BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 50 HEARING: 3/16/11
AUTHOR: Hill FISCAL: Yes
VERSION: 2/18/11 TAX LEVY: Yes
CONSULTANT: Grinnell
SAN BRUNO GAS EXPLOSION TAX EXCLUSION
Provides two state tax benefits to taxpayers affected by
the San Bruno Natural Gas Pipeline Explosion
Background and Existing Law
On September 9, 2010, a natural gas pipeline operated by
the Pacific Gas and Electric Company (PG&E) exploded in San
Bruno, California, killing eight people, destroying 53
homes, and damaging 175 residences. Acting Governor Abel
Maldonado proclaimed a state of emergency for the explosion
site as a state disaster; however, the federal government
did not declare the area a disaster for federal purposes.
In response, the Legislature approved the traditional three
changes to tax law when disaster strikes: a state backfill
for local property tax revenue losses attributable to
downward reassessment of disaster-affected property, a
prohibition on the assessor revoking the homeowners'
exemption for disaster-affected property, and enhanced
disaster losses for affected taxpayers (ABx6 11, Hall,
2010).
In addition to giving money directly to residents for
temporary housing and other basic necessities, PG&E set up
the "Rebuild San Bruno Fund," a $100 million fund to
compensate affected individuals by:
Paying for costs and losses not reimbursed by
insurance.
Cash disbursements to residents for immediate
financial assistance.
Reimbursements to the City of San Bruno for
disaster response and rebuilding public
infrastructure.
Additionally, individual and corporate donors sent nearly
$395,000 to the City of San Bruno, which distributed funds
AB 50 -- 2/18/11 -- Page 2
to assist victims with recovery and rebuilding. The
American Red Cross also distributed $440,507 to meet
personal living expenses, housing needs, furnishings,
health needs, lost wage replacement, and mental health
support.
Generally, federal and state tax law provide that "income"
includes all income from any source, such as wages,
dividends, or capital gains, unless specifically excluded,
such as employer's health insurance contributions,
insurance payments, or specified discharges of mortgage
indebtedness. State tax law conforms as of January 1, 2010
to Internal Revenue Code §139, which excludes from income
"disaster relief compensation," including payments for
personal, family, living, or funeral expenses, as well as
payments for expenses for rebuilding or rehabilitating a
personal residence or replacing personal property.
However, the tax treatment only applies to payments made in
connection with federally declared disasters, and the
federal government never acted to declare the San Bruno
explosion as a federal disaster. Because state law
conforms to the federal law, the Legislature must enact a
bill if it wants to exclude payments made to victims of the
San Bruno pipeline explosion from income for state
purposes.
Additionally, federal law allows taxpayers special capital
gains treatment when a disaster destroys their principal
residence. When the insurance payment exceeds the
taxpayer's adjusted basis in the property, therefore
generating a capital gain in a transaction known as an
"involuntary conversion." In a disaster, federal and state
law excludes the first $250,000 (single)/$500,000 (joint)
of payments from income, similar to when a taxpayer sells
the home. The taxpayer may also defer the tax on the
capital gain until he or she purchases a replacement
property is sold if the payments exceed the above
thresholds. State law conforms to the federal law as of
January 1, 2010.
Proposed Law
The bill deems that the San Bruno explosion to be a
qualified disaster for purposes of disaster payments,
thereby allowing taxpayers to exclude disaster relief
AB 50 -- 2/18/11 -- Page 3
payments from state income. The measure also provides
similar treatment for involuntary conversions resulting
from a disaster.
AB 50 changes a reference in the section of law that allows
excess disaster loss treatment for taxpayers affected by
this disaster to point to the correct section of law
conforming to federal law on net operating losses, which
the Legislature moved in a separate measure enacted on the
same day as ABx6 11.
The measure takes effect immediately as an urgency statute.
State Revenue Impact
According to the Franchise Tax Board (FTB), AB 50 results
in revenue losses to the state of $300,000 in 2010-11 and
$6,000 in 2011-12.
Comments
1. Purpose of the bill . On September 9, 2010, a natural
gas pipeline owned by Pacific Gas and Electric Company
(PG&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 city of San
Bruno 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.
The 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. When disaster strikes . Each year, the Legislature
enacts bills to provide three different tax benefits for
taxpayers and counties affected by disasters. Through last
AB 50 -- 2/18/11 -- Page 4
year, the Legislature has amended the Revenue and Taxation
Code several times for separate disasters to ensure that
Assessors may not deny homeowners' exemptions for
disaster-related reasons, added more than 50 code sections
to allow for excess disaster losses for both the Personal
Income Tax Law and the Corporation Tax Law, and enacted
more than 100 sections providing for the first year
backfill of local property tax losses and procedures
therein resulting from disaster reassessments. Last year,
the Legislature enacted four disaster-specific measures, AB
1662 (Portantino), AB 1690 (Chesbro), AB 2136 (V.M. Perez)
and ABx6 11, and another which triggers the preclusion on
assessors revoking homeowners' exemptions on
disaster-affected property whenever the Governor declares a
disaster, negating the need for a specific statutory change
for each disaster (SB 1494, Committee on Revenue and
Taxation). AB 50 goes a step further, deeming disaster
relief payments made to victims of the explosion excludible
from state income for tax purposes.
