BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 154 |Hearing |7/8/15 |
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|Author: |Ting |Tax Levy: |No |
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|Version: |6/30/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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TAXATION: FEDERAL CONFORMITY
Conforms state law to federal law as of January 1, 2015; makes
changes to the large corporate understatement penalty.
Background and Existing Law
I. Conformity. California law does not automatically conform
to changes to federal tax law, except for specific retirement
provisions. Instead, the Legislature must affirmatively conform
to federal changes. Conformity legislation is introduced
either as individual tax bills to conform to specific federal
changes, like the Stephen Beck, Jr., Achieving a Better Life
Experience Act of 2014 (AB 449, Irwin, and SB 324, Pavley) or as
one omnibus bill that provides that state law conforms to
federal law as of a specified date, currently January 1, 2009
(SB 401, Wolk, 2010).
II. Large Corporate Understatement Penalty. Corporation
taxpayers are subject to a penalty equal to 20% of any
understatement that exceeds $1 million of the tax shown on an
original return (or amended return filed on or before the
extended due date of the original return) for taxable years
beginning on or after January 1, 2003 (SBx1 28, Committee on
Budget, 2008). The measure also applies to understatements on
amended returns filed on or before May 31, 2009 for taxable
years beginning before January 1, 2008. The penalty applies to
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the total amount of the understatement for an entire combined
report, and excludes any understatement attributable to a change
in law under specified circumstances or when the taxpayer relied
on written advice from the Franchise Tax Board (FTB). The
penalty applies in addition to any other penalty, and is strict
liability, meaning that the taxpayer has no appeal rights. In
2010, the Legislature modified the penalty for taxable years for
the 2011 taxable year and thereafter to apply only to
understatements that exceed the greater of $1 million, or 20%
(SB 858, Committee on Budget and Fiscal Review, 2010).
Proposed Law
I. Conformity. Assembly Bill 154 conforms relevant sections of
the Revenue and Taxation Code to the Internal Revenue Code as of
January 1, 2015, with some modifications.
Specifically, the measure conforms 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; the exclusion from gross income
qualified military base realignment and closure fringe from the
Worker, Homeowner, and Business Assistance Act of 2009; the
disclosure of information with respect to foreign financial
assets in the Hiring Incentives to Restore Employment Act; not
treating certain swaps as Section 1256 contracts under the
Dodd-Frank Wall Street Reform and Consumer Protection Act; the
special rule with respect to certain redemptions by foreign
subsidiaries in the State Fiscal Relief and Other Provisions
Revenue Offsets; the modification of control definition for
purposes of Section 249 in the FAA Modernization and Reform Act
of 2012; the transfers of excess pension assets in the Moving
Ahead for Progress in the 21st Century Act; modifications to
acquisitions, dispositions, and aggregation of expenditures in
the research and development credit in the American Taxpayer
Relief Act of 2012; Indian general welfare benefits in the
Tribal General Welfare Act of 2014, various technical changes in
the Tax Technical Corrections Act of 2014; the Investment
Direction Rule for 529 accounts in the Achieving a Better Life
Experience Act. In the Small Business Jobs Act of 2010, AB 154
conforms to:
The limitation on penalty for failure to disclose
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reportable transactions based on resulting tax benefits,
Removal of cell phones and similar technology from
listed property,
Increase in information return penalties,
Special rules for annuities received from only a portion
of a contract.
AB 154 makes the following modifications for state purposes:
Conform to lower state excise tax of 12.5% on
nonqualified Archer Medical Savings Account distribution,
instead of 20% at federal.
Generally disconnects inflation adjustments to penalty
amounts.
AB 154 doesn't conform to:
The higher threshold of 10% of adjusted gross income to
claim unreimbursed medical expense deductions, maintaining
California current 7.5% threshold.
Deferral and ratable inclusion of income arising from
business indebtedness discharged by reacquisition of debt.
Requirement for certain tax preparers to file returns
electronically.
Inflation indexing of many penalty amounts.
Increase in penalty for failing to file partnership or
S-Corporation returns
Exempting limitation on net unrealized built-in losses
resulting from bank reorganizations.
Expansion of work opportunity tax credit, which would
have reduced the value of enterprise zone and other
geographically targeted economic development area credits.
As part of conformity, the measure repeals sections added by AB
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1423, AB 36 (Perea, 2010), AB 242 (Committee on Revenue and
Taxation, 2011) as the January 1, 2015 general conformity date
incorporates subsequent changes made by Congress. Additionally,
AB 154 makes legislative findings and declarations stating that
SB 401 (Wolk, 2010) is valid.
