BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1369|
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THIRD READING
Bill No: AB 1369
Author: Gatto (D)
Amended: 5/18/11 in Assembly
Vote: 27
SENATE GOVERNANCE & FINANCE COMMITTEE : 9-0, 7/6/11
AYES: Wolk, Huff, DeSaulnier, Fuller, Hancock, Hernandez,
Kehoe, La Malfa, Liu
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 75-0, 6/2/11 - See last page for vote
SUBJECT : Personal and corporate income taxes:
deductions: illegal act
SOURCE : Author
DIGEST : This bill disallows deductions for income
derived by a taxpayer from specified illegal activities.
This bill expands existing law by additionally denying
deductions for expenses, including deductions for costs of
goods sold, attributable to the taxpayer's gross income
directly derived from certain criminal profiteering
activities.
ANALYSIS : Existing federal law provides that all income,
from whatever source derived, is included in a taxpayer's
gross income, including income obtained from illegal
business activities, actual crimes or unethical or immoral
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business practices. Federal law allows a taxpayer to
deduct from the gross income all ordinary and necessary
business expenses, including expenses attributable to an
illegal business. Notwithstanding the general rule,
illegal payments such as bribes and kickbacks are not
deductible, nor are losses from illegal activities allowed
if there is a clear public policy that supports denying the
deductions. Special rules apply in the case of business
activities involving drug trafficking. In those cases, all
deductions are expressly disallowed.
Existing state law is similar to federal law but further
denies deductions from gross income if the income is
directly derived from or directly tends to promote or
further illegal activities relating to lotteries, gaming,
or horse racing. Similar restrictions apply to disallow
deductions, including cost of goods sold, from gross income
for other specified illegal activities including pimping or
pandering, larceny, obscene matter, robbery, burglary,
illegal sales of controlled substances, embezzlement, and
indecent exposure.
This bill disallows deductions for income derived by a
taxpayer from specified illegal activities. This bill
expands existing law by additionally denying deductions for
expenses, including deductions for costs of goods sold,
attributable to the taxpayer's gross income directly
derived from certain criminal profiteering activities.
This bill describes the criminal profiteering activities to
include any act or omission punishable under the
"California Control of Profits of Organized Crime Act" of
Penal Code Section 186.2, dealing with a controlled
substance enumerated in the Health and Safety Code, and
unlawful referrals (insurance fraud) specified in the
Insurance Code.
The bill also denies deductions to any taxpayer from gross
income earned from any activity that directly tends to
promote or to further, or are directly connected or
associated with, those specified acts or omissions of
criminal profiteering activity.
This bill specifies that a prior, final determination by a
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court of competent jurisdiction in any criminal
proceedings, or any proceeding in which the state, county,
city, or other political subdivision was a party on the
merits of the legality of the taxpayer's activities, is
required in order for this bill's provisions to apply.
This bill takes effect immediately and applies to any
taxable year that has not been closed by a statute of
limitations, res judicata, or otherwise.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/15/11)
Association of California Insurance Companies
Liberty Mutual Group
ARGUMENTS IN SUPPORT : According to the author's office,
this bill expands the definition of illegal activates
subject to the disallowance of claimed expenses or the cost
of goods sold. This bill ensures public expenditures
provided through the state tax system are reserved for
legitimate business expenses and remove loopholes that
allow criminals to avoid paying taxes for "business"
conducted while engaged in illegal activities.
ASSEMBLY FLOOR :
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill
Berryhill, Block, Blumenfield, Bonilla, Bradford,
Brownley, Buchanan, Butler, Charles Calderon, Campos,
Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson,
Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani,
Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove,
Hagman, Halderman, Harkey, Hayashi, Roger Hernández,
Hill, Huber, Huffman, Jeffries, Jones, Knight, Lara,
Logue, Bonnie Lowenthal, Ma, Mendoza, Miller, Mitchell,
Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan,
Perea, V. Manuel Pérez, Portantino, Silva, Skinner,
Smyth, Solorio, Swanson, Torres, Valadao, Wagner,
Williams, Yamada, John A. Pérez
NO VOTE RECORDED: Gorell, Hall, Hueso, Mansoor, Wieckowski
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AGB:do 8/15/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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