficiary  
            whose interest in the trust is contingent and who has never  
            received a distribution from the trust. 

          8)Defines a "qualified beneficiary" as an individual who is a  
            beneficiary of a qualified trust and is a nonresident on the  
            signing date of the VDA and for each of the preceding six  
            taxable years. 

          9)Provides that, under the terms of the VDA, the FTB may agree  
            to waive certain penalties for noncompliance, including the  
            underpayment-of-estimated-tax penalty, but requires specified  
            reporting and payment requirements for the six taxable years  
            immediately preceding the agreement.  For the taxable years  
            ending more than six years prior to the agreement, the  
            applicant's income or franchise tax, additions to tax, fees,  
            or penalties are waived. 

          10)Requires approved taxpayers to return a signed agreement to  
            the FTB, make all payments, and submit all returns to the FTB  
            within a 120-day statutory deadline that begins upon the  
            signing date of the VDA.  Failure to perform timely renders  
            the VDA null and void.  An exception to the requirement that  
            complete payment be made within 120 days allows the applicant  
            to enter into an IPA.  A taxpayer with a VDA who is also  
            approved for an IPA would be allowed to make monthly  
            installment payments on the outstanding tax liability for up  
            to 36 months and would still be in compliance with VDA. 

          11)Requires that the three-member Board of the FTB approve all  
            VDAs.

           FISCAL EFFECT  :  According to FTB staff, this measure will have  
          no impact on state income tax revenues.  

           COMMENTS  :   

           1)Purpose of this Bill  .  The purpose of this bill, sponsored by  
            the FTB, is "to revise the VDA statutes to eliminate  
            impediments to satisfying the VDA, thus reducing the risk of  
            taxpayers failing to comply with the VDA and incurring  








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            penalties and collective actions."

           2)Background  .  According to the FTB, "Some out-of-state  
            taxpayers that conduct business in California as defined by  
            the R&TC may not be aware of their California franchise or  
            income tax liability or filing requirements.  The FTB also may  
            not readily identify such taxpayers through its filing  
            enforcement or other compliance programs.  Given the  
            substantial penalties for delinquent filing of returns and  
            late payment of taxes, and the open statute to audit all  
            taxable years preceding identification, these taxpayers may be  
            reluctant to disclose their California presence and report any  
            tax liability voluntarily. 

          "Current VDA statutes allow qualified entities, qualified  
            shareholders, or qualified beneficiaries to disclose their  
            liability voluntarily through a VDA.  The qualified entities,  
            qualified shareholders, or beneficiaries that choose to  
            participate in a VDA may anonymously apply to the FTB and in  
            exchange, if accepted, must disclose their California tax  
            liability for the immediately preceding six taxable years.   
            Under the VDA statute, the FTB in turn waives its authority to  
            assess taxes, additions to tax, fees, or certain penalties for  
            the taxable years ending before the six taxable years covered  
            by the VDA.

            "The Multistate Tax Commission (MTC) has an agreement with 30  
            states, including California, which provides incentives for  
            taxpayers to request a VDA.  The states that participate in  
            MTC's voluntary disclosure program follow guidelines and  
            processes provided by the MTC, thereby allowing applicants to  
            request VDAs for multiple states through the MTC.  The  
            voluntary disclosure period in these states is the four  
            taxable years ending before the signing date of the VDA.  
           
            "Each of these states allows the taxpayer to remain anonymous  
            during the application period.  As a result, the estimated tax  
            payments due in the year immediately after the voluntary  
            disclosure period may be late, and the taxpayer is penalized  
            for the late payments.  The other states in the MTC Compact  
            address penalties on a case-by-case basis.  With the exception  
            of California's six-year VDA period, current state law  
            generally conforms to the MTC's VDA application procedures and  
            guidelines."









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           3)Related Legislation  .  

          AB 3073 (Revenue and Taxation Committee), Chapter 354, Statutes  
            of 2004, allows limited liability companies to qualify for  
            VDAs.

            SB 1185 (Revenue and Taxation Committee), Chapter 543,  
            Statutes of 2001, allows multi-jurisdictional trusts to  
            qualify for VDAs.

            AB 2280 (Caldera), Chapter 367, Statutes of 1994, allows the  
            FTB to enter into VDAs with out-of-state business taxpayers  
            that unknowingly have a tax liability in the state of  
            California.  



           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Franchise Tax Board (sponsor)
           
            Opposition 
           
          None on file

           Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916)  
          319-2098