II. Large Corporate Understatement Penalty. AB 154 makes the
following changes to the Large Corporate Understatement Penalty:
Provides that any amount of tax reflecting a proper 338
election doesn't count towards the understatement amount
for purposes of the penalty, which can generally be made up
to one year after an acquisition, are treated as shown on
an original return,
States that no penalty shall apply when FTB imposes an
alternative apportionment formula under Revenue and
Taxation Code §25137, or as a result of a change in the
taxpayer's federal accounting method where the due date of
the return is before the Secretary of the Treasury's
determination to change the accounting method.
State Revenue Impact
According to FTB, AB 154's conformity provisions result in net
revenue gains of $3.1 million in 2015-16, $8 million in 2016-17,
and $14.2 million in 2017-18. An estimate of the measure's
changes to the Large Corporate Understatement Penalty is
pending.
Comments
1. Purpose of the bill . According to the author, "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. Odd couple . AB 154 is the state's first omnibus tax
conformity measure in five years, and would move ahead the
state's conformity date by six years, picking up changes that
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will more closely align state and federal personal income and
corporation tax statutes, easing compliance headaches for
taxpayers as well as administrative difficulties for FTB.
However, the measure also contains changes to the state's Large
Corporate Understatement Penalty, which only applies to large
corporate taxpayers that significantly understate tax on their
original returns, and doesn't have a federal counterpart. While
the measure's changes to the penalty simply account for changes
where federal law affords taxpayers time to choose between two
transaction structures, or have their tax due changed by
decisions made by either IRS or FTB, putting the two together is
an odd match. The Committee may wish to consider whether AB
154's changes to the understatement penalty should be in a
separate bill.
3. Doomsday machine . SB 401 was the last tax conformity bill
the Legislature enacted by majority vote because Proposition 26
(2010) changed the standard that Legislative Counsel uses to
determine whether a legislative bill is a tax increase, and
therefore must be approved by 2/3 vote of each house of the
Legislature. Instead of "changes in state taxes enacted for the
purpose of increasing revenues collected pursuant thereto
whether by increased rates or changes in the method of
computation," Proposition 26 amended Section 3 of Article XIIIA
of the California Constitution to provide that the 2/3 vote
applied to any "change in state statute that leads any taxpayer
to pay a higher tax." As such, measures like SB 401 that
contained some provisions that increased taxes, and others that
decreased them, but resulted in a net revenue loss, were
majority vote bills before Proposition 26, but 2/3 vote bills
today. Additionally, the initiative provided that the
Legislature must reenact any bill that was enacted one year
before its enactment by majority vote or else such measure would
be "void," which captured two such bills, the gas tax swap (ABx8
6, Assembly Committee on Budget, 2010) and SB 401. While the
Legislature subsequently reauthorized the gas tax swap by 2/3
vote, it did not do the same for SB 401. While no one has yet
challenged the bill in court, should the measure be invalidated,
an adverse decision could theoretically change the calculation
of tax for every return filed for the last five years. AB 154
restates SB 401's validity in the hopes of eliminating any
uncertainty regarding SB 401's legality.
4. Urgency . AB 154 contains an urgency clause, which states
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that the measure's provisions must take effect immediately to
grant needed tax relief to taxpayers in conformity with federal
tax relief enacted in the last four years and to alleviate
administrative burdens on state tax agencies. As such,
Legislative Counsel has assigned the measure a 2/3 vote.
However, the urgency clause isn't necessary as the measure is
keyed a tax levy, which means that its changes affect the
current 2015 taxable year.
5. Tax Increase . Because the measure would result in an
increase in tax on any taxpayer according to Section 3 of
Article XIIIA of the California Constitution, Legislative
Counsel has keyed the measure a 2/3 vote.
Assembly Actions
Assembly Floor 75-0
Assembly Appropriations 15-0
Assembly Revenue and Taxation 6-0
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Support and
Opposition (7/2/15)
Support : California Asian Chamber of Commerce, California
Bankers Association, California Chamber of Commerce, California
Manufacturers and Technology Association, California Society of
Enrolled Agents, California Taxpayers Association, Computing
Technology Industry Association, Hewlett Packard Company,
National Federation of Independent Business, Spidell Publishing,
Inc.
Opposition : None received.
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