BILL ANALYSIS Ó
AB 154
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 154
(Ting) - As Amended March 26, 2015
2/3 vote. Tax levy. Fiscal committee.
SUBJECT: Taxation: federal conformity
SUMMARY: Changes California's specified date of conformity to
federal income tax law from January 1, 2009 to January 1, 2015
and, thereby, generally conforms to numerous changes made to
federal income tax law during that six-year period.
Specifically, this bill:
1)Conforms or partially conforms to the following federal
provisions relating to the:
a) Exclusion from gross income of qualified military base
realignment and closure fringe benefits. [Worker,
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Homeowner, and Business Assistance Act of 2009 (Public Law
(P.L.) 111-92).]
b) Increase in penalty for failure to file a partnership or
"S" corporation return. [Worker, Homeowner, and Business
Assistance Act of 2009 (P.L. 111-92).]
c) Disclosure of information with respect to foreign
financial assets. [Hiring Incentives to Restore Employment
(HIRE) Act (P.L. 111-147).]
d) Increase in additional tax on distributions from Archer
MSAs not used for qualified medical expenses. [Patient
Protection and Affordable Care Act (P.L. 111-148).]
e) Certain swaps not treated as Section 1256 contracts.
[Dodd-Frank Wall Street Reform and Consumer Protection Act
(P.L. 111-203).]
f) Special rule with respect to certain redemptions by
foreign subsidiaries. [State Fiscal relief and Other
Provisions; Revenue Offsets (P.L.111-226).]
g) Limitation on penalty for failure to disclose reportable
transactions based on resulting tax benefits. [Small
Business Jobs Act of 2010 (P.L. 111-240).]
h) Removal of cellular telephones and similar
telecommunications equipment from listed property. [Small
Business Jobs Act of 2010 (P.L. 111-240).]
i) Special rules for annuities received from only a portion
of a contract. [Small Business Jobs Act of 2010 (P.L.
111-240).]
j) Modification of the definition of "control" for purposes
of Section 249 of the Internal Revenue Code (IRC). [FAA
Modernization and Reform Act of 2012 (P.L. 112-95, Title
IX).]
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aa) Transfers of excess pension assets. [Moving Ahead for
Progress in the 21st Century Act (MAP-21) (P.L. 112-141).]
bb) Modifications of provisions related to acquisitions,
disposition and aggregation of research credit
expenditures. [American Taxpayer Relief Act of 2012 (ATRA)
(P.L. 112-240).]
cc) Indian general welfare benefits. [Tribal General
Welfare Act of 2014 (P.L. 113-168).]
dd) Extension of Work Opportunity credit. [Tax Increase
Prevention Act of 2014 (P.L. 113-295).]
ee) Investment direction rule for 529 plans. [The Achieving
a Better Life Experience Act of 2014 (P.L. 113-295).]
2)Provides that the state shall not conform to certain federal
provisions, including, among others:
a) Deferral and ratable inclusion of income arising from
business indebtedness discharged by the reacquisition of a
debt instrument. [American Recovery and Reinvestment Tax
Act of 2009 (P.L. 111-5).]
b) Exception from the limitations applicable to a "loss
corporation" that experiences an "ownership change" and the
extent to which it may offset taxable income in any
post-change taxable year by pre-change NOL, certain
built-in losses, and deductions attributable to the
pre-change period. [American Recovery and Reinvestment Act
of 2009 (P.L. 111-5).]
c) Requirements for certain tax preparers to file tax
returns electronically. [Worker, Homeowner, and Business
Assistance Act of 2009 (P. L. 111-92).]
d) Denial of deductions for annual fee on branded
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prescription pharmaceutical manufacturers and importers.
[Patient Protection and Affordable Care Act 9P. L.
111-148).]
e) Modification of itemized deduction for medical expenses.
[Patient Protection and Affordable Care Act 9P. L.
111-148).]
f) Qualified ABLE programs. [The Achieving a Better Life
Experience Act of 2014 (P.L. 113-295).]
g) Inflation adjustment for certain civil penalties. [The
Achieving a Better Life Experience Act of 2014 (P.L.
