BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 681 |Hearing | 7/15/15 |
| | |Date: | |
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|Author: |Hill |Tax Levy: |No |
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|Version: |6/29/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Corporation taxes: deduction: public utilities (Urgency)
Denies business expense deduction for fine imposed on PG&E by
the California Public Utilities Commission.
Background and Existing Law
On September 9th, 2010, a pipeline owned and operated by the
Pacific Gas and Electric (PG&E) Company exploded in the
Crestmoor neighborhood of San Bruno, California. This disaster
killed eight people, injured 58, destroyed 38 homes, and caused
extensive property damage. PG&E's regulator, the California
Public Utilities Commission (CPUC), subsequently found that the
utility had not made the proper investments in gas transmission
infrastructure despite rates designed to generate revenue
necessary to do so. CPUC initially proposed a fine of $1.4
billion: $950 million as a criminal penalty for the General
Fund, $400 million credit to rate payers, and $50 million in
remedies to enhance pipeline safety. CPUC eventually fined PG&E
$1.6 billion: $850 million for gas safety improvements paid by
shareholders, $400 million to ratepayers in a one-time bill
credit, $300 million to the state's general fund as a fine, and
$50 million toward various pipeline safety-related remedies. In
a subsequent letter, Commissioners stated "every dollar the
Commission ordered (PG&E's) shareholders pay in the final
decision was intended to penalize PG&E for its egregious actions
and legal violations." PG&E has also been indicted by a federal
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grand jury, and faces civil litigation as well.
Current federal and state laws generally allow taxpayers engaged
in a trade or business to deduct all expenses that are
considered ordinary and necessary in conducting that trade or
business, unless specifically excluded by statute, such as fines
and penalties paid to government for violating the law. Under
federal and state laws, taxpayers can deduct fines or penalties
paid to a non-government entity, such as a fine on a
professional athlete violating codes of conduct; however, last
year, the Legislature prohibited professional sports franchise
owners from deducting fines and penalties imposed by the
professional sports league that includes that franchise (AB 877,
Bocanegra, 2014). The author wants to ensure that PG&E won't be
able to deduct fines imposed by CPUC on PG&E due to the San
Bruno pipeline explosion.
Proposed Law
Senate Bill 681 states that for purposes of deducting regular
business expenses for state tax purposes, expenses or
expenditures for plant and equipment by Pacific Gas and Electric
Company that the Public Utilities Commission determined in
Decision 15-04-024 (April 9, 2015), "Decision on Fines and
Remedies to be Imposed on Pacific Gas and Electric Company for
Specific Violations in Connection with the Operation and
Practices of its Natural Gas Transmission System Pipelines,"
should be borne by the shareholders of the utility, and not the
utility's ratepayers, because of the utility's numerous
violations of law relating to public safety. The measure also
states amounts that the Public Utilities Commission, in Decision
15-04-024, ordered Pacific Gas and Electric Company to pay to
reimburse the commission for its costs incurred in investigating
and enforcing a violation of law relating to public safety by
the utility.
State Revenue Impact
Due to the measure's limited scope, Franchise Tax Board cannot
estimate the revenue for SB 681 without potentially violating
taxpayer confidentiality laws. However, SB 681 would deny
approximately $1.3 million in normally deductible expenses,
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which when multiplied by California's corporation tax rate of
8.84% equals $115 million.
Comments
1. Purpose of the bill . According to the author, "The CPUC's
decision to apply the majority of the PG&E's penalty to safety
improvements and bill reduction rather than sending it to the
General Fund was not made to reduce PG&E's financial
responsibility for the gas explosion that killed 8 and leveled a
neighborhood, but to ease the burden faced by PG&E's customers
who continue to pay PG&E to bring its neglected gas system to an
acceptable safety standard. The CPUC made it clear to the IRS
and the FTB that the penalty for this tragedy should not be
considered a business expense but a punishment. This bill is
meant to ensure that FTB will be able to carry out the CPUC's
intention to levy an historic penalty against PG&E for its
negligence. "
2. Special treatment . As a general matter in tax law, taxpayers
can deduct fines and penalties levied by government when no
violation of the law occurred. Taxpayers can also deduct
business expenses incurred to improve physical infrastructure,
such as pipelines. SB 681 would alter these standards that
apply to almost all taxpayers because of a singular event.
While the damage to lives and property of the San Bruno pipeline
explosion is horrific, is changing tax law meant to apply
equally to all taxpayers the appropriate way to sanction PG&E?
CPUC could have simply increased the non-deductible penalty
amount payable to the General Fund instead. On the other hand,
SB 681 is not unprecedented; AB 877 responded to the National
Basketball Association's fine against Donald Sterling in a very
similar way. The Committee may wish to consider whether
amending tax law is the best response to this tragedy.
3. Follow the lead . Generally, FTB would follow IRS's
determination regarding whether a fine is deductible for state
purposes. Section 162(f) of the Internal Revenue Code simply
states "No deduction shall be allowed ? for any fine or similar
penalty paid to a government for the violation of any law."
Federal regulations and an extensive body of case law generally
holds that compensatory, non-punitive damages paid to government
are deductible, such as civil judgment where the government
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recovers actual damages and court costs from taxpayer. Other
important factors include the severity of the conduct, and
whether the penalty was punitive or compensatory in nature,
among others. As such, the tax treatment of fines and penalties
can be different according to the facts and circumstances of
each case. In its letter to IRS Commissioner John Koskinen, CPUC
Commissioners state that their intent in levying the penalty
against PG&E was punitive, not compensatory. However, absent
legislation, the deductibility of the penalty for federal or
state purposes will remain unknown because any information on
PG&E's return is protected by taxpayer confidentiality laws.
4. Reverse nonconformity . California law does not
automatically conform to changes to federal tax law, except
under specified circumstances. Instead, the Legislature must
affirmatively conform to federal changes. Generally, when the
federal government changes its tax laws, California catches up
by enacting its own legislation in subsequent year to reduce
differences between the two codes, thereby easing the tax
preparation burden on taxpayers, tax preparers, and the
Franchise Tax Board. As discussed above, IRS may allow PG&E to
claim the deduction based on its interpretation of current law
as applied to CPUC's fine, but if SB 681 is enacted, the same
deduction denied for state tax purposes may be allowed for
federal.
5. Another way ? SB 681 refers to Section §162(a) of the
Internal Revenue Code (IRC) when denying a deduction for state
purposes; however, PG&E could be applying IRC §162(f), §167, or
§179, depending on the nature of the expense. Instead of
referring to federal law, the Committee may wish to consider
amending SB 681 to instead enact a stand-alone section of the
Corporation Tax stating that expenses of expenditures resulting
from the CPUC's decision are not deductible for state tax
purposes.
6. To tell the truth . The tax return of a firm as
sophisticated as PG&E will be long and complex. As such, it may
be difficult for FTB to easily determine whether PG&E complies
with SB 681 should it be enacted. The Committee may wish to
consider requiring any taxpayer to additionally certify under
penalty of perjury that it didn't claim any expenses affected by
the bill.
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7. 2/3 . Because SB 681 denies a normally deductible business
expense, it increases a tax on any taxpayer for purposes of
Section Three of Article XIIA of the California Constitution.
As such, Legislative Counsel has keyed the measure a 2/3 vote.
8. Urgency . In order for the bill to apply in the current
taxable year, and to ensure the effectiveness of PG&E decisions,
SB 681 contains an urgency clause, and is keyed a 2/3 vote.
Support and
Opposition (7/9/15)
Support : None received.
Opposition : California Taxpayers Association.
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