BILL ANALYSIS                                                                                                                                                                                                    Ó

          |SENATE RULES COMMITTEE            |                        AB 154|
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                                   THIRD READING 

          Bill No:  AB 154
          Author:   Ting (D)
          Amended:  8/26/15 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

           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.

          Senate Floor Amendments of 8/26/15 rearrange the changes to  
          Revenue and Taxation Code Section 19167, and make additional  
          technical and conforming amendments.

          Existing law:

          1)Does not automatically conform to changes made by Congress to  


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            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.

          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  

             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,


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             f)   The modification of the definition of "control" for  
               purposes of Section 249 in the FAA Modernization and Reform  
               Act of 2012,

             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  

          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  


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            SB 401 (Wolk, Chapter 14, Statutes of 2010) is valid.  

          5)Changes the LCUP to:

             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.

          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  


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          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 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  

          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  

          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  


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          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.

          SUPPORT:   (Verified8/27/15)

          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:   (Verified8/27/15)

          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,  


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            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

          Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119
          8/27/15 13:46:50

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