113-295).]
3)Conforms to the federal net operating loss (NOL) rules that
allow corporations expecting an NOL carryback to extend the
time for payment of taxes for the preceding taxable year.
4)Makes technical changes, corrects cross-references and deletes
unnecessary language that was used to conform to federal law
changes subsequent to January 1, 2009 and prior to January 1,
2015.
5)States legislative intent to confirm the validity and ongoing
effect of SB 401 (Wolk), Chapter 14, Statutes of 2010.
6)Provides that specified technical corrections to federal
income tax laws incorporated by this bill into the state law
are declaratory of existing law and shall be applied in the
same manner and for the same periods as specified for federal
purposes, or if later, the specified date of incorporation.
7)Takes effect immediately as a tax levy but will be operative
for taxable years beginning on or after January 1, 2015,
except as otherwise provided.
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EXISTING LAW conforms the state's R&TC, in many instances, to
provisions contained in the federal Internal Revenue Code (IRC).
California does not automatically conform to new federal
legislation. Rather, California may conform to specific
enactments at the federal level or may conform to the IRC as of
a specified date. The last IRC to which California conformed
was that in effect as of January 1, 2009.
FISCAL EFFECT: The Franchise Tax Board (FTB) staff estimates
that this bill will result in a revenue gain of $3.18 million in
fiscal year (FY) 2015-16, an annual loss of $672,000 in FY
2016-17, and a revenue gain of $4.1 million in FY 2017-18.
COMMENTS:
1)Author's Statement . According to the author's office, "AB 154
is a vital measure conforming state tax law to federal tax,
easing tax preparation for taxpayers and tax preparers alike.
This measure is intended to narrow differences between state
and federal law and provide relief to members of the United
States Armed Forces, businesses, and individual taxpayers."
2)Arguments in Support . The proponents argue that AB 154 "is a
critical first step toward reinstating comprehensive
conformity, and is important for taxpayers and the state."
They cite the independent FTB Taxpayers' Right Advocate's 2014
report to the Legislature stating that "non-conformity is a
leading cause for taxpayer error and non-compliance." The
proponents assert that conformity "would reduce the number of
different adjustments and methodologies required when filing a
state return, reducing the potential for errors and penalty
and interest assessments." The proponents note that, due to
non-conformity with federal law, the state must utilize more
staff "to answer questions, conduct separate audits, and
initiate collections on errors." All in all, conformity
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"would reduce the need for many of these activities, saving
the state and taxpayers time and money."
3)Conformity Decisions . Full descriptions of each of the
conformity items in AB 154 are included in the FTB's annual
report to the Legislature, "Summary of Federal Income Tax
Changes," that are available on the FTB's website.
4)The Importance (and Conundrum) of Conformity . When changes
are made to the federal income tax law, California does not
automatically adopt such provisions. Instead, state
legislation is needed to conform to most of those changes.
Conformity legislation is introduced either as individual tax
bills to conform to specific federal changes or as one omnibus
bill to conform to the federal law as of a certain date with
specified exceptions, a so-called "conformity" bill.
In the 1980s through the early 1990s, the state enacted
conformity legislation almost every year. However, since the
mid-1990s, state conformity has taken place less frequently -
in 1997, 1998, 2001, 2005, and 2010. In 2008, AB 1561
(Charles Calderon), a conformity bill, required a 2/3rd vote
of the membership in each house. AB 1561 did not advance from
the Senate Floor because it failed to secure 27 Senate votes.
A year later, in 2009, the Legislature approved AB 1580
(Charles Calderon), but the Governor vetoed it because of a
"single provision inserted at the last minute" that he could
not support. In 2010, the Legislature, in the 8th
Extraordinary Session, passed SBx8 32 (Wolk), which was
similar to AB 1580; the Governor also vetoed SBx8 32 for the
same reason.
