Senate Bill No. 495

Introduced by Senator Stone

February 26, 2015

An act to amend Section 18662 of the Revenue and Taxation Code, relating to taxation.

LEGISLATIVE COUNSEL’S DIGEST

SB 495, as introduced, Stone. Income taxes: withholding: real property sales.

Existing law requires the transferee of a California real property interest, in specified circumstances, to withhold, for income tax purposes, 31⁄3% of the sales price of the property when the property is acquired from either an individual, or a partnership or corporation without a permanent place of business, as specified. Existing law also allows, by election of the transferor, alternative withholding amounts that are not less than the amount of gain required to be recognized under income tax laws multiplied by the corporation tax rate, bank and financial corporate tax rate, the highest personal income tax rate, or the current “S” corporation tax rate plus the highest personal income tax rate, as applicable.

This bill would, in the case of any disposition of a California real property interest in taxable years beginning on or after January 1, 2016, provide that withholding would not be required if a transferor makes a written election, in a form prescribed by the Franchise Tax Board, to remit any tax due with the filing of any required tax return.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 18662 of the Revenue and Taxation Code
is amended to read:

18662.  

(a) The Franchise Tax Board may, by regulation,
require any person, in whatever capacity acting, including lessees
or mortgagors of real or personal property, fiduciaries, employers,
and any officer or department of the state, or any political
subdivision or agency of the state, or any city organized under a
freeholder’s charter, or any political body not a subdivision or
agency of the state, having the control, receipt, custody, disposal,
or payment of items of income specified in subdivision (b), to
withhold an amount, determined by the Franchise Tax Board to
reasonably represent the amount of tax due when the items of
income are included with other income of the taxpayer, and to
transmit the amount withheld to the Franchise Tax Board at the
time as it may designate.

(b) The items of income referred to in subdivision (a) are
interest, dividends, rents, prizes and winnings, premiums, annuities,
emoluments, compensation for services, including bonuses,
partnership income or gains, and other fixed or determinable annual
or periodical gains, profits, and income.

(c) The Franchise Tax Board may authorize the tax under
subdivision (a) to be deducted and withheld from the interest upon
any securities the owners of which are not known to the
withholding agent.

(d) Any person that fails to withhold from any payments any
amounts required to be withheld by this section or fails to remit
the taxes withheld is liable for the amount specified in Section
18668.

(e) (1) This subdivision applies to any disposition of a
California real property interest by:

(A) Any person, other than either of the following:

(i) Except as otherwise provided in this subdivision, a
corporation, including an entity classified for tax purposes as a
corporation under Part 11 (commencing with Section 23001).

(ii) Except as otherwise provided in this subdivision, a
partnership, as determined in accordance with Subchapter K of
Chapter 1 of Subtitle A of the Internal Revenue Code, including
an entity classified as a partnership for tax purposes under Part 10
(commencing with Section 17001).

(B) A corporation or partnership, if that corporation or
partnership immediately after the transfer of the title to the
California real property has no permanent place of business in
California. For purposes of this subdivision, a corporation or
partnership has no permanent place of business in California if all
of the following apply:

(i) It is not organized and existing under the laws of California.

(ii) It does not qualify with the office of the Secretary of State
to transact business in California.

(iii) It does not maintain and staff a permanent office in
California.

(2) (A) Except as provided in subparagraph (B), in the case of
any disposition of a California real property interest by a transferor
described in paragraph (1), the transferee, including for this purpose
any intermediary or accommodator in a deferred exchange, is
required to withhold an amount equal to 31⁄3 percent of the sales
price of the California real property conveyed.

(B) If the transferor makes an election under this subparagraph,
the transferee, including any intermediary or accommodator in a
deferred exchange, is required to withhold an amount equal to an
amount certified by the transferor in writing under penalty of
perjury. The amount certified shall not be less than the gain
required to be recognized under Part 10 (commencing with Section
17001) and Part 11 (commencing with Section 23001) on the
disposition of the California real property multiplied by the rate
specified in either Section 23151 or Section 23186, as applicable,
for transferors that are corporations, or the highest rate specified
in Section 17041 for transferors other than corporations. For
purposes of applying the previous sentence, the following shall
apply:

(i) The highest rate specified in Section 17041 is determined
without regard to any other tax rate specified under Part 10
(commencing with Section 17001) irrespective of whether the
applicable statute provides that tax shall be treated as if imposed
under Section 17041.

(ii) For corporations that are “S” corporations subject to the
modified tax rate specified in Section 23802, the rate shall be the
sum of the rate specified in subdivision (b) of Section 23802 and
the highest rate specified in Section 17041, as described in clause
(i).

