BILL ANALYSIS Ó
AB 50
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Date of Hearing: February 14, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 50 (Hill) - As Amended: February 3, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income and corporation taxes: gross income:
exclusion: capital gains: exclusion: disaster loss carryovers:
San Bruno gas explosion
SUMMARY : Excludes from gross income compensation provided by
the Pacific Gas and Electric Company (PG&E), the City of San
Bruno (City), or the American Red Cross, to victims of the
natural gas transmission line explosion (Explosion) of September
9, 2010 in the City. Specifically, this bill :
1)Provides that, for purposes of the Personal Income Tax (PIT)
Law, the Explosion shall be treated as a "qualified disaster"
within the meaning of Internal Revenue Code (IRC) Section 139.
2)Provides that any compensation provided by PG&E, the City, or
the American Red Cross, to a victim of the Explosion shall be
treated as a "qualified disaster relief payment" within the
meaning of IRC Section 139.
3)Excludes from gross income any gain from the compulsory or
involuntary conversion of property as a result of its partial
or total destruction by the Explosion.
4)Corrects an obsolete statutory reference in the laws currently
allowing the carryover of certain losses sustained in the
County of San Mateo as a result of the Explosion.
5)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Defines gross income, for purposes of the PIT Law, as all
income from whatever source derived, unless specifically
excluded.
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2)Conforms to IRC Section 139, which excludes from gross income
any amount received by an individual as a "qualified disaster
relief payment." A "qualified disaster relief payment"
includes any amount paid:
a) To cover reasonable and necessary personal, family,
living, or funeral expenses incurred as a result of a
"qualified disaster";
b) To cover reasonable and necessary expenses incurred to
rehabilitate a personal residence or to repair or replace
its contents; and,
c) By any government entity in connection with a "qualified
disaster" to promote the general welfare, but only to the
extent any expense compensated by such a payment is not
otherwise compensated for by insurance.
3)Defines a "qualified disaster" to include any federally
declared disaster.
4)Provides, under the PIT Law, for a gain or loss upon the
disposition of property.
5)Allows taxpayers to exclude from gross income gains from:
a) The sale or exchange of property if the property, for
two of the five years prior to the sale, was owned and used
as the taxpayer's principal residence. The allowable
exclusion is $250,000 (or $500,000 for taxpayers who are
married filing jointly); and,
b) The involuntary conversion of property, resulting from
destruction, into similar property<1> or into money used to
acquire replacement property within a specified period.
6)Provides, under both the PIT Law and the Corporation Tax Law,
for the carryover to specified taxable years of certain losses
sustained in the County of San Mateo as a result of the
Explosion.
FISCAL EFFECT : The Franchise Tax Board (FTB) has not yet
---------------------------
<1> Any gain is deferred until the sale of the replacement
property.
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provided a revenue estimate for the most recent version of this
bill. However, in its analysis of the originally introduced
version, FTB estimated revenue losses of $600,000 in fiscal year
(FY) 2010-11, $36,000 in FY 2011-12, and $30,000 in FY 2012-13.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
On September 9, 2010, a natural gas pipeline owned by
ÝPG&E] exploded. The blast killed 8, injured 66 people and
destroyed 37 homes.
The residents of Glenview have had their lives destroyed by
the explosion. PG&E, the Red Cross and the ÝCity] provided
emergency aid to victims of the blast. The victims face
inflated personal income tax bills based on the appearance
of a one-time cash windfall, when in fact the cash payments
were used for food, transportation and hotel accommodations
following the disaster.
This bill intends to provide tax relief to the victims of
the September 9, 2010 San Bruno explosion. The residents
of Glenview have been through enough and should not have to
face taxes that arise from this tragedy.
2)Proponents state:
Compensation to assist with the recovery from an unforeseen
catastrophe should not be considered as income for tax
purposes. The funds provided by PG&E are intended for
restoring homes and lives; therefore, it would be
inherently unfair and compassionless to allow those funds
to increase a victim's tax liability.
3)FTB notes the following in its staff analysis of this bill:
a) The terms "victim" and "compensation" are undefined in
this bill. These terms could have a broad meaning and may
lead to disputes between FTB and taxpayers. The author may
wish to amend the bill to include definitions;
b) The terms "compulsory or involuntary conversion" are
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used without reference to the provisions of existing law
pertaining to involuntary conversions. For clarity, the
author may wish to amend the bill to reference the
applicable provisions of existing law; and,
c) Under the terms of this bill, any payments made from
PG&E to victims of the Explosion - regardless of reason -
would remain excludable from gross income indefinitely.
