BILL ANALYSIS
AB 11
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 11 (De Leon)
As Amended July 14, 2009
2/3 vote. Urgency
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|ASSEMBLY: |75-0 |(April 30, |SENATE: |38-0 |(August 27, |
| | |2009) | | |2009) |
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Original Committee Reference: REV. & TAX .
SUMMARY : Clarifies that Internal Revenue Service (IRS) Notice
2008-83, which exempts banks from the restrictions of Internal
Revenue Code (IRC) Section 382 does not apply for purposes of
state income tax laws.
The Senate amendments :
1)Delete the legislative findings and declarations.
2)Add Revenue and Taxation Code Section 24458 to provide that
IRS Notice 2008-83, 2008-42 I.R.B. 905, relating to the
treatment of deductions under IRC Section 382(h) following an
ownership change, is not applicable for purposes of the
Corporation Tax (CT) Law, with respect to any ownership change
occurring at any time.
3)Add an urgency clause allowing this bill to take effect
immediately upon enactment.
EXISTING FEDERAL LAW allows a corporate taxpayer to carry
forward an NOL for 20 years, or carry it back for two years, to
reduce future or past taxable income, as long as the
corporation's legal identity is maintained. After certain asset
acquisitions in which the acquired corporation goes out of
existence, the acquired corporation's NOL carry forwards,
generally, are inherited by the acquiring corporation. However,
in order to limit tax-motivated acquisitions of loss
corporations, the use of those NOLs and other carry forwards may
be subject to special limitations. Acquired losses also include
what is called an "unrealized built-in loss", which is the
amount of the value of assets reported on the acquired
corporation's books that exceeds the fair market value of its
assets immediately before the corporation is acquired. IRC
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Section 382 limits the amount of acquired losses that the
acquiring corporation may use to offset its income in the year
of acquisition and the following years. Generally, the
acquiring corporation may use the acquired corporation's losses
in the amount equal to the value of the acquired corporation,
measured by the value of its stock immediately before the
acquisition, multiplied by the long-term tax exempt rate, a base
interest rate computed by the IRS.
In 2008, the Treasury Department issued Notice 2008-83, in which
it indicated that it is studying the proper treatment of
built-in losses allowed after an ownership change for a bank.
Notice 2008-83 further provided that any deduction properly
allowed, after an ownership change, to a bank with respect to
losses on loans or bad debts (including any deduction for a
reasonable addition to a reserve for bad debt) will not be
treated as a built-in loss or a deduction that is attributable
to periods before the change date and, therefore, would not be
subject to IRC Section 382 limitations, thus, allowing banks to
utilize the acquired losses fully in the year of acquisition and
the following years. Notice 2008-83 was clear that banks may
rely on the treatment allowed by Notice 2008-83 unless and until
additional guidance is issued, meaning that any bank acquisition
done before or after Notice 2008-83 would qualify for this
treatment.
No final or temporary regulations have been issued by the
Treasury Department following Notice 2008-83, but on February
17, 2009, President Obama signed the Act, which stated that
Notice 2008-83 is inconsistent with the congressional intent in
enacting IRC Section 382. The Act declared that the IRS was not
authorized under federal law to provide exemptions or special
rules that are restricted to particular industries or classes of
taxpayers and repealed Notice 2008-83. However, Congress
grandfathered in transactions that occurred on or before January
16, 2009, in order to protect taxpayers that have relied upon
the guidance.
EXISTING STATE LAW conforms to the IRC either by reference to
federal law as of a "specified date" or by stand-alone language
that mirrors the federal provision. Currently, certain
provisions of the PIT Law and CT Law are conformed to the IRC as
of January 1, 2005, unless otherwise provided. AB 115 (Klehs),
Chapter 691, Statutes of 2005 was the last California/federal
conformity bill.
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A PASSED BY THE ASSEMBLY , this bill:
1)Made the following legislative findings and declarations:
a) California conforms to various provisions of the IRC, as
enacted on a specified date; and, for taxable years
beginning on or after January 1, 2005, the conformity date
prescribed in the Revenue and Taxation Code (R&TC) for
those referenced provisions is January 1, 2005;
b) California conforms to IRC Section 382, as enacted
January 1, 2005, relating to limitations on net operating
loss carry forwards and certain built-in losses following
ownership change, and, as of January 1, 2005, IRC Section
382 applied to financial institutions;
c) On September 30, 2008, the IRS issued Notice 2008-83,
2008-42 I.R.B. 905 (Notice 2008-83) stating that, after an
ownership change, any deduction properly allowed to a bank
with respect to losses on loans or bad debts would not be
subject to the limitations of IRC Section 382;
d) Notice 2008-83 constitutes a substantial change to IRC
Section 382 and, while California conforms to IRC Section
382, as enacted on January 1, 2005, it has not conformed to
any changes to that section as set forth in Notice 2008-83;
e) The American Recovery and Reinvestment Act of 2009
(Public Law 111-5) (Act), signed by President Obama on
February 17, 2009, questioned the legal authority of Notice
2008-83 and repealed it. Notice 2008-83 was repealed
prospectively only, in order to protect the reliability of
guidance letters generally, and to avoid punishing
taxpayers that had relied on the guidance; and,
f) California should not conform to the construction of IRC
Section 382 as described in Notice 2008-83, inasmuch as the
legality of that construction has been questioned in
federal statute.
2)Stated that Notice 2008-83 does not apply for purposes of the
Personal Income Tax (PIT) Law or CT Law either prospectively
or retroactively.
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FISCAL EFFECT : FTB's legal staff has concluded that Notice
2008-83 has no legal effect for purposes of California tax laws
and, therefore, FTB staff estimates that this bill will not have
any revenue impact.