Finally, SB 401, the latest California-federal conformity bill,
was enacted in 2010 [SB 401 (Wolk), Chapter 14, Statutes of
2010]; and for the last five years, businesses, tax
practitioners and state tax agencies have been advocating for
a new bill to conform state tax laws to ever-changing federal
tax laws. Businesses generally prefer conformity to federal
tax laws because it reduces their state tax compliance costs.
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The tax practitioners have argued that failure to conform to
federal law in some areas may lead to improper tax reporting
to California and extra costs to the taxpayers. As an
example, a taxpayer may roll-over balances in an Archer
Medical Savings Account to a new Health Savings Account
without triggering liability at the federal level, but will
unknowingly face penalties for the transfer since it
constitutes a disqualified distribution for state purposes.
Finally, conformity legislation is also important to state
agencies. Conformity eases the burden, and reduces the costs,
of tax administration because the state may rely on federal
audits, federal case law, and regulations.
While state conformity to federal income tax provisions offers
certain advantages and reduces tax compliance costs, it can
also significantly impact state revenues. Thus, it would be
difficult to achieve complete conformity with federal income
tax rules. Often, the Legislature needs to increase tax rates
to fund a new or expand an existing credit or deduction
allowed for federal income tax purposes. Tax credits,
deductions, and exemptions are designed to provide incentives
for taxpayers that incur certain expenses or to influence
behavior, including business practices and decisions. Both
the federal and state governments often use tax policy to
influence taxpayers' behavior. However, federal tax
incentives may not necessarily produce the same effect on the
taxpayer's behavior at the state level if adopted by the state
government as they do on the federal level. Furthermore,
unlike the Federal Government, California cannot print money
to subsidize its budget. Therefore, the Legislature must be
mindful of fiscal effects of conforming to federal tax laws,
even if those may not trigger significant fiscal concerns in
Congress.
The Legislature continues to struggle with tax conformity and
this bill represents the most recent attempt to ease the
hardship on taxpayers and tax practitioners by bringing the
two tax codes closer together.
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5)Homeowner Assistance Program Payment for Employees and Members
of the Armed Forces. Under federal law, the Secretary of
Defense is authorized to provide assistance or reimbursement
for losses in the sale of family dwellings by members of the
Armed Forces living on or near a military installation in
situations where there was a base closure or realignment and
the property was the owner's primary residence, among other
requirements. These amounts are excluded from gross income
for federal income tax purposes and are not considered wages
for FICA tax purposes. The excludable amount is limited to the
reduction in the fair market value of the property. Under
state law, however, these assistance payments are subject to
the state income tax. This bill would exclude those amounts
from the state income tax, in conformity with the federal law.
6)Annual Fee on Branded Prescription: Manufacturers and
Importers . Under federal law effective starting in 2010,
certain entities engaged in the business of manufacturing or
importing branded prescription drugs for sale to any specified
government program or pursuant to coverage under any such
program are subject to an annual fee. The collected revenues
are credited to the Medicare Part B Trust fund. The fee
amount imposed on each individual entity fluctuates. The
aggregate fee amount is set by the Federal Government for each
calendar year and is apportioned among the covered entities
based on the entity's relative share of branded prescription
drug sales taken into account during the previous calendar
year. The fees are treated as excise taxes for purposes of
the federal income tax law and are considered a non-deductible
tax as described in Section 275(a)(6) of the IRC. As
discussed, California conforms to the IRC as of the specified
date - January 1, 2009. The federal provision imposing the
fee in question was enacted in 2010, after the "specified
date" of January 1, 2009. Therefore, the fee is deductible
under the Personal Income Tax Law. Because of the interaction
between the federal and state income tax laws and the lack of
conformity, the State is currently subsidizing the fee imposed
by the federal government by allowing a deduction to the
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affected entities for purposes of calculating their California
income tax liability. The Committee may wish to eliminate
this subsidy and conform to the federal tax treatment of the
fee as a nondeductible tax.
7)NOL Carryback Procedures . On September 30, 2008, the Governor
signed AB 1452 (Budget Committee), Chapter 763, Statutes of
2008, to implement provisions of the 2008-09 Budget agreement.