The lack of any limit in this regard could result in income
being excluded from tax for reasons other than those
intended. Accordingly, the author may wish to amend the
language to provide a limitation as to grounds for
compensation.
4)Committee Staff Comments:
a) The Explosion : On September 9, 2010, a 30-inch natural
gas pipeline owned by PG&E exploded in flames in San Bruno,
California. The Explosion, which registered as a 1.1
magnitude earthquake, caused the death of eight
individuals. In addition, FTB notes that the Explosion
caused damage to 175 homes, of which 53 were completely
destroyed. On September 10, 2010, acting Governor Abel
Maldonado proclaimed a state of emergency declaring the
Explosion site to be a state disaster. However, the
Explosion was never declared a federal disaster. Such a
federal declaration would have triggered the automatic
exclusion of qualified disaster relief payments under both
state and federal law. The state did act, on its own
initiative, to provide tax relief to victims of the
disaster. Specifically, on October 19, 2010, Governor
Arnold Schwarzenegger signed AB X6 11 (Hill) into law,
which added the Explosion to the list of disasters eligible
for full state reimbursement of local property tax losses,
beneficial homeowners' property tax exemption treatment,
and special "carry forward" treatment of excess disaster
losses.
b) The PG&E Fund : On September 13, 2010, PG&E announced
that it would be setting aside up to $100 million to assist
individuals impacted by the Explosion. Among other things,
this fund would be used to reimburse insurance deductibles,
and to help those with needs "above and beyond" the
temporary housing and other basic necessities already
provided. Specifically, PG&E announced that it would be
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providing cash disbursements of up to $50,000 per household
to residents in the affected area. PG&E also announced
that individuals would not be asked to waive potential
claims in order to receive these funds.
The author notes that, according to PG&E, $17.7 million has
already been distributed from the fund. Of this total,
roughly $8.5 million has been paid to 668 people for
"immediate relief," while roughly $4.4 million has been
paid to 440 people to cover "claims." In addition, the
author notes that the City and the American Red Cross have
disbursed $395,000 and $440,000 respectively.
c) The Tax Consequences of Emergency Aid : At a town hall
meeting following the Explosion, victims and community
leaders expressed concerns that those receiving emergency
aid would be subject to increased tax liability. These
concerns appear to be well-founded. While state law
conforms to the federal exclusion for "qualified disaster
relief payments," the underlying disaster must generally be
federally declared for the exclusion to apply. The author
notes that, "ÝThe Explosion] was not a presidentially
declared disaster, and as such the payments made by PG&E,
the Red Cross and the ÝCity] may not be excludable from
personal income for the victims."
d) What is the Intended Scope of the Exclusion? : This bill
provides that, for state purposes, the Explosion shall be
treated as a "qualified disaster." This bill also provides
that "any compensation provided by ÝPG&E], the ÝCity], or
the American Red Cross . . . shall be treated as a
qualified disaster relief payment . . . ." Unfortunately,
when read together, these two provisions make it difficult
to discern the exact scope of the intended exclusion.
Specifically, Committee staff has identified the following
questions:
i) Given that the Explosion is to be treated as a
"qualified disaster" under IRC Section 139, why is it
also necessary to explicitly provide that payments made
by PG&E, the City, or the American Red Cross shall be
treated as "qualified disaster relief payments"?
Arguably, if the state treats the Explosion as a
"qualified disaster" under IRC Section 139, then payments
from any source (and not just the three listed entities)
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will fall under the exclusion, provided they meet Section
139's criteria for "qualified disaster relief payments."
Does the author wish to limit the exclusion to payments
made by the three listed entities? Or does the author
wish the exclusion to apply to all payments falling
within Section 139's definition of "qualified disaster
relief payments"?
ii) Under this bill, any compensation provided by one of
the three listed entities "shall be treated as a
qualified disaster relief payment." Does this mean that
payments from the listed entities shall be excluded from
gross income so long as they meet IRC Section 139's
criteria for qualified disaster relief payments? Or,
conversely, does this mean that any payment from one of
the listed entities shall be excluded, irrespective of
whether it meets Section 139's criteria? If the second
interpretation is adopted, this could have far-reaching
and perhaps unintended consequences. Incidentally, this
second interpretation appears to be the one adopted by
FTB in its staff analysis of this bill.
Given the questions raised above, the author may wish to
take amendments clarifying the intended scope of the
exclusion. For example, the author may wish to simply
provide that, for state tax purposes, the Explosion shall
be treated as a "qualified disaster" under IRC Section 139.