(C) (i) The written certification required by subparagraph (B)
shall be in a form, as prescribed by the Franchise Tax Board. The
form shall provide as follows:

“Title and escrow persons and exchange accommodators are not
authorized to provide legal or accounting advice for purposes of
determining withholding amounts. Transferors are strongly
encouraged to consult with a competent tax professional for this
purpose.”

(ii) The Franchise Tax Board shall make this form available
electronically on its Web site in a format that allows a transferor
to complete and print the form. The Franchise Tax Board shall
also provide electronic means to enable the transferor to estimate
the amount of gain required to be recognized by the transferor in
the transaction. Any form or worksheet, electronic or otherwise,
developed for this purpose shall provide as follows:

“Title and escrow persons and exchange accommodators are not
authorized to provide legal or accounting advice for purposes of
determining withholding amounts. Transferors are strongly
encouraged to consult with a competent tax professional for this
purpose.”

(3) Notwithstanding any other provision of this subdivision, all
of the following shall apply:

(A) No transferee is required to withhold any amount under this
subdivision unless the sales price of the California real property
conveyed exceeds one hundred thousand dollars ($100,000).

(B) No transferee, other than an intermediary or an
accommodator in a deferred exchange, is required to withhold any
amount under this subdivision unless written notification of the
withholding requirements of this subdivision has been provided
by the real estate escrow person.

(C) (i) No transferee, trustee under a deed of trust, or mortgagee
under a mortgage with a power of sale is required to withhold
under this subdivision when the transferee has acquired California
real property at a sale pursuant to a power of sale under a mortgage
or deed of trust or a sale pursuant to a decree of foreclosure or has
acquired the property by a deed in lieu of foreclosure.

(ii) No transferee is required to withhold under this subdivision
when the transferor is a bank acting as trustee other than a trustee
of a deed of trust.

(D) No transferee, including for this purpose any intermediary
or accommodator in a deferred exchange, is required to withhold
any amount under this subdivision if the transferee, in good faith
and based on all the information of which he or she has knowledge,
relies on a written certificate executed by the transferor, certifying,
under penalty of perjury, one of the following:

(i) (I) The California real property being conveyed is the seller’s
or decedent’s principal residence, within the meaning of Section
121 of the Internal Revenue Code.

(II) The last use of the property being conveyed was use by the
transferor as the transferor’s principal residence within the meaning
of Section 121 of the Internal Revenue Code.

(ii) (I) The California real property being conveyed is being
exchanged, or will be exchanged, for property of like kind, within
the meaning of Section 1031 of the Internal Revenue Code, but
only to the extent of the amount of the gain not required to be
recognized for California income or franchise tax purposes under
Section 1031 of the Internal Revenue Code.

(II) Subclause (I) may not apply if an exchange does not qualify
for nonrecognition treatment for California income or franchise
tax purposes under Section 1031 of the Internal Revenue Code, in
whole or in part, due to the failure of the transaction to comply
with the provisions of Section 1031(a)(3) of the Internal Revenue
Code, relating to the requirement that property be identified and
that the exchange be completed not more than 180 days after the
transfer of the exchanged property.

(III) In any case where clause (ii) applies, the transferee,
including for this purpose any intermediary or accommodator in
a deferred exchange, is required to notify the Franchise Tax Board
in writing within 10 days of the expiration of the statutory periods
specified in Section 1031(a)(3) of the Internal Revenue Code and
thereafter remit the applicable withholding amounts determined
under this subdivision in accordance with paragraph (4).

(iii) The California real property has been compulsorily or
involuntarily converted, within the meaning of Section 1033 of
the Internal Revenue Code, and the transferor intends to acquire
property similar or related in service or use so as to be eligible for
nonrecognition of gain for California income tax purposes under
Section 1033 of the Internal Revenue Code.

(iv) The transaction will result in either a net loss or a net gain
not required to be recognized for California income or franchise
tax purposes.

(v) The transferor is a corporation with a permanent place of
business in California.

(E) (i) In the case of any transaction otherwise subject to this
subdivision that qualifies as an “installment sale,” within the
meaning of Section 453(b) of the Internal Revenue Code, for
California income tax purposes, the provisions of this subdivision
shall be separately applied to each principal payment to be made
under the terms of the installment sale agreement between the
parties.

(ii) For purposes of clause (i), subparagraph (A) of paragraph
(3) does not apply to each individual payment to be received under
the terms of the installment sale agreement.