Among other things, AB 1452 suspended the NOL deduction for
the 2008 and 2009 tax years (except for taxpayers with net
business income of less than $500,000), authorized NOL
carrybacks for losses incurred in 2011 or later tax years, and
expanded the NOL carryforward period from 10 years to 20 years
for losses incurred after January 1, 2008. AB 1452 authorized
taxpayers to use carrybacks to offset their income during the
two prior tax years. The carryback provisions were scheduled
to phase in, with 50% of any 2011 NOLs available for
carryback, 75% of any 2012 NOLs, and full carryback for NOLs
in subsequent years.
Two years later, when the Legislature was facing another
difficult budget, SB 858 (Senate Budget and Fiscal Review
Committee), Chapter 721, Statutes of 2010, was enacted. SB
858 further suspended the NOL deductions for the 2010 and 2011
taxable years and delayed the implementation of the NOL
carrybacks provisions, among other changes. Specifically, SB
858 disallowed NOL carrybacks for any NOLs attributable to
taxable years beginning before January 1, 2013. Consequently,
under existing law, the carryback provisions are scheduled to
phase in with 50% of any 2013 NOLs available for carryback,
75% of any 2014 NOLs, and full carryback for NOLs attributable
to tax year 2015 and thereafter.
Federal law allows a corporation anticipating a current-year
NOL to file Form 1138 to postpone the payment of all or some
of its income tax from the immediately preceding year.
Generally, to take advantage of NOLs, taxpayers have to first
wait for the conclusion of the tax year and then file an
amended return or ask for a refund. In this case, a
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corporation can file for a postponement of payment of taxes
from the preceding tax year in the current (unfinished) tax
year. By allowing a corporation to postpone part or all of
the payments during the year, companies can keep more cash on
hand to pay debts or make payroll. This bill would conform
California law to the federal rules allowing a corporation
expecting an NOL carryback to extend the time for payment of
taxes for the immediately preceding taxable year.
1)SB 401 and Proposition 26 . Proposition 26 was approved by the
voters on November 2, 2010. By amending Section 3 of Article
XIII A of the California Constitution, Proposition 26 expanded
the definition of a "tax" to include many state and local
government assessments classified as "fees" and provided that
any change in state statute that results in any taxpayer
paying a higher tax must be passed by a two-thirds vote of the
Legislature. Proposition 26 also included a provision stating
that any state law adopted between January 1, 2010 and
November 2, 2010 that conflicts with Proposition 26 would be
repealed one year after the proposition's approval. This
repeal would not take place, however, if the Legislature
passed the law again in compliance with Proposition 26. There
is significant ambiguity regarding the scope and meaning of
this provision. According to the FTB legal staff, there is no
basis to believe that SB 401 is not a valid law, at least for
the 12-month period following the adoption of Proposition 26.
Furthermore, Section 3.5 of Article III of the California
Constitution requires the FTB to enforce SB 401 until an
appellate court has made a determination that some portion or
all of SB 401 is "void" pursuant to Proposition 26 and,
therefore, unenforceable. [FTB publication, Legal Division
Guidance 2011-01-01 "Impact of Proposition 26 on SB 401
(Wolk)".] Despite the FTB pronouncement, some taxpayers are
seeking reassurance that the last conformity bill stands on
firm legal ground, which this bill would provide.
Specifically, this bill includes a legislative intent
provision confirming the validity and ongoing effect of SB
401.
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2)FTB Technical Amendments . The FTB staff, in its analysis of
this bill, suggested several technical amendments to clarify
this bill's provisions:
AMENDMENT 1
On page 15, lines 15-17, after "Code", delete "is modified by
substituting the phrase "Section 19307.5" in lieu of the
phrase "Section 6411." and insert:
shall not apply.
AMENDMENT 2
On page 21, line 12, delete "for" and insert:
to
REGISTERED SUPPORT / OPPOSITION:
Support
California Taxpayers Association (Support if amended)
California Chamber of Commerce (Support if amended)
California Manufacturers and Technology Association (Support if
amended)
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Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098