COMMENTS : The author states that, "On December 1, 2008, I
introduced AB 11 to protect California's budget from the recent
guidance letter by the U.S. Treasury Department designed to
provide a new federal tax break for bank mergers. While
then-Secretary Paulson may have had substantial reason to
unilaterally rewrite federal tax law to facilitate the takeover
of failing banks, our state's General Fund should not be
adversely impacted by that decision. Unfortunately, state law
requires the State to conform with Internal Revenue Services
(IRS) tax regulations. California should take explicit action
to ensure that the Franchise Tax Board does not conform to this
ruling. According to the Franchise Tax Board's estimates, if we
were to conform with this federal tax break, the state would
lose approximately $300 Million in tax revenue during the
current fiscal year, and up to $2 Billion in future years.
"California was not consulted on this breathtaking tax break.
Although recently enacted federal statute (HR 1) now asserts
that Treasury exceeded its legal authority in issuing IRS Notice
2008-83, and declares that the ruling shall have not force or
effect after January 16, 2009, AB 11 will ensure that our
state's budget is absolutely protected from the massive
corporate tax give away. It is anticipated that the Franchise
Tax Board will adopt regulations in March 2009, to affirm that
California will not comply with IRS Notice 2008-83, AB 11 would
add assurances that FTB's actions cannot be challenged."
Controversial History of Notice 2008-83. Generally, IRS
administrative pronouncements are issued without much notice
from the public, but the issuance of Notice 2008-83 created
quite a controversy. Questions were raised regarding the
circumstances under which the notice was issued and the Treasury
Department's legal authority to substantively change a 22-year
old tax law that limits the use of losses by banks following
acquisitions. Some current and former congressional staff
members, as well as many tax attorneys, concluded that the
Treasury Department had no authority to issue the notice (See,
e.g., "A Quiet Windfall for U.S. Banks," by Amit R. Paley,
Washington Post, Page A01, November 10, 2008). Lawmakers were
looking at "whether the notice was introduced to benefit
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specific banks, as well as whether it inappropriately
accelerated bank takeovers." (Id.). On November 18, 2008,
Senator Chuck Grassley, ranking member of the Committee on
Finance, asked Eric Thorson, the Treasury Department's Inspector
General, to review the circumstances and any possible conflicts
of interest involving the Treasury Department's administrative
move that gives a big tax break to banks that acquire poorly
performing banks. (Senate Finance Committee Release, "Grassley
Seeks Inspector General Review of Treasury Bank Merger Move,"
110th Congress, November 18, 2008). Senator Charles E. Schumer
and Senator Max Baucus also wrote to Mr. Paulson asking similar
questions regarding the Treasury Department's authority to enact
the tax break without Congressional review and expressing
concerns over the subsidy. The Treasury Department, however,
insisted that the new tax break was not intended to benefit any
particular bank and had been under "development for many, many
weeks." (See, e.g., "Bush's tax breaks for banks could cost
California $2 billion," Evan Harper, Los Angeles Times, November
11, 2008). It was reported, however, that days after the tax
rule was changed, "Wells Fargo moved to acquire Wachovia Corp.,
whose losses on loans could reach more than $70 billion," and
"PNC Financial Services Croup, which recently acquired National
City Corp, could receive as much as $5 billion in tax savings."
(Id.).
Finally, Congress put the controversy to rest when it enacted
the Act, which President Obama signed on February 17, 2009. The
Act clearly states that Notice 2008-83 was inconsistent with the
congressional intent in enacting IRC Section 382 and that the
Treasury Department's legal authority to prescribe the notice
was doubtful. Therefore, the Act repealed Notice 2008-83, but
grandfathered in the acquisitions that occurred prior to January
16, 2009. Notice 2008-83 is also effective for acquisitions
that occurred after January 16, 2009, if any ownership change
was pursuant to a written binding contract entered on or before
that date, or under a written agreement entered into on or
before that date, if the agreement was described on or before
January 16, 2009, in a public announcement or in a filing with
the Securities and Exchange Commission required by reason of
such ownership change.
On December 4, 2008, FTB directed its staff to begin regulatory
action to make Notice
2008-83 inapplicable for California purposes. At its March 19,
2009 meeting, FTB authorized staff to proceed with formal
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procedures under the Administrative Procedures Act to adopt this
regulation. While FTB is currently working on the regulations
that would clarify that Notice 2008-83 has no legal effect for
California tax purposes (either prospectively or retroactively),
a legislative act, such as this bill, would protect FTB's
position, and this state, from any potential legal challenge
seeking to invalidate those regulations.
Similar legislation. AB 692 (Calderon), which was introduced in
the current legislative session, clarifies that FTB has
authority to provide that any federal tax regulations or other
administrative guidance do not apply if the federal regulation
or guidance is in conflict with the applicable California income
tax laws or FTB regulations. AB 692 is pending on the Senate
Floor.
AB 1 X1 (Calderon) introduced in the 2009-10 First Extraordinary
Session, is similar to this bill. AB 1 X1 died in the
Assembly.
AB 14 X1 (De Leon), introduced in the 2009-10 First
Extraordinary Session, which died in the Assembly, and AB 21
X3(De Leon), introduced in the 2009-10 Third Extraordinary
Session, are almost identical to AB 11, as amended in the
Assembly.
AB 6 X4 (Laird), introduced in the 2007-08 Fourth Extraordinary
Session, directed FTB not to apply Notice 2008-83 nor any other
administrative guidance issued after October 20, 2008, that have
the same or similar effect for purposes of the PIT Law and CT
Law. AB 6 X4 died in the Assembly.
AB 18 X4 (Calderon), introduced in the 2007-08 Fourth
Extraordinary Session, was similar to this bill. AB 18 X4 died
in the Assembly.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001951