In this manner, all qualified disaster relief payments
will be excluded from gross income, irrespective of their
source. Of course, such an amendment would also mean that
payments must fall within Section 139's definition of
"qualified disaster relief payments" to be excluded from
gross income.
e) What Exactly is a Qualified Disaster Relief Payment? :
As noted above, "qualified disaster relief payments"
include any amount paid:
i) To cover reasonable and necessary personal, family,
living, or funeral expenses incurred as a result of a
"qualified disaster";
ii) To cover reasonable and necessary expenses incurred
to rehabilitate a personal residence or to repair or
replace its contents; and,
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iii) By any government entity in connection with a
"qualified disaster" to promote the general welfare, but
only to the extent any expense compensated by such a
payment is not otherwise compensated by insurance.
In other words, qualified payments must cover reasonable
and necessary expenses arising from the disaster. If a
private entity were simply to provide lump sum payments to
victims of a disaster, irrespective of actual damages
incurred, then the amount above and beyond that reasonably
needed for disaster-related expenses would fall outside IRC
Section 139's protections.
f) A Note on Federal Treatment : Even if this bill is
enacted, qualified disaster relief payments will not
receive the benefit of IRC Section 139 for federal income
tax purposes. This is because the Explosion was never
declared to be a federal disaster. Thus, situations would
arise where payments made to victims of the Explosion are
excluded from gross income at the state level and included
within gross income at the federal level. Treatment of
particular payments will obviously depend on the individual
circumstances of each taxpayer.
g) Involuntary Conversions : Under existing federal law, to
which California generally conforms, an involuntary
conversion occurs when property is destroyed, stolen, or
condemned, and the taxpayer receives other property or
money (usually insurance proceeds) as compensation. To the
degree this compensation exceeds the basis of the converted
property, the taxpayer realizes a gain.
There are two general circumstances under which gains from
the involuntary conversion of property are not recognized.
When property is converted involuntarily into other
property that is similar or related in service or use, no
gain is recognized. In addition, when property is
involuntary converted into money (e.g., insurance
proceeds), the owner may elect to postpone gain recognition
if replacement property is purchased within a specified
period of time.
When an individual's principal residence has been
involuntarily converted, the individual can exclude the
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realized gain as if the residence had been sold, up to the
applicable $250,000 or $500,000 maximum. If the total gain
realized is more than the maximum allowable exclusion, the
individual may defer recognition of the excess if
replacement property is purchased.
Special rules apply to a principal residence located in a
federal disaster area. No gain is recognized by reason of
the receipt of insurance proceeds for unscheduled personal
property that was part of the contents of the residence.
This is true regardless of the use to which the taxpayer
puts the insurance proceeds. All other insurance proceeds
for the residence or its contents are treated as a common
pool of funds received for the conversion of a single item
of property. Funds received for scheduled property must be
used to buy property that is similar to the converted
residence (or its contents) for the taxpayer to avoid
recognition of gain. Gain is recognized only to the extent
that the amount of the pool funds exceeds the cost of any
property similar or related in service or use to the
converted residence or its contents. Finally, the
replacement period is four years after the close of the
first tax year in which any part of the gain upon the
conversion is realized.
This bill provides that, notwithstanding any other law,
gross income shall not include any gain from the compulsory
or involuntary conversion of property caused by the
Explosion. Ostensibly, this exclusion would be far broader
than that provided by current law. Specifically, the
exclusion would seem to apply to both real and personal
property. Moreover, it would apply irrespective of whether
the destroyed property is the taxpayer's principal
residence or not. In addition, the exclusion would seem to
apply irrespective of whether a replacement property is
purchased. The Committee may wish to consider whether this
is an appropriate precedent to establish in the wake of
disasters that cause property damage. As an alternative,
the author may wish to amend the bill to provide that the
Explosion shall be treated, for state purposes, as a
federally declared disaster under IRC Section 1033, which
provides special rules for involuntary conversions caused
by such disasters.
h) This Bill's Effective Date : As a tax levy, this bill
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would go into effect immediately upon enactment, and would
apply to any compensation received on or after September 9,
2010.
i) Similar Legislation : AB 1728 (Villaraigosa), Chapter
685, Statutes of 2000, excluded from gross income
reparation payments designed to redress injustices done to
individuals required to perform slave or forced labor
during World War II. The author argues that AB 1728
provides a precedent for the gross income exclusion
provided by this measure.
j) Suggested Technical Amendment : Committee staff suggests
deleting all references to Revenue and Taxation Code
Section 17131 in Section 1 of this bill. For example,
instead of providing that the Explosion shall be treated as
a qualified disaster "under Section 17131, within the
meaning of" IRC Section 139, it would be preferable simply
to provide that the Explosion shall be treated, for state
purposes, as a qualified disaster under IRC Section 139.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
Pacific Gas and Electric Company
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098