BILL ANALYSIS                                                                                                                                                                                                    Ó


          |SENATE RULES COMMITTEE            |                       AB 1173|
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                                    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  


                                                                   AB 1173

          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  



                                                                    AB 1173


          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).   

              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  



                                                                    AB 1173

                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  

          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  



                                                                    AB 1173

          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  
          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,  



                                                                    AB 1173

            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

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