BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1173| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 1173 Author: Bocanegra (D) Amended: 9/6/13 in Senate Vote: 21 SENATE GOVERNANCE & FINANCE COMMITTEE : 7-0, 8/14/13 AYES: Wolk, Knight, Beall, DeSaulnier, Emmerson, Hernandez, Liu SENATE APPROPRIATIONS COMMITTEE : 7-0, 8/30/13 AYES: De León, Walters, Gaines, Hill, Lara, Padilla, Steinberg ASSEMBLY FLOOR : 78-0, 5/29/13 - See last page for vote SUBJECT : Personal income and corporate tax law: nonqualified deferred compensation plan: tentative minimum tax: credits: exempt organizations SOURCE : Author DIGEST : This bill reduces the excise tax penalty from 20% to 5% for taxable years beginning January 1, 2013, on an amount deferred under a nonqualified deferred compensation (NQDC) plan that is not subject to a substantial risk of forfeiture and does not meet the requirements of Internal Revenue Code (IRC) Section 409A. This bill also clarifies the scope of the California Motion Picture Tax Credit (film tax credit) utilization and simplifies the process by which certain nonprofit organizations may obtain tax-exempt status in California. Senate Floor Amendments of 9/6/13 provide that the bill's CONTINUED AB 1173 Page 2 reduction in the penalty rate applied to nonqualified deferred contribution plan distributions begins in the 2013 taxable year, and add the entire contents of AB 1413 (Committee on Revenue and Taxation), which deals with the film credit and tax exempt status for nonprofit organizations. ANALYSIS : Existing law does not automatically conform to changes to federal tax law, except for specific retirement provisions contained in Subchapter D of the IRC, sometimes called the "400 series," which guides the tax treatment of pensions and other retirement plans. Instead, the Legislature must affirmatively conform to federal changes outside the 400 series, unlike other states that have enacted laws that conform its law whenever Congress changes the IRC. NQDCs are deferred compensation arrangements that don't comply with the Employment Retirement Income Security Act of 1974, and generally allow employers to discriminate by only offering plans to senior management and highly-compensated employees and unlimited employer contributions, but disallow employer deductions for contributions until distributions are paid. In 2004, Congress added Section 409A to the IRC to limit amounts deferred under NQDCs in response to the Enron scandal, where executives enriched themselves at the expense of the company and its creditors by taking substantial withdrawals from NQDCs immediately before the firm declared bankruptcy. The new federal law prohibits any acceleration or change in NQDC payments, with some exceptions. Any payments that violate the new federal law become taxable income at a penalty rate 20% higher than the taxpayer's applicable marginal rate. Because California law automatically conforms without modification, the state applies the same 20% increase in the marginal rate on NQDC distributions that run afoul of the new federal law as a penalty, leading to a potential combined federal and state tax that reaches almost 100% of the income. Existing law allows a qualified taxpayer, for taxable years beginning on or after January 1, 2011 a film tax credit, under either the Personal Income Tax Law (PIT) or Corporation Tax Law (CT). Requires the California Film Commission to allocate $100 million of credit authorizations each year during the period 2009-10 through Fiscal Year (FYs) on a first-come, first-serve CONTINUED AB 1173 Page 3 basis. This bill: 1.Beginning January 1, 2013, reduces the excise tax penalty from 20% to 5% on an amount deferred under an NQDC plan that is not subject to a substantial risk of forfeiture and does not meet the requirements of IRC Section 409A. 2.Provides that the film tax credit may be used to reduce a qualified corporate taxpayer's "regular" income tax beyond the tentative minimum tax for taxable years beginning on or after January 1, 2011. 3.Permits organizations formed under IRC Section 501(c)(4), (5), (6), or (7) that are tax-exempt for federal tax purposes to be treated as tax-exempt organizations for California tax purposes, without approval by the Franchise Tax Board (FTB). Specifically: A. Provides that an organization organized and operated for nonprofit purposes shall be exempt under the CT Law upon submission to the FTB a copy of the determination letter or ruling issued by the Internal Revenue Service (IRS) approving the organization's tax-exempt status under IRC Section 501(c)(4), (5), (6), or (7). B. Requires the organization to notify the FTB of a revocation or suspension of tax-exempt status for federal income tax purposes, and upon receipt thereof, the FTB