BILL ANALYSIS Ó
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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
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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
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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
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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
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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,
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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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