3. Reverse Non-conformity ? Generally, when the federal
government changes its tax laws, California must enact its
own conformity legislation to reduce differences between
the two codes, thereby easing the tax preparation burden on
taxpayers, tax preparers, and FTB. However, state tax law
did not conform to changes made in federal law after 2005
until last year, when the Legislature enacted a bill
conforming to changes through January 1, 2009 (SB 401,
Wolk). AB 50 changes the two sections of state law that
link to Internal Revenue Code §139, which provides that
disaster relief payments are excluded for income for
federal purposes whenever the federal government declares a
disaster, and §1033, which provides involuntary conversion
treatment for properties destroyed in such a case.
AB 50 allows these benefits solely for state purposes by
modifying California laws that link to the Internal Revenue
Code, but taxpayers do not have these benefits when paying
federal income tax. Providing a state benefit in absence
of similar federal treatment is precedential - never before
has California enacted an exclusion for payments made to
disaster-affected residents, although state-only income
exclusions exist for other purposes. AB 50 grants
taxpayers a benefit on their state taxes, but may also
confuse them because of the opposite federal treatment;
taxpayers are not used to different treatment of the same
AB 50 -- 2/18/11 -- Page 5
income, a treatment which runs opposite to the
Legislature's conformity efforts. Instead of moving toward
more harmony between federal and state tax law, the
Committee may wish to consider whether the precedent AB 50
creates and the distance it creates between federal and
state tax law is worth the benefit for disaster-affected
taxpayers.
4. God and Man . The President can declare federal
disasters, but they can also result from a terroristic or
military action, an accident involving a common carrier as
declared by the Secretary of the Treasury, among others.
While Congress could change federal law making the San
Bruno explosion a federal disaster, the disaster payments
are currently taxable federal income. In San Bruno, the
state declared a disaster, but the federal government did
not, so taxpayers must include disaster relief payments
from the City, PG&E, and the American Red Cross as taxable
income, and cannot treat the destruction of a home as an
involuntary conversion for either federal or state purposes
absent a change. The federal government had good reason
for not declaring the pipeline explosion a disaster because
the resulting tax treatment is traditionally reserved for
"acts of God," such as flood, fires, and hurricanes, not
man-made ones like the pipeline explosion. For example,
when British Petroleum (BP) spilled oil in the Gulf of
Mexico, the subsequent disaster relief payments to affected
residents are taxable income, because Congress did not
specifically change federal law to deem that disaster a
natural one for tax purposes. The payments are also a
deductible expense for BP. Congress considered several
measures to treat the BP payments as such, yet no bill was
enacted. The Committee may wish to consider whether
treating this man-made disaster as a natural one for tax
purposes creates a questionable precedent, especially when
Congress did not act on the BP oil spill.
5. On the Merits of Converting . AB 50 changes tax law in
two ways for taxpayers affected by the San Bruno fire.
First, the bill excludes from gross income any qualified
disaster relief payment. Second, the bill allows
involuntary conversion treatment for property destroyed in
the disaster, providing a reduced capital gain upon sale.
"Disaster Relief Payments" include any amounts:
AB 50 -- 2/18/11 -- Page 6
To cover reasonable and necessary personal, family,
living, or funeral expenses incurred as a result of
the qualifying disaster, or expenses incurred to
rehabilitate a personal residence or to repair or
replace its contents.
By any government entity in connection with a
qualifying disaster to promote the general welfare,
but only to the extent expenses are not covered by
insurance payments.
"Involuntary conversions" are not what Spanish Inquisitors
did but instead provide a benefit to taxpayers who have
homes destroyed in a disaster. When the compensation
(usually insurance proceeds) provided when a property is
destroyed, stolen, or condemned exceeds the adjusted basis,
the taxpayer generates a capital gain.
For non-personal residences, involuntary conversion
treatment allows taxpayers to defer any gain if they
receive reimbursement in the form of similar property.
Taxpayers may also defer the gain if they use the
compensation to replace the destroyed property within two
years after the first tax year of the gain. For personal
residences, taxpayers can also treat involuntarily
converted principal residences as if they sold the property
by excluding the first $250,000 (single)/$500,000 (joint)
of gains from income, and defer the rest if they purchase
replacement property.
6. Technical Amendment Needed . To specify the income
exclusion for payments received before the beginning of the
current year, FTB suggests that an operative date be
specified by inserting "This section shall apply to
payments made on or after September 9, 2010" on Page 2,
Line 7, after "Code"
Assembly Actions
Assembly Revenue and Taxation Committee: 9-0
Assembly Appropriations Committee:15-0
Assembly Floor: 75-0
Support and Opposition (3/10/11)
AB 50 -- 2/18/11 -- Page 7
Support : Pacific Gas and Electric Company; American
Federation of State, County and Municipal employees
(AFSCME), AFL-CIO.
Opposition : Unknown.