shall rescind the organization of tax-exempt status for state tax purposes. C. States that the California approval of tax-exempt status based upon notification of federal approval does not prevent the FTB from revoking the exemption of an organization that is not operated in accordance with California or federal laws. D. Provides that an organization formed as a California corporation or is qualified to do business in this state will not qualify as tax exempt for state tax purposes if it is listed by the Secretary of State (SOS) or FTB as "suspended" or "forfeited" and will not receive an CONTINUED AB 1173 Page 4 acknowledgment letter from the FTB until it reinstates its status with the SOS and FTB as an "active" corporation. E. Specifies that, if the FTB revokes or suspends tax-exempt status of an organization, the exemption may be reinstated only upon compliance with state tax laws, regardless of whether the organization provides a determination letter from the IRS. 1.Authorizes the FTB to prescribe rules and regulations to implement this bill. 2.Declares that the retroactive application of amendments made to the provisions relating to the film tax credit serves a public purpose for specified reasons and does not constitute a gift of public funds within the meaning of Section 6 of Article XVI of the California Constitution. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 8/30/13) (reflects prior version of the bill) Agricultural Council of California BenefitRFT, Inc. California Chamber of Commerce California Employment Law Counsel California Society of CPAs California Taxpayers Association Del Taco LLC Dreyer, Edmonds & Robbins Executive Compensation Solutions Loeb & Loeb, LLP LTC Performance Strategies, Inc. Mahoney & Associates Meyer-Chatfield Corp. Mezrah Consulting Motion Picture Association of America, Inc. Mullin Barens Sanford Financial & Insurance Services Munger, Tolles & Olson LLP National Association of Insurance and Finance Advisors National Association of Insurance and Finance Advisors of California CONTINUED AB 1173 Page 5 National Federation of Independent Business Paul Hastings LLP Rex Halverson & Associates, LLC Robin M. Schachter, Akin Gump Strauss Hauer and Feld LLP Skadden, Arps, Slate, Meagher & Flom LLP Spidell Publishing, Inc. Summit Alliance Executive Benefits, LLC Sunkist Growers Inc. The American Council of Life Insurers The Association for Advanced Life Underwriting The Association of California Life and Health Insurance Companies Windes & McClaughry Accountancy Corporation ARGUMENTS IN SUPPORT : According to the author, "AB 1173 lowers the potential tax penalty rate from 20% to 5% for nonqualified deferred compensation plans that are subject to IRC Section 409A. A NQDC plan refers to compensation that a worker earns in one year but that is not paid until a future year. In general, Section 409A requires that the timing of the NQDC payments be established in advance of when the services are performed. If these payments do not meet strict limitations, Section 409A increases the federal income tax rate by an additional 20%. The code section was created after Enron Executives accelerated nonqualified deferred compensation payments as the company was going bankrupt. It is meant to prevent powerful executives from manipulating the timing of their compensation. Treasury regulations have, however, interpreted Section 409A broadly, possibly reaching into entertainment and general service contracts. Specifically, California's entertainment industry has been adversely affected by Section 409A. Movie studios often enter into agreements with actors, directors, producers and writers whereby the talent provides services in one year with a right under the agreement to receive compensation in a later year, upon the occurrence of one or more events (e.g., a film achieving a specified level of box office receipts). Arrangements like these may be considered deferred compensation plans, potentially covered under Section 409A. ASSEMBLY FLOOR : 78-0, 5/29/13 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom, CONTINUED AB 1173 Page 6 Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway, Cooley, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox, Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gorell, Gray, Grove, Hagman, Hall, Harkey, Roger Hernández, Jones, Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein, Mansoor, Medina, Melendez, Mitchell, Morrell, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson, Perea, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas, Skinner, Stone, Ting, Wagner, Waldron, Weber, Wieckowski, Wilk, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Holden, Vacancy AB:ej 9/9/13 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED