BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 672
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          CONCURRENCE IN SENATE AMENDMENTS
          AB 672 (Harkey)
          As Amended  June 11, 2013
          Majority vote
           
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          |ASSEMBLY:  |76-0 |(April 18,      |SENATE: |38-0 |(August 15,    |
          |           |     |2013)           |        |     |2013)          |
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           Original Committee Reference:    REV. & TAX.  

           SUMMARY  :  Eliminates the requirement for a fiduciary of a  
          specified estate to obtain a tax clearance certificate from the  
          Franchise Tax Board (FTB) to allow the final account of the  
          fiduciary by the probate court.  Specifically,  this bill  :  


          1)Repeals the tax clearance certificate requirement that applies  
            to an estate with more than $1 million in assets if the fair  
            market value of the assets distributable to one or more  
            nonresident beneficiaries exceeds $250,000. 


          2)Deletes the provisions authorizing the FTB to provide the tax  
            clearance certificates and any related expedited services. 


          3)Clarifies that a deduction relating to amounts attributable  
            and taxable to nonresident beneficiaries where the fiduciary  
            failed to obtain a tax clearance certificate is not allowable  
            only for taxable years beginning before January 1, 2014.


          4)Makes other conforming changes to certain provisions related  
            to the tax administration of estates. 
           
          The Senate Amendments: 


           1)Clarify that the provisions denying deductions with respect to  
            amounts attributable and taxable to nonresident beneficiaries,  
            where the fiduciary failed to obtain a tax clearance  
            certificate, are effective only for taxable years beginning  
            after January 1, 2014.








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          2)Revise the repeal date of those provisions relating to the  
            denial of the deductions from January 1, 2014, to December 1,  
            2018.

           EXISTING LAW  :

          1)Prohibits a probate court from accepting a final accounting  
            from a fiduciary of an estate, unless the fiduciary obtains a  
            tax clearance certificate from the FTB, if the estate has more  
            than $1 million in assets at the date of the decedent's death  
            and the fair market value of the assets distributable to one  
            or more nonresident beneficiaries exceeds $250,000.  (Revenue  
            and Taxation Code (R&TC) Section 19513.)

          2)Authorizes the FTB to prescribe regulations setting the  
            minimum value of the assets of the estate at the death of the  
            decedent and the minimum value of the assets distributable to  
            one or more nonresidents, which will require the estate to  
            obtain a tax clearance certificate from the FTB.  (R&TC  
            Section 19513(b).)

          3)Provides that, within 30 days after receiving a request for a  
            certificate, the FTB must either issue the certificate or  
            notify the person requesting the certificate of the amount of  
            tax, interest, and/or penalties that shall be paid or the  
            amount of bond, deposit, or other security that shall be  
            furnished as a condition of issuance of the certificate.   
            (R&TC Section 19514.)  

          4)Specifies that the certificate does not relieve the estate or  
            the fiduciary for any amounts of tax, interest and/or  
            penalties that are due and unpaid at the time the certificate  
            is issued or which may become due from the decedent or estate  
            after the issuance of the certificate.  

          5)Provides that a claim by a public entity against an estate  
            must be filed within the time provided or is barred.  (Probate  
            Code (PC) Section 9200.)

          6)Denies deductions with respect to amounts attributable and  
            taxable to nonresident beneficiaries of an estate if the  
            fiduciary fails to obtain a tax clearance certificate. 
          








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          7)Requires notice of administration of decedent's estate be  
            provided to the FTB.  Specifically, requires a general  
            personal representative or attorney of a decedent's estate to  
            give notice of the administration of the estate to the FTB not  
            later than 90 days after the date letters of administration  
            are first issued.  

          8)Requires the FTB to mail notice assessing taxes and commence  
            any proceeding in court within 18 months after written request  
            is filed (after the tax return is made) by the fiduciary of  
            the estate or trust.  (R&TC Section 19517.) 

           FISCAL EFFECT  :  The FTB staff estimates that this bill will  
          result in an annual revenue loss of $3,000 in fiscal year (FY)  
          2013-14, $6,000 in FY 2014-15, and $7,000 in FY 2015-16.  

           COMMENTS  :   

           1)Author's Statement  .  The author states that, "Probate is  
            already a challenging and lengthy ordeal. This bill would  
            eliminate a burdensome process that is part of probate that is  
            not necessary to prevent assets under probate control from  
            being distributed to nonresident beneficiaries before state  
            income tax liabilities are paid."  
           
           2)Arguments in Support  .  The proponents of this bill argue that  
            the tax clearance certificate requirement "places a burden on  
            the estate and the probate court system."  They note that in  
            certain situations "where estates are not aware of the tax  
            clearance certificate, or where estates only become aware  
            later in the process that the estate meets the threshold  
            requirements for tax clearance, the requirement can create a  
            significant delay often requiring the postponement of judicial  
            proceedings," which increases the administrative costs of  
            probate for both the court and the estate.  

           3)Background  .  While the state inheritance tax in California was  
            repealed by the voters in 1982, a final decedent income tax  
            return is still required to be filed to account for the  
            decedent's final tax year.  In addition, if any income is  
            generated by the estate prior to distribution to its  
            beneficiaries, a fiduciary income tax return is required to be  
            filed for the estate.  The Probate Court oversees the payment  
            of probate estate debts and the distribution of the estate  
            assets (although not all estates are subject to probate  








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            administration).  Generally, probate proceedings are  
            instituted in the county of residence of a decedent, or the  
            county where the decedent owned real property.

           4)The Tax Clearance Certificate Requirement  .  The tax clearance  
            requirement was enacted in 1935 to prevent assets, which are  
            under the control of the Probate Court of California, from  
            being distributed out of state before all state income taxes  
            owed by the estate have been paid or secured.  Thus, existing  
            law prohibits a probate court from accepting a final  
            accounting from a fiduciary of an estate, unless the fiduciary  
            obtains a tax clearance certificate from the FTB.  However,  
            this requirement to obtain a tax clearance certificate applies  
            to an estate only if the value of its assets at the death of  
            the decedent and the value of the assets distributable to  
            nonresidents exceed the amounts prescribed by regulations  
            promulgated by the FTB.  Currently, those amounts are set at  
            $1 million and $250,000.  Consequently, a personal  
            representative of an estate must request a tax clearance  
            certificate from the FTB only if the estate has more than $1  
            million in assets at the date of the decedent's death and the  
            fair market value of the assets distributable to one or more  
            nonresident beneficiaries exceeds $250,000.  Within 30 days  
            after receiving a request for a certificate, the FTB must  
            either issue the certificate or notify the person requesting  
            the certificate of the amount of tax, interest, and/or  
            penalties that must be paid or the amount of bond, deposit, or  
            other security that must be furnished as a condition of  
            issuance of the certificate.  

          A tax clearance certificate provides that all taxes, additions  
            to tax, penalties, and/or interest imposed by the Personal  
            Income Tax Law upon the estate or decedent have been paid and  
            that all other amounts that may become due in the future are  
            secured by bond, deposit, or otherwise.  The certificate does  
            not relieve the estate or the fiduciary for any due and unpaid  
            amounts.  In the absence of the certificate, the California  
            Probate Court is prohibited from allowing the final account of  
            an estate.  According to the FTB, an average of 500 estates  
            request tax clearance certificates each year.  Of those  
            estates, an average of 440 estates required a tax clearance  
            certificate, resulting in an average collection amount of  
            $10,000 per year.  

           5)Notice Requirement to the FTB  .  The personal representative  








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            appointed by the court to administer a decedent's estate is  
            required to exert diligent efforts to identify creditors of  
            the decedent and provide every reasonably ascertainable  
            creditor with a Notice of Administration of a Decedent's  
            Estate (PC Section 9050).  The notice to creditors must be  
            provided within four months of the date the personal  
            representative first receives Letters of Administration from  
            the court, or within 30 days of the date the representative  
            first obtained knowledge of the creditor and his or her claim.  
             (PC Section 9051.)  

          In 2008, the Legislature passed AB 361 (Ma), Chapter 105,  
            Statutes of 2007, to require a personal representative of an  
            estate to notify the FTB of the probate proceedings no later  
            than 90 days after the date when Letters of Administration are  
            first issued for the estate by the court.  This notification  
            requirement gives the FTB an opportunity to file a Creditor's  
            Claim in the probate proceedings to protect the state's tax  
            liability interest in the estate's distributable assets.   
            Thus, the FTB may file a claim for outstanding tax liabilities  
            against an estate in probate court within 18 months of  
            receiving written notice.  In the case where no notice or  
            written request is submitted to the FTB and the estate has  
            been distributed, the FTB may file a claim, at any time,  
            against any beneficiary of the estate that received the  
            property. 

           6)Is the Tax Clearance Certificate Requirement Outdated and  
            Unnecessary  ?  According to the sponsor, the tax clearance  
            certificate is a burdensome and unnecessary process.  The FTB  
            states that it is burdensome because it may significantly  
            delay probate proceedings in cases where estates are either  
            not aware of the tax clearance requirement or become aware of  
            the requirement later in the process when it is determined  
            that the estate's assets meet the $1 million threshold and the  
            aggregate distributions to nonresidents are in excess of  
            $250,000. 

          The FTB also asserts that the existing notice requirement,  
            outside of the tax clearance requirement, provides the agency  
            with the opportunity to file a timely claim in probate courts  
            to protect the state's interest in tax liabilities, without  
            compromising the FTB's ability to collect delinquent taxes  
            from specified estates.  Apparently, since the notice  
            requirement became operative, the compliance rate for all  








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            estates has reached 99% within 12 months of the close of the  
            taxable year.  The 99% compliance rate has been steady for  
            taxable years 2008, 2009, and 2010.  

          Furthermore, the repeal of the tax clearance certificate  
            requirement would allow the FTB to redirect resources to other  
            revenue generating activities and would relieve the California  
            Superior Court, Probate Division, from requiring a tax  
            clearance certificate to allow a final account of specified  
            estates.  

          The Legislature may wish to consider whether the repeal of the  
            tax clearance certificate requirement would increase  
            noncompliance among estates with nonresident beneficiaries.
           

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


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