BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 505


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 505  
          (Melendez) - As Introduced February 23, 2015


          


          Majority vote.  Tax levy.  Fiscal committee. 
          


          SUBJECT:  Personal Income Tax Law:  exclusion:  veterans:   
          concurrent retirement and disability pay.


          SUMMARY:  Excludes from gross income Concurrent Retirement and  
          Disability Pay (CRDP) payments, as defined.  Specifically, this  
          bill:  


          1)Excludes from gross income, for taxable years beginning on or  
            after January 1, 2016, CRDP payments received by an eligible  
            individual during the taxable year. 









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          2)Defines an "eligible individual" as an active, reserve, or  
            retired member of the United States (U.S.) military who served  
            in active duty. 


          3)Defines "CRDP" as payments received by an eligible individual,  
            as provided in Section 1414 of Title 10 of the U.S. Code. 


          4)Provides that no inference shall be drawn with respect to the  
            property tax treatment of CRDP payments received before  
            January 1, 2016.


          5)Takes effect immediately as a tax levy. 


          EXISTING FEDERAL LAW:  


          1)Provide that "gross income" includes all income from whatever  
            source derived, including compensation for services, business  
            income, gains from property, interest, dividends, rents, and  
            royalties, unless specifically excluded. 

          2)Exclude from gross income certain types of income received by  
            an individual as a result of the individual's active service  
            in the Armed Forces of the U.S. as follows:

             a)   A pension, annuity, or similar payment for personal  
               injuries or sickness that resulted from combat-related  
               service in the Armed Forces or a disability annuity  
               (Internal Revenue Code (IRC) Section 104);  

             b)   Compensation received for active service by a member of  
               the U.S. Armed Forces below the grade of commissioned  
               officer for any month during which the individual served in  
               combat zones or was hospitalized as a result of wounds,  








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               disease, or injury incurred in a combat zone (IRC Section  
               112);

             c)   The premium paid into a survivor annuity account for the  
               qualified survivors of military personnel;

             d)   Disability retirement pay that is computed on the basis  
               of the percentage of disability (IRC Section 104);

             e)   Dividends and proceeds from maturing government  
               endowment insurance contracts under the National Service  
               Life Insurance Act of 1940 and all other acts relating to  
               veterans;

             f)   Interest left on deposit with the Veterans  
               Administration (VA); 

             g)   Veterans' benefits under any law administered by the  
               U.S. Department of Veterans Affairs (VA), including amounts  
               paid to veterans or their families in the form of  
               educational, training, or subsistence allowances,  
               disability compensation and pension payments for  
               disabilities, compensation for participation in a work  
               therapy programs (38 U.S.C. §5301 and following); and,

             h)   Armed Forces allowances.  (IRC Section 265.)

          3)Defines "combat-related injuries" as injuries incurred as a  
            direct result of armed conflict, while engaged in  
            extra-hazardous service, or in the performance of duty under  
            conditions simulating war. 

          4)Does not exclude from gross income CRDP, which is paid for  
            non-combat related injuries. 

          5)Exempts from taxation military death benefits paid to  
            qualified survivors.  (IRC Section 134).

          EXISTING STATE LAW generally conforms to the federal tax law  








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          with respect to various exclusions from gross income of amounts  
          received as veterans' benefits.


          FISCAL EFFECT:  The Franchise Tax Board (FTB) staff estimates  
          that this bill will result in an annual General Fund loss of $14  
          million in the fiscal year (FY) 2015-16, $24 million in FY  
          2016-17, and $24 million in FY 2017-18.


          COMMENTS:  


           1)Author's Statement  .  The author has provided the following  
            statement in support of this bill:

          "Currently, service members who have sustained injuries while in  
            battle receive compensation for their sacrifice in the form of  
            Combat-Related Special Compensation (CRSC).  CRSC payments  
            received by an eligible individual who performed service in a  
            combat zone are exempt from state and federal taxes.

          "Concurrent Retirement and Disability Pay (CRDP) are payments  
            received by an eligible veteran who is retired and entitled to  
            receive disability income.  Currently, these payments are not  
            excluded from federal and state tax liability.

          "Our retired veterans have selflessly put their lives on the  
            line for this country.  This bill would simply allow those who  
            are injured or disabled to be able to take full advantage of  
            their disability benefits.  Relieving these brave men and  
            women of CRDP tax liability is the least this state can do to  
            honor those that have sacrificed so much."  
           
