BILL ANALYSIS Ó
AB 154
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
154 (Ting)
As Amended
2/3 vote. Urgency
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|ASSEMBLY: | 75-0 |(June 3, 2015) |SENATE: |39-0 |(August 31, |
| | | | | |2015) |
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Original Committee Reference: REV. & TAX.
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.
The Senate amendments:
1)Add the following exceptions to the Large Corporate
Understatement Penalty (LCUP):
a) An increase in tax from a proper election under Internal
Revenue Code (IRC) Section 338 as reported on the first
amended return; and,
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b) An understatement attributable to either of the
following:
i) The Franchise Tax Board's (FTB) imposition of an
alternative apportionment or allocation method under the
authority of Revenue and Taxation Code (R&TC) Section
25137; or,
ii) A change to the taxpayer's federal method of
accounting where the due date of the return is before the
Secretary of the Treasury's determination to change the
accounting method.
2)Rearrange the changes to R&TC Section 19167, and make
additional technical and conforming changes.
EXISTING LAW conforms the state's Revenue and Taxation Code, in
many instances, to provisions contained in the federal 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.
AS PASSED BY THE ASSEMBLY, this bill:
1)Conformed or partially conformed to the following federal
provisions relating to the:
a) Exclusion from gross income of qualified military base
realignment and closure fringe benefits. [Worker,
Homeowner, and Business Assistance Act of 2009 (Public Law
(P.L.) 111-92).]
b) Denial of deductions for annual fee on branded
prescription pharmaceutical manufacturers and importers.
[Patient Protection and Affordable Care Act (P.L.
111-148).]
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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 (Medical Savings Accounts) 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 Internal Revenue Code (IRC) Section 249. [Federal
Aviation Administration Modernization and Reform Act of
2012 (P.L. 112-95, Title IX).]
aa) Transfers of excess pension assets. [Moving Ahead for
Progress in the 21st Century Act (MAP-21) (P.L. 112-141).]
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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) Investment direction rule for 529 plans. [The Achieving
a Better Life Experience Act of 2014 (P.L. 113-295).]
2)Provided 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 net operating loss
(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) 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).]
d) Requirements for certain tax preparers to file tax
returns electronically. [Worker, Homeowner, and Business
Assistance Act of 2009 (P. L. 111-92).]
e) Modification of itemized deduction for medical expenses.
[Patient Protection and Affordable Care Act (P. L.
111-148).]
f) Qualified ABLE (Achieving a Better Life Experience)
programs. [The Achieving a Better Life Experience Act of
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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).]
h) Extension of Work Opportunity credit. [Tax Increase
Prevention Act of 2014 (P.L. 113-295).]
3)Conformed to the federal NOL rules that allow corporations
expecting an NOL carryback to extend the time for payment of
taxes for the preceding taxable year.
4)Made 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)Stated legislative intent to confirm the validity and ongoing
effect of SB 401 (Wolk), Chapter 14, Statutes of 2010.
6)Provided 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 an urgency statute, but will be
operative for taxable years beginning on or after January 1,
2015, except as otherwise provided.
FISCAL EFFECT: According to the Senate Appropriations
Committee, the Franchise Tax Board (FTB) estimates that 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. This bill would not impact
FTB's administration costs.
COMMENTS:
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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)Conformity Decisions. Full descriptions of each of the
conformity items in this bill are included in the FTB's annual
report to the Legislature, "Summary of Federal Income Tax
Changes," that are available on the FTB's Web site.
3)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.
4)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) of the 2007-08 Regular Session, a
conformity bill, required a two-thirds 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 Eighth Extraordinary Session, passed SB 32
X8 (Wolk), which was similar to AB 1580; the Governor also
vetoed SB 32 X8 for the same reason.
Finally, SB 401, the latest California-federal conformity
bill, was enacted in 2010 [SB 401 (Wolk), Chapter 14, Statutes
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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.
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 MSA 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
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hardship on taxpayers and tax practitioners by bringing the
two tax codes closer together.
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 Federal Insurance Contributions Act 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 IRC Section 275(a)(6). 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. This bill would 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 (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.
8)LCUP. This bill makes changes to the state's LCUP, which only
applies to large corporate taxpayers that significantly
understate tax on their original returns. The changes would
provide that any amount of tax reflecting a proper 338
election does not count toward the understatement amount for
purposes of the penalty. Additional, no penalty shall apply
when FTB imposes an alternative apportionment formula under
R&TC Section 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. The LCUP was enacted in 2008
as part of the package aimed at reducing the budget deficit.
It is a strict liability penalty, meaning that the taxpayer
has no appeal rights. The penalty applies even if the
understatement does not result from any wrongdoing on the part
of the taxpayer. These changes will provide taxpayer relief.
9)SB 401 and Proposition 26 (2010). Proposition 26 was approved
by the voters on November 2, 2010. By amending California
Constitution Article XII A, Section 3, 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
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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, California Constitution Article III, Section 3.5
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.
Analysis Prepared by:
Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN:
0001887