BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 154|
|Office of Senate Floor Analyses | |
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THIRD READING
Bill No: AB 154
Author: Ting (D)
Amended: 6/30/15 in Senate
Vote: 27 - Urgency
SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/8/15
AYES: Hertzberg, Beall, Hernandez, Lara, Moorlach, Pavley
NO VOTE RECORDED: Nguyen
SENATE APPROPRIATIONS COMMITTEE: 5-0, 8/17/15
AYES: Lara, Beall, Hill, Leyva, Mendoza
NO VOTE RECORDED: Bates, Nielsen
ASSEMBLY FLOOR: 75-0, 6/3/15 - See last page for vote
SUBJECT: Taxation: federal conformity
SOURCE: Author
DIGEST: This bill conforms state tax law to relevant sections
of the Internal Revenue Code as of January 1, 2015, and makes
changes to the large corporate understatement penalty.
ANALYSIS:
Existing law:
1)Does not automatically conform to changes made by Congress to
the Internal Revenue Code except for changes to pension and
retirement programs; instead, the Legislature must
affirmatively conform state law to federal to ensure
consistent treatment for the same items.
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2)Conforms to the Internal Revenue Code as of January 1, 2009.
3)Applies the Large Corporate Understatement Penalty (LCUP) on
corporation taxpayers of 20% of any understatement on an
original return that exceeds $1 million.
4)Provides that LCUP applies to the total amount of the
understatement for an entire combined report of corporations,
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).
This bill:
1)Conforms appropriate sections of state law to the Internal
Revenue Code as of January 1, 2015, which includes, among
others:
a) 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,
b) The exclusion from gross income for the qualified
military base realignment and closure fringe benefit
enacted by the Worker, Homeowner, and Business Assistance
Act of 2009,
c) The disclosure of information with respect to foreign
financial assets in the Hiring Incentives to Restore
Employment Act,
d) Not treating certain swaps as Section 1256 contracts
under the Dodd-Frank Wall Street Reform and Consumer
Protection Act,
e) The special rule with respect to certain redemptions by
foreign subsidiaries in the State Fiscal Relief and Other
Provisions Revenue Offsets,
f) The modification of the definition of "control" for
purposes of Section 249 in the FAA Modernization and Reform
Act of 2012,
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g) Treatment for transfers of excess pension assets in the
Moving Ahead for Progress in the 21st Century Act,
h) Modifications to acquisitions, dispositions, and
aggregation of expenditures in the research and development
credit in the American Taxpayer Relief Act of 2012,
i) Treatment of Indian general welfare benefits in the
Tribal General Welfare Act of 2014,
j) Various technical changes in the Tax Technical
Corrections Act of 2014,
aa) The Investment Direction Rule for 529 Education Savings
accounts in the Achieving a Better Life Experience Act,and
bb) In the Small Business Jobs Act of 2010, the limitation
on penalty for failure to disclose reportable transactions
based on resulting tax benefits, removal of cell phones and
similar technology from listed property, increase in
information return penalties, and special rules for
annuities received from only a portion of a contract.
2)Enacts modified conformity for other state tax law, including:
a) A lower state excise tax of 12.5% on nonqualified Archer
Medical Savings Account distribution, instead of 20% at
federal, and
b) Disconnection of inflation adjustments to penalty
amounts.
3)Repeals sections added by AB 36 (Perea, Chapter 17, Statutes
of 2010), AB 242 (Committee on Revenue and Taxation, Chapter
727, Statutes of 2011), and AB 1423 (Perea, Chapter 490,
Statutes of 2011), as the January 1, 2015 general conformity
date incorporates changes made by Congress made subsequent to
the enactment of those bills.
4)Makes legislative findings and declarations stating that that
SB 401 (Wolk, Chapter 14, Statutes of 2010) is valid.
5)Changes the LCUP to:
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a) Provide that any amount of tax reflecting a proper
election under Internal Revenue Code §338 doesn't count
towards the understatement amount for purposes of LCUP.
b) States that LCUP doesn't 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.
Comments
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 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.
SB 401 was the last tax conformity bill the Legislature enacted
by majority vote, because Proposition 26 (2010) changed the
standard in the California Constitution 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
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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 tax return filed in the state for the last five
years. AB 154 restates SB 401's validity in the hopes of
eliminating any uncertainty regarding the legality of its
provisions.
Additionally, the measure doesn't conform to some changes in
federal tax law, including:
1)The higher threshold of 10% of adjusted gross income to claim
unreimbursed medical expense deductions, maintaining
California current 7.5% threshold.
2)Deferral and ratable inclusion of income arising from business
indebtedness discharged by reacquisition of debt.
3)Requirement for certain tax preparers to file returns
electronically.
4)Increase in penalty for failing to file partnership or
S-Corporation returns
5)Exempting limitation on net unrealized built-in losses
resulting from bank reorganizations.
6)Expansion of work opportunity tax credit, which would have
reduced the value of enterprise zone and other geographically
targeted economic development area credits.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
According to Senate Appropriations Committee, the bill's
cumulative revenue impact from all its provision would be
General Fund increases of $3 million in 2015-16, $7.8 million in
2016-17, and $14 million in 2017-18. The bill would not impact
FTB's administration costs.
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SUPPORT: (Verified8/18/15)
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: (Verified8/18/15)
None received
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."
ASSEMBLY FLOOR: 75-0, 6/3/15
AYES: Achadjian, Alejo, Baker, Bigelow, Bloom, Bonilla, Bonta,
Brown, Burke, Calderon, Campos, Chau, Chávez, Chiu, Chu,
Cooley, Cooper, Dababneh, Daly, Dodd, Eggman, Frazier, Beth
Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,
Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Roger
Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey,
Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes,
McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte,
O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon,
Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood, Atkins
NO VOTE RECORDED: Travis Allen, Brough, Chang, Dahle, Harper
AB 154
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Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119
8/19/15 20:50:27
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