           2)Existing Tax Treatment of Military Compensation under Federal  
            and State Laws  .  Prior to the enactment of the Tax Reform Act  
            of 1986, a variety of benefits for military personnel were  
            excluded from gross income under federal law and various  
            regulations.  In 1986, Congress determined that in the future  








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            no such exclusions would be permitted except under some  
            provisions of the IRC, but "grandfathered" all of the previous  
            non-Code exclusions.  (IRC Section 134). 

          Benefits administered by the Department of Veterans Affairs,  
            including disability compensation, are not subject to federal  
            income tax.  As explained by the FTB staff, before 2002  
            federal law "prohibited the concurrent receipt of military  
            retired pay and disability compensation from the VA for the  
            same period of service.  Consequently, the retired pay of a  
            military retiree was reduced by the amount of disability  
            compensation received from the VA."  In 2002, federal law was  
            amended to authorize the payment of additional compensation  
            for a combat-related disability to certain military retirees,  
            known as Combat-Related Special Compensation (CRSC).  The CRSC  
            payment is considered disability compensation and is excluded  
            from gross income under both federal and state tax laws.  In  
            2003, Congress authorized additional payments to those  
            military retirees whose retired pay was reduced by the amount  
            of disability compensation administered by the VA.  However,  
            the new retired pay, known as Concurrent Receipt of Disability  
            Pay (CRDP), is currently subject to both federal and state  
            income taxes.   

           3)What Does This Bill Do  ?  This bill is intended to create an  
            exclusion from gross income for one type of military retiree  
            compensation - CRDP payments.  CRSC compensation is paid for  
            combat-related injuries and, as explained above, is considered  
            disability compensation.  CRSC compensation is currently not  
            taxable under the federal and state laws.  In contrast, CRDP  
            payments are paid to a retired member of the U.S. military for  
            noncombat-related injuries and are taxable under both federal  
            and state law.  Thus, this bill provides an exclusion from  
            gross income for CRDP compensation received in taxable years  
            beginning on or after January 1, 2016. 

           4)Income Limitation  .  This bill provides an exclusion from gross  
            income for CRDP to all military retirees, regardless of their  
            income.  Tax exemptions are often granted with some type of  








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            income limitation.  

           5)Non-Conformity to Federal Law  .  State conformity with federal  
            law promotes greater simplicity and eases administration of  
            complex tax laws.  By providing an exclusion from gross income  
            for retired pay and survivor annuities, this bill would bring  
            California out of conformity with the federal law.  

           6)FTB's Implementation Concerns  .  The FTB staff notes that,  
            because for federal purposes gross income includes both  
            military retirement pay and CRDP, "it is unclear how the  
            department would be able to validate the CRDP exclusion for  
            state purposes."  The FTB staff is concerned that "the lack of  
            guidance could cause disputes between taxpayers and the  
            department and require the department to open up an audit in  
            order to verify the amount of gross income reported by  
            taxpayers."

           7)FTB's Technical Concerns  . The FTB staff recommends a technical  
            amendment to replace the phrase "eligible individual" with  
            "qualified retiree," which would be consistent with Title 10  
            of the U.S. Code Section 1414.  

           8)Sunset Date  .  This bill lacks a sunset date to allow periodic  
            legislative review of this tax expenditure.  The Committee  
            staff recommends an amendment to add a sunset date.

           9)Prior Legislation  :

             a)   AB 2329 (Melendez), of the 2013-14 Legislative Session,  
               is substantially similar to this bill.  AB 2329 was held on  
               the Assembly Appropriations' Suspense File.

             b)   AB 2004 (Knight), of the 2011-12 Legislative Session,  
               would have allowed an individual to exclude from his/her  
               gross income Combat-Related Special Compensation and  
               Concurrent Retirement and Disability Pay payments, as  
               defined.  AB 2004 was held on the Assembly Committee on  
               Appropriations' Suspense File.








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             c)    SB 401 (Wolk), Chapter 14, Statutes of 2010, provided  
               specified date conformity to the IRC, including the gross  
               income exclusions for combat-related injury pay and  
               combat-related disability pay. 

             d)   AB 53 (Klehs), Chapter 1138, Statutes of 1987, repealed  
               the pension and retirement pay exclusions as a result of  
               active duty in the Armed Forces. 



          REGISTERED SUPPORT / OPPOSITION:




          Support


          None on file




          Opposition


          None on file




          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098













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