BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 681|
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THIRD READING
Bill No: SB 681
Author: Hill (D), et al.
Amended: 7/16/15
Vote: 27 - Urgency
PRIOR VOTES NOT RELEVANT
SENATE GOVERNANCE & FIN. COMMITTEE: 4-2, 7/15/15
AYES: Hertzberg, Beall, Lara, Pavley
NOES: Nguyen, Moorlach
NO VOTE RECORDED: Hernandez
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
SUBJECT: Corporation taxes: deduction: public utilities
SOURCE: Author
DIGEST: This bill prohibits the Pacific Gas & Electric Company
(PG&E) from claiming a deduction against its income for tax
purposes for fines imposed on it by the California Public
Utilities Commission (CPUC) in its case regarding the San Bruno
pipeline explosion.
ANALYSIS:
Existing law:
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1)Allows taxpayers engaged in a trade or business to deduct from
taxable income for state and federal purposes all expenses
that are considered ordinary and necessary in conducting that
trade or business.
2)Allows taxpayers to deduct most fines or penalties paid to
government for compensatory, non-punitive actions such as
amounts paid subject to civil litigation.
3)Prohibits taxpayers from deducting fines and penalties paid to
government for violating the law.
4)Allows deductions for fines and penalties paid to a
non-government entities, such as a fine on a professional
athlete violating codes of conduct.
5)Prohibits professional sports franchise owners from deducting
fines and penalties imposed by the professional sports league
that includes that franchise (AB 877, Bocanegra, Chapter 792,
Statutes of 2014).
This bill:
1)Prohibits PG&E from deducting the following amounts amount it
pays or incurs identified by the CPUC in its "Decision on
Fines and Remedies to be Imposed on Pacific Gas & Electric
Company for Specified Violations in Connection with the
Operations and Practices of its Natural Gas System Pipelines."
a) $850 million in future gas infrastructure improvements
related to transmission pipeline safety,
b) $400 million in bill credits for gas ratepayers, and
c) $50 million to implement other remedies.
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1)Requires PG&E to certify under penalty of perjury that it did
not take any of the above expenses into account in determining
its income.
Background
On September 9, 2010, a pipeline owned and operated by PG&E
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,
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 grand jury, and faces
civil litigation as well.
Because California law conforms to federal law regarding expense
deductions, the Franchise Tax Board (FTB) would follow the
Internal Revenue Service's (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 recovers
actual damages and court costs from taxpayer. Other important
factors include the severity of the conduct, and whether the
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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.
Comments
SB 681 alters long-standing tax law that applies 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 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.
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 years 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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: Yes
SUPPORT: (Verified8/18/15)
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None received
OPPOSITION: (Verified8/18/15)
California Taxpayers Association
ARGUMENTS IN SUPPORT: 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."
ARGUMENTS IN OPPOSITION: According to the California
Taxpayers Association, "Current law authorizes individuals and
corporations to take tax deductions for the payment of monetary
damages in legal cases. The principles of sound tax policy
dictate that tax law should be uniform and applied equitably to
all taxpayers, but this bill proposes to use California's
Revenue and Taxation Code as a weapon against one taxpayer,
running counter to 30 years of strong public policy regarding
applying principles of tort law to the tax code. Taxpayers
should have assurance that tax laws apply uniformly to all in
the state, and should be able to predict how the law will be
applied to them. Targeting a single company by altering tax law
after the fact sets a dangerous precedent that will have a
chilling effect on any business considering operating in
California. [Additionally] California conforms to the federal
rule allowing deductions for ordinary and necessary business
expenses, which includes the payment of monetary damages in
legal cases. Deductions prohibited by the this bill will
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continue to be allowed under federal law, this creating a state
and federal difference."
Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119
8/19/15 20:43:04
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