(4) (A) Amounts withheld and payments made in accordance
with this subdivision shall be reported and remitted to the Franchise
Tax Board in the form and manner and at the time specified by
the Franchise Tax Board. Notwithstanding the foregoing, funds
withheld on individual transactions by real estate escrow persons
may, at the option of the real estate escrow person, be remitted by
the 20th day of the month following the close of escrow for the
individual transaction, or may be remitted on a monthly basis in
combination with other transactions closed during that month.

(B) The transferor shall submit a copy of the written certificate
and supporting documentation for the reduced withholding
specified in subparagraph (B) of paragraph (2) or subparagraph
(D) of paragraph (3), executed by the transferor, to the Franchise
Tax Board upon request.

(5) For purposes of this subdivision, “California real property
interest” means an interest in real property located in California
and defined in Section 897(c)(1)(A)(i) of the Internal Revenue
Code.

(6) For purposes of this subdivision, “real estate escrow person”
means any of the following persons involved in the real estate
transaction:

(A) The person, including any attorney, escrow company, or
title company, responsible for closing the transaction.

(B) If no person described in subparagraph (A) is responsible
for closing the transaction, then any other person who receives
and disburses the consideration or value for the interest or property
conveyed.

(7) (A) Unless the real estate escrow person provides
“assistance,” it shall be unlawful for any real estate escrow person
to charge any customer for complying with the requirements of
this subdivision.

(B) For purposes of this paragraph, “assistance” includes, but
is not limited to, helping the parties clarify with the Franchise Tax
Board the issue of whether withholding is required under this
subdivision or, upon request of the parties, withholding an amount
under this subdivision and remitting that amount to the Franchise
Tax Board.

(C) For purposes of this paragraph, “assistance” does not include
providing the written notification of the withholding requirements
of this subdivision.

(D) In a case where the real estate escrow person provides
“assistance” in complying with the withholding requirements of
this subdivision, it shall be unlawful for the real estate escrow
person to charge any customer a fee that exceeds forty-five dollars
($45).

(8) For purposes of this subdivision, “sales price” means the
sum of all of the following:

(A) The cash paid, or to be paid, but excluding for this purpose
any stated or unstated interest or original issue discount, as
determined under Sections 1271 through 1275, inclusive, of the
Internal Revenue Code.

(B) The fair market value of other property transferred, or to be
transferred.

(C) The outstanding amount of any liability assumed by the
transferee or to which the California real property interest is subject
immediately before and after the transfer.

(9) The Franchise Tax Board may prescribe, by forms,
instructions, published notices, or regulations, any requirements
necessary for the efficient administration of this subdivision
relating to the treatment of “de minimis” amounts otherwise
required under this section.

begin insert

(10) (A) Notwithstanding any other law, in the case of any
disposition of a California real property interest in taxable years
beginning on or after January 1, 2016, if not otherwise exempt,
withholding is not required under this section if a transferor makes
an election under this paragraph to remit any tax due with the
filing of any tax return required by this part.

end insert begin insert

(B) The election shall be made in a written form, as prescribed
by the Franchise Tax Board. The Franchise Tax Board may
prescribe, by forms, instructions, published notices, or regulations,
any requirements necessary for the efficient administration of this
paragraph, including the timing of making the election.

end insert

(f) Withholding is not required under this section with respect
to wages, salaries, fees, or other compensation paid by a
corporation for services performed in California for that corporation
to a nonresident corporate director for director services, including
attendance at a board of directors’ meeting.

(g) In the case of any payment described in subdivision (f), the
person making the payment shall do each of the following:

(1) File a return with the Franchise Tax Board at the time and
in the form and manner specified by the Franchise Tax Board.

(2) Provide the payee with a statement at the time and in the
form and manner specified by the Franchise Tax Board.

(h) (1) The amendments to this section made by Chapter 488
of the Statutes of 2002 apply to dispositions of California real
property interests that occur on or after January 1, 2003.

(2) In the case of any payments received on or after January 1,
2003, pursuant to an installment sale agreement relating to a
disposition occurring before January 1, 2003, the amendments to
this section made by Chapter 488 of the Statutes of 2002 do not
apply to those payments.

(i) (1) The amendments made to this section by the act adding
this subdivision shall apply to dispositions of California real
property interests that occur on or after January 1, 2009.

(2) In the case of any payments received on or after January 1,
2009, pursuant to an installment sale agreement relating to a
disposition occurring before January 1, 2009, the amendments
made to this section by the act adding this subdivision do not apply
to those payments.