BILL ANALYSIS Ó
AB 50
Page A
CONCURRENCE IN SENATE AMENDMENTS
AB 50 (Hill)
As Amended March 17, 2011
Majority vote. Tax levy
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|ASSEMBLY: |75-0 |(March 3, 2011) |SENATE: |37-0 |(March 24, |
| | | | | |2011) |
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Original Committee Reference: REV. & TAX.
SUMMARY : Excludes from gross income "qualified disaster relief
payments" provided to victims of the natural gas transmission
line explosion (Explosion) of September 9, 2010, in the City of
San Bruno (City).
The Senate amendments clarify that the gross income exclusion
applies to payments made on or after September 9, 2010.
EXISTING LAW :
1)Defines gross income, for purposes of the Personal Income Tax
(PIT) Law, as all income from whatever source derived, unless
specifically excluded.
2)Conforms to Internal Revenue code (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; or,
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
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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) estimates revenue
losses of $300,000 in fiscal year (FY) 2010-11 and $6,000 in FY
2011-12.
AS PASSED BY THE ASSEMBLY , this bill:
1)Provided that, for purposes of the PIT Law, the Explosion
shall be treated as a "qualified disaster" within the meaning
of IRC Section 139, which excludes "qualified disaster relief
payments" from gross income.
2)Provided that, for purposes of the PIT Law, the Explosion
shall be treated as a "federally declared disaster" within the
meaning of IRC Section 1033, which provides special rules for
involuntary conversions caused by such disasters.
3)Corrected 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.
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<1> Any gain is deferred until the sale of the replacement
property.
AB 50
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4)Would take immediate effect as a tax levy.
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)Committee 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 11 X6 (Hill) Chapter 2,
Statutes of 2009-10 Sixth Extraordinary Session into law,
which added the Explosion to the list of disasters eligible
for full state reimbursement of local property tax losses,
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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
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 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";
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ii) To cover reasonable and necessary expenses incurred
to rehabilitate a personal residence or to repair or
replace its contents; or,
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.
e) 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
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
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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.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
FN: 0000118